3
Transcript of evidence taken before
The Select Committee on Economic Affairs
Evidence Session No. 10 Heard in Public Questions 112 ‑ 121
Members present
Lord Carrington of Fulham
Lord Griffiths of Fforestfach
Lord Lawson of Blaby
Lord Shipley
Lord Skidelsky
________________
Lord Adonis
Q112 The Chairman: Lord Adonis, welcome to these familiar surroundings. Thank you very much for joining us today. This is the fifth session in our inquiry into the economic case for HS2, and, as somebody who was there at the start, I wonder if you could just help us briefly to answer one of the questions that a number of witnesses have put to us, which is: what is the exam question that HS2 answers?
Lord Adonis: You will have seen the command paper that I presented to Parliament in March 2010, which, on pages 8, 9 and 10, sets out the then Government’s rationale for HS2.
I ought to make clear that, from the outset, the essential rationale for HS2 was about the need for a step‑change in capacity between the three major conurbations of the country: Greater London, the West Midlands and the north-west, with connections also to the great conurbations of the East Midlands and West Yorkshire.
If I could draw the Committee’s attention to page 8 of the 2010 command paper, it is quite important in understanding the development of it. I know it has been asserted that there were some people, like myself, who were fixated with fast trains and train sets and saw the potential for cutting journey times and thought this was wonderful because we were unduly influenced by the bullet trains and the TGV and just wanted the same for Britain. In fact, it was a hard‑headed analysis of likely capacity requirements that drove the rationale for HS2. Conclusion 1 of the Government’s assessment of the case for HS2, on page 8 of the 2010 command paper, was: “That over the next 20 to 30 years the UK will require a step-change in transport capacity between its largest and most productive conurbations, both facilitating and responding to long‑term economic growth”. Conclusion 2 is: “That alongside such additional capacity, there are real benefits for the economy and for passengers from improving journey times and hence the connectivity of the UK”. So it was first capacity and then associated benefits, which, in the strategic case that the coalition Government published last year, is reiterated.
There are only two ways, of course, of producing a step‑change in capacity. One is to build an entirely new line, as in fact most developed countries have done between their major conurbations, if they have economic geography similar to ours, beginning with Japan in the early 1960s with the opening of the original Shinkansen line between Tokyo and Osaka, and as indeed is now starting to happen in the United States, which of course has been very averse over the previous two generations to rail travel; or you have to upgrade the existing lines.
I well recall my first ministerial engagement as Minister for Transport, which was opening the completed West Coast Main Line modernisation project. This was in October 2008. The west coast modernisation cost, at then prices, £9 billion, so at today’s equivalent HS2 prices significantly more, for a 10‑year programme of upgrading the West Coast Main Line, which produced fractional benefits compared to HS2. Indeed, because this was the modernisation of a pre‑Victorian railway—the West Coast Main Line, the London to Birmingham railway, was opened before the coronation of Queen Victoria in 1838, so it is coming on for 200 years old—many of the promised and proposed benefits within the price tag were not deliverable. It is a very difficult and complex job modernising a Victorian railway that is running at multiples of the capacity it was designed for. The completion of that work was after 10 years of chronic delay and inconvenience for passengers while that work was conducted. Indeed, of the £9 billion cost, from memory, I think half a billion, but it may have been more, was in payments to train operating companies as compensation from Network Rail for not running services, because of the chronic disruption while that work was taking place.
It became clear to my advisers and myself, as we were looking at what would happen with the next step‑change in capacity, that there were only two alternatives. One was building a new line, which had been the norm. The other was very expensive upgrades in the Victorian and pre‑Victorian infrastructure to seek to achieve—it may not even have been achievable—another step‑change in capacity on the West Coast Main Line, on the Midland Main Line through to Sheffield and, ultimately, on the East Coast Main Line too.
In the command paper, and I will particularly draw the Committee’s attention to the table on page 51, was set out the assessment of those alternatives, and the conclusion reached there was that the highest capacity‑increasing option on the existing lines would cost, in cash terms—leaving aside seeking to price the disruption, taking that completely outside—more than building HS2, and yielded half the additional capacity. In the strategic case, the Government dismissed that option as being impractical, and I could go through what that option involved. For example, it involved four‑tracking the Chiltern Line; given the reaction to HS2, you can imagine how that would have been greeted. It was not a practical proposition.
The point that holds, to which I am sure the Committee were paying close attention, is that it is not a choice between doing nothing and doing HS2; it is a choice between very difficult and very expensive capacity enhancements on the existing lines, being the busiest lines in the country, and HS2. I cannot come before the Committee and say with any certainty, because there is no certainty in these matters, that one would have been cheaper than the other. I can say, because we have the experience, that the last upgrade of the West Coast Main Line cost £9 billion; it delivered a fraction of the benefits of HS2; and no sooner had it been completed than rail planners and transport analysts were telling me that the next phase of upgrade would need to be planned rapidly because of capacity requirements, which are set out in both the command paper and the strategic case.
The Chairman: We want to get to the bottom of the question of capacity, and we have asked the Department for Transport for further information, but that so far has not been forthcoming. From your time at the Department for Transport, why is there a degree of reluctance to share this information? It has only come out as a result of a court hearing.
Lord Adonis: I have no idea. I am no longer responsible for these matters. When I was responsible, I shared almost everything. I have always taken the view that one should be as open as possible. Indeed, when I published these proposals in 2010, I also published all the alternative routes that we had considered and not decided to proceed with, which was thought at the time to be a very risky proceeding, because it might illustrate the fact that there were alternatives. However, I have always taken the view that all of this should be in the public domain. I hope that this material is forthcoming.
Q113 The Chairman: An important infrastructure alternative is the rollout of superfast broadband across the country, which will have quite a dramatic impact on the way business is conducted and the way people communicate. Was that taken into account in your thinking?
Lord Adonis: Yes. It is complementary. It is not an alternative. The evidence is that superfast broadband does indeed generate more local working and home-working, but it does not stifle growth in demand for travel.
Lord Skidelsky: Can I ask why that should be so? It is counterintuitive, just on the face of it.
Lord Adonis: People seem to like working in networked communities, which is why new highly networked communities with high concentrations of economic activity like Docklands have been so successful. There is clearly more. Of course, we are also an expanding economy with an increasing population, so the increase in home-working has not led to a decrease in demand for business travel. On the contrary, business travel demands have increased sharply.
I remember one of my first jobs on the Financial Times was telecommunication correspondent. This was 20 years ago, and we were told then that the introduction of mobile phones, much better telecommunications technology and fibre optics would lead to a dramatic surge in home-working, and a massive reduction in requirements for office networked communities, and that was just as Docklands was taking off. Unless the future is going to be radically different from the last 20 years, what one would expect to see is an increase in home-working and the connectivity that comes with being able to work outside the office, but also a continuing demand for networked business centres and travel between home and those centres, and between business centres.
Lord Skidelsky: I have just one follow‑up. How much weight did you place, in estimating the capacity constraints you would face, on the rising population?
Lord Adonis: That was taken account of in the Department’s estimates.
Lord Skidelsky: It is quite substantial.
Lord Adonis: We were doing our work in 2009‑10, and population projections have been increased since, substantially.
Q114 Lord Griffiths of Fforestfach: Regarding home-working and so on, to what extent would that still hold if the train operators had complete freedom in pricing?
Lord Adonis: They do have very substantial freedom in pricing at the moment. I am not sure where your question is leading.
Lord Griffiths of Fforestfach: If you had regulated prices and I now had the option that I could work more at home or, on the other hand, I could travel, if the price of travel were to be increased, I would clearly have a greater incentive to work at home. It does seem to me that rail fares are a highly charged political issue, and, when they increase, there is a lot of discussion in the press about them.
Lord Adonis: Business travel has increased substantially. A significant proportion of that is on regulated fares, because these are full‑price tickets that people are buying. Equally, of course, there has been an explosion in cheaper travel because one of the big developments of the last 20 years has been the development of advance tickets and advance ticketing. I do not myself subscribe to the view that travel should only be for the rich. The development of advance tickets, which now account for a very substantial proportion of rail travel and can be extremely cheap, is a positive development, enabling people to travel in ways that otherwise would not have been possible or would have taken up a much larger proportion of their budget.
Of course, it is important to understand that it is meeting peak capacity that is a key requirement of a well functioning transport system, able to serve the needs of the economy. The peak requirements on the West Coast Main Line are very intensive, commuting into the metropolitan centres of London, the West Midlands and the north-west, and that will be on full‑priced, regulated fares, because these are commuter tickets. In particular on the southern part of the West Coast Main Line, which is one of the busiest mixed‑use railways in the world, south of Rugby, you have long‑distance trains coming from Scotland, Liverpool, Manchester, north Wales, semi-fast trains coming from Birmingham and Milton Keynes, and very intensive commuter services coming in. Also, half of all of the freight traffic movements in the entire country use the West Coast Main Line at some point, particularly around Rugby, because of the distribution centres in the Midlands. It is that requirement for peak capacity on what are very, very busy commuter lines as well as long‑distance lines. Commuter tickets are not discounted, which is the capacity requirement underlying HS2.
Q115 Lord Shipley: I would like to ask you about the October 2013 strategic case. Do you think it now provides a convincing narrative for the reasons as to why HS2 is required, and do you think that the public‑relations handling of that strategic case has been as strong and as successful as it might have been?
Lord Adonis: I have not been a party to the public relations, so I cannot answer that question, I am afraid. The essential rationale, which is a capacity argument, was true in 2010, was true in 2013 and is true in 2014. I cannot answer for how well presented the case was, but I happen to think that it was brilliantly presented in 2010 and perhaps less well presented afterwards, but that may just be a matter of amour‑propre. I do notice that the key compelling charts, like figure 6 on page 16 looking at past and forecast demand, and all of the charts that lay out peak‑hour capacity coming out of Euston and how that would be dealt with in various different scenarios, ring true from the work that we did in 2009 and 2010.
Lord Shipley: Bridget Rosewell gave evidence to the Committee two or three weeks ago, and she said that the October 2013 version “articulates a case for an engine for growth”. Would you subscribe to that?
Lord Adonis: I have always taken a view in public policy that you should adopt the most conservative case. The first piece of serious academic work I did when I was a young Oxford academic was a history of the poll tax, with David Butler and Tony Travers, two very distinguished professors. What that taught me—and this was hugely important for my life as a Minister—was that, when you are engaging in public policy, you should always start with the assumption that the status quo may be better than any change. The then Thatcher Government would have done so much better if it had simply kept the status quo and not embarked on the poll tax. I know Lord Lawson has many views on these matters too.
The status quo in the case of the West Coast Main Line and the connectivity between London, the Midlands and the north-west is not an option. There is no option that is going to allow this Victorian railway to see us through the next 20 to 25 years. Only change options are available to us. The conservative argument for HS2, the one that persuaded me that it was right, on behalf of the then Government, to put forward this proposal, is that we will need a step‑change in transport capacity, particularly to move businesspeople and commuters between and into the major conurbations of London, the West Midlands and the north-west. It was on that basis that the Government proceeded, and I have read out the relevant passage.
There are also many claimed benefits in terms of growth, connectivity and journey‑time savings. They are clear benefits. How you price them is debatable, but they are manifest benefits. However, they, to my mind, are the added benefits; they are not the essential argument. The essential argument is that we have two choices as a country: we spend tens of billions over the next 20 to 30 years on upgrading the existing West Coast, Midland and East Coast Main Lines and the stations that serve them, or we do HS2. On the balance of the arguments, I thought the case for HS2 won out.
Lord Skidelsky: What thought was given to running HS2 at a slower speed?
Lord Adonis: It is in the 2010 command paper. It is perfectly possible to. The estimate of the cost of building a conventional line as against a high speed line is it is about 10% less, but it seemed to me to be crazy to do that, to build a 21st century railway to 19th century technology. No one that I am aware of has embarked on that particular course. If you are going to build a new railway you should build it to modern technology, which includes, of course, international markets for the signalling, the trains, and all of the equipment that is needed, which is now 400km an hour technology and rolling stock. I hope we will be buying internationally competitive equipment and rolling stock and not seeking to customise it any more than we need to to run some trains through to destinations beyond HS2, so there would need to be some customisation. I could not see any good argument for building a railway to historic rather than to present levels of technology.
Lord Griffiths of Fforestfach: It would just cost a little less.
Lord Adonis: It would cost a bit less, but then it is not even clear it costs less actually, because to build a railway to conventional line speeds you would then need wholly customised equipment for the whole of the route. Also—and this is quite a significant factor in the light of the public consultation that has been adopted—the argument for building such a line is that you could use existing transport corridors more; you could do it less with high speed rail. The idea that building next to existing transport corridors—which would also include having to significantly widen transport routes through major towns and cities—would be less controversial than building HS2 is for the birds. The bits of HS2 that have proved most controversial are those very small sections, because it is a high speed line, so it largely goes through unpopulated territory. There are very small sections that do go through populated territory: the exit from Euston and the parts of the Chilterns and the approaches to cities where there is population. If you were using the existing transport corridors the impact on settled communities would have been very significantly greater, so I am not even sure the 10% saving would have been realised by the time you had had to do the mitigation or the route changes that would have been required to meet the opposition that would have been generated.
Lord Griffiths of Fforestfach: Would you say that HS2 would lead to an increase in productivity in the British economy and to an increase in the long‑term trend rate of economic growth?
Lord Adonis: I hope so, but one cannot be certain. I hope it will do so, in particular because I hope what it will do is to network together far more efficiently than we do at the moment, to create greater agglomeration between the major conurbations of the country. In the 2010 command paper is what I thought was one of the most interesting pieces of work that was done—it is on page 60—which is GVA per head mapped against journey time by rail to central London, so it is not doing it by distance, but by journey time by rail. There is a strong correlation between proximity to London in terms of journey time and gross value added, which, of course, includes not just commuter destinations to London, but major cities like Oxford and Portsmouth and so on.
As I say, this is not the central case for HS2 by any means, but one would hope that by bringing the great metropolitan centres of the West Midlands, Greater Manchester, the East Midlands and West Yorkshire much closer to London, and creating agglomeration effects, this will boost growth. However, the future may not be like the past.
Q116 Lord Carrington of Fulham: One of the things that justifies the HS2 project, in terms of the numbers and the economics of it, is the amount that businesspeople particularly are prepared to pay extra to shorten their journey times. There have been various numbers that have been adjusted over the various reports that have come out, and I think have come down somewhat, but as we have probed those numbers it has been suggested to us that they are hard to justify other than being “directional”, in the words of a finance director of mine at one time, who was never prepared to be tied down to numbers. In other words, it just said “we assume” that businesses will value a quicker journey, and we will put a number on that, and then we will multiply it up, and that produces 75% or 80% of the benefit of HS2, and that is then projected forward for 20 years or so. It all suggests to us that the numbers are pretty hard to rely on; is that something you would agree with?
Lord Adonis: No, I would not agree with it. Can I first of all reiterate the points that, before you get to the economic case and the BCR and all of that, you have the capacity requirements, which this Government and future governments are going to have to address? When it comes to the BCR—and as a Minister I have been looking at these BCRs all the time, and I have always been somewhat sceptical of BCRs—a BCR is the economic model that is negotiated between the Department for Transport and the Treasury, which changes over time in terms of the components that go into it, which is trying to make an approximation of long‑term economic benefits.
My own view is that this is an aid to policymaking, but it should not be a substitute for judgment. The reason why we have Ministers who take decisions, and a Government and Parliament that take decisions, rather than simply putting them through a computer, is that this is a matter of judgment. My personal view, for what it is worth, is that aggregating small journey time savings is a debatable and maybe not particularly fruitful endeavour.
As it happens, in the case of high speed rail, they are not small journey time savings; they are substantial journey time savings for most of the journeys. It is not just 20 minutes, for example, London to Birmingham; Old Oak Common, which is the junction with Crossrail, to Birmingham International, which is the economic hub of the West Midlands, is a journey time of 31 minutes straight into Crossrail, which is the new £16 billion line that goes straight into the West End and the City. The journey time savings are going to be very substantial; they are not going to be marginal at all.
Even if we take the argument and accept that the value of journey time savings has been overestimated, there are other things in that model I think are frankly crazy; for example, the economic model posits that growth in passenger numbers stops in 20 years. You see it in the 2013 strategic case, on page 16; the long-term demand is then plateaued in 2033. That is, again, part of the model. I understand the rationale, which is the further out you go the greater the uncertainty and therefore the less reliance you should put on projections of passenger demand. All I would say, as a matter of common sense, is if anybody seriously thinks that demand on the West Coast Main Line and for travel between London, Birmingham and Manchester is going to stop growing in 2033, I think that they would be in a small minority of opinion and I would be prepared to wager a very large bet that that does not prove to be the case. It would have been equivalent to Brunel, when he was building the Great Western Railway, being told that the better option was to upgrade the canals, because you could not see and project any passenger number post‑1870, and an upgraded twin‑tracked canal system between London and Birmingham would be more than enough to meet demand for the next 20 years. It is not a plausible position.
Again, I am always into conservative cases on these things. The point I make in response to Lord Carrington is that even if you accept that journey time savings have been exaggerated, I would put to you there are other elements in that model—that is, of course, a model that produced a satisfactory BCR—that are hugely implausible; by far the most implausible assumption is that passenger growth will stop in 20 years. When I had this benefit‑cost ratio and all the components explained to me, because I am not an economist, but I take my responsibilities seriously and went through all of this in some detail when we were going through this in 2010, the conclusion I reached was that you could put different assumptions in. You could have a lesser assumption for journey time savings; you could have a greater assumption for future passenger growth. It would come out somewhere around this, but that was not a substitute for judgment, and the central judgment that led to HS2 is that we are not going to be able, as a country, to get through the next 20 years without major infrastructure upgrading between the three principal conurbations of the country. We either do it by a further modernisation of the Victorian and pre‑Victorian railway—and I have been there; that was going to be a very expensive option with marginal benefits—or we built a new line.
I was also influenced by the fact that almost every country with our economic geography, almost every country that had faced this issue over the previous generation, had opted for high speed rail. I visited them; again, I took this very seriously. I spent two months visiting most of the countries that have developed high speed rail over the last generation. I caught the tail-end of the last evidence session; you could have a debate about whether city X or Y benefited more or less; did Avignon benefit more or less than Lyon or Lille, which is very depressed? Did it get the full benefits that it might have got? What I can tell the Committee is I did not meet a single mayor of a city, whether it had gained more or less, Minister, parliamentarian, of any country that has developed high speed rail, who told me that if they could have rerun the previous 20, 30, or 50 years, in the case of Japan, they would have thought they were better off not doing it: none, not one.
However, on the other big decision I had to take as Transport Secretary, which was on aviation options—that was very, very difficult, where we placed new runway capacity in the south‑east of England—I can tell you that in probably about half of the countries I visited the Ministers, parliamentarians and mayors told me they thought they had made very significant strategic errors in the location of airports and the development of airport capacity over the previous generation. I simply put it to the Committee that when the whole of international opinion and evidence is on one side, which it certainly is not, I should say, in the case of aviation, then I tend to be of the school of public policy that thinks that is an argument for, not an argument against.
Lord Carrington of Fulham: That is very helpful, and I quite understand what you are saying, but the conclusion from that is that all the modelling that the Department for Transport does, and all the other various academics do, is all really a waste of time.
Lord Adonis: No.
Lord Carrington of Fulham: What we really ought to be doing is saying, “Well, we actually think this is a good thing; therefore it is a good thing.”
Lord Adonis: No, I did not say it was a waste of time; let me emphasise what I said. I said it was an important aid to decision‑making—an important aid. If the modelling had not shown a robust business case, and it did, then that would have been a significant factor, but it is not the only factor. The Committee will have been looking at the historic evidence on the Jubilee Line, on the M25, on a number of big infrastructure projects in the past, which have had much weaker BCRs than HS2, but which nobody would dream now of revisiting.
Indeed, somebody said to me—this may be dangerously anecdotal—that of the major infrastructure projects linking major cities and conurbations, which had been carried out in the previous two generations, only two had significantly underperformed projections. One was the Humber Bridge; well, we all know the political history of that particular decision. The other, very tellingly—and I caught the end of your last evidence session—was HS1. I did look at HS1 with some care, because this is a very important issue in respect of HS2; HS1 was between three cities—London, Paris and Brussels—that did not have very substantial traffic; it is important to understand that. It was the then Conservative Government that back-engineered figures for the next 20 years that showed extraordinary levels of growth between those three cities where there was not substantial traffic at the time when the project was commissioned, whereas, again, with the conservative argument, building a line between the three major conurbations of the country where there is huge traffic and very great pressure at the moment, is a much stronger position. My own view, for what it is worth, if you could rerun the history, is that we built the wrong high speed line first; we should have built the high speed line between our major conurbations in England first, before we started building a line out to the continent, but that is another matter.
Lord Carrington of Fulham: If I can just finish on this, that is not the argument that we have been hearing. The argument we have been hearing is the pressure is not the traffic between London and Birmingham, and so on; the pressure is actually on the commuter traffic in London, and that is a very different issue.
Lord Adonis: No, it is not. No, the two are the same, because in order to address that, the released capacity on the existing lines is essential, and for freight traffic too, so the two arguments are the same: that by taking all of the long‑distance, and a good part of the semi‑fast, semi‑distance traffic off the West Coast Main Line and, in due course, the Midland Mainline and the East Coast Mainline, you dramatically enhance capacity in a way that is otherwise impossible to do on the conventional lines for commuter traffic, and also crucially for freight traffic as well.
Q117 Lord Lawson of Blaby: Lord Adonis, you are the only begetter of HS2, and far and away its most eloquent advocate. It is, however, a hugely expensive public expenditure project. Would you be in favour of it irrespective of what it cost?
Lord Adonis: No.
Lord Lawson of Blaby: What is the upper limit of cost where you would say, “No, that is too much”?
Lord Adonis: A price where any plausible view of the cost-benefits of upgrading the existing lines would be very significantly bigger than building a new line, including pricing in the cost of disruption, which is very expensive, and has not been priced properly in previous upgrades. The half-billion figure that I gave did not remotely price the cost of 10 years of chronic and sometimes perpetual disruption on the West Coast Main Line, but that is a judgment that would need to be made. At the current figure of £42 billion, of which 50% is contingency, my judgment is—again, looking at the alternatives—that HS2 is not at that upper limit, but, if it were to increase way above that then it might reach such a limit.
Lord Lawson of Blaby: Can you give us some idea—because you have studied this very carefully, very closely, over a number of years—of what that limit might be? I say this because we have had a lot of evidence that the great majority of these projects—not every one, but the great majority—substantially exceed the projected cost. Although you say £42 billion—in fact the Government now says around £50 billion; there are others who have said £80 billion—at what figure would you say, “No, that is too much”?
Lord Adonis: There are two different issues here, which I think are important. Increasing figures because of increasing projections of construction costs and so on, I entirely discount, because the same would be true of the conventional upgrades. It is not the case that conventional upgrades of existing infrastructure somehow overrun their costs by less than new lines. On the contrary, look at the upgrade of the Jubilee Line, which was hugely expensive, as well as the extension of the line; both massively overran their costs.
The issue that would weigh on me is if there were new factors, something like a massive increase in tunnelling, which, holding the two options at a constant price, led to a very big increase in the cost of HS2. That has not happened yet; there has been some increase in the costs, because of some design changes, but the spec for HS2 has not changed substantially since the one that was published in 2010, which in my judgment withstands comparison between plausible upgrades of the existing infrastructure.
Lord Lawson of Blaby: It has not happened yet, but it could happen. There could be cost escalation of various kinds, but you are not able to put a figure on the point at which you would cry, “No, stop; that is too much.”
Lord Adonis: I was very concerned when the figure that Government published went up by nearly £10 billion, from £32 billion, which is the figure that I published, to £42 billion. I was very concerned about that, but most of that increase was a big increase imposed by the Treasury for additional contingency—a big increase. Some increase was because of cost increases, and a very small proportion—I think about a tenth of it—was because of design changes. The issue of contingencies is an issue I hope the Committee will pay some attention to, because I had a big difference of opinion with my advisers and with the Treasury. The Treasury requires a contingency of 50% on the cost of projects.
Lord Lawson of Blaby: Based on bitter experience.
Lord Adonis: This is an interesting issue for the Committee to consider. My view, having looked at what happens in other countries and why their costs are so much lower, is that part of the reason why our costs of infrastructure are so high is because the Treasury requires such high contingencies to be built in at such an early stage in the development of projects. When I was Transport Minister, I was dealing constantly with project managers; they immediately take the figure as the figure including contingencies, and all the bids come in close to it, and so on. The proof of that being the case is the way that HS2 is currently discussed; it is always referred to—indeed, you yourself referred to it Lord Lawson, as a £42 billion project. It is not: it is a £28 billion project with a 50% contingency, which has been built into the cost. If it was talked about as a £28 billion project, and the promoters would need to go cap in hand to the Treasury for additional funding, I would be prepared to wager, again, that the cost of this project at the end of the day would come in less than it does when imposing very large contingencies at a very early stage in the project.
Lord Lawson of Blaby: What are you proposing should be done now to reduce the cost?
Lord Adonis: I think it was a mistake, in my view, to build in such a large contingency at such an early stage.
Lord Lawson of Blaby: What practical proposal have you got now to prevent this lack of financial discipline?
Lord Adonis: The best advice I could give the Committee is to do whatever it takes to keep Sir David Higgins as the chief project manager, because he has got some record of delivering big infrastructure projects on time and on budget. It is the project management that is now going to be utterly vital to bringing this project in on time and on budget, and weak project management of a project of this kind, which is the largest construction project in western Europe, would be the most likely cause of an escalation in costs.
Q118 Lord Lawson of Blaby: May I just ask one question on a completely different topic: we were told by Professor Glaister, and I quote, “As I understand the history, when Lord Adonis commissioned HS2 to start to investigate the proposal, he dictated that fares should be the same on the new railway as they would be on the old railway. That was the starting point and it has been fundamentally that way ever since.” Is that correct?
Lord Adonis: I did not dictate it, no. It was the view of my advisers from an early stage that the railway should not be built as a premium-cost railway, but equally I took the view that the pricing policy and strategy on the line was going to be a matter for a later day. I thought the sensible conservative assumption to take was that the pricing would be broadly at today’s level, but, of course, you do have a choice, when we are much closer to the opening of this railway, which is not going to be until 2025 or 2026, whether or not you want to have particularly business fares priced at a higher level.
Lord Lawson of Blaby: Which might be sensible, do you think?
Lord Adonis: I can see arguments on both sides; I think I would be prepared to leave this decision to being taken much closer to the time, because who knows what conventional wisdom about pricing strategies for transport modes will be in 10 years’ time, which is when these decisions will be taken.
Lord Lawson of Blaby: You are very familiar obviously with the concept of willingness to pay, which is in the analysis. If it is felt that there is an unwillingness to pay for higher fares on the high speed HS2 track, is this not rather strange, if you are having this huge improvement, and there is not a willingness to pay higher fares?
Lord Adonis: As I say, when you said that I dictated—
Lord Lawson of Blaby: I did not say you did; Professor Glaister did.
Lord Adonis: I did take a decision that the modelling would be done on the basis of fares not being higher, but it would be possible to have fares higher, and, of course, I understand the argument. Rail fares have risen substantially above the rate of inflation over the last 20 years, and that has been accompanied by very significant increases in travel. I certainly do not take the view that if the benefits are there that passengers would not be prepared to pay for them, but I did not build in more expensive fares as an assumption in the costings.
Q119 The Chairman: The HS2 is a stimulant for growth across the country, but particularly in the north; that is one of the important claims that has been made. We have heard from a number of witnesses, and we are due to hear from local city leaders, and they have said in written evidence that significant additional investment is needed in order to connect cities with the new stations, if they are outside the city, and to put in additional infrastructure. In London the rebuilding of Euston is another major capital project. As I understand it, the cost of all of this, which is absolutely essential and necessary to generate growth, are not captured within the £50 billion overall cost—the difference between £42 billion and £50 billion I think is the rolling stock. Should those costs not be captured? It would seem that Network Rail and a number of other witnesses have said capacity is the justification for phase 1; for phase 2, it is economic growth. Unless you capture all the costs of that, and all the investment necessary in that, you are not able to do a proper analysis.
Lord Adonis: I do not think that is a fair criticism, because the £42 billion does include the cost of all the stations and infrastructure integral to HS2 itself, including London Euston, the new city-centre station in Birmingham, the new city-centre station in Manchester, and so on, so it includes all of those costs. Again, the counterfactual is quite important: London Euston is falling down. Many members of the Committee may use it; you will see it is a mid‑1960s station built for half of the passenger numbers that currently use it, and it is in a semi‑dilapidated state. Compared to King’s Cross St Pancras and the modernisation that has taken place there, Euston is clearly life-expired. There is not a future for Euston that has the status quo and no investment, against the rebuilding; it will have to be rebuilt either way. The question is whether it is rebuilt with high‑speed capacity as part of it or not.
The other elements that you have referred to are additional investments with their own benefits over and above HS2, so the HS3, as it is loosely called; I do not think it will necessarily be a high speed line, but the east-west line from the north, which could link Liverpool, Manchester, Leeds, Sheffield and the north-east. That is an entirely separate and additional project. It is not required because of HS2; it is an additional project over and above HS2. Now, of course, the city leaders of the Midlands and the north are very anxious to have additional investment over and above HS2, so, of course, they are making the argument for it. I happen to think that, particularly in the case of east-west rail linking up the major cities of the north, that there is a strong case for it, but it is not a case integral to HS2.
The Chairman: Were you concerned that the benefits would largely be felt in London and the London economy? We have heard from some witnesses in cities outside of London that this will suck economic activity down to London; for instance, Birmingham becomes a commuter city. Was that a concern of yours?
Lord Adonis: You have got the city leaders of Birmingham and Manchester coming to give evidence to you, Chair. Put that question to them and you will get a very, very sharp answer to this view that having improved connectivity with London is somehow going to suck economic activity into London. I was very influenced in my thinking on this by a professor at the LSE, who said that effective 21st century cities are both very powerful centres of production, but also of consumption. The great cities of the Midlands and the north have huge assets in terms of consumption; they are desirable places to be; they have in many cases a very high quality housing stock, particularly for professional people—large Edwardian and Victorian housing stock—and they have very successful and acclaimed cultural institutions. I see Lord Shipley, a former leader of Newcastle City Council here; he would be able to wax eloquent about the value of the great cities of the north-east as centres of consumption as well as centres of production.
The idea that because the trains get faster to London everyone is going to decamp to London, is not a plausible proposition; it is certainly not one held by the leaders of those cities, nor is it one held by the leaders of second cities, which have been served by high speed lines in other countries, not one of whom, when I have met them, said that they thought that they would have been better off without the high speed line.
Q120 Lord Shipley: It has rarely been mentioned in any of our hearings, and has not been today: are you satisfied that rail linkages by high speed with Scotland are going to be satisfactory?
Lord Adonis: I heard one of your last witnesses saying that the majority of the track mileage on the TGVs is off the high speed line. The 2010 plan, which the present Government has maintained, is to run the high speed trains to Scotland off the conventional line on the west coast and east coast to Glasgow and Edinburgh, which would give a very substantially shorter journey time of about an hour in the case of both the West Coast Main Line and the East Coast Main Line. That is taking the journey time to between three and a quarter and three and a half hours between Glasgow and London and Edinburgh and London, which is a big improvement on the status quo. The building of the high speed line all the way through to Glasgow and Edinburgh will clearly have to be something for beyond the early‑2030s, because the traffic would be significantly less than south of Manchester and Leeds.
Lord Shipley: Does that include freight traffic? Because obviously there is not a new line, so actually increasing the amount of freight that is moved by rail is going to be more limited. Do you think that kind of connectivity matters or might it be that air takes over a lot of the growth in freight mileage?
Lord Adonis: There is still quite a lot of spare capacity on the West Coast Main Line and the East Coast Main Line north of Manchester. The East Coast Main Line is more problematic actually; as you know, the East Coast Main Line south of Newcastle suffers from significant issues of congestion. We were not looking at this, but it may be that the case for building out on the east coast further north than Leeds is stronger.
Lord Lawson of Blaby: You were somewhat dismissive about benefit‑cost ratios, but I do not think you were arguing that they should be disregarded altogether; they are obviously a significant metric that has to be taken into account. What is the lowest benefit-cost ratio you would consider acceptable?
Lord Adonis: The rule of thumb in the department is that a project with a BCR of less than 2 is either weak or there would need to be significant additional factors to be taken into account to make it a project that is likely to be supportable. HS2 was above 2.
Lord Lawson of Blaby: If it turned out to be below 2 then you would not want to go ahead.
Lord Adonis: I did not say that. I said there would need to be significant additional factors to be taken into account, but it has been above 2.
Q121 The Chairman: Two short questions: do you think that the Department for Transport is sufficiently resourced to carry out HS2 and all the other projects it has got on? Are you satisfied that there is enough co-ordination across Government as a whole to deliver the benefits of HS2?
Lord Adonis: A separate HS2 company has been established. I know that has been significantly enhancing its capacity over the last two years. The critical thing to my mind is the leadership of the project, like all projects, and like all organisations, with weak leadership they are unlikely to thrive. I was very concerned in the period after 2010 that there was very weak project leadership for HS2. The arrival of Sir David Higgins, who is one of the best major project managers in the world, and was the previous Chief Executive of Network Rail, along with Simon Kirby, is giving this project the strongest possible leadership; to my mind that is the crucial resourcing that it requires. Quite how large the project teams need to be, and at what stage you engage substantial new construction partners, and all of that, is very much a secondary consideration, which Sir David and Mr Kirby will take.
The Chairman: Lord Adonis, thank you very much indeed for a most interesting session.
Lord Adonis: Thank you, Chair.