EHS0057/EAC/14-15

HS2 Ltd—Written evidence

1. About HS2

1.1.       HS2 Ltd was established by the Government in January 2009 to develop proposals for a new high speed rail line between London and the West Midlands, and to consider the case for high speed rail services linking London, northern England and Scotland.

1.2.       HS2 Ltd is responsible for providing advice to the Government on the economic case for HS2 and analysing the potential value for money of the proposed HS2 scheme. It is published alongside and in support of the Department for Transport’s (DfT) strategic case which summarises the case for action, the full rationale for the scheme and considers the value for money of alternative proposals to HS2. The most recent versions of the economic case and strategic case were published in October 2013[1].

2. Introduction

2.1.       HS2 is much more than just a railway; it is a truly transformational opportunity, particularly for our cities in the Midlands and the North. It is an opportunity to invest in our future economic growth.

2.2.       HS2 will deliver jobs, skills, and a new legacy for our railway engineering industry. HS2 will support rebalancing the economy and boost our international competitiveness. HS2 will deliver regeneration in key cities in the Midlands and the North.

2.3.       The Business Case for HS2, published in October 2013, demonstrates the strong economic case for the scheme. However, as described in the report we believe this understates the full benefits of the scheme. In particular, conventional appraisal techniques may not fully reflect changes in businesses and households’ location in response to the scheme.

2.4.       On the basis of our analysis, we reached three main conclusions:

• The standard cost-benefit analysis shows that the benefits of the HS2 network exceed the costs by a considerable margin and that under standard assumptions the economic cases for both phases of the project are robust and are resilient to a wide range of factors and events.
• Standard assumptions on the demand cap and the value of time (VoT) in the appraisal fail to capture large amounts of potential additional benefits from HS2. There is a significant chance that the return on investment in HS2 could be considerably higher than previous appraisals have suggested.
• HS2 has the potential to deliver productivity gains that will alter geographic distribution of economic activity in a way that cannot be modelled in our economic appraisal.

2.5.       In recognition of some of the challenges of measuring the full economic impacts of major transformational transport schemes, DfT have commissioned an independent review that will inform future guidance.

2.6.       HS2 is a once-in-a-generation opportunity which will have the greatest impact if it is co-ordinated with other investment.  HS2 is working to maximise these benefits through the Growth Task Force, Regeneration Company and local growth strategies. Sir David Higgins’ second report will set out how HS2 will also improve the integration of existing networks.

3. HS2 – The Economic Case is strong

3.1.       Our analysis shows that the economic case is strong. The ‘standard’ point benefit-cost ratio (BCR) for the full HS2 network is ‘high’ value for money at 2.3, including wider economic impacts. Even for Phase One alone the ‘standard’ benefit-cost ratio is estimated at 1.7 including wider economic impacts and there is estimated to be a high likelihood, greater than 75%, of Phase One being medium value for money or higher.

3.2.       Economic growth exerts a strong influence over the value for money of the scheme as it affects the likely rate of growth in demand, and therefore revenues, and also the valuation that is placed on some of the benefits of the scheme. Even with historically low levels of growth, enduring for many decades, our analysis of the scheme would still most likely offer medium value for money.

3.3.       We have included a wide range of construction costs in our analyses, from the target price that HS2 Ltd has been set for Phase One (£17.1 billion 2011 prices) to the highest estimate of cost including the maximum level of contingency (£21.2 billion 2011 prices). These conclusions are therefore resilient to a range of assumptions about cost contingency. However, lower levels of contingency are clearly associated with higher value for money which is why HS2 Ltd is determined to deliver the project within the target price set for the company as part of the spending review. Maintaining a vigorous and disciplined approach to cost control is a key priority.

3.4.       From our analysis of the value for money of HS2, it is clear that some of the standard assumptions and approximations that are provided in the DfT guidance are exerting a strong influence over the results of the cost benefit analysis. In particular, our analysis suggests that the hard limit that is placed on the growth in demand and revenues by the guidance, and the use of values of time that do not vary with length of journey, are leading to a significant underestimation of the benefits that could be realised from the investment in HS2.

3.5.       Furthermore, HS2 is an unusual proposal in many respects. It is both national in scale, and yet it strongly impacts on existing transport networks at a local level. It is a transformational scheme which: connects 8 out of 10 of the major cities in the UK; almost doubles capacity on north-south inter-city routes; and offers step-changes in journey times.

3.6.       The standard appraisal approach assumes no demand growth beyond 2036 irrespective of future growth in population or GDP.  While it would be unreasonable to expect demand for rail travel to continue to grow indefinitely, our view is that this assumption is probably conservative, and that the standard practice of conducting analysis for only one level of demand cap obscures the potential for much higher returns from further growth in demand. A 10% increase in that level results in the cap being reached in 2040 with a point estimate BCR of 2.8 and a very high probability of the BCR being in the high or very high value for money categories. A 39% increase results in the cap being reached in 2049 with a point estimate BCR of 4.5 and an even higher probability of the BCR being in the high or very high categories.

3.7.       Another factor that is thought to lead to a significant understatement of benefits from HS2 is the practice of using a single value of time for all lengths of trip in the appraisal. We have conducted a test to illustrate the impact on the BCR of adopting alternative values of time as suggested by the Institute of Transport Studies[2]. The test uses a business value of time of £45 per hour (2010 prices), this is 40% higher than the standard values of time of £32 per hour (2010 prices) but still lower than the value used in the August 2012 economic update (£47 per hour). The test also uses non-business values of time that have been adjusted to better reflect the length of trips that are affected by HS2 and other modelled changes in service patterns. Using alternative values of time derived from this research, HS2 delivers a return that is greater than £2 for every £1 invested in virtually all of the tested scenarios – even those with the most pessimistic economic growth, cost and demand forecasting assumptions.

3.8.       Our analysis demonstrates that investment in HS2 offers strong returns that are resilient to a broad range of eventualities and risks around costs, demand growth and the performance of the economy. However, when drawing comparisons with other schemes it is important to recognise that our economic appraisal may not fully capture the full range of potential benefits from investment in a transformational scheme such as HS2.

3.9.       HS2 will lead to greater opportunities for businesses and people in one area to connect with businesses and people in other areas. This is true for city regions benefitting directly from HS2 services, but also for areas which benefit from released capacity on the classic network. Greater opportunities to connect with others make these areas more attractive places for businesses and people to locate. We would expect people and businesses to take these new opportunities into account in their location decisions, and that this could ultimately lead to changes in future patterns of land use. The impact of such changes in land-use is not captured in our standard cost benefit analysis.

3.10.   In order to understand the potential opportunity created as a result of investment in HS2, we commissioned KPMG[3] to examine regional economic impacts measured in terms of productivity. The analysis approaches the question of economic impact in a different way to our appraisal, but is well grounded in economic theory, and considers the impact that investment in HS2 would have on economic output by understanding how such investment would influence regional economic performance, both in terms of overall economic productivity and, crucially, the location of economic activity. The results suggested that HS2 could boost all regions of the, and in particular the Midlands and the North.

3.11.   It is difficult to draw a direct comparison between these results and our economic appraisal. Fundamental differences in methodological approach mean that it is not possible to directly compare results (and they are not additive), but it suggests that there may be additional benefits from HS2 that are not being captured in our economic appraisal.

3.12.   These areas of potential additional benefits are all subject to on-going DfT research[4].

3.13.   The economic case can only ever provide part of the overall picture, and there are many other factors that should be taken into account.

4. HS2 will deliver jobs, skills and build industrial capability

4.1.       HS2 will be the biggest construction project in Europe. It will therefore be a major generator of jobs directly linked to the project, across a wide range of disciplines and directly benefiting communities across the country.

4.2.       Building the network will create nearly 25,000 construction jobs and thousands of supply chain jobs. Operating and maintaining the railway will create approximately 3,000 permanent jobs and HS2 stations will support up to 100,000 local jobs.

4.3.       It is important that UK industry is well placed to take advantage of this opportunity, both from a business and jobs perspective. Work to upskill our future workforce has already started. HS2 Ltd is working closely with the Department for Business, Innovation and Skills (BIS), the DfT and industry to develop a new national college for high speed rail to train the next generation of world class engineers to work on the construction of HS2. It will be a world-class institution, focused on designing and delivering the high level skills needed for high speed rail, and other major engineering projects of the future. To date, our contractors have already given more than 700 graduate trainees or apprentices the experience of working on HS2. We expect HS2 to create more than 2,000 FTE apprenticeships in construction alone. This investment in human capital will build our industrial capability – particularly in engineering, construction, environment and create a lasting legacy for the UK as a country that can deliver major infrastructure projects.

4.4.       High speed rail is a global industry. The project provides an opportunity to align industrial and infrastructure policy, and use HS2 to develop UK industries which can compete effectively on the global stage. Business contracts arising from a project of the scale of HS2 will be significant. HS2 is expected to lead contracts worth over £10bn in civil engineering and tunnelling including viaducts, bridges and tracks; around £4bn in station and depot works; £4bn in railway systems such as signalling and power supply equipment; and around £7bn in the design and manufacture of rolling stock. (These figures cover investment in both Phase One and Phase Two).

5. HS2 will improve rail connectivity and capacity

5.1.       HS2 is designed to be a long-term transformational answer to the capacity problem of the UK’s railways. Over the past 20 years rail travel has doubled from 0.74 billion journeys to 1.5 billion journeys per year[5]. The population of the UK is also forecast to increase by almost 10 million over the next 25 years[6]. Without HS2 it is estimated that by 2026, maximum hourly demand could be at least 150 people for every 100 commuter seats departing Euston and Birmingham New Street, and more than 100 passengers for every 100 seats on intercity services departing Euston and Birmingham New Street[7].

5.2.       The railway is effectively the same size as 15 years ago, but there are now around 4,100 more train services a day; an increase of c.25%[8]. The West Coast Mainline is operating at a level of intensity that is making it extremely difficult to achieve target levels of performance reliability. Much of the growth in capacity up this point has been accommodated through train lengthening and additional service frequency. Yet on a typical weekday in 2013 approximately 120,000 passengers arriving into London in the morning peak had to stand. At Euston, 50% of trains in the morning peak period and 44% of trains in the evening peak period already have passengers standing. Overcrowding is not a problem confined to London. More than 10% of passengers arriving on morning peak hour services in Birmingham, Leeds, Manchester and Sheffield are standing[9]. To try to simply maintain the status quo would be a missed opportunity.

5.3.       The benefits of Phase One in terms of extra rail capacity south of Birmingham are obvious. Put simply, more track means more trains and therefore more space for commuters, long-distance travellers and freight. HS2 will ultimately provide up to 18 long-distance train services into London per hour.

5.4.       Phase Two, as currently planned, will bring huge benefits to the North, substantially cutting journey times. The journey from London to Manchester would be cut by an hour, whilst that to and from Leeds would be substantially reduced as well. Similar savings would be achieved on the routes to and from other key northern cities. New classic compatible trains will serve major northern cities, with the capability to run at high speed along the new proposed line and then seamlessly switch over to conventional tracks beyond Manchester and Leeds to serve Newcastle, Preston, Carlisle, Edinburgh, Glasgow and beyond.

5.5.       HS2 is predicted to increase the total number of people who can reasonably access employment opportunities in HS2 station city regions by rail by and the number of businesses accessible from firms in HS2 station cities[10]. Improving connectivity will increase growth potential and provide opportunities for long-term job creation in the wider economy.

5.6.       It is expected that 301,000 passengers will use HS2 each weekday[11] and that it will increase evening peak hour departure capacity departing London Euston threefold, to approximately 34,900 seats[12] in total. In addition to increasing capacity, HS2 will also release train paths on the existing West Coast and East Coast Mainlines for new local passenger services and freight services.

5.7.       Additional capacity will also support greater agglomeration, as high-value businesses cluster around the network. This will make it easier for businesses to connect, trade, and specialise, while also expanding labour markets – which makes them more attractive locations to invest, work and live. The productivity boost from investment in HS2 will help put our great cities on a path to higher growth, giving businesses in the North access to larger markets in the South and an international stage.

6. HS2 will help to rebalance the economy

6.1.       In the UK, the distribution of decision-making top-end roles is unusually geographically concentrated. Sixty six FTSE100 companies have their headquarters located in London and the South East of England[13] while just six are located north of Birmingham. Business densities in London are also considerably higher than in other HS2 station cities[14].

6.2.       Productivity in London is twice as high as in other HS2 station city regions (£37,200 per head in Greater London and £15,300-£19,100 per head elsewhere)[15] and since 2008, population growth in London (9%) was twice that in the other station city regions (4-5%). London accounts for 13% of the UK population, whilst the Birmingham, Leeds, Manchester, Sheffield, Derby and Nottingham city regions together account for 17% of the UK population[16]. Similarly, London accounts for 13% of UK employment whilst Birmingham, Leeds, Manchester, Sheffield, Derby and Nottingham city regions together account for 19%[17].

6.3.       London also demonstrates the economic potential for other city locations. Average pay and disposable income in London are higher than elsewhere, with high labour costs reflecting high productivity[18]. At £21,466 in 2012, Gross Disposable Household Income per head was 28% higher in London than in the UK as a whole (£16,791)[19].

6.4.       However, housing pressure and congestion is far more acute in London and the South East than elsewhere. In June 2014, average house prices in London and the South East were £499,000 and £326,000 respectively, compared to £276,000 for England as a whole[20]. Average road speeds in London are typically much lower than elsewhere in the country. In 2012/13, average road speeds on locally managed A roads were just 16.7 mph in London, compared to 24.9 mph for England as a whole. Road speeds in 10 of the 14 Inner London Boroughs were amongst the slowest in the country[21].

6.5.       Economic geography explains some of the variation in the economic performance of the UK. A paper written for HS2 Ltd on the economic impacts of HS2, by Bridget Rosewell (Volterra Partners) and Tony Venables (University of Oxford) explains the mechanisms by which connecting places may lead to additional productivity gains. The paper describes how transport improvement can allow more economic activity to concentrate, at high density, in a particular place. Commuting capacity enables this, giving rise to a larger and more effective labour market and this was a core argument for the investment in Crossrail. A large body of empirical work tells us that large and high density agglomerations of activity are highly productive.

6.6.       Businesses in London benefit from the agglomeration effects associated with dense markets and access to a deep pool of labour. These agglomeration benefits are not as strong in other UK cities because they don’t have the same access to markets and labour – they are not as big and they are not well connected to each other. Compared to other European countries there is a large disparity between the population of the UK’s capital city and its ‘second tier’ cities[22].

6.7.       HS2 provides opportunities to bring cities closer together and improve access to other businesses and people access to a wider range of jobs. In addition to reducing journey times between London and regional cities, HS2 will better connect cities outside of London to each other. For example, Nottingham to Leeds would be reduced from 106 minutes to 47 and Leeds to Birmingham would be reduced from 118 minutes to 57 minutes[23].

6.8.       City regions in the Midlands and North do not attract enough business investment, but there is scope for them to play a bigger role. In 2008-2012, London experienced at least 5 times as many new business start-ups than any other HS2 station city region[24]. Since 2010, 79% of net private sector jobs growth occurred in London, while Britain’s next nine largest cities accounted for just 10% of all net new private sector jobs created[25]. Our forecasts suggest that investment in HS2 could mean that Phase Two city regions in the north of the country (particularly Yorkshire and the Midlands) experience an improvement in their competitive position relative to Greater London and the rest of Great Britain[26].

6.9.       HS2 Plus flagged the challenge of poor connectivity in the North, not just between the region and London, but also east-west between Liverpool and Manchester, Manchester and Leeds, Leeds and Hull[27].For example, commuting between the Manchester and Leeds city regions is around 40% lower than expected given the characteristics of the two cities and the physical distance between them[28]. Less than 0.5% per cent of Leeds commuters came from Manchester and vice versa[29]. In 2011, one in five people working in London travelled to work by rail. Whilst, infrastructure largely dictates the use of rail, the rate for those working in the Northern HS2 station cities is much lower than in London and England and Wales as a whole (from 1% in Greater Manchester and the Nottingham and Derby city regions to 4% in the West Midlands and West Yorkshire city regions, compared to 20% and 6% respectively)[30].

6.10.   Transforming connectivity between our biggest cities creates a major opportunity to fundamentally change the way our cities work together. City links: integration and isolation (Centre for Cities, March 2008) recommended that national government should invest in new infrastructure linking more isolated towns to regional economic hubs[31].

6.11.   The Rosewell/Venables work also describes the outcome of a number of studies that have looked at the relocation of business activity from New York and other major US cities to secondary cities. For example, Strauss-Kahn and Vives (2009) study the location decisions of 30,000 US headquarters, around 5% of which relocate every year. Headquarters have become increasingly concentrated in medium sized service-oriented metropolitan areas. The areas that have received most inwards moves (and moves which have not then been reversed) are those with a high level of business activity, relatively low wages and, above all, good business transport links (in the US, airports). Giroud (2013) establishes that opening an airline route which reduces travel time between a firm’s HQ and a plant increases, on average, investment in that plant by around 9% and productivity by 1.3%. Studying the effect of telecommunications, Loannides et al. (2008) argue and present some evidence that better communications have tended to promote convergence of city size.

6.12.   The One North report recently stated that HS2 would lower barriers to trade with the South, multiplying the benefits of investment in high-speed rail to the benefit of the country as a whole. It also recommended that HS2 and the North’s interconnected city regions will together make the North a new destination of choice for mobile international businesses; and that HS2 is a key catalyst for northern city regeneration, not simply a means to shorten journey times[32]

7. Investment in HS2 will drive regeneration around station areas

7.1.       HS2 will also generate economic opportunities and development beyond the impacts of the direct expenditure which can deliver significant benefits to local economies. HS2 Ltd forecasts that commercial development brought forward as a result of HS2 in areas immediately surrounding HS2 stations could support up to 100,000 jobs.

7.2.       Stations serve millions of passengers each day and act as a window to visitors creating lasting first impressions. New or renovated stations can have a considerable impact upon their locale by improving its appearance, improving retail and leisure offerings and increasing non-travel footfall.

7.3.       Station regeneration can have wide ranging economic impacts for an area. The economic impact of the Sheffield Station Gateway Project[33] suggested by the change in property values in the immediate locale was estimated to be equivalent to an inward investment of £74 million compared with station investment of £25 million. This, in turn, could be expected to generate a further uplift in annual GVA of £3.4 million. The direct impacts on employment for Sheffield were estimated to be 185 additional jobs, and the increase in employment in areas around Sheffield Station increased overall by 2,800. Within a 400 metre radius of the station, total Rateable Values (RVs) rose from £8.7 million to £14.7 million between 2003 and 2008, an increase of 67%. This is more than three times the corresponding increase for Sheffield as a whole and reflects the increase in both the quantity of commercial development and value per square foot.

7.4.       In London, investment in Crossrail is already driving property development around new stations before they open. GVA[34] estimated that Crossrail could help create additional residential and commercial value of as much as £5.5 billion along the route between 2012 and 2021. Crossrail will support the delivery of 57,000 new homes and 3.25 million square metres of commercial office space that have been identified for development within one kilometre of stations along the route, and there will be significant increases in residential capital values of 25% immediately around stations in central London and 20% in the suburbs.

7.5.       In addition to supporting up to 100,000 jobs, HS2 stations are also expected to support at least 10,000 new homes[35]. HS2 is committed to maximising the benefits of regeneration through:

• The Growth Taskforce – we are working with Government and local partners to support the development of local growth strategies;
• The establishment of a Regeneration Company – we are developing proposals to establish a central regeneration company to ensure that potential growth around station developments is unlocked, accelerated, and enhanced; and
• The forthcoming report from Sir David Higgins – we are working with Network Rail/DfT to maximise connectivity between HS2 and the existing transport system to ensure the benefits of HS2 are widely spread beyond the network.

8. HS2 should not be viewed in isolation

8.1.       HS2 will not operate in a vacuum. It will provide a step change for UK transport capacity and connectivity, and connections with other networks (across all modes). It will improve access to international gateways and ports, release vital capacity on existing lines for passengers and freight, and ensure the benefits are spread well beyond the line of route.

8.2.       To date, the discussions about how to realise the potential of the second phase of HS2 have tended to focus on the line itself. This underestimates both the transformation that HS2 could bring to the regions and the potential change if HS2 is seen as part of the wider transport network. Issues such as how to considerably improve the trans-Pennine line between Leeds and Manchester; or whether to re-open the Wortley Curve to improve services to Bradford and Wakefield; or the potential for electrification from Leeds to Hull; or the impact of the East Coast upgrade are not within HS2’s remit, but remain relevant to final decisions on the route.

8.3.       HS2 and the future of the existing network need to be considered together to maximise the synergy between them – and both need to be considered as part of the much wider overview of how to regenerate the North as a whole. Equally, through the Growth Taskforce, HS2 will work with local authorities to enable them to develop their own vision of how best to use HS2 to regenerate local areas by planning development around stations and interchanges.

8.4.       HS2 will bring new opportunities for regeneration and development of land around stations, and better connectivity will bring new opportunities for people and businesses to locate outside of London and the South East. Increasing use of flexible working patterns and high speed connections between London and other core cities will create more opportunities for people and businesses to have a permanent physical base a long way from London, taking advantage of lower property and business costs.

8.5.       HS2 will boost the productive potential of the UK as part of the national infrastructure plan and investments in local growth deals to support future economic growth and help to rebalance the economy.

September 2014