1
Revised transcript of evidence taken before
The Select Committee on Economic Affairs
Evidence Session No. 6 Heard in Public Questions 63 - 77
Witnesses: Alison Munro and David Prout
Lord Hollick (Chairman)
Baroness Blackstone
Lord Carrington of Fulham
Lord Lawson of Blaby
Lord May of Oxford
Lord McFall of Alcluith
Lord Monks
Lord Rowe-Beddoe
Lord Shipley
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Alison Munro, Managing Director - Development, HS2 Limited, and David Prout, Director General of the HS2 Group, Department for Transport
Q63 The Chairman: Ms Munro and Mr Prout, thank you very much for joining us. In the previous session, you heard Professor Overman say that this project would sit in the bottom 10% of transport projects that were looked at and evaluated by the Department for Transport. I think Professor Mackie marked it down in the bottom 1%. Do you agree with that assessment?
David Prout: Thank you, Lord Chairman. I do not know if that is correct or not, but I can certainly let you know. What I would say is that transport projects are very different. The vast majority of transport projects that we evaluate are quite small. They are completed reasonably quickly and they are followed by a 15-year evaluation period when you assess the impact of that transport project on demand.
The HS2 project is very different from that in one key respect, the benefit-cost ratio, in that it only allows demand to continue to increase until three years after the HS2 phase 2 is opened. A roundabout will be built in a couple of years and then you look at increasing demand over a 15-year period. With HS2, we measure it from the date of the calculation. The impact of that is that demand is effectively capped in 2036 for HS2, even though phase 2 is only completed in 2033. As we show in the strategic case, that has a downward pressure on the benefit-cost ratio.
Q64 The Chairman: Can we come back to the question that Lord Lawson asked in the last session, which is the total overall cost of this project? The Financial Times reported last week that Sir David Higgins was “struggling to keep it within the spending envelope that he has”. The question is: is the £50 billion budget both realistic and achievable? Of course, £50 billion is in 2011 figures. It would be interesting to know what it is in 2014 figures.
The other question that has come up in previous sessions is the extent to which this could be done at a lower cost if we were not going for world-record speeds and were going for more modest speeds of 175 miles. I would be grateful for your views on that.
David Prout: I think you need to look at the cost of the project in two parts, phase 1 and phase 2, because our estimates on phase 1 are much more mature. We have done much more work on that, but we also have made the majority of decisions on phase 1. As far as phase 1 is concerned, we are clear that we will come in on budget of £21.4 billion. In June or July last year, at the time of the spending review, we put up the cost estimate for HS2 and we had a lot of flak in the press for that. We put it up by £10 billion. The previous cost had been at what is called a P50 level of certainty, a 50% chance of coming in on budget. The £10 billion increase was a P95, a 95% likelihood of coming in on budget, so the budget that we have is a P95 budget coming in at £21.4 billion for phase 1.
We have not made decisions on phase 2 yet, but what we are absolutely clear about, and what the Chancellor made clear to David Higgins, the Secretary of State, and me when we saw him a week or two ago, is that the budget is the budget.
The Chairman: So that I understand, phase 2 has been calculated to not quite such a granular degree, and therefore there is an element of estimation in it, but nevertheless the Chancellor has said, “Well, that may be the case but you have to stick to this £50 billion”?
David Prout: Correct, yes.
Alison Munro: I was just going to pick up your question about whether we could save costs by delivering the railway at a lower speed. We did actually look, in the early days, at what you would save by delivering a conventional railway rather than a high-speed railway. What we found is a lot of the cost you still have to bear. You still have to provide the stations and the track and so on. What we found from that was that it saved about 10% of cost, and that was slowing it down to a conventional speed, but you lost much more in terms of benefits. I think you lost about 30% of benefits for a 10% saving in the cost. Looking at it incrementally, the extra cost of high-speed was outweighed by the extra benefits that you get from high-speed.
The Chairman: It would solve the capacity problems, which we will come on to later, but you would get less value for money from time saved, which is a controversial discussion. Thank you.
Alison Munro: Less value in terms of benefits.
David Prout: Could I add one thing at this point? In the previous evidence session, it was said that we had not looked at alternatives and, as Ms Munro has just said, that is one of the alternatives that we have looked at. But over the years the Department, working with partners, has done a huge amount of work on alternatives. There are four major reports on alternatives: Atkins in 2010, Atkins again in 2011, Atkins and Network Rail in 2012, and most recently again in 2013. These are really substantial, thick reports on alternatives, dealing with road and rail alternatives. Most recently, only yesterday, David Higgins set out in his report that we had looked again at alternatives, particularly on the eastern leg of phase 2, and we really pulled up the roots on that and had a good hard look at it. David Higgins concluded again that the right strategic alternative is a high-speed route east and west of Birmingham.
The Chairman: Did these alternatives have the same rigorous analysis of cost benefit and value for money attached to them?
David Prout: They have BCRs attached to them, assessments of the amount of capacity that you would generate, assessments of the kind of disruption that would be generated by the construction of these alternatives. You do not get the same level of cost estimation as you do on a much more mature scheme like HS2, where we know much more about it, but we deal with that by optimism bias and so on.
Q65 Baroness Blackstone: Could you tell us why the cost-benefit ratio was not presented without the wider economic benefits included? In making the strategic case, you always included the wider economic benefits. Can you tell us why that is?
David Prout: In the strategic case, we were presenting the case for HS2 as a whole; the transport user benefits and the wider economic impacts. In the economic case, which was published alongside that, the BCR without wider economic impacts was included. It is not a difficult calculation to get from the table produced in the strategic case from the BCR with WEIs to without WEIs. All the inputs are set out and it is a simple long division to go from one to the other.
Baroness Blackstone: Do you accept what Professor Overman was saying? I do not know whether you were here throughout the session—
David Prout: Yes, I was.
Baroness Blackstone: —that if the wider economic case is not included you get a very different kind of outcome? It becomes only moderately good value for money and it does not compare terribly well with all sorts of other things, according to him.
David Prout: The BCR is the BCR and it is set out in the documentation. When you calculate just transport user benefits, you naturally get a lower BCR than if you do transport user benefits plus wider economic impacts. That is correct.
Alison Munro: But the inclusion of wider economic impacts is consistent with the way that the Department generally looks at the value for money of schemes. If you were comparing with other schemes you would want to include the wider economic impacts, and the value for money assessment.
Baroness Blackstone: Given what you were saying earlier about the work that has been done on these other projects, I am not quite clear why that has not all been published and set out in direct comparison with HS2, because I do not think it has been.
David Prout: It has been, yes.
Baroness Blackstone: It has?
David Prout: At each decision point we have set out the latest alternatives. We did it in the strategic case. There is a whole chapter on alternatives in the strategic case that we published in October.
Baroness Blackstone: Is that in the October 2013 document?
David Prout: In this one, yes. The full report was published alongside it, at the same time.
Q66 Lord Smith of Clifton: The Department for Transport has told the Committee in written evidence that, “HS2 is designed to be a long-term answer to the capacity problem we face on our railways”. Can you explain where that capacity problem is?
David Prout: Yes. HS2 is quite a complicated project in terms of explaining what the problems are that it is trying to tackle and how it will meet those problems. I think it is important to try to set this in a bit of context in wider transport policy as well as the HS2 project itself. I have read all the transcripts that have been published so far of the previous evidence sessions and there has been a lot of talk, for example, about short, medium and long-term investments in the transport infrastructure in this country.
Short term, the DfT has done a lot of work to increase the capacity of services on the West Coast Main Line into Euston Station. We have increased the length of Pendolinos on the busiest routes from nine carriages to 11 carriages. We are about to convert a first-class carriage to standard-class on the nine-carriage Pendolinos in order to increase capacity. Between 1997 and 2010, we went from seven trains an hour on the West Coast Main Line to 11 trains an hour––11 train paths an hour. These are the short-term measures that we have been taking in order to increase capacity on the West Coast Main Line.
Lord Smith of Clifton: Is the capacity pinching so badly and where does it pinch badly? On some evidence we have heard, the only intercity capacity problem is the 7 o'clock going out from Euston.
David Prout: There are basically two major issues in terms of capacity that HS2 is dealing with. One is long-distance capacity, and that is a question of not just seats on trains but of train paths. Train paths are like landing slots at Heathrow and there are not enough train paths on the west coast main line to accommodate all the demands. For example, at the moment Virgin would like to put in routes from Blackpool and Shrewsbury direct to London and there is not space for those train paths. There is a train-path problem as well as a number of seats problem on the long-distance services.
The other problem is commuter capacity, and there the overcrowding on commuter trains is much worse than it is on long-distance trains. What HS2 does is create 18 additional train paths per hour north to south, and that takes long-distance trains off the existing tracks on to our new track and frees up capacity on the existing tracks for more commuter services. It deals with these two issues, long distance and commuter, and in both respects creates additional capacity.
In addition to that, going back to one of your earlier questions on freight, the West Coast Main Line is a mixed-use railway: long-distance intercity trains, short and long-distance commuter trains and freight trains, all muddled up together. That is one of the reasons that reliability on the West Coast Main Line is so poor, because if you get delays on one of those it knocks on right through the system. Taking the intercity trains off the West Coast Main Line will create more space for freight as well.
Lord Smith of Clifton: What about capacity for commuters coming in from the south to the capital? It will not do much for them, will it?
David Prout: It does not serve the south of London.
Lord Smith of Clifton: No, quite. In terms of priority, is that not one of the major priorities for overcrowding and lack of capacity?
David Prout: There are many priorities, and HS2, over this five-year spending review period, takes £16 billion of the £73 billion going into transport infrastructure investment.
The Chairman: I wrote last week to the Secretary of State and asked for some detailed information about capacity. When will that be forthcoming?
David Prout: We are preparing that information at the moment, and we will talk to the Secretary of State about it.
Q67 Lord Monks: Can I shift the questioning away from capacity towards demand and the demand forecasts that we are operating? There has been substantial growth in rail transport, although it has been rather flat in the last couple of years or so. How confident are you about the demand forecasts in the future, the 2.2% running up to 2036?
David Prout: We are as confident as we can be, and you have heard other people giving evidence where they said that our demand assumptions are reasonable. You compare them to the historic trend over the last 20 years and they are reasonable. They are possibly an under-estimate, but 2.2% a year is the figure that we have gone for as the most reliable that we can devise. As I said also, do not forget that as far as demand is concerned we cap it in 2036. We do not increase after that. The population will go on increasing at 5 million every 10 years, but we cap demand in 2036.
Lord Monks: How robust do you think the assumed link between rail demand and GDP growth is in the model that HS2 has used to produce demand forecasts for the future?
David Prout: We think it is robust. The link is not a completely linear parallel link. If you look at rail demand over the last 100 years, we are back now to the number of passenger journeys you had in 1920. The pattern has been down and then back up again, and over that time economic growth has gone up and up, pretty steadily with a few blips. I do not think there has ever been a pound-for-journey link and, more recently, rail demand has been going up more rapidly than GDP.
Alison Munro: Perhaps I could add a bit of context on that. Quite a lot of the growth that we have projected into the future is driven by population growth. As Mr Prout said, if you look at the number of trips that people make in the future, on our forecasts that increases from 2.1 at the moment to about 2.9, so we are not talking of a massive change in the way that individual people behave. It is a combination of factors. When you look at that, compared with what has happened in the past, our forecasts are quite conservative.
Q68 Lord May of Oxford: I want to ask you some questions about the prospect of premium pricing. In your strategic case for HS2, it says the estimates of the revenue that HS2 will generate are based on “conservative assumptions, using the same fare structure as the existing railway”. Being a bit more explicit about that, in written evidence to the Committee, the Department for Transport has said, “Our assumptions on the viability of HS2 and the expected fares income do not factor in or depend on a premium for high-speed services”.
To the contrary, Volterra Partners told the Committee in written evidence that the assumption that HS2 will charge the same fares for non-high-speed rail services is hugely misleading. Professor Glaister said last week that the issue of fares has never been properly addressed, and he thought that premium fares indeed could reduce demand and place even greater burdens on the taxpayer. Could you tell us a little bit more about your reaction to all that?
David Prout: The assumption that we have made in our modelling is that it will be the same average fare structure as there is today.
Lord May of Oxford: What would be your reply to Volterra and Professor Glaister?
David Prout: I did not really understand the comment from Volterra, I am afraid. I simply did not understand what they were saying, because what they said was not true.
Alison Munro: I think Professor Glaister also made the point that if you are providing a lot of capacity, which High Speed 2 will do, in that scenario you probably would not price up. You want people to use that capacity and that is the philosophy that underlies our assumption that you would not charge premium fares; you want to get people to use High Speed 2. That releases the capacity on the existing railway, which then provides the opportunity for more commuter services and so on. There is a policy reason for having this assumption.
Lord May of Oxford: I am very tempted to set a precedent in the Select Committee by saying, “Would you like to have a bet on it?” Perhaps we should move on.
The Chairman: Perhaps there is a little bit of form already, which is that we have received evidence that suggests that the premium pricing on the HS1 link has in fact deterred passengers from going on the High Speed 1 from Ashford to London, and that the numbers on that line are below the forecasts that were in place at the time that it was built. Could you shed any light on that?
David Prout: The franchise for the domestic service on HS1 is part of a wider franchise for that part of the south-east. As part of the franchise, the franchisee is allowed to charge premium fares. That is a policy decision that was made by the Government when that franchise was put in place and it is then a commercial decision on the part of the franchisee to maximise their revenue within the terms of their franchise. That is how it works.
Lord Smith of Clifton: In Japan, the high-speed trains charge more than the surface ones and they do it remarkably well.
David Prout: All I am saying is that all of our modelling is based on the same fare structure as we have today and, given that fare structure, you end up with the BCR that you have, and you can demonstrate that the railway, when you do the commercial modelling, will run at a very sizable surplus.
Baroness Blackstone: I am puzzled as to why you would not at least model a premium price fare structure. After all, if you are providing a better service, most commercial operators in whatever the field, whatever the sector, would charge more for a better service, so why not consider this at least?
David Prout: We have looked at it, not in a huge amount of detail but we have looked at it. If you increase the fares, you will reduce the demand, you will increase the payment per person. It is obvious. In the end, the rough workings we did on this came out roughly even. As Alison says, the policy reason for saying that fares will be as they are today is to maximise use of the railway, not maximise revenues. On that model, the BCR comes out where it comes out.
The Chairman: Would the franchise allow the operator to charge a premium price or not?
David Prout: The franchise conditions have not been determined yet.
Q69 Lord McFall of Alcluith: A number of respondents have raised concerns about the time-saving benefits from faster trains and that that would be lost if they were not near them. Indeed, one respondent, a private individual Dr Nigel Shepperson, submitted evidence saying that currently it takes him 75 minutes to get to Euston via Virgin Trains from his local station at Lichfield Trent Valley. Although he lives less than 20 miles from Curzon Street – the proposed site of the HS2 station in Birmingham – the door-to-door journey to Euston via HS2 would take him an extra 25 minutes, namely 100 minutes. Is that situation unique or could it be happening in a number of other places?
David Prout: It could happen. He would presumably continue to use a Lichfield service rather than go to Curzon Street.
Alison Munro: Overall, what our modelling is showing is that the vast majority of people get substantial journey time savings from High Speed 2 because that is what is generating the benefits.
Lord McFall of Alcluith: Could you put a figure on that when you say “the vast majority”? Have you modelled it?
Alison Munro: The modelling models how all the rail users will choose whether to switch to High Speed 2 or to continue to use the existing railway. It is the journey time savings that they will enjoy by switching to High Speed 2 that drives the benefits that then go into the benefit-cost ratio. The fact that High Speed 2 is generating a lot of benefits is demonstrating that for many people High Speed 2 is delivering a considerable benefit.
Lord McFall of Alcluith: When Professor Mackie gave evidence, he said that he was not convinced that the access cost from home to these station locations has been fully factored into the model. Is he wrong?
Alison Munro: We have included access costs in the model. We have a specific model within our model, the station access model, which models people’s journey times from their homes or from their offices to the station, so we do try to do that. That model is based on evidence. It is the best we can do in the modelling sense, so that is definitely included.
Lord McFall of Alcluith: So he is wrong in what he says?
Alison Munro: I would hate to say he is wrong. I do not know exactly what he has said, but we definitely model access to our stations and that is included.
Lord McFall of Alcluith: I will repeat what he says, “I am not convinced that the access cost from home to these station locations has been fully factored into the model”.
Alison Munro: We certainly attempt to, as far as you can do in modelling, and modelling is not a precise way of calculating every individual journey. It models, on average, how people behave and it is built on existing data, so we try to model it as best we can. In fact, if you look at the composition of the benefits, we do generate positive benefits in terms of people’s access to the station, so overall High Speed 2 improves accessibility to stations. For example, Old Oak Common introduces a better station location for many people in the west of London. We improve accessibility, for example with Euston station where we include a link to Euston Square in our costs provision for improving the underground provision.
So within our current costs we do provide for good access to our stations, because we have always recognised that if this railway is going to be used and deliver benefits people have to have good access to the stations. That has been a driving factor as we have developed the design of the railway.
Q70 Lord McFall of Alcluith: Sir David Higgins mentioned on Monday proposals for HS3 and his support for it. How much work has been done on that, and what is the ballpark figure for the cost for HS3?
David Prout: We have done a fair amount of work with Network Rail on HS3. The question that was asked of us was whether it was feasible to reduce journey times between Manchester and Leeds as a core part of a new east-west corridor. We have identified numerous interventions. The number I have in my head is 120 different interventions you could make on the route that could reduce journey times.
Lord McFall of Alcluith: I have seen a figure used that it would cut the journey time from 48 minutes to 26 minutes. Is that the type of figure you are thinking of?
David Prout: I cannot remember what miles per hour that assumes for the line, but at the 26-minute end of the scale it is more expensive than it is at the 35-minute end of the scale because you have to do more interventions. What we have not done yet is identify which are the most cost-effective interventions to make, and then go from that to a proposal as to how you would put together the series of interventions that would be the most cost effective to reduce journey time.
Lord McFall of Alcluith: So we could describe your proposals as at a very rudimentary stage at the moment in terms of analysis?
David Prout: I would say they are at a preliminary stage, yes.
Lord McFall of Alcluith: What is the global figure that you are talking about for this?
David Prout: It depends which interventions you choose, and we have not done that.
Lord McFall of Alcluith: What is the range? A figure of £7 billion has been mentioned.
David Prout: Yes. I do not know where that figure came from.
Lord McFall of Alcluith: So what is the range?
David Prout: We do not have a range because we do not have a proposal that has the right combination of the most cost-effective interventions yet.
Lord McFall of Alcluith: The £7 billion figure was released along with the report.
David Prout: No, I do not think it was.
Alison Munro: I think the £7 billion figure has been quoted. It was not our figure and I think it was simply if you took the per mile cost of High Speed 2 and applied it to High Speed 3.
Lord McFall of Alcluith: So you have not done a lot of modelling and you have not done any costing in terms of the global figure: is it fair enough to assess that?
David Prout: No, I do not think so. What we have done is we have worked out the numerous different interventions you could make to reduce the journey time between the two cities. What we have not done is identify which are the most cost-effective interventions and we have not put together a package that we would want to present to the Government for approval.
Lord McFall of Alcluith: So people should not really be rubbing their hands in glee at the moment. We need an awful lot of information to come out. Okay, fine.
Q71 Lord Rowe-Beddoe: A significant part of the benefit-cost ratio that we have been given is attributable to the regeneration benefits that are associated, or have been suggested to be associated, with this project. What complementary policies do you believe are required to ensure that those regeneration benefits will happen?
David Prout: In point of fact, the benefit-cost ratio is largely made up of transport user benefits rather than regeneration benefits. Those are the benefits that will be experienced by individual travellers and businesses as a result of the increased connectivity and capacity that we will create.
Lord Rowe-Beddoe: Excuse me: is that the 1.7 or the 2.3?
David Prout: That would be the 1.7 for the whole—
Lord Rowe-Beddoe: I am talking about the 2.3.
David Prout: That element is what is technically described as the wider economic impacts or wider economic benefits, but those do not include regeneration. Those include—it is set out in the economic case—agglomeration, increased competition and accessibility of the labour market. The regeneration, for example around Curzon Street or Old Oak Common, is not included in the benefit-cost ratio, but your question still stands: what do you need to do to make the most of those opportunities? That is an issue that was tackled by Lord Deighton in the Growth Taskforce report. He talked about it in four dimensions: what you needed to do in the station places to drive regeneration; what you needed to do to get the network ready in order to have the maximum possible accessibility of the HS2 stations to surrounding areas; what you needed to do in terms of skills to get people ready to benefit from the opportunities presented by HS2; and what you needed to do to make the most of the huge procurement effort that has to be done from HS2, so how you get British business ready to do the best they possibly can from the huge spend through one project.
Lord Rowe-Beddoe: How do you think we are going to do that?
David Prout: If you look at the regeneration issue, I think you have to look at it in several dimensions. In the first instance there is the land that HS2 will own on the stations and around the stations. We have to design our stations and our road access in a way that will drive regeneration in those places. Secondly, there is the area immediately surrounding our stations. It is very important for the local planning authorities to put in place plans for the regeneration of those areas, for them to use their compulsory purchase powers where necessary to do land assembly, and for the Government to contribute from the usual regeneration pots to make the most of those opportunities. Then there are the wider areas where HS2 will have an impact. That is where things like the skills agenda, the procurement agenda and so on come into play.
Q72 Lord Rowe-Beddoe: We have received written evidence, and in fact other witnesses have referred to it, of the danger that London will benefit at the expense of regional centres. Would you care to comment?
David Prout: Yes. I think what everybody who has appeared in front of the Committee has agreed is that transport infrastructure investment can lead to economic growth. I think that is common ground. The question then is whether HS2 can rebalance the economy or contribute towards that. There are several dimensions to this which I thought about in preparation. The first thing is that the economic benefits you get from transport infrastructure investment are largely around business efficiency, investment, agglomeration and so on. London is already extremely well connected. The north of England, where we are taking the railway, is not so well connected: therefore, if you create a railway line between the two, the proportional benefit will fall on the north rather than London. London is already very well connected. It will make a less important difference than to the north where they are not so very well connected, so they will get a big benefit from it. Logically that would suggest that in terms of the balance of economic growth, the north would benefit more than the south.
The second thing is the particular circumstances that pertain in this country at this moment and for the foreseeable future around the very high costs of locating in London—be that housing, office or labour costs. If you make the north more accessible, it will tend to make it more attractive because it is a cheaper place to locate. I think that is some of the argument—I did not follow all of it—around the U-curve that people were describing in your earlier sessions, where if you have two really badly connected places, you have two head offices. That is not where we are at the moment. If you have two places that are reasonably well connected you have the offices in the bigger place, naturally. If you have two places that are really well connected you locate in the cheaper place. That is what I understood the academics to be saying who presented to you earlier last week. Under those circumstances, given the relative costs of London and the north and the benefits of improved connectivity between the north and the south, again you would think that that would tend towards rebalancing the economy.
Thirdly, there has been a lot of talk about the KPMG study. We have just heard Professor Overman at length, and a lot of the talk has focused on the quantum of benefit, £15 billion, £8 billion—but, again, what I think is common ground is that the analysis they have shown around the relative benefits of different parts of the country is sound, and that is why there has been such outrage by the so-called red dots on the KPMG map: the places that will not benefit from HS2 because they are in Cornwall or East Anglia or wherever.
In addition to that, one has to listen carefully to what the leaders of the north are saying. They are not saying, “Please do not send HS2 here because we will disbenefit from it”. Quite the opposite, they are saying, “Please send it here because we will benefit from it”, and I think that we should listen to that. Our modelling shows that 70% of the jobs supported by HS2 will be outside London. Is that enough?
Lord Rowe-Beddoe: That is a very telling response. I think you perhaps ought to address your answer to the Yorkshire Chambers of Commerce, who appear to be not quite on the same page as you, and also the London Borough of Hillingdon who have a deep concern.
David Prout: They have a particular reason for saying that.
Lord Rowe-Beddoe: But anyway, thank you for that. That is very helpful.
The Chairman: It is unsurprising that some of the cities in the north are not saying, “We do not want it”, because it is looking a gift horse in the mouth, is it not? They are getting it and it is paid for by the whole country.
David Prout: Yes, but if it was going to suck the life out of their economies they would not be welcoming it.
The Chairman: That is true.
Q73 Lord Carrington of Fulham: To carry on a little bit from that, if I understand what you are saying, which is very interesting, it is that there is a positive benefit, everybody is agreed that there is a positive benefit, and all they are arguing about is the quantum of the positive benefit: how big it is. That then raises the next issue. If the positive benefit is at the small end of expectations, whatever that may be—I suspect that there is an error factor in all of these calculations, purely because of the length of time that is involved and the difficulty of projecting future income streams and so on—are there other projects that could have been done in the transport field, not necessarily on the railways but perhaps on the road, which could have produced a similar benefit at the lower end, and have you modelled that at all?
David Prout: That is a question that is addressed at the heart of all the alternative studies that we have done. There clearly are alternatives that can increase capacity, and some of them are being implemented at the moment, as I alluded to earlier in terms of extending the Pendolino trains, but in terms of quantum of capacity increase, none of the alternatives that do not involve building a new railway delivers the same quantum of benefit. That is common sense because we are building a new railway. All the others are about adapting, mending, tweaking and adding to the existing railway. You cannot get away from the fact that a new railway creates new capacity.
The second thing is around connectivity. There has been a lot of criticism of the case for HS2 in terms of its presentation in the early days as being about speed. It was always presented as speed and capacity right from the 2009 documents, if you go back to them, but speed is important. Getting to Manchester quickly is important. It is two hours eight minutes at the moment. It will be one hour eight minutes. That is transformational. It will make it much easier, quicker, more convenient and less tiring to go to and from Manchester. You cannot get that without building a new, high-speed railway.
In terms of reliability, HS1, the Channel Tunnel rail link, has over 99% reliability. The West Coast Main Line is 85%, having had £9 billion spent on it. It is still at 85% and that is because it is old and rickety, it twists and turns and it has mixed use. For reliability, you can only get that kind of huge step change by building a new railway. In terms of frequency as well, you can only get the step change by creating a new railway because only then can you create the extra train paths that allow you to have more frequent trains.
Q74 Lord Carrington of Fulham: One final question that is really exploring what we were talking about before: the connectivity between the northern cities. That seems to drive a lot of the economic benefit of HS2. In other words it is the phase 2, it is the Y at the top that forms a lot of the economic benefit coming down the whole project, which is right at the tail end of the investment project, as I understand it. Would it have been better to have started it the other way around: not with HS3 necessarily, although that could then be tied into it perhaps, but to have built the connection between Birmingham, Manchester and Leeds first, got all that up and running and going, and then considered building the connection through to London? That seems to be putting to one side the problems with the commuter traffic into London, which can be addressed in other ways, perhaps—but putting the HS2 London-Birmingham link into the second phase rather than the first phase?
David Prout: The BCR of 1.7 is for phase 1. The 2.3 is for phase 1 and phase 2. It is not just for phase 2 in isolation. There are two major issues. The first is simply a practical one, which of course could be overcome by delay, which is that we are much further advanced in terms of the regulatory and legislative provisions for phase 1 than we are for phase 2. More important than that are the capacity constraints between Birmingham and London that are causing the problems on the West Coast Main Line. You basically have to tackle those first, otherwise by freeing up the routes to the north all you do is free them up and put them into a traffic jam. You have to free up the bottom end first. That is why we have to build a new Euston station, at huge expense. It is no good building a new railway line into London unless you have the platforms to park the trains at. You have to do it. You have to do it south to north, because that is where the traffic jam is.
Lord Shipley: Can I just pursue that? I was told three years ago that there was a third reason why London-Birmingham had to come first, which was that the fares income was needed to help generate revenue. In that context, and before you comment on that, I have been puzzled about what you referred to as the rough workings on fares, because I would have thought that what the fare levels were going to be would be central to decision-making. What is your expectation in terms of public subsidy on HS2? What proportion of the total do you think, from your rough workings, the fares will represent?
David Prout: If you look at the commercial case, we did not give our detailed workings but we gave the headlines in terms of public subsidy for the operating railway, and what those headlines show is that HS2 will operate at a very substantial operating surplus. Part of that will be abstraction from the existing railway network, because we are taking business off the West Coast Main Line, the East Coast Main Line, the Midland Main Line, on to HS2, but the balance, as set out in the commercial case, shows that HS2 will net for UK Rail plc an increase in revenue.
Lord Shipley: Is that based on there not being a premium price?
David Prout: Correct, yes. What we have done is said, “Can we operate this railway effectively, efficiently and with a good BCR using the existing fare structure?”—and we can. That is the thinking that we have put into it.
Q75 Lord Shipley: All right. Can I pursue the rest of the rail network briefly? I am a user, I live in Newcastle and I use the east coast line weekly. In your view, will the fact that there is going to be major capital investment in HS2 reduce the likelihood of the upgrading of the intercity connectivity that occurs, for example, down the east coast? There are others into the south-west and into south Wales. Will they suffer as a consequence of investment going into HS2?
David Prout: There are two answers to that. As I said earlier, if you look at the overall capital investment programme for the next five-year period, £16 billion goes into HS2 and more than that goes into the classic rail network. Some £73 billion overall goes into transport infrastructure investment, so if those plans are implemented and if those plans are continued there will be adequate funding for investment in the rest of the rail network. One of the things we are very conscious of in developing our plans is pre-commitment of future control periods for Network Rail—and we basically avoid that wherever we possibly can.
In terms of the services to Newcastle, the intercity express programme is now commissioned and is starting to be provided. That will go ahead, barring unforeseen circumstances that I cannot imagine. It is all contractualised now. There are some particular issues north of where HS2 new track stops, just south of York. Coming from Newcastle you will come down the classic network to Church Fenton in a classic compatible train, bump up on to our lovely new railway and come down at 225 miles per hour. But between York and Newcastle there is a well known two-track section of track. It is very expensive and disruptive to upgrade that, but at some point in the next 20 years, before HS2 is finished, I would have thought there is a good chance that something will be done about that.
Lord Shipley: I would certainly support you in that endeavour, but I think there is a wider question about those parts of the UK that are not part of the HS2 network and how they are going to ensure that the investment is put in to enable them to have rapid connectivity.
My last question is to ask you about the HS2 Growth Taskforce. What work are the Government doing to implement the recommendations that it made?
David Prout: The task force made 19 recommendations. We accepted 18 of them. All of those are being worked on at the moment. Probably the most visible thing to the public would be the announcement of the new HS2 skills academy that will be built in Birmingham and Doncaster. Equally, last week HS2 held its second round of suppliers’ conferences where it announced that there would be at least 2,000 apprentices as part of HS2, which was one of the recommendations of the Growth Taskforce. All the cities up and down the line are working on their growth strategies in order to put in place the right planning regime around our stations. We have pump-primed that for the non-London parts of station places for phase 1, with some resource funding from DfT so that they can do that better.
We are working on the establishment of what we are calling Regenco at the moment so that we have a central government capability to help local areas regenerate around the stations. We are working hard across the piece on that and Sir Jeremy Heywood, the Cabinet Secretary, has chaired a series of meetings across government to make sure that departments pull together on this issue.
Lord Shipley: Okay, so a lot of people are doing a lot of work. Is the DfT adequately resourced to deal with all of this and all of the other major transport projects it is handling?
David Prout: There is a really important issue around the amount of work that DfT is doing. We are adequately resourced at the moment but there are more projects coming. Fiscal constraint is a problem for all government departments and I would strongly advocate large and highly skilled teams dealing with these major projects, because they are very complicated. The burden of responsibility on our shoulders to ensure that the money is spent well is huge. Since I took over as DG for HS2, we have increased the size of the team from 30 to over 100, and I think that is about the right size for this stage of the project for dealing with HS2.
Lord Lawson of Blaby: I have a very quick question, because we are coming to the end. You stated that HS2 would have a substantial operating surplus, but is that not slightly misleading? There will also be a very substantial burden on the taxpayer and on the public finances, will there not?
David Prout: The cost of capital is not taken into account in that calculation. That is common practice, as you know.
Lord Lawson of Blaby: Yes, except it is a very capital intensive project, is it not?
David Prout: Well, you get a lot for your money.
Lord Lawson of Blaby: True. So you do not count the capital cost. You stated there will be great benefits from your lovely railway—I think that was your phrase—that would not be secured by improving the existing network. That may well be the case, but it may also be the case that the benefit-cost ratio of improving the existing network is greater than the benefit-cost ratio of HS2. What studies have you done of the alternatives and have you published them?
David Prout: Yes. There were four major studies, as I said at the beginning of the evidence that I gave, in 2010, 2011, 2012 and 2013; weighty, extensive studies of the alternatives with the BCRs set out. It is indeed the case that some of the small interventions do generate a very good BCR, and some of those are being implemented. I gave the example earlier of increasing the length of Pendolino trains. That is a very cost-effective way of increasing capacity but it only takes you so far.
Q76 Lord Lawson of Blaby: Finally, one of you stated much earlier on—I am not quite sure which of you it was, forgive me—that there is an increase in passenger journeys from 2.1 to 2.9. What precisely does that relate to?
Alison Munro: That is the number of trips per household per year: so that gives you an indication of how much more travelling we are expecting people to do on long-distance journeys.
Lord Lawson of Blaby: I thought it was that. What puzzled me was that you say that is a very conservative estimate and yet it is an increase of 40%. That does not sound like a conservative estimate to me at all.
Alison Munro: We are assuming that once it gets to that higher figure of 2.9, which is in 2036, it never increases beyond that—so forever more that is the amount of increase in travel. At the moment there are quite significant differences in the amount of trip-making between richer people and poorer people. The sort of increase in the number of trips people would make per year is really not large, I would suggest.
Lord Lawson of Blaby: A 40% increase not large? It seems to me very large.
Alison Munro: But in absolute terms we are talking about from two trips a year to less than three trips a year. It is not difficult to imagine that increase in trip-making.
Lord Lawson of Blaby: Difficult to imagine such an increase, you say?
Alison Munro: I do not think it is at all difficult to imagine people increasing their trips from two a year—we are starting from a low level—to under three a year per household. That seems to me quite a modest level of travel.
Lord Lawson of Blaby: Since some people will not travel any more it means that there are other people who are going to have to travel a lot more. So it does not seem that it is such a cautious estimate, but I will leave that with you.
Q77 The Chairman: You mentioned the very considerable investment that is going to be required to make Euston ready for HS2. Some witnesses have suggested, or some written evidence has suggested, that HS2 should stop at Old Oak Common. Is that an option that you considered—and, if so, what were the drawbacks of doing that?
David Prout: I think it is the door-to-door issue and the connectivity issue that you have been discussing in the Committee over the last couple of weeks. A central London station is an essential part of driving demand on HS2. The capital investment required would not justify terminating a station out at Old Oak Common. Interestingly, the new open access providers of high-speed services in Italy have not been allowed into Termini station in central Rome but are forced to drop their passengers at a station in the outskirts. I think that is a real problem for them.
Alison Munro: In our modelling of High Speed 2, we estimate that about one-third of people would choose to use Old Oak Common, so for two-thirds of people a central London location is preferable. If you stopped the trains at Old Oak Common, that would be a disbenefit to two-thirds of people. Some of them would then choose to continue on the existing railway, so you would not get the benefits of High Speed 2.
The Chairman: Mr Prout, Ms Munro, thank you very much indeed: a most interesting session.