2
Revised transcript of evidence taken before
The Select Committee on Economic Affairs
Evidence Session No. 19 Heard in Public Questions 216 - 235
Witnesses: Rt Hon Patrick McLoughlin MP, David Prout and Lord Deighton
Baroness Blackstone
Lord Carrington of Fulham
Lord Griffiths of Fforestfach
Lord Lawson of Blaby
Lord McFall of Alcluith
Lord Monks
Lord Rowe-Beddoe
Lord Shipley
Lord Skidelsky
Lord Smith of Clifton
Baroness Wheatcroft
______________________
Rt Hon Patrick McLoughlin MP, Secretary of State for Transport, David Prout, Director General, High Speed 2 Group, Department for Transport, and Lord Deighton, former Chairman, HS2 Growth Task Force
Q216 The Chairman: Secretary of State, Lord Deighton and Mr Prout, welcome to this the ninth meeting and the 19th session of the Committee on the economic case for HS2. We have been quite hard at it for the last few months and we shall be drawing to a close early in the new year, when we will have Sir David Higgins and the benefit of some questions with the Chancellor of the Exchequer. Thank you very much for joining us today. I wonder if I might start.
The value of time has taken up quite a bit of time for the Committee and how the value of time is calculated, because of course it underpins a very substantial part of the benefit side of the analysis of the benefit-cost ratio. The numbers appear to be derived from the survey of car users carried out in 1994. I wonder, Secretary of State, whether you consider that to be a robust basis for making a decision on what is a substantial project.
Rt Hon Patrick McLoughlin MP: I have just been passed a note to say that they were re-estimated in 2013, so to go back to 1994 was perhaps slightly out of date. We have revised down our values of time for the 2013 case and the values are consistent with people working on trains. I do not think it is just a matter of value of time as well. We need to look at—and we have looked at—the wider context of time and capacity. There is obviously the time that people use on the train, but there is also the capacity issue, which is one of the most important things as far as the overall case for HS2 is concerned.
The Chairman: We will come to capacity at a later stage. When you say they were updated, presumably it was the 1994 numbers. Were they updated on the basis of new survey evidence?
Rt Hon Patrick McLoughlin MP: They were re-estimated in 2013. We commissioned the study from the Institute for Transport Studies in Leeds University, which showed that our values of time are consistent with the available evidence, and I am told they were reduced by 33%.
The Chairman: I see. One of the issues that have certainly come up is the question of how people use their time. Clearly, in 1994 wireless connectivity was not widely available, if at all.
Rt Hon Patrick McLoughlin MP: I do not think it was at all available.
The Chairman: It was not available at all. When we see pictures of Secretaries of State and the Prime Minister on the television, they are working industriously in the railway carriage because they have connectivity. To what extent have you been able to take that productive use of time into account in the calculation?
Rt Hon Patrick McLoughlin MP: We have been able to take it into account. It has been taken into account in the work that has been done. As I say, I think all the major academics that you have had before you have been accepted the way in which we carried out the studies for the BCR. I would also point out that the new form of being able to work while you are on the train is still a factor. If you had the choice between a long train journey and a short train journey, I think most people would book the shorter train journey.
The Chairman: One of the pieces of evidence we had is from the Institute for Transport Studies, which has cast quite a lot of doubt on the theoretical underpinnings of this. I think you have accepted its recommendation that there should be a review of the underpinnings of the value of time. Is that something that the department is currently looking at?
Rt Hon Patrick McLoughlin MP: We are constantly looking at any comments that are made by various bodies. Sometimes we are accused of carrying out reports and then being attacked for carrying out such reports, if they come out in a positive light, and attacked for not carrying out reports if they do not come out in a negative light. That is part of the issue of doing a big and—I accept for some people—controversial project like this.
Q217 Lord Lawson of Blaby: We were given some evidence from your department that defines the values of time, as far as HS2 is concerned, as, “What people and businesses would be willing to pay for quicker journeys”. How do you know what they are willing to pay and, if they are willing to pay it, why are they not being asked to pay it? Why do you have a massive taxpayer subsidy written in?
David Prout: In terms of the calculation of willingness to pay, what we are after is a measure of how much a business or individual would be willing to pay for the time saved in a journey.
Lord Lawson of Blaby: But how do you know this?
David Prout: We measure it by using a proxy that is based on the average business wages of the people who are using the train service. It is very different for businesspeople from commuter or leisure travel. The value we place on business time is £32 per hour. On commuter and leisure time it is £6 to £7 an hour. In answer to your question, we looked at a whole range of studies of willingness to pay and specifically at how much someone would be willing to pay. From across Europe we produced a table—figure 5.14 in The Strategic Case for HS2—which shows that the proxy value that we used is absolutely smack in the middle of the range of the value for time and willingness to pay studies that have been done by reputable institutions that are used in different transport appraisal processes across Europe.
Lord Lawson of Blaby: I must say that I find that profoundly unconvincing. You look at a number of other studies for which there is probably no empirical support at all. You then put your pen in the middle of those and say, “That is sensible”.
David Prout: Lord Lawson, you have had various economic experts in front of the panel. They have said that they think that the benefit-cost ratio for phase one and phase two is robust and that the WebTAG guidance as used by DfT is world class. That is what the experts think. The way that the department calculates BCRs is widely recognised across the world as being best in class.
Lord Lawson of Blaby: I have heard no evidence—and I have heard a lot of evidence—that seems to me to have any significant empirical basis at all. I find it highly unconvincing for that reason. Anyhow, let us take up the second point I was raising. Suppose that is what they are willing to pay. Why are they not being asked to pay it?
Rt Hon Patrick McLoughlin MP: What do you mean, “Why are they not being asked to pay it?”. If you take today’s rail journeys, you find that there are a lot of people who pay for expensive tickets, but if you pre-book and you are in a position to pre-book you can get some very good deals on the railways today. I was a junior Minister in the Department for Transport 25 years ago and I think one of the revolutions that have taken place is the explosion in the rail industry. Twenty-five years ago, the thought that the rail industry would today be moving 1.6 billion passengers a year and that we will have seen rises of 4.6% per annum in intercity travel might have surprised the Treasury, I think, which might have said, “That is cloud-cuckoo-land”, but that is exactly the position we find ourselves in. We find ourselves having to match up to those capacity demands, or not.
Lord Lawson of Blaby: Secretary of State, you slid on from the cost of time to the capacity issue, which I am sure we will come to anyway, but that is not what we are talking about just now. We are talking about the value of time saved and I am still puzzled. Lord Deighton in his very helpful letter to the Chairman said that there is a taxpayer subsidy of in excess of £30 billion. That I think is probably an understatement for reasons we will no doubt come on to, but that does not seem to me to suggest that people are being asked to pay what apparently we are told they are willing to pay.
Lord Deighton: You do not want to talk about the subsidy yet; we are still just talking about trying to justify the willingness to pay.
The Chairman: I think what underpins Lord Lawson’s question is that the economic model, which has been done to calculate the benefit-cost ratio, assumes that nobody pays any more for travelling on HS2 than they will on the classic rail network.
David Prout: That is correct, Chairman. All BCRs need to be based on assumptions. The assumption that we have used for this BCR is that the fare structure that we have today will be the fare structure that we have in future. That shows that using that fare structure, which is not a premium fare structure, you get a positive benefit-cost ratio. In addition, the modelling that we have done, as set out in the commercial case that was published in March, shows that HS2 will operate at a very, very substantial operating surplus, and that as a whole GB rail with HS2 will generate more revenue than without HS2. That is a different thing from covering the cost of capital, which I think is what Lord Lawson is coming to in the end, but it is the choice of the country and the Government of the day as to whether or not they wish to build a new railway line. That is a choice that the Government have made and it will be financed in the same way as many other types of public sector investment are.
The Chairman: Yes. It is a £31 billion call, of course. Thank you very much. Can we move on?
Q218 Baroness Blackstone: Can I come back to the issue of capacity? Some of the information that we have received is inconsistent with some of the things that we have been told. For example, David Prout told the Committee back in October that there was a “number of seats” issue. Yet the information that we received from your department, Secretary of State, showed that in peak times trains coming into Euston or departing from Euston were only 50% to 60% full. What is your take on this? Is there really a capacity problem, given that your department has shown us figures of that sort?
Rt Hon Patrick McLoughlin MP: There are a number of answers to this, but I would point out the first document that was issued on High Speed 2 by the last Government. On page 8, one of the key reasons 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”. The point I am making there is that capacity is not new to this. Capacity has always been one of the big reasons for building HS2.
We have taken a number of measures to increase capacity on the current West Coast Main Line, but at the moment the West Coast Main Line is the busiest railway line anywhere in Europe. Train companies want to operate extra services and they are being prevented from offering those extra services because we do not have the train paths available. In fact, last year Virgin wanted to operate new services from Shrewsbury and Blackpool and it was delayed. We are going to operate those particular services from next weekend, but it has been at a great struggle and we will not be offering the amount of services from those particular areas that we would like to be able to offer.
I go back again to 20 years ago, when there were something like 20 train journeys a day from London to Manchester. Today there are in excess of 45. It is a question of how we provide the extra capacity that is so desperately needed. As I said earlier, we are seeing long-distance demand rising by 4.6% per annum on average over the last five years. Our business case for this has rested on the fact that that increase will only be 2.2% over the next few years. As I say, history and recent precedent shows that it has been far in excess of that 2.5%.
Baroness Blackstone: I still do not follow, Secretary of State, why there is a desperate capacity problem, as you have just put it, when your department tells us—and these are very recent figures—that, as far as capacity is concerned, even on peak trains the trains are only 50% to 60% full. What you are saying does not follow from those figures.
Rt Hon Patrick McLoughlin MP: We have increased capacity greatly—as much as we can—by extending the trains, but that is a short-term answer to a long-term problem. One of the things I have asked Virgin to do—and it has done—is to convert first-class carriages to standard-class carriages on each of the trains. We have seen an increase in capacity of 33% since the peak-hour seats in 2008. We have done what we can in the short term to increase that capacity, but the figures that you are referring to are the peak three hours. In the peak hour, we are already at full capacity.
Baroness Blackstone: No, I am sorry, Secretary of State, these figures are peak-hour figures, according to the advice that we have been given.
Rt Hon Patrick McLoughlin MP: The three hours.
Baroness Blackstone: They are for peak hours, not pre-peak hours. In fact, as I understand it, the trains that are really very full are the first off-peak trains - the first two that come immediately after the less full peak-hour trains. So why do you not use pricing policy to try to spread that load a bit more into the peak trains by reducing the charges that we make for tickets?
Rt Hon Patrick McLoughlin MP: We are trying to. A lot more work is being done on smart ticketing and smart ticketing pricing. It is worth making the point that north of Rugby we have spent £9 billion on upgrading the West Coast Main Line.[1] When Lord Adonis spoke at Second Reading of the Bill, he made the point that had that money perhaps been spent on HS2 we would not face the problems that we currently have. I think he said that on the Floor of the House.
Baroness Blackstone: I think it is also the case that we would be spending a huge amount more on HS2 than what you have undoubtedly spent in upgrading some of the services north of Rugby. I also wonder whether the investment in HS2 is going to directly help the problems that you just described earlier with trains from Shrewsbury and Blackpool.
Rt Hon Patrick McLoughlin MP: Yes, because it will free up those services. What you are doing is adding massively to the capacity and the connectivity as far as Birmingham, Manchester, Crewe, Leeds and Sheffield are concerned. That will mean that you still have the railway lines that you can offer more services on. It enables us to be able to offer more services from those particular towns and cities, but it also gives us the opportunity to see more freight carried by the railways. One of the other great success stories in the last 20 years has been an increase of freight on the railways of some 60%, which I very much welcome. One of the things that is now putting a curtailment on that is the availability of capacity.
David Prout: Chairman, can I go back to the question of how crowded the trains are? The figures we gave you are averages over the peak hour: 11 trains an hour in the peak hour, and 25 or more trains over the three peak hours. Within that, some trains are more crowded than others. You are absolutely right that the busiest train is the first one at a lower fare after the peak-hour period, but as was set out in our letter to you, Chairman, the time that we measured the crowding on the trains is also limited. We measure mid-week peaks, we do not measure Friday peaks and we do not measure busy weekend peaks, in order to give the fairest possible representation of the kind of loading that we have. So, yes, over the three-hour peak at the moment—having added 50% to the capacity over the period since 2008—we have a loading of between 50% and 60%. Within that some trains are much more crowded than others. On Fridays and at weekends you can get very crowded trains indeed.
Baroness Blackstone: But the 50% to 60% is an average over that three-hour period?
David Prout: It is an average over those peaks, but it has to be seen against the background of a 50% increase in capacity since 2008.
Lord Deighton: What I think is not argued about is that there is no room for more train paths. I think this is a very valid discussion about how full each train is, but everybody agrees there is no room for more train paths. When I looked at this with my Taskforce, the thing that struck me—and this is a highly qualitative judgment—was that the more the person knew about the railway and how it operated, the more convinced they were that to solve the capacity problem up to Birmingham, this had to happen. As empty as some of the trains may be at some part of the day, we are full with train paths. In certain parts of the day, both long-distance and particularly commuter trains are overcrowded. Given the lead time to put in new capacity, unless we do something about it now in a fundamental way, we are going to have an awful jam between here and Birmingham.
David Prout: I think that is the evidence that Virgin gave you when they came here the other day as well.
The Chairman: You referred to the letter—and thank you for the letter—but for reasons of commercial confidentiality, unfortunately, you were unable to share with us the real numbers so I guess we will have to leave it at that.
Q219 Lord Smith of Clifton: Secretary of State, what sensitivity analysis have you carried out for the values of travel-time savings in the economic case?
Rt Hon Patrick McLoughlin MP: As I say, that has been done by the WebTAG system. We have tested the impact of both higher and lower values of time on the BCR. The research of the Institute for Transport Studies in Leeds has found that the value of time for high-speed rail travel is likely to be higher than the value of time that we have used in the economic case. With a higher value time, even with a pessimistic growth of forecasting scenarios, HS2 is very likely to have a BCR greater than two for the full Y network.
Lord Smith of Clifton: Given the possible problems discussed earlier with the nominal values of time, why in the economic case have you not reflected the outcome of applying a 25% reduction to the value of travel-time savings for non-work travellers?
David Prout: At figure 16, page 39, of the economic case, which is a more detailed version of part of the strategic case, you will see that we model a low-fares scenario, which shows that you get more demand immediately for HS2. If you put the fares down, demand goes up. That means that you meet the demand cap, which is imposed by the WebTAG guidance, earlier than with higher fares. If you then remove the cap, you show that lower fares lead to more demand and basically the same BCR as you have with the standard existing fare structure that we have at the moment. As I say, it is set out in pages 39 and 40 of the economic case.
Lord Smith of Clifton: When you were defending the quality of some of your cost-benefit studies, you said that they are recognised internationally as best in class. Well, of course, it is a very small class. Not all nations are doing this. It is half a dozen at the most, I should think.
David Prout: It is the case that other nations do not do it as well as us, but you had Professor Venables and Professor Overman in front of the Committee in earlier sessions. They have just recently completed a study for us reviewing our guidance on how to do benefit-cost ratios. They come from very different standpoints, as you heard when they appeared in front of you, and their conclusion is that our BCRs are robust and our processes are world class.
Q220 Lord Shipley: Can I examine the case around capacity further? It is the issue of how we define capacity. The Department for Transport has said that, despite the West Coast Main Line upgrade, the line has now reached capacity in terms of the number of trains that can operate on the line. It has been put to us that if you had four tracks in the Coventry corridor to allow faster trains to bypass slower ones, you could increase the capacity. In addition, there could be things that you could do on signalling—to have in-cab signalling, for example—to improve capacity in that respect. Why is HS2 the only viable solution to the capacity problem?
Rt Hon Patrick McLoughlin MP: Lord Shipley, I am informed that the best of the rail alternatives would only provide 24% more peak-hour seats out of Euston over our committed improvements. We have spent a huge amount of money and time and effort. In fact, if you talked to Sir Richard Leese, he would say that while the work on the West Coast Main Line was being upgraded, over the time that it took to do that it did very serious economic damage to Manchester. I think this was probably true, although I do not want to speak for Lord Adonis, when he first issued his command paper back in 2009 as to the most straightforward way forward.
I would also point out that what you are talking about continually doing is upgrading a system that is now over 120 years old. We have not built a new railway line in this country north of London for 120 years. I must admit that I find it rather ironic that I can go from London to Paris or London to Brussels on a high-speed train but I cannot go from London to Birmingham, to Manchester or to Leeds. We are better connected as far as connectivity is concerned with parts of Europe than we are with our own country. That is part of the reason why—and I think it is a very substantial reason—if you talk to the leaders of Birmingham City Council, Manchester, or Leeds for that matter, they are very insistent that High Speed 2 is the right answer for their regions and their areas. Indeed, when a bit of a question mark was being expressed at one stage, it was the city leaders who came to see the Prime Minister to express their support for this project.
Lord Shipley: We had some very helpful discussions with some city leaders when we took evidence in Manchester. Can I go a bit further on the issue? It has been put to us that HS2 has been a solution looking for a problem. My question is this: have there been sufficient incentives in place to assess alternative schemes properly—because alternative schemes were proposed? Have they been assessed properly?
Rt Hon Patrick McLoughlin MP: I do not think there is any project that has had more reports and inquiries into it than HS2. At the end of the day, we still come to the view that the best way overall to increase the capacity is by HS2. At the moment we are building a £15 billion railway in London. Nobody complains about that, and I think that people in Birmingham, Manchester and Leeds are saying that we need a major upgrade on infrastructure that HS2 certainly will provide.
David Prout: Chairman, if I may, it is important to understand something of the history of the West Coast Main Line to understand why upgrading it is so difficult. The West Coast Main Line is not like the Great Western Main Line or the East Coast Main Line, which were designed for trains that went faster than the trains of the day. They had nice straight railways. They got plenty of space. When the West Coast Main Line was built, it was basically the first railway line between London and the north. It was built to follow the canals. It follows a twisting and turning path following the contours as the canals do, so getting any additional speed on the West Coast Main Line in the first instance is very, very difficult.
Secondly, it was originally built as a two-track main line. When it was upgraded to a four-track main line in the late 19th century, they did it on the cheap. They decided to go from two tracks to four without buying any additional land. That means that where the embankments were originally at the right sort of angle to last for a long time, they were made much steeper in order to make space for the two additional tracks. Where you had cuttings that were originally like this, they were made much steeper to make space for four tracks rather than two. That means that maintaining the West Coast Main Line in itself is a real problem and incredibly expensive, as is doing any significant works when you have four tracks that are crammed together into too little space with no working space around them. That means that when we were upgrading the West Coast Main Line, when you tried to do any work to either of the two central lines you had to close three of the four tracks.
Doing any work on the West Coast Main Line is unbelievably disruptive and there is literally no space to add additional tracks. The embankments and cuttings are unstable. It is hugely expensive. This is why when the West Coast Main Line was upgraded everybody in the industry—and this is long before my time—were of the view that that would get us by for a certain amount of time and then the only solution was to build a new railway. That is exactly what Virgin told you when they appeared before you the other day as well.
Rt Hon Patrick McLoughlin MP: Sorry, can I add one thing? I think it is also about the reliability of the system, too. If you think back to just last winter, every railway line had disruptions save one, and that was HS1 because it was built to a modern engineering standard. It was the only railway line that did not have any severe hold-ups because of weather problems last winter.
Lord Shipley: Has the calculation of the cost of disruption been fairly done between the alternatives and HS2? Presumably, HS2 will produce some disruption and there will be costs associated with that. Are you confident that those calculations have been properly done?
Rt Hon Patrick McLoughlin MP: There will be some disruption in certain areas while HS2 is being built, certainly, but nowhere in the lines of the amount of disruption would that be required for an upgrading of the West Coast.
David Prout: You do not get 18 new trains an hour with upgrading the existing main lines. The only way you get that increase in capacity for intercity journeys and the released capacity for commuter journeys is by building a new railway.
Q221 The Chairman: We received a presentation and a submission from High Speed UK—HSUK. Has that been properly evaluated and compared and contrasted with HS2?
David Prout: I do not know who HSUK are.
Rt Hon Patrick McLoughlin MP: They are the central railway.
David Prout: They are the central railway, are they? Yes, we have looked at the reinstatement of the central railway and it is by no means as simple as HSUK would have us believe.
The Chairman: That may or may not be the case, but have you had the opportunity to review and assess it in detail?
David Prout: The main elements of the central railway proposal were looked at in the 2013 alternative study for the East Coast Main Line.
Q222 Lord Skidelsky: Secretary of State and Lord Deighton, I would like to probe a little further the estimates of growth in long-distance rail travel. The economic case for HS2 says that the growth in long-distance rail travel demand since 1994 equates to an average year on year growth rate over the past 18 years of 4.9%. The economic case forecasts that the demand for long-distance rail travel will rise at 2.2% between 2010 and 2036. Are those two numbers comparable? In other words, is that 2.2% compounded, because otherwise why should there be a decrease over the next period from the increase over the last 18 years?
Rt Hon Patrick McLoughlin MP: I think we gave you 4.6%, not 4.9%.
Lord Skidelsky: Mine says 4.9%.
Rt Hon Patrick McLoughlin MP: Okay. We have taken a very conservative estimate about future growth because we have seen growth at a level that I do not think anybody anticipated at the privatisation of the railways. I come back to what I think has been an amazing sort of growth, and that is at a time when new technologies, working on trains and receiving e-mails on trains have improved the capabilities of travel and what you can do while you are travelling. We have estimated at a conservative estimate but, as we say, over the last few years the increase has been 4.6%. Yes, in answer to the first part of your question, it was a 2.2% compound increase.
Lord Skidelsky: So you are extrapolating but adding a conservative premium? In other words, you are doing an extrapolation but saying, “We are taking a conservative view”?
Rt Hon Patrick McLoughlin MP: Yes.
Lord Skidelsky: The two numbers are comparable anyway.
Rt Hon Patrick McLoughlin MP: Yes.
Lord Skidelsky: That is interesting, because it raises the question of how robust these extrapolated techniques are. I go on to my second question, which is: have you taken into account the increase in capacity of other forms of transport? I know you have other things that you have factored in, like working at home and even working more on trains, but what about technological improvements in car travel? I mean the development of the automated car and the development of car profiling, both of which could be anticipated to grow in the next 20 years and would not only increase car capacity use for any given road space but would make car journeys more attractive for commuters because they would be able to work in them. I am not saying that these are going to happen, but have they been factored into the estimates of demand for rail travel?
Rt Hon Patrick McLoughlin MP: What we have factored in is what we have seen happen. Yes, we have seen greater car ownership, we have seen more car ownership, but we have also seen people wanting the convenience of the train and being able to work on the train. Those things have been factored in, but exactly what the transport picture will be in 25 years’ time is anyone’s guess.
Lord Skidelsky: Have you taken evidence from motorcar manufacturers in deriving these estimates as to what possible or even likely developments in motorcar technology will happen over a 20-year period, because this is the period of the forecast?
Rt Hon Patrick McLoughlin MP: We would also want to look at what investment we are making in the roads. HS2 is not one issue by itself. It is not the only bit of transport investment that we are making over the next five, 10, 15 years. Last week I announced a massive improvement in the road investment strategy, which is the first time that we have given the kind of five-year plan that we give for Network Rail as to what should happen on the roads. Increasing capacity on the roads is part of what we are trying to do overall to improve the infrastructure of the United Kingdom as a country. I think that has been taken into account. I am not sure that we have taken any evidence direct from motor manufacturers.
David Prout: The department as a whole is absolutely up to speed with everything that the car industry is thinking about, and we monitor that constantly. We have a quarterly bulletin in the department on motor technologies. I think the answer to your question about whether we have taken it into account is to be found in the conservative nature of the estimates we make. We are not saying in the benefit-cost ratio that growth is going to continue at 4% or 5% a year. We are saying that it continues at 2.2% a year and does not grow at all after 2036. That is the input for the model that we used for generating the benefit-cost ratio.
Lord Skidelsky: To sum up, those models contain an explicit allowance for improvements in motor technology?
David Prout: They do not have a line that says, “Reduction in rail demand resulting from improved road technology”, no. But, as I say, our projections are at 2.2% against a 20-year background of 4% to 5%. So I think it is a conservative estimate.
Q223 Lord Monks: Secretary of State, I think we are fairly clear who the likely winners are out of this, including London, Birmingham, Leeds and Manchester. What about the losers? What about the ones who do not have easy access to HS2? What about their position and their rail services? We note that the strategic case said that all towns and cities that currently have a direct service will retain broadly comparable or better services once it is completed, but there are only four interchange points, I think, on the HS2 line. There was a statement by Mr Collins, the chief executive of Virgin Trains, that 40% of Virgin Trains’ current revenue from the West Coast Main Line would go to HS2, and whether the rest would be profitable he said we would have to look at. Is there any guarantee for the Coventrys or the Rugbys of this world about their position in the future and their maintaining a service as good as the one they have now?
Rt Hon Patrick McLoughlin MP: Definitely. This is an addition; it is not a minus from the services that are available. Coventry is 11 miles from Birmingham International, so it is very close. There will be connectivity into Birmingham International as far as Coventry is concerned and, indeed, the whole West Midlands conurbation. I grew up 20 miles north of Birmingham, so if I think back to being a child, places like Cannock Chase and Hednesford were not served by a railway line. That is now served by a railway line, which is feeding into Birmingham. That has made a tremendous difference to what was basically a coalfield area, and we are seeing a regeneration in those areas as a result of that.
Wherever I go these days as Secretary of State for Transport, the demand is always for more services, better services, not for fewer services. The only way we are going to provide those extra services is by increasing the capacity. I am sorry to repeat myself, but I come back to Blackpool and Shrewsbury. They were being held back for extra services because there was not the capacity. It was not seen as the most profitable or rewarding route to serve. That is the case, and I think the areas that Lord Monks has talked about will see more opportunities because of more availability. I was in Milton Keynes just the other week, and what was interesting about Milton Keynes, I was told, is that not as many but a good number of people arrive into Milton Keynes to go to work as leave Milton Keynes in the morning. It is an incredibly busy station and an incredibly busy growth area. The one thing they want is more faster trains into London, which at the moment it is hard to give them.
Lord Deighton: To give you a bit more background on that, I know you went to Manchester but my Growth Taskforce and I went to all the cities that get a main station and one or two others. The reasoning behind your question is very valid, because the general feedback was that the people from Manchester, Leeds and Sheffield said, “Yes, this is absolutely terrific. Why can you not just hurry up and get on with it?”. We also invited to all those sessions people from further out in the regions, whether it was from Wakefield when we were in Leeds, or from Wolverhampton when we were in Birmingham, and the most anxious people were those who wanted to be reassured that they would benefit from the freed-up capacity but also that this would not come with neglect of the road strategy. If you are trying to run a manufacturing business out of Wolverhampton, it is the roads that matter to you, not high-speed rail going to Birmingham and Manchester. What we clearly took away from them is that we had to have an integrated transport strategy that understood what connectivity meant to different parts of the country. HS2 solves certain problems. It gives you a platform for solving others if you make other investments and co-ordinate the rest of your transport strategy, but it does not in and of itself, without doing these other things, solve everybody’s problems.
Lord Monks: Could I press you just a little on that? If the long-distance trains are taken off the West Coast Main Line, say, to free up capacity, it begins to be a bit of a strain to think that maybe Stoke might keep two fast trains an hour, which it gets courtesy of the fact that it is on the main line to Manchester at the moment, or at least in part apart from its own merits. How robust can that commitment be?
Rt Hon Patrick McLoughlin MP: I would point you to what happens on the Javelin service at the moment in Kent. If you think of travelling down to Canterbury or into other parts of Kent, the Javelin train travels down to Ashford at high speed and then continues on the conventional railway lines. I must not prejudge decisions that I have not yet taken, but the interchange at Crewe, for instance, following on from David Higgins’ report, would be a very important area following on to services to places like Liverpool, the Handsacre junction if it were to remain in—and, as I say, that decision has not yet been taken—and the Handsacre junction is quite important for feeding Stoke-on-Trent.
I would also point out the A500, the road that serves Stoke-on-Trent where it links into the M6. Only just over that route is the proposal to put Crewe station. I think the development that comes around as a result of that investment will make a substantial difference both to the regeneration and the chances of regeneration of Stoke-on-Trent. Again, look at the transformation of King’s Cross and St Pancras and its attractiveness. Twenty years ago it was not a place that you would imagine any major international research company or major company wanting to locate to. We have Google locating there and we have the Crick Institute being built at the moment, which have been fantastic to the regeneration and lifting the vibrancy of that area.
Q224 Lord McFall of Alcluith: Secretary of State, I was interested in an article that Steve Richards wrote this morning in the Independent about transport. He was talking about his “affluent middle-class” friends and mentioned a well-off couple who wanted to travel to Devon for the weekend but were deterred by the £300 train costs and instead opted for the jammed roads. There was also a couple from the Chilterns who said that the train fares were preposterous. They tried off-peak fares but the rail companies are adept at changing the definition. Why do people in this area feel that they cannot get transport services at decent prices?
Rt Hon Patrick McLoughlin MP: Perhaps they are not that adept at looking or understanding the way the pricing system works. I have not read the article so I am reluctant to comment on an article that I have not read, but there are—
Lord McFall of Alcluith: So these are middle-class people who are a bit thick?
Rt Hon Patrick McLoughlin MP: Lord McFall, those are your words. They were not mine. It is the kind of word that if any Secretary of State dared use it would no doubt end in certain headlines, and I am leaving the authorship rightly at your doorstep on that one. I am just saying that there are lots of opportunities for people to pre-book tickets and get some very, very good deals. Yes, if you turn up on the day and expect to be able to travel, it can be expensive. I presume, by the sounds of the price that you are quoting, that you are talking about first-class tickets.
Lord McFall of Alcluith: It is Steve Richards who is talking about it, but he is talking about people’s perception that they are not getting decent prices overall. Would you contest that?
Rt Hon Patrick McLoughlin MP: I would contest it. I think there are some incredibly good-value deals to have. Indeed, this year we have seen the first new rail card introduced for 25 years; two people travelling together at whatever age get a very substantial discount, not the same discount that is there for people over 60. I think that has been the way in which the rail industry has managed to adapt. You could not turn up to an airport and get on a plane, but if you book last minute on planes they are quite expensive as well. If you pre-book and pre-book early you can get some very good deals.
Lord McFall of Alcluith: I am sure you will be glad to know, Secretary of State, that I have secured my Railcard.
Rt Hon Patrick McLoughlin MP: Oh, right.
Q225 Lord McFall of Alcluith: On to the main point, how will HS2 rebalance the UK economy, or will it simply displace activity from elsewhere?
Rt Hon Patrick McLoughlin MP: There are a lot of arguments that somehow, by building HS2, all we are going to do is suck all this traffic and passengers into London and it will be great for London and very bad for the regions. What I would say in answer to that is go and talk to the leaders of the regions. Talk to Richard Leese, talk to Albert Bore, talk to Councillor Wakefield, and talk to Julie Dore in Sheffield. Those are the leaders, and in Richard Leese’s case he has been the leader of Manchester City Council for 18 years. As he pointed out to me, he has seen 12 Transport Secretaries during his time. The fact is that they say that this connection is vitally important for their cities to be able to compete. If the assumption behind what you were saying was that we need not worry about the services or the infrastructure outside London, well, I do not buy that. I think it is very important.
Lord McFall of Alcluith: No, I will tell you what I was thinking of. I was thinking of Professor Overman when he gave his evidence, when he said that when we come in and regenerate around, say, the new station at Birmingham or Manchester, a lot of the firms that are going to locate there, and the things they are going to do there, were activities that would have gone elsewhere within the Manchester or Birmingham urban areas, so managing that is difficult. That is what I have in mind.
Rt Hon Patrick McLoughlin MP: I do not accept that. I think we have to give the cities outside London a chance to attract some of the investment that has been attracted into London. They are areas that will be attractive if they have the right connectivity and transport infrastructure, because they are fantastic places to live.
Lord Deighton: I think we have to accept that there must be some displacement activity. It is hard to work out exactly what. Coincidentally, I was in Manchester yesterday with the Chancellor opening the new Manchester City Football Academy, which has been funded by the Middle East and which is partnering Manchester in an extraordinary programme of regeneration, frankly. Without this kind of modern approach to how they build a city that is competitive to London and competitive to other European cities, that was never going to happen.
It might be helpful if I stand back a bit and look at what we are trying to do here. We talk a lot about rebalancing the economy. I think the theory behind this—and it is a problem that all Governments have tried to deal with—is the imbalance in growth around the United Kingdom. The south of the south-east has this extraordinary machine in London, which generates a much higher level of growth than the rest of the country. The challenge is to reproduce the levels of productivity in London and the south-east in the rest of the country.
Over the decades, we have tried a number of ways to do this. We tried propping up ailing industries, which did not work. We have tried relocating chunks of the public sector—look at Northern Ireland as an example—and that does not work as a sustainable model. We are trying to build and support thriving city centres outside London that have the capacity to grow at a much faster rate than they have historically. It is precisely the right model for a knowledge-based economy. It is predicated upon connectivity, both physical and digital, and this is an important part of the physical connection to make it happen. The evidence from the US is that it growing quite strongly now, and you can isolate that to the hundred big metro areas around the United States. Growth now happens in cities, and this strategy for investing in our infrastructure is about providing the framework that will allow our big cities outside London to have a decent chance of competing internationally for the kinds of things they need to do to be effective, economic operations. That is what this is about. That is the model you have to think of, and I think you will find it very useful when you talk to the Chancellor. I did not know he was coming, but we have been trying to deal with this problem in the Treasury and figuring out the smart way to get into it. Do you do it from the bottom up or the top down? We have decided to say, “We have to get the growth rate in the north up to where it is in the south”. What do you need to do that? You need to do it around cities and you need to have the infrastructure that can facilitate that. His northern powerhouse concept is a way of forcing us all to think about how to tackle this challenge and put in place the things we need so we can push up that growth rate to get our productivity sorted out in the north.
Lord Lawson of Blaby: What you are suggesting, Lord Deighton, is that we need a Crossrail for the north. That is nothing to do with HS2.
Lord Deighton: No, that is why we have introduced the concept of HS3 because HS3 essentially is Crossrail for the north. It takes the journey from Manchester to Leeds and makes it look like the journey from Heathrow to Canary Wharf on Crossrail. You are precisely right, but I think that is another part of the infrastructure. To be successful in the UK as a big city, you need great connections into London. That is just the way this economy works and I do not think that sucks anything out. If it does suck everything into London, that certainly did not occur to anybody in London because HS2 is not particularly high up on their list of things to do.
As the Secretary of State has said a number of times, there a couple of things that struck me when we met the private and public sector leaders in all these cities, and one was how important they felt HS2 was to their longer-term future. The second one was how in most cases they thought we would never get round to doing it because everybody only ever invests in the infrastructure in the south, and they just assumed that we were going to take forever to make up our minds. It was quite interesting; the very fact we were there, and were talking not about whether we could do it but how we should do it in a way that allowed some of the economic potential to be unleashed in the way I just described for them, was a highly energising discussion to have and the one they have been looking to have for the last 20 years.
Rt Hon Patrick McLoughlin MP: If I could follow on from that, I do not think it is HS3 instead of HS2; they are both complementary to each other.
Q226 Lord Lawson of Blaby: On that issue, since you have raised it—I make that point, Secretary—the evidence that we had from the TGV in France is that the bulk of the benefit, not all of it but most of it, has gone to Paris. There is substantial evidence with HS2 not that there will be no benefit to the north but that most of it will go to London, whereas the benefit from the Crossrail for the north, whether it is HS3 or something slightly less ambitious, will be overwhelmingly for the north. It does seem to me to be consistent with what you have said and what the Chancellor has said: that that should have a much higher priority.
Lord McFall of Alcluith: Could I add that when you are talking about Crossrail to the north it will be a Crossrail beyond Manchester and Leeds? In other words, we have to factor other places like Scotland into it.
Rt Hon Patrick McLoughlin MP: Let us deal with the other places that we have to factor into it. You mentioned Manchester and Leeds, but I think I need to include Newcastle as well as Hull and—
Lord McFall of Alcluith: Absolutely, yes.
Rt Hon Patrick McLoughlin MP: It is that top part of England that is needed, but then the connectivity into Scotland is very important as well. Indeed, from day one of opening I hope there will be services that go up to Scotland. I talked earlier about what happens at the moment in Kent, with trains going down to Ashford and then continuing on those lines.
Coming back to the point that Lord Lawson made, not to be able to connect into a high-speed system for the rest of the country would put us those northern cities at a disadvantage. If you talk to them, they are of exactly that mind, too. I put that exact question this morning to Richard Leese and his answer was that it is not either/or; it is the fact that we need to address both those issues in the long—
Lord Lawson of Blaby: The question is which is more important at a time of very great public expenditure problems.
Q227 Lord Griffiths of Fforestfach: This afternoon I feel I have heard two stories to justify HS2. One story is through the lens of economic analysis, which is very precise, the estimates of the time saved on journeys and so on. As an economist myself, to start justifying £50 billion on the basis of time saved needs a common-sense check. You seem to be relying on a huge number if you use that framework in which to do it. The second approach we have just heard from Lord Deighton, which is that there is tremendous growth potential, we need to get productivity up in the UK, we need connectivity, and we need agglomeration. All that might be absolutely right, but fundamentally you do not have the narrow economic analysis, and you are telling us that it is a punt. You may be right in your judgment, but fundamentally you are asking us to take a bet.
Rt Hon Patrick McLoughlin MP: I do not think we are asking you to take a bet. I think there are two reasons for us doing this. There is the fact that it leads to greater connectivity. There is our belief that it would give the cities, as Lord Deighton has just made clear, the opportunity to compete. But it is also about upgrading our infrastructure, too; I pointed out earlier the £9 billion on the West Coast Main Line north of Rugby.
Lord Griffiths of Fforestfach: Secretary of State, is that not ultimately a judgment that you make, which is a broad, general judgment? When you come to estimating time saved, you have very narrow economic analysis and a great tradition of cost-benefit analysis and so on, and you can say, “Yes, we are coming up with a benefit-cost ratio”. If you do the other one and say, “We need to upgrade the infrastructure”, you may be absolutely right, but if you are saying somehow that you have an economic case for it, which you can hold up your hand and swear to and say, “Yes, I have total confidence in that”, it does seem to me that you are asking us to take a punt.
Rt Hon Patrick McLoughlin MP: Obviously, one has to look at the economic case and you have to make sure there is an economic case. I think it is worth pointing out that the economic case for the Jubilee Line was 0.9, but without the Jubilee Line I do not think we would have seen the kind of investment that we have seen in Canary Wharf. The economic case for the underpass, the Limehouse Link, was 0.49. I think without taking that kind of punt—as you might have put it—we would not have seen the kind of transformation we have seen in that area. This is not just on a punt. It is about capacity, but obviously we have to try to make the figures match up because that is what economists like you, Lord Griffiths, ask us about.
The Chairman: I am afraid we have a Division. Could I suspend the meeting? We will hopefully be back in five or six minutes.
Rt Hon Patrick McLoughlin MP: Okay.
The session was suspended for a Division in the House.
The Chairman: Thank you for your patience. We can now resume. I think Lord Griffiths was embarking on the second part of his question.
Q228 Lord Griffiths of Fforestfach: Thank you, Secretary of State, for what you said about the Jubilee Line and Limehouse Link, and the way in which the assumptions made fell far short of what happened.
The second part of the question is concerned with Lord Deighton and the Taskforce he chaired on the growth coming from HS2, particularly the contributions made in the cities and so on. When we visited Manchester the week before last and heard from the leaders of Manchester, Nottingham, Leeds and Sheffield, the one thing that certainly impressed me was how excited they were about it. They saw real opportunities here. Then they came out and I think revealed only a little of what their wish lists were, which of course were very long indeed. So there are two questions that one inevitably asks. First, how are they going to be funded, because I think the wider economic benefits are crucial to the case you are making? We would like answer to that.
Secondly, transport is clearly at the core of this, but there are so many issues connected with planning, the regions and so on, to what extent have the Government, the Cabinet Office and the key Minister responsible got it right if the benefits are so great? Is there not a need for the Cabinet Office to play a greater role?
Lord Deighton: Thank you for that question, which really gets to the heart of some of the issues. I share your frustration with the way our looking at benefits here does not really quite match a transformational project. The more transformational and the bigger the project, the more important the wider economic benefits are, typically. But I think it is an important discipline and guide that we put everything on the same basis. You always begin with a standard cost-benefit analysis, because then you can rank projects and not get too carried away. Of course, we talk about the Jubilee Line and the M25, and we only ever remember the ones that had much wider economic benefits, so I think the retrospective analysis does give you a bit of an optimism bias. I like to think of us as being at the next stage, which is: let us put behind us assessing the costs and benefits, because you can only go so far before you reach diminishing returns, and the real job is how you crystallise the lowest possible costs and realise the biggest possible set of opportunities. Conceptually that is how you move off from the evaluation analysis to the project delivery. So I think it is important to understand that there is a theory behind it.
How do you go about it and how do you fund it? For me, I am delighted that having created this strategy and empowered these people we are overwhelmed with lots of brilliant ideas to fund. That is a very high-class problem, and we just need to be highly disciplined about choosing which ones to fund and to be creative in funding as many of them as possible in a way that is manageable within the various fiscal constraints that we have. I think process can help with that problem.
There are three or four elements to what you have to do. It was clear to us that this regeneration, rebalancing or growth in the cities has to be locally led. For this project in particular you need the discipline of having a very clear vision locally about what they want out of it, a very clear growth strategy that fits what the cities are doing together with the broader region, and a very specific delivery body that is charged with making all that happen. The regions were particularly keen, though, that they should be supported by the centre, which is probably a function of scars that they have had from past things they have never been able to get done. So they were very keen that we set up a—for want of a better phrase—regeneration body in the centre to support all the regeneration efforts around the cities. We are in the process of setting that up and working out how to capitalise it to give it the financial wherewithal to do some of the investment ahead of the train arriving. I think it goes with the flow of what we are doing in general in empowering city leadership. The Chancellor has already done the deal with greater Manchester, which is always our favourite city and region, saying, “You guys seem to be pretty good. You seem to have a plan. Okay, what extra powers do you need? How can you encompass the broader region? What is a sensible basis for us to devolve more money to go with the power and the plan?”. I think the Chancellor has said that he has opened the business to other cities that can come up with a similarly credible way of developing their own local economies. I think it will require some changes as to how they go about planning, but these are all achievable things. What I love about it is that it is unleashing a real appetite to improve the cities just in the way you would want.
Lord Griffiths of Fforestfach: Those transformational benefits come at a cost. We heard least week from TfL that the sheer capacity problems of High Speed 2 delivering more passengers to Euston—a Euston that itself is going to have to be completely rebuilt—would necessitate Crossrail 2 in order to move the traffic around. I think that was a cool £27 billion. So you are absolutely right; it is inspiring in some ways that there are all these projects. On the other hand, some of them are going to be absolutely essential if HS2 is to work and they come at a very great cost.
Lord Deighton: The Secretary of State has the answer to that. I never cease to be impressed by TfL’s capacity to take any single piece of data and use it as justification for Crossrail 2.
Rt Hon Patrick McLoughlin MP: I was merely reflecting a little earlier on, when Lord Griffiths said at the start of his question that the northern city leaders seem to be ambitious, that I would suggest arranging for Lord Griffiths to meet Boris Johnson to discuss ambition and London transport demands. I think it is rather a good thing that there is this ambition by city leaders and that it is being more seriously looked into.
Q229 Lord Rowe-Beddoe: Secretary of State, if we may, let us stay with what has been referred to as HS3—that link. As you have heard we had the benefit of meeting five or six leaders of large northern cities, including the private sector. I must say that sitting there—and I can understand what has been said—I suddenly became very much aware that this not just desirable for them but the difference perhaps between night and day. I think Sir David Higgins in his second report, which was published in October, said that, “substantially improved services east-west are not only desirable, but possible. This is as important to the North as Crossrail”. So I am confused. We have the why, and it would be much easier to start perhaps from the top end, but then we are told by Mr Prout in evidence that of course we have all the planning now and we have not done much up there. It worries me, and I think it worries this Committee, that we are still London-centric. We have heard the warnings about the imbalance that this could create and not to do what you all—your Government, the previous Government, Lord Adonis—would like to see happen. We asked one of the leaders, the Mayor of Liverpool, if he had a choice between HS2 and HS3, and I have his quote here. It will be no surprise that he said, “I would go for HS3 all the time because it is seriously about connecting cities to drive economic growth in those cities to generally rebalance the economy”. How would you address those sorts of concerns?
Rt Hon Patrick McLoughlin MP: It is a very wide question. I do not think that Joe Anderson, although he would be talking for himself as far as that is concerned, would get the agreement of Richard Leese on what else is required. I do not think it is one or the other. I do think that the east-west links are part of the same issue and solution. Perhaps one of the things that we have not done incredibly well in this country over the years is invest the right kinds of amounts in our transport infrastructure that we need to invest. At the moment we are doing quite a lot in the north. We have the northern hub taking place, which will lead to a great deal of improved capacity in the short term. We have created a body called Transport for North. I have met it and I am going to meet it in early January, too. That is doing the initial work. The Government, along with Transport for North, will come out with their recommendations towards the end of March on the way forward for transport for the north. But I still come back to the point that it is not one or the other. They link into each other, and I do not think that we have been idle on the subject.
It is just worth thinking about the money that we are spending on HS2. It is not that it is being spent on HS2 and we are not doing anything else. Over the next five years in the region of £38 billion will be spent by Network Rail, and £12 billion of that is enhancement of the rail network. At the moment, there is a huge project going on at Reading station, for instance, not just rebuilding the station, although that has taken place, but providing new extra capacity so that some of the freight that is coming down from the Midlands is not going to go directly on to that railway line but will go over that railway line, thus freeing up capacity. So that is one of the things that I would say: this project is not in isolation as far as infrastructure is concerned. This is not the only project we are doing. This project starts basically when Crossrail finishes, and if you look at the money profile you will see the profile of expenditure rise once Crossrail takes over. Once Crossrail is completed in 2018, that is when the money will start to be spent on HS2.
I would also mention that you have the positive benefits of showing off and promoting engineering in this country, and perhaps a lot of other sides of the benefits that we have seen in the amount of work and business that will be set out for companies in this country. HS2 has already held three exhibitions and conferences for small and medium companies on how to feed into the business opportunities that are going to come from HS2. One of those was in London, Manchester and Birmingham, and they were well attended by a range of businesses from Carillion to even very, very small local suppliers. I think that is all part of the overall story, as is making sure that we as a country are in a position to provide not just the workforce but also the goods and services that will be needed on a project like this, as we have done, in fairness, for Crossrail.
Lord Rowe-Beddoe: Thank you, Secretary of State. Can I just ask Lord Deighton another question? You have talked about a regeneration board and my ears pricked up, as a former chairman of the Welsh Development Agency and a person who sadly rued the day when this Government decided to get rid of regional development agencies. How are you going to conceive that? Are you going to have private-sector people? Or is it just to be Whitehall?
Lord Deighton: No, it will be private-sector people. It will probably be built on the existing Network Rail regeneration business, LCR, and they will team up with HS2 centrally and then work with each of the cities together. We think that gives us the right balance between being locally led in the cities but having somebody in the centre who can help extract money from us at the Treasury and can also make sure that we are sharing best practice across all the different projects.
Lord Rowe-Beddoe: But who can provide advice to the cities if required.
Lord Deighton: Absolutely, so expertise, best practice and a connection back into the hub.
Q230 Baroness Wheatcroft: I can understand that rebuilding economies outside London depends in part on having good connectivity with the capital. There is no getting away from the importance of London, but I wonder whether the Secretary of State could say a bit about what has been learnt so far from HS1. Has that benefited economies outside London?
Rt Hon Patrick McLoughlin MP: If you go back to the Second Reading debate on HS1, a number of Kent MPs made a point about what HS1 has achieved for Kent and the areas in and around it. Perhaps one of the more interesting speeches was by Mr Mark Reckless who, of course, has said what a fantastic job HS1 had done for the Medway towns in providing that connection for Kent.
Baroness Wheatcroft: I am not sure I would put much stress on what Mr Reckless says. Do we have any figures?
Rt Hon Patrick McLoughlin MP: I do not have them instantly to hand, but I think we can let the Committee have some of those things. I was merely using him as an example of somebody who at one stage was singing its praises, although now I am told they are not so impressed with HS2, but there is the simple fact of what he was saying about the impact that it had on the Medway towns. We can let you have those figures.
David Prout: We will publish an interim report on the impact of HS1. That report is largely built around benefit-cost ratios. One of things that is very difficult to do, either in projecting or indeed measuring the growth that is generated by transport infrastructure investment, is dealing with land-use change and what is displacement and what is genuinely new growth. That is something that Professor Venables and Professor Overman, who came to talk to you, have worked with us on. We will also be publishing their report, which makes recommendations on how we should try to measure that better in future.
Lord Smith of Clifton: When is it likely to be published?
David Prout: I do not have a date. I know that the HS1 report is going through the assurance processes within the department at the moment.
Lord Smith of Clifton: Is there any estimated time of arrival?
David Prout: I do not have it.
Lord Smith of Clifton: It will be after we have reported?
David Prout: I do not know. I cannot tell you.
Baroness Wheatcroft: Obviously it would be interesting, and any figures that you could get to us in advance of that would be appreciated. One of the things that would be useful to know is the extent to which people are choosing to go on HS1 and how many people are opting for the cheaper tickets on the stopping train, and that feeds into my question here. What about pricing on HS2? Would you countenance undercutting by the other rail lines?
Rt Hon Patrick McLoughlin MP: Basically, no. We believe that we are providing extra capacity; it will not need to be undercut. There is competition on perhaps one of our cities, Birmingham, because you have three different services that feed into Birmingham. You have Virgin Trains, you have London Midland and you have Chiltern lines as well that feed into there, but Virgin has continued to see growth, as have the other two carriers. So we have seen a great increase in passenger numbers. That is probably one of the areas where you have the most competition, although there is open access to a more limited extent on the East Coast Main Line but not to the same degree as in that competition between three fairly big operators.
Q231 Lord Carrington of Fulham: I will come on to what I want to talk to you about, which is the cost of the whole project. But when we were talking about capacity on the West Coast Main Line, the evidence we have heard—and in fact I think some of the evidence we have heard from Mr Prout in the past—was that one of the major capacity constraints was the commuter lines into London, which are overcrowded at the moment, so their capacity is too short. We heard in the evidence before that the proposal for HS2 was to relieve that so that there would be more train paths coming in on the commuter routes into London on the existing West Coast Main Line tracks. Are there other ways, though, of relieving the commuter traffic into London?
Rt Hon Patrick McLoughlin MP: One of the things that I think is quite interesting is the impact that Crossrail will have on Old Oak Common. The fact is that Old Oak Common will become a major new terminus for transport in England and the United Kingdom in due course, because you will have not only the Crossrail trains running there but another interchange for other destinations. So Old Oak Common will become a very important transport opportunity in the future, as indeed could the development that could take place around Old Oak Common. The mayor is setting up a development corporation specifically for that area, which you will know perhaps better than I do.
Lord Carrington of Fulham: I have had some involvement, yes. The problem with Old Oak Common, though, is that it is going to have Crossrail coming into it, obviously, but its other transport links, particularly into the underground and bus systems, are not great at the moment. It will take a lot of investment to make that work, I would have thought, but I take your point. It leads on to my question, because those two aspects of HS2 are going to lead to massive knock-on expenditure, not just the expenditure that TfL is talking about for Crossrail 2 but quite a lot of smaller expenditure adding up to quite large sums. How confident are you that the £50 billion or so that HS2 is going to cost is going to be realistic? The French experience with the TGV has been that they have not been able to keep the costs in line with their budgets. I know that we perhaps have a better track record on that with HS1, but how confident are you that these costs can be constrained?
Rt Hon Patrick McLoughlin MP: We do have a better track record, more up to date than HS1, with Crossrail. Crossrail has been a fantastic achievement; it has been delivered on budget and within the estimations for the next two years on time. That has shown that we have some tremendous advantages in the delivery on costs. That is one of the reasons why David Higgins was brought in as the chairman of the company to oversee that project, and likewise Simon Kirby. So it is a matter of making sure of the cost elements that have been set out—£21.4 billion for phase one, £21.2 billion for phase two and £7.5 billion for the rolling stock—which have also included quite a healthy contingency. The first position on phase one is £5.7 billion, on phase two it is £8.7 billion, and there is £1.7 billion rolling stock contingency.
Lord Carrington of Fulham: The experience of what is happening at Euston station is that the costs keep on being multiplied every time anybody looks at it again. You do not have to add in the Euston Arch to make it run over cost. How confident are you that those types of costs, the smaller costs, are not going to suddenly come in and bite you? Are they really indicated in the contingency?
Rt Hon Patrick McLoughlin MP: Of the three stations—Euston, King’s Cross and St Pancras—it used to be Euston that was seen as the modern station, the good station. Now it is seen as the slightly tired station that desperately needs the kind of investment that we have seen at St Pancras and King’s Cross. I have been using St Pancras over the last 20 years. It used to be a place that you would not want to spend more than five minutes in. Now it is a destination in its own right. If you arrive there early for a train you do not mind. It is a pleasant place and a great environment to be in. So I think that is what we have to properly work on at Euston.
I was over in New York to see the work that is being done in the Hudson Yards development at Penn station. They are basically developing above the station. That will capture value for what you could do with the rest of that area and possibly be of help to some of the costs that we are seeing with the station and a lot of interest in the way in which that should be developed.
David Prout: Can I just say, Chairman, that we are not over cost at Euston. We know exactly what the budget is for designing the HS2 station at Euston. The things we are working on at the moment are how we can reduce disruption to existing passengers into Euston—and we have taken a step back to make sure that we have got that absolutely right—and how we can design our new station to fit into a wider vision for Euston station. But as far as the HS2 station is concerned, we are not over budget. We are simply taking time to reflect on what we are proposing to make sure that what we are doing forms part of a bigger jigsaw puzzle for the whole of Euston station if a decision is taken in due course to rebuild the rest of the station.
Lord Carrington of Fulham: Adding in all these bits, do you have a total envelope of costs that you think this would deliver the project under? Is £50 billion the right number? Or is it higher than that by the time you have added in all the additionals that you are going to have to put in to make the project work?
Rt Hon Patrick McLoughlin MP: No, the £50 billion is the envelope cost for the project.
David Prout: The £50 billion includes everything that is necessary to make HS2 work. It includes, for example, platform extensions at stations off the HS2 network where HS2 trains will run: Lime Street, Waverley and Newcastle. There is money in the budget for those kinds of adjustments. Everything we need to do for HS2 is included in the £50 billion. One of the first things that we asked David Higgins to do when he took over as chairman of HS2 was to assure us that our costs were right. He did a lot of work assuring the costs and, in particular, benchmarked HS2 costs against HS1 costs. If you look at what he published in March, you will see that HS1 costs per mile in 2011 prices were £37.6 million. For HS2 we have an allowance at P50 of £43 million per mile and our P95 figure is £47.6 million per mile. If you take HS1 as a benchmark at £37.5 million per mile and our allowance at P95 is £47.5 million, we think our costs are robust.
Lord Carrington of Fulham: That would cover the complementary infrastructure projects that are required, or enough of them to make the whole thing work?
David Prout: All the infrastructure that is required to allow HS2 to run on the dedicated line and the train-service specifications for the classic lines as well.
Lord Carrington of Fulham: And to deliver the basic economic benefits to the north?
David Prout: All the benefits that were set out in the economic case, yes.
Lord Deighton: That should not stop us evaluating other projects that logically should take advantage of the fact that we will have HS2. That is where you have to draw the line.
If I may make one other comment, there are two aspects to the budget. One is that it is clearly good practice to deliver the project within the budget. Of course we may just have a budget that is much too big. So we also need to make sure—and Mr Prout referred to this—that our costs are as competitive as they can be. One thing that we have done at the Treasury is to say to David Higgins, “You need to go and have a look at how they are delivering these projects across Europe”, because we have done some work through Infrastructure UK, which is part of the Treasury, which shows that some of the big European projects per mile get delivered more cheaply, and we have broken that down. A lot of that is clearly a function of the building here taking place through highly congested, difficult terrain. If you go from Euston up to the Chilterns, that is a really complicated piece of engineering, so its cost per kilometre is going to be very, very high. But we do think that there are probably practices and techniques that are employed in Europe that we could probably transfer here to get some costs down, and we want to at least make sure we have understood that, explored it, and implemented if it is possible.
Rt Hon Patrick McLoughlin MP: There are also the lessons that we are learning from Crossrail. Some of the construction, things that have been developed by Crossrail particularly with Laing O’Rourke such as pre-building offsite and putting into site, have been very impressive indeed. Laing O’Rourke has a huge site in Nottingham, in an old colliery area, which is a very impressive production unit indeed.
The Chairman: Mr Prout, what is £50 billion in 2014 money?
David Prout: We quote it in 2011 money: Q2 2011.
The Chairman: But we are in 2014.
David Prout: We quote it in 2011 prices to maintain consistency with our quotes across a period of time.
The Chairman: Consistency, of course, is a virtue, but in real terms you have to spend the money in the year you spend it. My question is: what inflation rate is built into your planning for the purposes of this type of construction? As the Secretary of State pointed out, Crossrail 1 was done at a particularly advantageous time when there was precious little else happening. We now have a cornucopia of projects and the economy is moving forward, which is all good news, but that is likely, is it not, to lead to a degree of inflation for this type of project? Has that been calculated?
David Prout: We use the standard Treasury inflation guidance to calculate that in the benefit-cost ratio.
The Chairman: Thank you.
Q232 Lord Lawson of Blaby: You spoke warmly a moment ago about HS1. What speed does HS1 run at?
David Prout: It runs at 300 kilometres per hour maximum. I will confirm that in due course, but I am pretty sure that is its maximum: 360 for our HS2 trains.
Lord Lawson of Blaby: But HS2’s maximum is 400 is it not?
David Prout: We design to that standard, but—
Lord Lawson of Blaby: Exactly. HS1, although it is designed to run at 300, does not actually run at 300; and 400, which is designed for, is far faster than the TGV, far faster than anything else in Europe, far faster than HS1. Yet for this premium, for this fancy vanity project—being able to boast that we have the fastest railway anywhere in Europe—it is a substantial additional cost. It saves a piffling amount of time, whatever that time is worth, and it does very little more, if anything, to capacity, than if it were an HS1-speed railway. How can you possibly justify this additional cost, particularly, as Lord Deighton said, when you want to achieve your objectives at the lowest possible cost?
David Prout: The additional cost of designing to a 400 kilometres per hour capacity as opposed to conventional railway is roughly 9%.
Lord Lawson of Blaby: This is what Lord Adonis said. He said 10%, but that is the same thing. But we have been advised that that is untrue, because that assumes precisely the same alignment of the tracks. That is correct, is it not?
David Prout: You would not require the same alignment if you were designing to a lower speed.
Lord Lawson of Blaby: Exactly. That is my point. When you said 9% or 10% extra, that assumes that you had the same alignment—and you would not have the same alignment. In fact, it would be cheaper, so the difference would be greater than 9% or 10%.
David Prout: Why would you not have the same alignment?
Lord Lawson of Blaby: You just said that you would not. You yourself said that.
David Prout: I was saying that you would not have to have the same alignment.
Lord Lawson of Blaby: Exactly, so if you were sensible you would not; you would do it on a cheaper alignment. So I remain puzzled as to why you go for this ultra-high speed. I would be interested to see the calculations that you have done showing how much it would cost with the modified alignment, the less expensive alignment, if you had HS1-type speed—in other words, high speed—rather than this ultra-high speed so that you can just boast that we have the fastest trains in Europe.
David Prout: But what is the cheaper alignment that you are referring to?
Lord Lawson of Blaby: We are advised by people who know more about this than I do that you would not have to have the same alignment, and you would have a different alignment because it would be cheaper. You yourself said that you would not need to have the same alignment if it was at the HS1 speed. You said that a moment ago.
David Prout: You do not have to have the same alignment, because the radius of the curves is different.
Lord Lawson of Blaby: Exactly.
David Prout: But the alignment that we have chosen is to minimise the environmental impact of the railway. That above all is the thing that has dictated the route of the train. You would still want to have that objective in mind if you were building for a slower speed. So I do not accept the premise that you would necessarily have a different alignment. Where you save money on slower speeds is on things like tunnel size, because as a train goes through a tunnel if it going fast it generates a lot of heat and you have to have a bigger tunnel. But I do not accept the premise that you would necessarily have a different alignment.
Lord Lawson of Blaby: You yourself said that you would a few moments ago.
David Prout: I said that you could.
Q233 Lord Lawson of Blaby: Exactly, and to save money you would. I assume the Treasury is not so asleep on the job that they will allow you to have a more expensive alignment than you need.
On capacity, again the Secretary of State pointed out that there has been a particularly marked increase in recent years in freight capacity, and that is clearly important in design. But the capacity problem is the capacity at the peaks only and clearly freight does not need to travel at peak times. So why do you feel that the capacity problem is as acute as it is when freight could travel—if the railway’s pricing policy was sensible—at off-peak periods and everybody would be happy?
Rt Hon Patrick McLoughlin MP: I have been on the West Coast Main Line a number of times and heard the excuse that we are running late because of a freight train in front of us, so I do not buy what you are saying as an argument to back up the point that you are making. The simple fact is that the West Coast Main Line, as it operates today, is the busiest railway line anywhere in Europe and we have taken as much capacity as we can out of it. Obviously there is greater demand in the rush-hour period and in the peak-hour period, but the growth that we have seen is not just in the peak-hour period; it is across the whole service.
Lord Lawson of Blaby: But there is no capacity problem on the figures that we have been provided with apart from at the peaks.
David Prout: There are two different issues with regard to capacity. One is with regard to train paths, and that is the number of trains you can run on the track. The second is in regard to overcrowding and the number of people on the trains. Overcrowding is worse at peak times, but there are not enough train paths at the moment to accommodate the amount of demand for freight transport. Freight is constantly trying to get on the lines, and we are unable to give them the space to get on the lines that they want.
Lord Lawson of Blaby: Let me come back to the huge taxpayer subsidy that has been referred to earlier today. To what extent do you think there is scope for reducing this taxpayer subsidy by the Government getting a cash return from the operator of HS2? What have you factored in for that?
David Prout: We have not decided what to do with HS2 once it is completed. With HS1, a 30-year franchise was sold for roughly a third of the price of constructing the railway. HS2 is different because it is absolutely the core part of the north-south railway system and it is designed to abstract a lot of business from the rest of the railway. We have shown that, overall, net for GB Rail HS2 will increase the amount of revenue. If you sell a franchise for example on HS2—and, as I say, no decisions have been taken by government at this stage—you get an upfront capital receipt but you do not have the benefit of the very substantial revenues that HS2 will bring in over a very long period of time. So it is by no means obvious with HS2 that the right thing to do is to sell a franchise in the same way as was done with HS1. Decisions on that have not yet been made and they will be made in due course by the Government.
Lord Lawson of Blaby: But this is rather important, is it not? What is the basis for this cash return that you will get in year in, year out?
David Prout: The basis is the modelling that we have done on demand and fares.
Lord Lawson of Blaby: It is the cash return that the taxpayer, the Government, will benefit from?
David Prout: Yes. It will go into the overall pot of money that is used to run the UK rail system and there is a redistribution mechanism there. Some franchises run at premium—that is, they pay money in—and some franchises are paid a subsidy. HS2 will operate at a very substantial surplus, so a premium will be paid into the overall system.
Lord Lawson of Blaby: In your calculations you have made no estimate—no reliable estimate anyway—either of what you could get for selling the franchise or, if you gave the franchise away for nothing, which you are suggesting is a possibility, of what income you would get year in, year out—
Rt Hon Patrick McLoughlin MP: I do not think we would be giving the franchise away for nothing.
Lord Lawson of Blaby: So you will be selling?
Rt Hon Patrick McLoughlin MP: Not necessarily, but it may be the way in which the franchise is offered. As Mr Prout has said, those decisions have yet to be taken. It may well be that you could offer a franchise, or more of the kind of deal that we have with HS1, which is another long-term concession. But those will be decisions to be taken nearer the time.
David Prout: I am sorry, Lord Lawson. I used the word “franchise” for HS1. I meant concession, and that is what has caused the confusion. Apologies.
Lord Lawson of Blaby: Finally, taking all this into consideration, in your estimation what is the level of the ongoing taxpayer subsidy for HS2?
David Prout: Setting aside the cost-of-capital issue that we discussed earlier, our modelling says that there would be no ongoing taxpayer subsidy for HS2. In fact, quite the opposite: it would run at a very substantial surplus.
Lord Lawson of Blaby: Lord Deighton’s letter referred to £32 billion or £31 point something billion.
Lord Deighton: That includes the capital cost.
Lord Lawson of Blaby: That includes the capital cost?
Lord Deighton: Yes.
Lord Lawson of Blaby: Fully? Which should be included, of course. That is quite right.
Lord Deighton: For the full economic analysis, but the way we do it—the year in, year out cash flow—should be positive, as Mr Prout suggests.
Q234 The Chairman: Taking the numbers from Lord Deighton’s letter we have a £31.5 billion capital cost, which is going to generate £300 million a year, 1% return. Is that correct?
David Prout: I do not know if those two figures are strictly comparable. I think I would need to take some advice and write to you as to whether you can make that calculation.
The Chairman: It says here that it will generate a premium of around £300 million a year. So it would seem—
David Prout: Correct, for UK rail as a whole.
Rt Hon Patrick McLoughlin MP: That is for UK rail as a whole from 2036.
David Prout: In 2036, yes.
The Chairman: That level of return would make it extremely difficult to recover a substantial part of the capital cost that has been invested, so should we not look at the capital cost as sunk money?
David Prout: No one is suggesting that you should not. It is a choice for the Government whether or not to make this investment.
The Chairman: This, of course, then has to be paid off by the taxpayers over time, but the £300 million a year—
Lord Lawson of Blaby: That is the whole network. I think HS2, according to Lord Deighton’s thing, is between £50 million and £100 million.
David Prout: The operating surplus on HS2 annually will be in the billions. But when you then feed that into the overall GB rail-network-subsidy system you will find that you get less of a premium from the West Coast Main Line. So they sort of balance each other out.
The Chairman: That is the net number?
David Prout: Yes, the net.
The Chairman: I see.
David Prout: Yes, and net you get £300 million.
Lord Deighton: We are taking all the business away from the existing network.
The Chairman: This begs a question about the existing classic franchise and whether that survives.
Lord Deighton: The problem is in trying to work out a value for HS2 it is quite difficult to look at HS2’s value on its own, for example, without properly addressing the questions you asked earlier about the operating and pricing model, because effectively, to start with, the analysis here looks at it as an overall network, which I think at this stage is the right way to look at it. If we get to the point where we think it may be in our interest to separate it out and sell a concession, we will have to determine how to value it independently.
The Chairman: So those are all decisions that have to be taken?
Lord Deighton: Yes.
Q235 The Chairman: One final question, and this is still an issue that concerns the Committee: will you be publishing a list of those additional infrastructure investments—which for instance we heard about when we were in Manchester—which are necessary to achieve the vision, Lord Deighton, that you painted, which is of economic regeneration? Will we be able to see a list of those and the costs associated with them? Whether or not you include Crossrail 2 in that essentially is a matter that you will you have to take up with the Mayor of London.
Rt Hon Patrick McLoughlin MP: I do not think that any decision has yet been taken as far as Crossrail 2 is concerned, but there will be organisations that will include the cost of Crossrail 2 and sort of try to build up the figure. The truth of the matter is there will need to be investment in Euston if nothing happens. So do you say that that is a result of HS2, or do you say that when you are rebuilding HS2 you take the advantage of doing the upgrade that would need perhaps to have happened in due course? I think that figure will be very difficult.
The other thing is whether the northern hub is anything to do with HS2. Well, it will feed into the rail infrastructure and it might make people more likely to use the railway as a means of transportation. So it is basically impossible to do that figure. As I said in my earlier remarks to the Committee, over the next five years £38 billion will be expended by Network Rail, of which £12 billion is enhancement on the service. Will all that enhancement in future years be for the benefit of HS2? No. The answer is that it will not be, because there will be certain areas that will want better connectivity as a result of certain areas getting HS2. So I think that is an impossible figure for us to give you.
The Chairman: But the cost of the new stations that have to be built at Leeds and Birmingham is included, is it?
Rt Hon Patrick McLoughlin MP: That is included.
The Chairman: So the direct costs associated with HS2 are included, and let us say that optional extras, which would have transformational benefits to the economy, we would have to look at separately?
Lord Deighton: Yes. I think you are seeing hesitation on this side because we obviously want to avoid the conclusion that you have to add all these other costs on to get the benefits. I think Mr Prout has been very clear from the beginning that this is how the analysis has been done and that the existing justification of the business is based on what is in the budget. When we talk about all these other things we are simply saying, “We have a strategy. HS2 is part of the strategy. There will be many other components to the strategy that will need funding too”, and it clearly makes sense when you spend money in the future to link it to the things you already have. So I think it is slightly dangerous to try to create an accumulated cost. I think that is the resistance you are seeing here.
The Chairman: On that note we will end. Thank you very much for your time and very helpful answers.