EHS0040/EAC/14-15
Introduction
Since the proposals for High Speed 2 (Phase 1) were announced in 2010, I have spent a great deal of time looking into the proposals in detail, and it has become increasingly clear that this line was ill-conceived, its development poorly managed, and fundamentally, as currently proposed, the wrong infrastructure project for our country’s needs. A significant flaw in the case for HS2 has always been the misrepresentation of its supposed benefits to our national economy.
There is huge doubt over the viability of the economic case for HS2. Five business cases have been produced for Phase 1 of HS2, and yet, we still do not have a case that is solid and workable. When HS2 was first announced the benefit cost ratio (BCR) for Phase 1 was 2.4 and for the full Phase 1 and Phase 2 route (the “Y”) it was 4. The current BCR for Phase 1 has dropped to 1.4, meaning only £1.40 coming back for every £1 spent, and dropped to just 1.8 for the Y: hardly a lucrative prospect. To compare this BCR with other infrastructure projects, many road improvements projects have a BCR of 10 and the Optimised Alternative (the alternative to HS2 put forward by the 51M group of Councils opposed to HS2) has a BCR of 5.
The Department for Transport deem any scheme with a BCR of less than 1.5 as being “low value for money” and not to be proceeded. My colleague, Rt Hon Philip Hammond MP, when he was Secretary of State for Transport said when HS2 was first announced, that it would be necessary to “seriously review the viability” of HS2 if its BCR dropped below 1.5. On this basis alone it is time to “seriously review” the viability of HS2.
The assumptions which are used to back up the claims of a BCR of 1.4 often lack robust and consistent evidential basis and this is detailed further below.
In addition to the declining BCR, the budget for HS2 has increased dramatically since the project’s inception in 2010, and further rises are probable. The original budget was £20 billion; however, this has now more than doubled to £42 billion, (£50bn including rolling stock). Both the Heathrow spur (at a cost of £2bn) and the HS1 connection (£700m) are no longer going ahead, yet the budget has not reduced. The Institute of Economic Affairs even forecasts that the budget could rise to £80 billion.[1] Yet another consultation for compensation is currently taking place, and accurate costings for mitigation for those affected has not yet been fully accounted for in the budget. Plans for Euston have not been finalised, which, as they involve a total rethink and representation of the proposals, could also alter the budget significantly. Additionally, the budget is still based on 2011 prices, meaning that the £50 billion price tag is in fact three years out of date.
There has been a great deal of criticism of the business case from a large number of organisation across the spectrum including the National Audit Office, the House of Commons Public Accounts Committee, various think tanks, economists, transport experts and industry bodies (such as the Institute of Directors) and I hope these will be examined in detail by the Committee. The KPMG report – on which the latest business case was based, has been largely discredited and its methodology criticised. The fact that HS2 requires a £31.5bn subsidy speaks for itself.
The risks behind HS2 have always been high on the agenda of this project, yet they continue to be available only to an inner circle in Government. The project has been given an ‘amber/red’ rating by the Major Projects Authority (MPA), but the release of their reports has been blocked by the Secretary of State for Transport. The MPA reports have not been made available even to the select committee examining this project following Second Reading of the Bill. This goes against the recommendation by the Information Commissioner to release the reports, as well as suggesting that the reports are detrimental to the case in favour of HS2. This veto reflects poorly on the transparency of this project, and worryingly means that both my colleagues in the Chamber and those sitting on the HS2 Hybrid Bill Select Committee will not be, and have not been, in full possession of HS2’s risks when making important decisions.
Conclusion
With such a large amount of taxpayers’ money at stake, as well as the significant community and environmental impacts, it is vital that this project is given the highest level of scrutiny before going ahead. The opportunity cost of £50bn+ and the alternative projects which could be achieved with this level of spend mean that it is vital that the business case for HS2 is robust and offers a good return for taxpayers. If this is not the case HS2 should not proceed. Without all the information on the risks that have been assessed informed decision making is impossible.
There are a number of factors which should have been included in making an economic case for the project. As well as the factors which have been excluded, a number of the assumptions made in the business case do not stand up to scrutiny. The assumptions have changed considerably in the different versions of the business case and often with little evidential justification. If these assumptions are wrong (and many have been questioned by independent bodies) then the BCR falls way below its current level of 1.4, making the project even less viable.
Value attributed to journey time savings
The HS2 business case has always relied heavily on the value attributed to journey time savings – particularly for business travellers - which accounts for two thirds of the benefits of the project.
Although the Department of Transport have now accepted (unlike in earlier business cases) that business people do work on trains, the latest business case ignores the fact that the time saved through shorter journey times is already productively used and assumes that businesses would be willing to pay a premium for having a shorter journey (which they may not if their employees can work on a journey). In recognising that business people do work on trains (and therefore quicker journey times are not so important) the Government has publically shifted their rationale for building HS2 from high speed to capacity and yet at the same time over 79% of the claimed transport user benefits are still attributed to time savings.
The business case also assumes a substantial increase in business travellers. With the continuing developments in technology it is by no means certain that there will be a substantial increase in the numbers of business travellers in future years and in fact current figures show that business travel is falling.
Demand Forecasting
The business case for HS2 relies on there being an ongoing increase in demand for long distance rail travel at 2.2% per annum and over 25 years (ie that long distance rail growth will have increased by 79% by 2036). However, over the last two years long distance rail growth has plateaued. The strong growth in long distance rail demand following privatization in 1995 has stalled with no growth for over 2 years despite the rally in the economy. A recent article [2] highlights this.
Forecasting so far into the future is very uncertain and previous rail projects have overestimated demand hugely (such as HS1 which runs at about one third of the predicted passenger levels). A study of more than 200 infrastructure projects [3] found that there is a tendency to overestimate passenger forecasts by over 100% on rail projects. If there is not a 79% increase in passenger demand (which seems highly unlikely) then the BCR would inevitably be reduced.
Savings from cuts to existing rail services
The business case for HS2 has always included savings arising from cuts to current intercity services.
The 2013 case includes an increase in cuts from £5.5bn (in the previous business case in 2012) to £8.3bn. It is surprising that this figure has increased by almost 50% in one year. Again, without these large amount of cuts being included in the business case (which assumes that people would move from existing services to HS2 – where there is a large price increase), the BCR would be lower.
Price competition
The business case ignores the effect of price competition from other lines both in terms of how it affects revenues and demand. Available evidence shows that passengers are more likely to travel on cheaper lines than pay a premium to travel more quickly. If passengers choose to travel on cheaper lines then this could result in unused capacity on HS2 (as has happened with HS1).
The KPMG report and Wider Economic Impacts
The 2013 business case includes KPMG’s work on the Wider Economic Impacts of the project. The report was widely criticised by academic experts and its results have been contested. It is notable that the report was not peer reviewed by the Analytical Challenge Panel. A number of economics experts agree that the KPMG work lacks statistical rigour and even contains methodological errors which could cause the wider economic benefits to be overestimated by 6 to 8 times[4].
The other issue with including the wider economic impacts to support the business case is that the cost of regional economic and transport spending necessary to realise the wider benefits should also be included in the BCR but it is not. In addition, the economic disbenefits to regions where HS2 comes through have not been included in the business case and a lower landscape value has been used which should be rectified. IN addition there may be even wider disbenefits. Chiltern District Council have commissioned a piece of work which has shown that the local economy will suffer to the tune of £170m during the construction phase alone.
Additional costs not included in the business case
There are a number of costs which are excluded from the business case and which should also be factored in such as financing costs of capital (interest payments on HS2 debt could total £2.3bn per year), the costs of Crossrail 2 which is required to deal with the numbers of passengers arriving on HS2 into London Euston, property compensation (the full cost of property blight is estimated at £9.5bn) and the fact that HS2 is likely to make an operating loss (due to exaggerated passenger demand).
Alternatives
The business case for HS2 does not include any consideration of alternative investments which could achieve the same aim as HS2 nor does it consider how HS2 would fit into a wider UK transport policy. Consideration should be given to the returns from projects such as installing superfast (Korean levels) broadband across the UK or from projects focusing on the North (for example the £15bn “One North Transport Plan” or upgrades to existing services, particularly commuter services.
Capacity
The business case for HS2 continues to ignore the real position on capacity. It is now claimed that HS2 is vital to deal with a capacity crisis on WCML. However, the evidence shows that the WCML currently has considerable spare capacity (data released to the High Court as part of the 2012 Judicial Review challenge to HS2) showed an average evening peak load factor on intercity trains into Euston was only 52%. In the event that capacity does become an issue, there are other cheaper alternatives to increase capacity with less disruption to services than HS2 will cause[5].
Conclusion -if the above costs are added in or if the flawed assumptions are corrected and factored into the HS2 business case, the BCR will fall to below its existing low level of 1.4 (HS2 Action Alliance have conducted research which suggests the true BCR is around 0.5). I would assume that the Treasury would be aware of these flaws and they should rework the business case to include these factors and make that information publicly available.
There is little academic evidence that I have found to support the notion that a high-speed rail line will lead to the economic regeneration of the North of England, as suggested in the now discredited KPMG report, commissioned by HS2 Ltd and referred to above.
In fact the available evidence shows the contrary, in that where a dominant city is connected by high speed rail to a less dominant city, it is the dominant city (ie London) which benefits most because greater competition will then be accessible and skilled workers may start to commute to the larger city sucking skills away from those very places it is intended to regenerate. [6] The 2011 business case for HS2 stated that 75% of the new jobs created would be in London. Evidence also shows that the best way to regenerate an area and increase economic activity is to provide better regional transport connections in and around cities. Many of the towns and cities in the Midlands and the North have poor connections to each other and overcrowded commuter services. HS2 will do little or nothing to solve these problems for the majority of cities.
Taking HS1 as an example, in spite of many promises of the positive regeneration of East Kent in the 1990s, HS1 has failed so far to live up to expectations. Dr Wellings from the Institute of Economic Affairs argues that economic regeneration would be reflected in lower unemployment, but in the case of East Kent, from 2010-2013, the average employment rate was 5% points lower than during the pre-high speed period, compared with a 1.8% drop nationally.[7] He goes on to assert that even an infrastructure project as large as high-speed rail is not influential enough to counteract other economic factors in order to fundamentally regenerate an area of the UK, such is proved in the case of HS1.[8] Birmingham is as close to London now as the Northern cities would be with HS2 and yet is it suffers from high levels of unemployment and deprivation. The case of Rotherham is also often cited in similar terms.
Looking at the evidence of high speed rail in France, it was hoped that the TGV would regenerate some of France’s other cities but yet relative unemployment has increased in Lille since the opening of the TGV. Also in Lyon unemployment in the Rhone department increased from an average of 5.4% before the TGV was built to 9.7% in 2013. What job growth there was limited to those areas in close proximity to the line and its stations. It is also notable that in France, in spite of an established high speed rail network, 82% of CAC40 companies are based in Paris and none in the other cities served by the TGV.
In a February 2014 report, the Institute of Directors stated that 70% of their members believe that HS2 will have no impact on their productivity, and only 24% expect any sort of benefits.[9] The author of the report explains that economic benefits are determined by one’s proximity to the line itself, which limits widespread economic regeneration.[10] Owing to this probable trend, the report goes on to argue that not enough businesses will benefit to justify such extravagant Government investment, as the project has ‘such potential to turn into a white elephant’.[11]
The KPMG report assumes that the only constraint on commercial activity is transport infrastructure. KPMG assumed that each of the areas served by HS2 has a limitless supply of property, talent and other resources and on this basis argued that the economic benefits of having the new line would be £15bn a year. However, it appears that a great deal of complementary action is envisaged from local authorities and local enterprise partnerships to develop the areas around the HS2 stations. This is particularly the case around the stations which are outside city centres and require additional infrastructure to connect them to the existing transport networks – again the cost of this has not been factored into the economic case for HS2 and many of the areas could have been regenerated without the need for a high speed rail link. There will also be the cost of additional tunnelling in a number of areas to mitigate the damaging environmental effects of the rail line.
There are question marks over whether HS2 would ever reach Scotland as transport is devolved and it is unclear if Scotland would be able to afford a high speed rail line.
It is not clear how the benefits (which will largely be in terms of jobs and regeneration around the stations) can be realised nationally.
London’s dominance is expected to increase and although properties in some areas around the stations may increase in value, those on the route with no station will lose. With the huge £31.5bn subsidy and exaggerated passenger demand figures the cost is likely to exceed any net benefits.
It is also likely that because of the shortage of skills in the UK for the necessary workforce to construct HS2 that there will need to be a significant importation of labour resulting in more foreign remittances.
As previously mentioned, HS2 is likely to lead to greater centralisation, making the services, culture and other attractions of London more accessible to the detriment of other cities and the regions. There will also be economic disruption caused by the damage done by the line to areas through which HS2 passes but which have no station, such as Buckinghamshire.
I often refer to the fact that my constituency in Chesham and Amersham will have all the pain and no gain in relation to this project. As Phase 1 will be non-stop between London and Birmingham, Buckinghamshire will reap few economic rewards from the line itself. Instead, it is more likely that my constituency will suffer in terms of fewer tourists visiting the Chilterns Area of Outstanding Natural Beauty, potential damage to local amenities, a detrimental effect on my constituents’ wellbeing, and impacts on property prices.
Regarding Chiltern District as a whole, the effect on business could be substantial. There are approximately 5260 businesses in the district, which accounts for more than 32700 jobs.[12] The line may not only deter these businesses from expanding during the construction period, as they will inevitably be affected by increased traffic, lengthy road diversions, noise, and land blight, but it also may affect the likelihood of new businesses choosing our district as a viable place to locate. It is even estimated that transport disruption alone could result in £12.6million to the district’s businesses and £89.8million in travel costs to its residents.[13]
Moreover, the Chilterns AONB is the only nationally environmentally protected are on the proposed route of HS2, with approximately 5.6 miles of the line exposed. This area contains ancient woodlands, habitats, and large swathes of beautiful countryside; if this is irreversibly damaged by a project that does not even have a decent business case, both the Government’s environmental and economic credentials will be ruined.
I would assume that HS2 – if built - should operate as a franchise, and unless the Government is willing to fix the price on HS2 at the same level as the WCML and ECML (which would seem unlikely) that there will be price competition.
Ticket prices for HS2 have not yet been announced, but in spite of HS2’s assumptions that HS2 will be priced the same as the classic network, fares on HS1 are 20% higher than on non-high speed routes, and premium fares for high speed rail lines is international convention.
I broadly welcome the recent announcement of HS3 by the Chancellor, as I am a strong believer in the advancement of modern transport infrastructure. As HS3 focuses on Northern economic growth and connectivity, the Government is finally making plans to ameliorate an area that is in desperate need of revival. However, despite HS3 promising a ‘powerhouse’ of more efficient transport links between Northern cities, the Government is failing to form a cohesive plan of national transport redevelopment. By pushing ahead prematurely with HS2, the North will potentially have to wait decades for any sort of economic rebalancing which HS3 could bring, to be felt.
To achieve a better integrated North with greater economic prosperity, it follows that investment should be concentrated on starting any new rail lines in the North first. The Government’s £50 billion HS2 budget could be refocused and injected into creating stronger links between Northern cities, which would encourage a fundamental transformation of regional transport in these areas, and much more effectively boost local economies. By starting in the North, more time could then be devoted to formulating plans for Crossrail 2 in the South, a workable HS1 link, and a direct connection to our major airports, in order to fully maximise transport integration across the entire country. As it stands, the case for HS2 is significantly weakened by the clear benefits that HS3 could bring, both quicker and more successfully, to the North.
Conclusion
The junior Transport Minister, Robert Goodwill MP, said on 20 March 2014 in answer to a parliamentary written question to me that ‘the project already offers high value for money’. I believe that based on current evidence this is not the reality of the situation. The current economic case offers poor value for money, little evidence that HS2 will deliver the economic growth it promises, and a grave unawareness of where £50 billion could be better spent. We have a duty to the taxpayer to make sure that we are investing in the right projects – it is time to rethink HS2 and focus on a coherent UK-wide transport strategy encompassing air, rail and road with projects which provide better returns and benefit more people than HS2 will. The future is superfast broadband, driverless cars, integrated regional transport systems, hub airports – not HS2.
[1] The High Speed Gravy Train: Special Interests, Transport Policy and Government Spending, Dr Richard Wellings, Institute of Economic Affairs, 19 August 2013.
[2] Modern Railways article “The Growth Delusion”, August 2014
[3] Flyvbjerg B, Mette K. Skamris Holm, and Soren L. Buhl: How (In)accurate are Demand Forecasts in Public Works Projects?
[4] Daniel Graham, Prof. of Statistical Modelling; Research Dir. of Railway & Transport Strategy Centre, Imperial; Henry
Overman, Prof. of Economic Geography, LSE; John Tomaney, Prof. of Urban & Regional Planning, UCL
[5] 51M Optimised Alternative was costed at £2bn by Network Rail.
[6] Professor John Tomanay’s evidenc to the Transport Select Committee http://www.publications.parliament.uk/pa/cm201012/cmselect/cmtran/writev/rail/m14.htm
[7] Failure To Transform: High-Speed Rail and The Regeneration Myth, Dr Richard Wellings, Institute of Economic Affairs, April 2014, p.6.
[8] Failure To Transform’, p. 35.
[9] High Speed 2: on the wrong track, Andrew Silvester, Senior Parliamentary Affairs Officer, Institute of Directors, February 2014, p. 8.
[10] High Speed 2: on the wrong track, p.11.
[11] High Speed 2: on the wrong track, p.19.
[12] Economic Impact of HS2 on Chiltern District Final Report, Peter Brett on behalf of Chiltern District Council, July 2014, p.7.
[13] Economic Impact of HS2 on Chiltern District Final Report, p.24.