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.
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.
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.
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
IMPACT ON EMPLOYMENT
46. The London-West Midlands leg of HS2 would, according
to the Government, result in the creation of some 40,000 jobsa
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.
Some of the jobs around the stations would be relocated from elsewhere.
47. The Government and supporters of high-speed rail,
such as Greengauge 21, point also to the strategic advantages
that HS2 would offer.
A new line would improve capacity and reliabilityfor 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
and business organisations and one that is likely to reinforce
the trend away from domestic flights to Heathrow.
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.
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."
The Northern Way estimated that the increase in GVA could be three
times greater than the welfare benefits calculated by the DfT.
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."
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).
Indeed, even some sponsors of these studies recognise the appraisal
techniques used as being "in their infancy".
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.
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.
50. The Government has claimed that HS2 would change
the economic geography of Britain, rebalance the economy and reduce
the north-south divide.
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 UKnot just money, but things like high-speed
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."
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."
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. 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
and others 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.
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
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
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.
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
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."
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.
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.
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.
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. HS2 Ltd
confirmed that it had not assessed the regional impacts and distributions
of benefits or losses associated with HS2.
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
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. 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.
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. HS1previously known as the Channel
Tunnel Rail Linkwas 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
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. Supportnot least with fundingwill
be needed from the Government. We call upon the Government to
recognise this as a priority.
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.
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 which provides
an appraisal of the scheme in terms of the welfare benefits to
society and the costs to Government.
In the HS2 debate, the economic case is commonly (and confusingly)
referred to as the business case.
60. As we have seen, HS2 Ltd estimates that the Y
network will deliver £44 billion of net benefits at present
Wider Economic Impacts) and £17bn of net costs to government.
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 2.0see Table 1 below. They are
classified as "high" value for money.Table
1 HS2 economic case: benefit:cost ratios
|BCR without WEI
|BCR with WEI
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. 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.
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.)
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.
Mr Hammond instructed HS2 Ltd to produce an updated business case
by the end of the year.
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.
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.
Some major transport schemes that have proved highly successful,
such as the Jubilee Line Extension, were initially appraised as
having relatively low BCRs.
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 SAVINGSHOW 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.
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. 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".
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
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.
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.
Mr Hammond told us that he had not specified a design speed for
HS2 Ltd explained that the economic case (and advice from the
President of SNCF) had led them to recommend the 250 mph design
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
115 The Prime Minister, Rt Hon David Cameron MP, HC
Deb, 22 June 2011, c322 Back
Rt Hon Philip Hammond MP, HC Deb, 23 Jun 2011, c458 Back
Q 511 Back
Booz & Co, HS2 London to the West Midlands. Appraisal of
Sustainability Non Technical Summary. A report for HS2 Ltd,
February 2011, p 27 Back
Further details are set out by the (then) Government in High
Speed Rail, Cm 7827,March 2010. Back
Q 529 Back
Qq 363-367. See also Transport Committee, The future of aviation,
First Report of Session 2009-2010, HC 125, 7 December 2009, pp
Ev 132 Back
Ev w356 Back
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
Ev 249 Back
Ev w356 Back
Q 359 Back
Ev w430 Back
HC Deb, 28 February 2011, c15WS Back
House of Commons Liaison Committee, Evidence from the Prime
Minister, Oral evidence, 6 Sept 2011, Q 241 Back
Ev 296 Back
Ev 113 Back
Ev 140 Back
Q 169 Daniel Moylan Back
Ev 132 Back
See also Ev w20 for contrasting view. Back
Q 90 Back
Qq 319-323 Back
KPMG, Report for Centro, High Speed Rail and supporting investments
in the West Midlands, 24 June 2010 www.centro.org.uk Back
Ev 106 Back
Q 277 Back
Ev 106 Back
Q 164. See also the Mayor of London's response to the DfT's HS2
consultation, 29 July 2011. Back
Annex 1, paras 3.31-3.41, 3.47-3.52 Back
Ev 87 q30. HS2 Ltd did, however, undertake work with Professor
Vickerman and Reg Harman on international experience. See Economic
Case for HS2, p 34. Back
Ev 298 and Q 416 Back
Q 417. See also Exeter City Council, Ev w179. Back
Ev 260 Back
DfT, Economic Case for HS2, February 2011 Back
The "economic case" is a key component of the wider
"business case". See DfT, Economic Case for HS2.
The Y Network and London - West Midlands. February 2011, p5
The business case for HS2 is also examined in Ev 202, Ev w38 and
Ev w86. Back
Future costs and benefits are converted to a common date (in this
case 2009) using a discount rate of 3.0/3.5%. Back
Economic Case for HS2, p12 Back
HM Treasury classifies a BCR above 1.5 as "good" while
a BCR above 2.0 as "high". Back
Ev 267 Back
Ev 254 and Ev 267. See also further written evidence from HS2
Action Alliance (Ev 220) and 51m (Ev 162). Back
According to HS2 Ltd opening later would improve the economic
case for HS2 as passenger demand would be higher, though of course
it would defer the benefits of the new line. Back
Economic Case for HS2, pp 6-7 Back
29 July 2011 letter to HS2 Ltd Back
Q 554 Back
The Committee investigated the economic appraisal of transport
schemes at length in its inquiry Transport and the economy,
Third Report of Session 2010-11, HC 473, 2 March 2011. Back
Annex 1, A2.29 Back
Economic Case for HS2, p 31 Back
Transport and the economy, HC 473, 2 March 2011, pp 30-34 Back
Ev w553 Back
Ev 115 Back
Ev 191 Back
DfT, Britain's Transport Infrastructure: High Speed Two,
January 2009, p 27 Back
Qq 518-520. The letter from Sir David Rowlands to Lord Adonis,
13 February 2009, setting out HS2 Ltd's remit, discussed speed
criteria and suggested that the design speed for HS2 was likely
to be "at least the maximum speed for HS1" [186mph].
However, no specific speed was specified. Back
Qq 435-438, 444-447 Back