House of Commons - High Speed Rail

High Speed Rail - Transport Committee Contents

4 Economic impacts

I believe that if we are really serious about rebalancing our economy and ensuring that we get growth across the country, and not just in the south-east, the time for high-speed rail has come. That is why it has my strong support.[115]

I believe that it is not possible for Britain to maintain its prosperity in the 21st century in an increasingly competitive global economy unless we can close the growth gap between north and south. Governments for the past 50 or 60 years have wrestled with this challenge and we have not succeeded yet. This approach of investing in strategic infrastructure is the last best chance to achieve that.[116]

National impacts

45. Mr Hammond said that, while he "starts with capacity", the broader purpose of HS2 is to support economic growth, particularly in the Midlands and the North of England.[117] According to the Government, HS2 would not only create significant direct employment but would also benefit the UK economy as a whole through wider long-term economic impacts and strategic benefits. The HS2 business case, which we analyse later in this chapter, concluded that the Phase I, from London to the West Midlands, would generate £20bn in economic welfare benefits, principally as a result of time savings to business travellers. This estimate also includes £4 billion in wider economic impacts (WEI) which would result from improved competition (£1bn), larger labour markets and concentrations of specialised firms, key markets and suppliers (£3bn). The total benefits for the Y network were estimated at £44bn, including WEI estimated at £6bn, on a pro rata basis, as a detailed appraisal has not yet been undertaken.

IMPACT ON EMPLOYMENT

46. The London-West Midlands leg of HS2 would, according to the Government, result in the creation of some 40,000 jobs—a potential 30,000 in "planned employment growth" around the high-speed rail stations (with two-thirds at Old Oak Common), 9,000 in construction of the line and 1,500 in the operation and maintenance of the trains.[118] Some of the jobs around the stations would be relocated from elsewhere.

STRATEGIC BENEFITS

47. The Government and supporters of high-speed rail, such as Greengauge 21, point also to the strategic advantages that HS2 would offer.[119] A new line would improve capacity and reliability—for services both on the new line and the classic lines that it relieves and the opportunity for greatly improved journey times, depending on the design speed chosen. Journey times are an important aspect, particularly for those cities lying furthest from London. Lower journey times improve connectivity between the major cities in England and with Scotland and make it easier to get "there and back in a day" which Eddington identified as valuable to business and tourism. For example, on completion of the Y network, journey times between Birmingham and Liverpool would be 60 minutes and 65 minutes between Birmingham and Leeds. Better journey times would provide an increasingly competitive alternative to road and, for some longer journeys, to air. (See Chapter 5.) Improved access to Heathrow from the regions is another strategic economic benefit much emphasised by the Government[120] and business organisations and one that is likely to reinforce the trend away from domestic flights to Heathrow.[121] The proposed link between HS2 and HS1 would also make possible direct services between the regions and the European mainland, although the commercial viability of these remains to be established.

ALTERNATIVE ASSESSMENTS

48. Supporters of high-speed rail have argued that the economic benefits of HS2 would be far greater than those identified by HS2 Ltd in its business case. They contend that there would be significant additional impacts on productivity, measured as increased Gross Value Added (GVA). Figures vary considerably, depending on the assumptions and methodology. In a study for Greengauge 21, KPMG estimated that "a comprehensive high-speed rail network, could boost Britain's annual GVA by up to £29bn, including re-use of the existing lines."[122] The Northern Way estimated that the increase in GVA could be three times greater than the welfare benefits calculated by the DfT.[123] Most recently, the Core Cities Group, representing the eight largest English cities outside London, has published a study by consultants Volterra and Arup, which suggested that "Investment in a full high-speed rail network and electrification will underpin the creation of 400,000 jobs in Core Cities, and 1 million jobs in total across their wider urban areas."[124]

49. Although Mr Hammond has sometimes cited such studies in support of HS2, the DfT has remained wary about the validity of such methods and does not include these additional GVA impacts in its own formal appraisal methodology (WebTAG).[125] Indeed, even some sponsors of these studies recognise the appraisal techniques used as being "in their infancy".[126] On the other hand, some have argued that even DfT's figures are too optimistic. Professor Vickerman said that the calculations of employment that would result from HS2, including those by the DfT, took little account of jobs that were displaced or relocated and were, therefore, gross rather than net figures.[127] The Taxpayers' Alliance has claimed that HS2 is a highly inefficient way of creating jobs and that the wider economy would create four times as many jobs with the same level of capital expenditure.[128]

Regional impacts—rebalancing and regeneration

50. The Government has claimed that HS2 would change the economic geography of Britain, rebalance the economy and reduce the north-south divide.[129] The Prime Minister has made it clear that HS2 is a major component of the Government's regional policy:

[...] we have to have our own dedicated regional policy here in the UK—not just money, but things like high-speed rail.[130]

The campaign Yes to HS2 is supportive of this view and asserts that HS2 would bring economic benefits, particularly to the Midlands and the North, "helping to rebalance the country's current south-eastern centric economy."[131] Regional business organisations are also supportive. Mr Geoffrey Piper, Chief Executive of the North West Business Leadership Team, believes that HS2 is "vital for the long-term prosperity of the region."[132]

51. The cities in which new HS2 stations would be built and those which would be served by HS2 trains running on the "classic" network were very positive about the potential economic regeneration benefits for the cities and, to varying degrees, the surrounding regions. Birmingham City Council saw HS2 services and a new station at Curzon Street as a major catalyst for regeneration of the eastern part of Birmingham city centre. The West Midlands Integrated Transport Authority (Centro) commissioned a study from KPMG which concluded that HS2, plus a programme of regional rail enhancements, would increase GVA in the West Midlands by £1.5bn, the equivalent of a £300 rise in average wages.[133] The London Borough of Hammersmith and Fulham was strongly supportive of the proposal for a station at Old Oak Common because of the potential benefits to the local economy, although TfL[134] and others[135] pointed out the constrained nature of the site and the lack of access by road. Manchester and Leeds local authorities and business organisations also saw considerable regeneration potential from HS2.

52. We saw for ourselves the regeneration of Lille that has been achieved through sustained economic development efforts integrated with the Euralille TGV (high-speed rail) station and international high-speed rail services. We heard also from business and economic development professionals in Frankfurt how the new high-speed rail (ICE) line between Frankfurt and Cologne had helped to strengthen the regional economy and to spread growth.[136] SNCF Director, Pierre Messulam, described how, over time, the Paris-Lyon TGV line had brought economic benefits to both cities. He also described the TGV as a catalyst for growth but not a guarantor of it:

In some areas where local authorities did not pay attention to connection with roads, taxation and training the work force, frankly speaking, nothing happened and TGV could not save them.[137]

Other experts whom we met in France and Germany confirmed that regeneration and economic growth required sustained and integrated planning and additional public investment in order to take advantage of the potential offered by high-speed rail. Professor Vickerman said how hard it was to predict the economic impacts of high-speed rail on individual cities and that the results to date had been mixed. He was reluctant to speculate on the impacts of HS2 on Birmingham or Manchester.[138]

53. It seems clear that high-speed rail can have beneficial economic impacts in the areas immediately around the stations. The extent to which the benefits of high-speed rail might be felt over a broader area would seem to depend on the quality of local and regional transport networks and the extent to which the development of high-speed rail is integrated with wider economic development planning. The Centro / KPMG study of HS2, though positive overall, concluded that the benefits would be concentrated in central Birmingham and around the new Birmingham Interchange station.[139] We were told in France that the economic impacts of TGV services extended up to 40km from the stations. The most obvious impacts were on financial services and tourism, with increased commuting in both directions. The full effects of high-speed rail took many years to be felt.

54. To what extent HS2, on its own, would rebalance the north-south divide is harder to assess. On the basis of studying high-speed rail in continental Europe, Professor Tomaney found that "the impacts of high-speed rail on local and regional development are ambiguous at best and negative at worst."[140] Where there had been development gain following the arrival of high-speed rail, this had also involved large-scale economic development planning by the regional authority.[141] high-speed rail. Whilst he supported investment in public transport infrastructure to provide better connectivity between the major northern cities, he warned that HS2 may benefit London and the south east disproportionately and work against rebalancing.[142] Ironically, the London Borough of Camden (in which Euston Station is located) is opposed to HS2, partly due to the blight and other impacts on local businesses; and the Mayor of London is less than enthusiastic, insisting that a new tube line to relieve pressure on existing Euston underground stations is required before the Y network is completed.[143]

55. Oxera's report for the Committee found that the Government's business case had limited evidence regarding the scale of the wider economic impacts or which regions would gain or lose.[144] HS2 Ltd confirmed that it had not assessed the regional impacts and distributions of benefits or losses associated with HS2.[145] The Government's economic case shows that two-thirds of the transport-user benefits accrue to passengers who start their journey outside London. These are primarily time-saving benefits to business people travelling to London, which is not necessarily comparable with economic growth or increased employment in these regions. More than half of the 40,000 jobs associated with HS2 will be in London, including 20,000 at Old Oak Common. It is likely that secondary employment arising from the HS2 supply chain, for example in the manufacture of high-speed trains, would be spread across a wider area.

56. Some areas feared that they might lose out as a result of HS2, in terms of the relative quality of rail services and, as a consequence, in investment and employment. Coventry and Stoke had particular concerns. Mark Barry of the Cardiff Business Partnership told the Committee that, according to Greengauge 21, HS2 would have a negative impact on the economies of Wales and the south-west of England, with the loss of 60,000 jobs in these areas.[146] He argued that, for reasons of regional equity, economic mitigation measures were needed and should be an integral part of the HS2 project, as environmental mitigation would be.[147] We heard in France how some towns, such as Amiens and Reims, had lost out, in relative economic terms, as a result of not being served by TGV services.

57. The UK already has some experience of the impacts of high-speed rail. HS1—previously known as the Channel Tunnel Rail Link—was opened to St Pancras International station in 2007. It carries Eurostar international and Javelin high-speed regional services. The NAO has undertaken two value-for-money assessments of the scheme. According to the DfT, the economic net benefits were some £1billion. The NAO concluded that the project would not have gone ahead without public sector grants and that the economic justification was heavily dependent on the wider benefits envisaged by the Government and its assumptions about regeneration impacts. A study for London & Continental Railways in 2009 concluded that the net project costs were matched by additional earnings and transport user benefits. In addition, it estimated there were wider economic benefits of £3.8bn and regeneration benefits of £10bn. The NAO is due to publish a final report in early 2012.

Capacity to exploit opportunities

58. The evidence we have received and our visit to France and Germany lead us to two conclusions about the potential of HS2 to stimulate national and regional growth. First, it is obvious that the economic impacts of high-speed rail can vary and are not easily predicted: only time will tell whether or not HS2 will, for example, help to rebalance the economy and reduce the north-south divide. Our judgement is that HS2 could indeed be the catalyst for these economic benefits. Our second conclusion, from the experience of France and elsewhere, is that if high-speed rail is to realise its full potential the Government's plans for HS2 must be accompanied by complementary regional and local strategies for transport, housing, skills and employment. Under current Government policies, the responsibility for producing such plans rests with local economic partnerships, integrated transport authorities and combinations of such bodies. Support—not least with funding—will be needed from the Government. We call upon the Government to recognise this as a priority.

Economic case

59. In order to be considered for Treasury funding, a major transport scheme proposal must be accompanied by a business case, comprising five parts conforming to the Treasury's five case model for major projects.[148] As the promoter of HS2, it falls to the DfT to provide the business case for HS2. A key part of the business case is the economic case[149] which provides an appraisal of the scheme in terms of the welfare benefits to society and the costs to Government.[150] In the HS2 debate, the economic case is commonly (and confusingly) referred to as the business case.[151]

60. As we have seen, HS2 Ltd estimates that the Y network will deliver £44 billion of net benefits at present values[152] (including Wider Economic Impacts) and £17bn of net costs to government.[153] This gives a benefit to cost ratio (BCR) of 2.6, i.e. £2.60 of benefit for each £1.00 invested. The BCR for London-West Midlands only is lower, at 2.0—see Table 1 below. They are classified as "high" value for money.[154]Table 1 HS2 economic case: benefit:cost ratios

Appraisal date: March 2010 February 2011

London-West Midlands London-West Midlands Y network

BCR without WEI 2.4 1.6 2.2

BCR with WEI 2.7 2.0 2.6

Note: No BCR calculation was published for the Y network in 2010.

ASSUMPTIONS AND SENSITIVITY

61. Because of the importance of the economic case and its technical nature, we engaged Oxera to advise us on its technical validity and critical assumptions (Annex 1). Oxera concluded that the appraisal complied with standard methodology; although the methodology was designed to rank options it has increasingly been used to give an overall view of the value for money of individual schemes. They noted that assumptions about passenger growth and fares were critical to the overall economic case and that the passenger forecasts had been subject to detailed testing by HS2 Ltd.[155] They explored the sensitivity of the case to changes in values of key variables, including passenger growth, fares, scheme costs and opening year, and showed that quite different outcomes were possible, although not necessarily more probable. They concluded that the case for the Y network appeared to be much stronger than the case for London-West Midlands only, but the Y network figures were only indicative as the detailed work on the Leeds and Manchester legs had not been undertaken. For example, the number and location of stations had not been identified. Oxera posed various questions which the DfT and HS2 Ltd answered in supplementary evidence.[156]

62. Table 1 also demonstrates the sensitivity of the economic case to changes in variables. The BCR (without wider economic impacts) for London-West Midlands was revised from 2.4 in 2010 to 1.6 in 2011. (With WEI the BCR fell from 2.7 to 2.0.)[157] These revisions were a result of lower GDP forecasts and consequently slower growth in rail demand; the inclusion in the Y network of a spur to Heathrow; errors in the calculations; and other factors.[158] Mr Hammond instructed HS2 Ltd to produce an updated business case by the end of the year.[159] He told us that:

As rail projects go, a BCR of 2.6 [for the Y network] is quite reasonable. If it were to fall much below 1.5, I would certainly be putting it under some very close scrutiny.[160]

Rail schemes tend to have lower BCRs than road schemes and, whilst the DfT takes account of the economic case, it does not allocate funds on this criterion alone.[161] Some major transport schemes that have proved highly successful, such as the Jubilee Line Extension, were initially appraised as having relatively low BCRs.[162]

63. The case for investing in a high-speed line between London and the West Midlands depends largely on the assumption that the full Y network will be completed. Whilst we can see that the benefits of a more extensive high-speed rail network, embracing Manchester and Leeds, are likely to be greater than those of the London-West Midlands line alone, it is disappointing that even basic information on the Y network, such as the number and location of stations, was not available during the public consultation or during our inquiry. We believe that there should be an urgent strategic appraisal of phase II before a final decision on phase I is taken. It is also disappointing that as a major justification for HS2 phases I and II is the rebalancing of the economy, a full assessment of the case for building north to south has not been undertaken. This work should be carried out as a priority.

TIME SAVINGS—HOW VALUABLE?

64. The economic benefits, according to the DfT's methodology, arise mainly from transport user benefits of which time savings are the major component.[163] The basis of this appraisal is that time spent travelling is deemed unproductive and, therefore, time saved, particularly for business travellers, is of economic benefit. The £44bn total includes benefits of £25bn to business users, £13bn to other transport users and £6bn WEIs (explained above). No quantified costs or benefits are included for carbon or landscape impacts (see Chapter 5).

65. Time savings are a long-established part of the economic case for transport investment. However, as we showed in our inquiry into transport and the economy, there is much debate and disagreement as to whether this is the best method to assess large schemes which are intended to bring about long-term economic growth.[164] With regard to HS2, the issue is hotly contested. Objectors, such as AGAHST, 51m and HS2 Action Alliance, contend that, as a result of changes in mobile communications and information technology, time spent travelling by rail is increasingly productive for business people. On this basis, they challenge the high values attached to time savings in the DfT's economic case for HS2. Professor Lyons and Dr Steve Atkins, who designed the 2004 and 2010 surveys of how rail passenger spend their time, found that the proportion of passengers who considered that their travel time was very worthwhile had gone up by a quarter in six years. They concluded that, in relation to the economic case for HS2, the "core assumption" that travel time is unproductive was "flawed".[165] Professor Nash was also critical:

The most suspect part of current appraisal methods as applied to high-speed rail is the valuation of business travel time.[166]

66. HS2 Ltd acknowledges the debate and says that, if rail travel time is deemed productive, the reduction in crowding should be given more weight than is currently the case, as passengers who previously stood would be able to use their time productively. It has evaluated HS2 on both bases and says the BCR is very similar. 51m and others point out that, on this appraisal basis, the BCR for alternative schemes, such as the one they put forward or those assessed by Atkins, improve significantly.

THE NEED FOR SPEED?

67. CPRE and others have pointed out that the high value attached to time savings by HS2 Ltd has influenced the scheme design: very high speed, a straight alignment and few station stops tend to improve the economic case whilst lower speeds and deviations (to reduce landscape, noise or energy impacts) tend to weaken it. Other witnesses have argued that the focus on the economic case, based on time savings, has discouraged consideration of wider objectives and the potential of HSR, particularly the strategic economic importance to the regions of access to Heathrow.[167] We sought to clarify if very high speed was a policy objective and how the design speed of 250 mph had been arrived at. The announcement of the HS2 project in 2009 noted that the accepted definition of "high speed" was trains travelling at over 150 mph.[168] Mr Hammond told us that he had not specified a design speed for HS2.[169] HS2 Ltd explained that the economic case (and advice from the President of SNCF) had led them to recommend the 250 mph design speed.[170]

68. A high-speed line offers potential economic and strategic benefits that a conventional line does not. These include a dramatic shift in connectivity between the UK's major cities and improved access from the regions to Heathrow and continental Europe. These are in addition to the time savings and crowding benefits outlined in the Government's economic case. It seems clear, therefore, that if a new line is to be built, it should be a high-speed line. It is possible however, that very high speed (250 mph) may have been given an undue emphasis as a result of the particular appraisal method used as part of the economic case. It may be that a high-speed line operating at less than 250 mph may offer greater opportunities for noise and environmental impact mitigation, as well as an opportunity to follow existing transport corridors. We are concerned that the decision to build a 250 mph line has prematurely ruled out other route options such as building HS2 alongside an existing motorway corridor such as the M40 or M1/M6.

69. The economic case for HS2 has a double importance. Not only does it purport to assess whether HS2 is a good investment, but it also significantly influences the scheme design. The robustness of the methodology is therefore critical. We note the debate over whether it is appropriate to attach so much weight to travel time savings and whether other approaches, including a higher valuation of reduced crowding or impacts on Gross Value Added, should be used as well or instead. We conclude that it is disappointing that a major strategic scheme, with the potential to grow and rebalance the economy and to address major capacity issues, is being designed and assessed to a large extent on the basis of the value of travel time savings, which are not universally accepted. When HS2 Ltd provides the updated economic case to the Secretary of State for Transport later this year, it should provide a comparative assessment on the basis of reduced crowding, with a lower value attached to time savings. The implications for the scheme design should be made explicit. This should also be applied to any assessment of alternatives to HS2.

115 The Prime Minister, Rt Hon David Cameron MP, HC Deb, 22 June 2011, c322 Back

116 Rt Hon Philip Hammond MP, HC Deb, 23 Jun 2011, c458 Back

117 Q 511 Back

118 Booz & Co, HS2 London to the West Midlands. Appraisal of Sustainability Non Technical Summary. A report for HS2 Ltd, February 2011, p 27 Back

119 Further details are set out by the (then) Government in High Speed Rail, Cm 7827,March 2010. Back

120 Q 529 Back

121 Qq 363-367. See also Transport Committee, The future of aviation, First Report of Session 2009-2010, HC 125, 7 December 2009, pp 24-30. Back

122 Ev 132 Back

123 Ev w356 Back

124 Volterra and Arup, Understanding the transport infrastructure requirements to deliver growth in England's Core Cities, interim report, July 2011. See also comments by HS2 Action Alliance, Ev 229. Back

125 Ev 249 Back

126 Ev w356 Back