Written evidence from the Department for Transport
I am writing to provide a response to several questions that were asked during the Public Accounts Committee hearing on the Great Western (GW) Railway on 14 December.
Chris Evans MP asked about the business case for the electrification of the Cardiff to Swansea line (Q64). My Department does not hold a formal five-case business case for the Cardiff-Swansea electrification scheme in isolation. The Economic Case was last examined at the time of the main Great Western enhancement appraisal in February 2015, which concluded that electrification of this section of route would return a benefit to cost ratio (BCR) of 0.57. A number of factors including both the cost estimates for the work and the decision to vary the GW Intercity Express Programme (IEP) order to all bi-modes mean this estimate is no longer current. The Department intends to produce an updated appraisal in 2017. The full business case needs to consider the strategic case as well as the economic case and other factors.
Mr Richard Bacon MP asked about the quantified financial benefit of reduced wear and tear on the track for electric trains compared to the bi-mode trains (Q98). In 2014/2015 my Department reviewed its assumptions on the Variable Track Access Charges for IEP (now known as Vehicle Usage Charge (VUC) and confirmed that it is approximately 10p/mile cheaper to use a 9-car electric train rather than a 9-car bi-mode. The figures should be taken as approximate as the final VUC rate will need to be determined by Network Rail.
Philip Boswell MP asked about an integrated strategy and plans for the necessary skills to deliver enhancements (Q137). We published the Transport Infrastructure Skills Strategy in January 2016, aimed at delivering the skills and capabilities needed to meet the challenge of our ambitious infrastructure programme. The strategy includes an ambition to create 30,000 apprenticeships within the rail and road sectors by 2020, stretching targets on diversity, and recommendations around collaboration and the development of specialist centres of excellence in training. We recognise that signalling and tunnelling are critical skills areas. As part of the Crossrail programme the Tunnelling and Underground Construction Academy was founded in 2012, and has seen more than 12,000 course enrolments over that time. My Department and the rail industry have also invested significantly in building new training centres to develop critical skills areas, including the National Training Academy for Rail and the National College for High Speed Rail.
The industry-led Strategic Transport Apprenticeship Taskforce (STAT) was established as the primary delivery vehicle for the Strategy, and is now chaired by Mike Brown, Commissioner of Transport for London. STAT will publish an Annual Report in spring 2017 detailing progress against the strategy recommendations.
The rail industry launched the Sector Skills Delivery Plan in December 2016. This plan includes programmes to develop new training standards, promote diversity and improve recruitment and retention within the sector. The industry is in the process of finalising standards for new signalling operations apprenticeships, which are expected to be published in early 2017.
Nigel Mills MP asked whether rolling stock contracts are procured in sterling or Euros (Q141). Rolling Stock is generally procured through the franchising process. Once a bidder has submitted their price as part of the competition they are at risk of currency movements to funding rates. Generally they will try to get the manufacturer to hedge their prices for a period of time so they have certainty of build price but this is dependent on the manufacturer. Where the currency has not been hedged the exchange rate will be fixed on contract signature and converted to pounds. Payment to the manufacturer on completion of milestones will normally be in pounds.
On some rolling stock programmes, DfT takes a bigger role. For example, elements of the Intercity Express Programme and the Thameslink rolling stock and depots programme have sterling, euro and yen cost components. Prior to financial close (as is normal) the Department took the foreign exchange risk. At the point of financial close Agility/Hitachi (for IEP) and Cross London Trains (for Thameslink rolling stock) took that risk thereafter by a mix of hedging and swaps. All of the contracts are stated in Sterling. During the financial close process we assumed the risk in relation to swap rates exceeding the anticipated levels and this was reported to Parliament.
Mr Richard Bacon MP asked for clarification on a number of issues relating to HS2 (Q160-164). As the Committee noted at the meeting, the government announced on 15 November 2016 the preferred route for Phase 2b, from Crewe to Manchester and from the West Midlands to Leeds[1]. Phase 2b is at the heart of the Government’s plan to increase capacity on our congested railways, improve connections between our biggest cities and regions, and generate jobs, skills and economic growth, helping us build an economy that works for all. The preferred route incorporates some changes to what the government proposed in 2013/14. Going forward, the government is consulting on seven substantial changes to the route. One of the proposed changes concerns the way of serving Sheffield as proposed by Sir David Higgins in a report earlier this year[2].
The Government is determined to move quickly so that we can ensure the country realises the benefits of HS2 as soon as possible. Regarding timing of a decision on the Sheffield connection, the consultation will end on 9 March 2017. The Government will consider the public feedback and publish its formal response in 2017.
On the timing to secure assurance on the delivery of the identified potential efficiencies, the 2015 Spending Review set a budget for HS2 of £55.7bn. HS2 is an ambitious engineering project which will take many years to complete, and like any programme of this scale, controlling costs will be challenging, yet the Government is committed to delivering HS2 within this budget.
The Government has published preliminary cost estimates in the Financial Case of the Strategic Outline Business Case (SOBC) for Phase 2b as part of the November announcement[3]. We continue to scrutinise HS2 Ltd’s cost estimates closely and will report revised estimates in the Outline Business Case (OBC) when it is published in 2019 to support the Phase 2b hybrid Bill that we plan to deposit in Parliament at the same time. The revised estimates will incorporate efficiencies both in the design itself and the procurement.
We expect HS2 Ltd will be able to take advantage of experience and learn lessons from the Phase One and Phase 2a processes. Moreover, cost estimates will become more certain as HS2 Ltd awards contracts in 2017 to progress the design of Phase 2b in readiness for the deposit of the Phase 2b Hybrid Bill. These provide additional confidence that there will be an appropriate level of maturity around the Phase 2b cost estimates by the time of publishing the Phase 2b OBC.
On the increase in BCR for HS2, as set out in the Economic Case of the SOBC for Phase 2b published as part of the November announcement[4], we have updated our estimate of the central BCR for the HS2 network as a whole to 2.7 (with over £102bn in total welfare benefits), up from 2.2 as last published in the SOBC for Phase 2a in November 2015.
The revision reflects updates to improve our modelling and appraisal framework, ensuring we are using the most up-to-date information and are consistent with the latest guidance in appraising rail schemes. The largest driver of the increase in the central BCR is from updating the demand forecasts and moving the ‘demand cap’ to a fixed forecast 20 years in the future. This increase has been offset to some extent by the following revisions. We have made changes to our appraisal including revising the calculation of user benefits and adopting the latest values of travel time following a detailed study we recently published. We have also updated some policy assumptions such as the Government’s commitments in relation to non-HS2 rail services and changes to the Phase 2b design since November 2015. A diagram illustrating the effect of each change on the central BCR for the whole HS2 network since November 2015 is shown below, taken from Figure 1.2 in the Phase 2b Economic Case.
As the HS2 scheme design progresses, we will continue to update our appraisal of benefits and costs in line with the latest information and appraisal guidance.
I hope this information is helpful. I am copying this letter to Mr Richard Bacon MP, who was sitting as Chair on the 14 December, to Richard Brown, Amyas Morse, and to Mark Carne.
Philip Rutnam, Permanent Secretary
22 December 2016