Written evidence from Wendover HS2 Business
Group (HSR 170)
1. CONTEXT AND
AIMS OF
THE SUBMISSION
1.1 Wendover HS2[382]
(WHS2) welcomes the opportunity to present evidence to the Transport
Committee. Dr John Savin is happy to provide verbal evidence if
requested. We focus the business case and what it says about regional
impacts and the effect on the conventional rail network.
1.2 The case for HS2 is presented by the Government
as: "When not If"—although the demand to support
the new line has receded from 2033 to 2043. The rail report by
Sir Roy McNulty suggests greater existing capacity utilisation
and efficiency; a new line provides neither without network rationalisation.
1.3 Analysis of actual numbers in the business
case (given in spreadsheets released only on 13 April) indicates
that we should be asking instead: "Where and How?" There
might be a strong national case for new high speed lines integrated
into the rail network rather than superseding it. The current
route design seems to be about supporting airports rather than
delivering UK-wide regional benefits.
1.4 The rhetoric around HS2 has now shifted to
the concept of "transformational" benefits and "once
in a generation" opportunities. Analysis shows that HS2 delivers
88% of its benefits after 2043, so it offers in practice a once
in a next but one or two generation opportunity. Can we bring
forward the benefits of any new high speed/capacity lines? How
certain can we be about the growth impact?
2. DETAILED CONCLUSIONS
2.1 £60.25 billion (2009 prices) will
be required to construct and renew the HS2 Y-network.
2.1.1 In the peak construction years, the average
annual cost will be £3.3 billion in 2009 money.
2.1.2 The Y-arm costs look low compared to Stage
1, despite their longer length and need for four to six stations.
2.2 Under the current proposal, major regions
with 76% of demand will not be properly served till 2033.
2.2.1 Serving more population centres minimises
demand risk since the route is available to more cities.
2.2.2 Stage 1 deliberately avoids major population
centres—possibly to maximise speed.
2.2.3 Alternative route options, which deliver
greater national benefits sooner, have been discarded.
2.2.4 Benefits north of Preston and Leeds may
be negative, due to more crowding and slower services.
2.3 The route seems to favour private airport
operators at the expense of regional development.
2.3.1 Only 0.8% of HS2 Y-stage passengers use
Heathrow (2,000 daily).
2.3.2 Air shift to HS2 (on an unconstrained model)
at best moves 88 domestic to long-haul flights per day.
2.4 Move of base year to 2043 from 2033 is dictated
by the need to have a doubling of passengers.
2.4.1 The sophisticated forecast predicts that
there was no rail travel outside London before 1975.
2.4.2 An extra 70,000 new rail passengers need
to travel over the inflated base demand of 170,000.
2.4.3 An obsolete long-distance demand elasticity
continues to be used. This overstates demand by 34%.
2.4.4 Impact on road demand is minimal, eg 1,300
per day fewer cars between Manchester and London.
2.5 Most passenger benefits are not gained till
after 2043.
2.5.1 Only 12% of business passenger benefits
occur before 2043.
2.5.2 Even in Present Value terms, only 26% of
benefits are gained before 2043.
2.5.3 Most Regions see little benefit till 2033—this
delays any transformational benefits for 76% of users.
2.5.4 Business travellers in 2092 need to be
nearly four times richer than their 2009 ancestors.
2.6 HS2 will drain the UK conventional network
of £5.8 billion per year.
2.6.1 Cuts of up to £1 billion per
year (2009 money) are planned once the Y-arms open.
2.6.2 A 2030's Treasury may further cut residual
conventional networks (Beeching 2.0?) to pay off debt.
2.6.3 A pension fund buying the annual HS2 surplus
in 2043 might pay £8 billion—requiring a £76 billion
write off.
2.7 Transformational impact is claimed but not
substantiated.
2.7.1 Many projections confuse cause and effect
in estimating the benefits from rail on local productivity.
2.7.2 The majority of transformational gains
will occur after 2043, as they are linked to passenger benefits.
2.7.3 Identifiable additional benefits are rising
land prices next to stations and housing developments.
3. Is there really a rail demand issue?
3.1 Network Rail's Route Utilisation Strategy
of December 2010 stated that, with planned improvements like the
new trains now arriving, the projected standing on weekday trains
is as in Exhibit 1.
Exhibit 1
FORECAST TRAINS WITH STANDING PASSENGERS
IN 2024
ON THE WEST COAST MAIN LINE
| Glasgow | Birmingham
| Manchester | Liverpool
|
| Crowded trains | 16.1% | 1.0%
| 5.4% | 2.9% |
| Source: Figure 4.6 Page 71 West Coast Main line Route Utilisation Strategy
|
3.2 HS2 Ltd (HS2L) say the line is at capacity and solutions
other than HS2 are "extraordinarily expensive".
3.3 There is clearly a commuter problem into Euston now—which
will get worse medium-term even if HS2 goes ahead. This needs
immediate expansion of Euston, not a new rail line in 2026.
3.4 We support the work on Rail Package 2 (RP2) and Scenario
B done by HS2 Action Alliance (HS2AA) and support its conclusion
that incremental removal of bottlenecks would be cost effective.
The upgraded Chiltern Line could take more Birmingham traffic,
freeing WCML train paths on the southern section.
3.5 However, in the event that HS2 is built as the Government
proposes, what is its real national impact?
4. What are HS2's real costs?
4.1 Building HS2 is stated to be affordable for £2 billion
per year. It is also claimed that it will not affect other rail
investments. These are policy matters but we can look at the cash
required.
4.2 The cost of HS2 in 2009 money (including indirect taxes)
is shown in Exhibit 2. Including renewal costs, this is £60.25 billion
at 2009 prices, before inflation. Inflation could push costs to
£66.6 billion by 2033.
Exhibit 2
COST PROFILE OF CONSTRUCTION
4.3 The cost per Parliament is shown in Exhibit 3. This uses
2009 prices and also shows an inflation adjusted price - the Treasury
budget. Note that the budget in the HS2L spreadsheets is £1.3 billion
for this Parliament, possibly £1.6 billion with inflation;
the cost announced in December 2010 was £750 million.
4.4 The HS2 predicted expenditure will average £3.3 billion
annually from 2019 though to 2028.
Exhibit 3
POTENTIAL HS2 EXPENDITURE (£ MILLION) BY
PARLIAMENTARY TERM
4.5 The cost to 2035 of the Y-arms may be an underestimate.
The cost of Stage 1 is £20.3 billion and the cost of
the Y-arms is £14.7 billion in 2009 money (excluding
the £3.9 billion Heathrow link and £6.3 billion
for trains).
4.6 The Y-arms are c 50% longer than Stage 1, yet costs are
27.5% lower. With no details of the Y-route till after the current
consultation, these values cannot be scrutinised. This is a major
risk.
4.7 The Y-arms presumably involve building at least four stations,[383]
maybe six if external Manchester airport and Leeds-York city interchanges
are built by analogy with Birmingham proposals.
4.8 We expect major Y items to equal the high costs of Stage
1 Euston rebuilding and London tunnels.
5. Why is HS2 so slow to meet the highest regional demand
levels?
5.1 The pattern of forecast demand calls into question the
current route strategy (Exhibit 4). Looking at core rail demand
(ignoring modal shifts), 67% of forecast passengers (to and from
London) are from the North West, Yorkshire and Humberside, North-East
and East Midlands. Scotland adds a further 9%.
Exhibit 4
POTENTIAL BASE-LOAD RAIL DEMAND
TO AND FROM LONDON IN 2043
5.2 This means that 76% of projected demand is not properly
served till the Y is built in 2033, assuming the project runs
to schedule. The West Midlands with only 24% of demand gets a
seven-year head-start.
5.3 We note that significant parts of the East Midlands are
not served by HS2 current routes. Spending on conventional services
is planned to be cut by up to £1 billion per year (2009
prices) from 2033.
5.4 If the aim was to invest in the regions and RP2 or Scenario
B was rejected, a direct M1 route with an arm to Manchester and
spur to Birmingham would appear to be a more logical choice. The
distances are roughly the same but any transformational economic
impacts could be greater and come sooner.
5.5 If a new line is built, it makes sense to maximise cash
fares by serving major population centres. Stage 1 deliberately
avoids population centres, like Milton Keynes and Luton, which
might benefit.
6. Is HS2 really about boosting Birmingham and London airports?
6.1 The Y-route air demand model for 2043 shows that 25% of
air passengers might opt to take HS2: 13,155 passengers, of whom
9,199 travel direct to London, the others to and from the South
East. This is using an unconstrained air demand model, so may
exaggerate the likely numbers.
6.2 This frees only c 88 takeoff and landing slots, allowing
88 long-haul flights - which are more profitable for operators
but generate much more CO2. However, only a proportion
of flights saved will be at Heathrow. Most slots are freed at
Gatwick, Stansted and Luton—where low-cost airlines will
compete.
6.3 The March 2010 estimate is that only 2,000 HS2 passengers
per day (0.8% of 2043 travellers) will use Heathrow, even with
an HS2 Heathrow station. The HS2 link costs £3.9 billion
in 2009 money.
6.4 However, why funnel regional demand via Heathrow rather
than developing strong regional airports like Manchester? This
is favouring a southern private airport over regional growth.
6.5 Effects on regional airports are not measured. One theory
for the HS2 Stage 1 route is to boost Birmingham as the fifth
London airport. If so, this needs to be explicit; it is not in
the consultation.
7. Are HS2 demand projections realistic?
7.1 The predicted number of HS2 passengers between London
and the regions is shown in Exhibit 5. We asked for, but have
been denied, specific journey forecasts from HS2L. HS2L say they
do not hold the data and have no interest in it. Exhibit 5 is
derived from regional demand forecasts.
7.2 HS2L only project forecasts for two individual years:
2021 and 2036, based on a 2008 base year. The 2036 figures were
extrapolated to 2043.
7.3 A model should be capable of extrapolating the past to
be certain of having some future relevance. Unfortunately, a linear
back-extrapolation of HS2L forecasts (Exhibit 6) predicts that
rail travel outside London started in 1975. Such a test is over-simplistic,
but investigating the historic validity of the model is important.
How can it predict 34 years of growth if it cannot replicate the
previous 33?
7.4 HS2 chose its target forecast year, 2043, on the basis
that it provides enough demand to justify the project. This requires
a doubling of demand from the 2008 base year. The previous target
year of 2033 was linked to WebTAG guidance designed to limit forecasting
errors; these rise with duration.
7.5 Forecasting of large projects is complex in operation
but the core idea is a simple multiplier of GDP by an elasticity
(a fixed multiplication factor). With HS2, the long-term GDP per
capita growth agreed with DfT (once Treasury forecasts expire),
is 1.91%. GDP forecasting one year ahead is highly uncertain.
Exhibit 5
POTENTIAL HS2 PASSENGERS REGIONAL-LONDON HS2 USE
IN 2043
Exhibit 6
LINEAR EXTRAPOLATION OF GROWTH PRODUCTION TO HS2L
BASE AND PREDICTED GROWTH YEARS.
7.6 The HS2 business case requires a steady UK GDP growth
to 2092 giving £104,865 per capita (up 348%) and possibly
a population of 93 millio.[384]
7.7 HS2L is still using an outdated elasticity measure for
long-distance demand growth relative to GDP (PDFH 4.1). It has
been estimated by HS2AA that this old elasticity may be overstate
demand by 34%. The new standard was ready for use in April 2010
but the Secretary of State has not approved its use.
7.8 If demand fell by 34%, the BCR of the Y-case (excluding
economic benefits) could fall to 0.81 from 1.78.
7.9 The method also depends on a tight relationship between
GDP growth and rail use. The correlation between GDP and growth
on the WCML is 0.45.[385]
The correlation for UK rail growth was 0.26. A period of growth
covering a major service upgrade is not a reliable basis for an
ultra-long-term extrapolation.
7.10 The predicted 2043 drop in national road use (outside
London) due to HS2 is 0.35%. Some bigger regional percentage falls
are expected, eg between London and the North West an 18% fall
might occur by 2043, but this is only 1,300 fewer car journeys
and would be swamped by local traffic.
8. Passenger Benefits— the profit gain to the employers
of very rich business travellers after 2043
8.1 Passenger benefits are monetarised but have no direct
relationship to actual cash. They form the biggest identified
benefits, so if HS2 is transformational, these must be the main
engine of change. For this section, we focus on business passenger
benefits, as these feed into wider economic impacts.
8.2 The benefits are shown in Exhibit 7 rising to £3.2 billion
in 2092 (2009 money). In theory, these are direct productivity
gains experienced by employers at 2009 prices. The Stage 1 (S1)
and Y-arm benefits are separate rows. Although the number of Y-arm
passengers is lower than in Stage 1, they travel longer distances
so have a higher monetarised time gain. Leisure benefits are £1.4 billion
in 2092.
8.3 However, Y-arm passengers may get even better journey
times if the route is in a direct M1 corridor. HS2L has not explored
this aspect as the route option has not been assessed.
8.4 The distribution of benefits is heavily skewed to the
years after 2043: 88% of the total. Hence, today's taxpayers
are being asked to fund a scheme to meet the supposed needs of
richer, post-2043 business travellers. The Present Value of the
post-2043 benefits is 74% of the overall benefit PV. Some 87%
of Leisure benefits are also gained after 2043. This
is a high level of altruism for 2011 taxpayers.
8.5 There may be severe disbenefits to passengers north of
Preston and Leeds who could suffer lower speeds on non-tilting
classic-compatible HS2 trains with fewer seats and worse connections.
Exhibit 7
BUSINESS PASSENGER BENEFITS FROM HS2 TRAVEL
9. Over-valuing time—should HS2 be more cautious
in its very-long term GDP growth assumptions?
9.1 All passenger benefits are based on the Value of Time
(VoT). VoT is based on surveys from the 1990's based on 2002 prices
and adjusted for both the real growth in wages to 2009 and for
inflation.
9.2 The business VoT 2009 is £48.64 per hour, equal to
an employment cost of £94,856 per year estimated as a pre-tax
salary of c £62,000. This is in the top income range for
the UK.
9.3 This value is grown in real terms based on the DfT economic
forecast of GDP for the century. By 2092, the business passenger's
salary has risen to maybe £240,000 (2009 money)—a 291%
real pay rise.
9.4 These intangible passenger benefits might be mostly illusory.
Many business travellers work on trains and many travel outside
standard office hours to get to and from meetings. The VoT assumes
that 100% of the business passenger benefit translates into improved
productivity, and thereby GDP.
9.5 If Business VoT is only £18.48 ph, assuming 50% of
time is either productive or wasted, the business benefit PV drops
from £25.6 billion to £16.3 billion. The Y-route
central case BCR (no economic impacts) falls to 1.34 from 1.78.
The effect is mitigated by both VoT rises and the effect of discounting.
9.6 If VoT is constant from 2011, the BCR becomes 0.89; if
passengers also fall by 34%: the BCR is 0.41.
10. HS2 will drain the UK conventional network of £5.8 billion
per year in fares
10.1 Fare revenues are only recognised from new customers.
Exhibit 8 shows the revenues. Fares are as in 2002, updated by
inflation adjustment to 2009, and also increased by standard rail
price rises, now RPI+3%. The 2043 annual revenue is £2.1 billion
in 2009 money.
10.2 As it captures most high-paying passengers, HS2 also
strips £5.8 billion from the WCML, ECML and MML combined.
As a rough estimate, the HS2 franchise could have total fare income
of £7.9 billion in 2043.
Exhibit 8
HS2 INCREMENTAL FARES AT 2009 PRICES
11. What effect might HS2 have on the efficiency and value
of the residual network?
11.1 The simple answer is that no one knows. HS2 claims a
further benefit through cuts of up to £1 billion in
conventional services. There are promises of improved local services.
11.2 The HS2 case relies on squeezing 240,000 passengers down
one set of twin track rails into and out of London. Technically,
we understand it is feasible if computer-based in-cab signalling
works, if all trains are totally reliable and if enhanced braking
systems are developed to allow shorter train headways.
11.3 This seems a fragile basis for a transformational rail
link. On HS2, one failed train in rural Buckinghamshire would
bring services between London and the North to a grinding halt.
11.4 We assume a subsidy of £5.3 billion to support
the residual network. This may be an underestimate as few normal
businesses can survive a massive demand fall off—especially
faced with high fixed costs.
11.5 A 2030's Treasury nursing a £66.6 billion bill
may ask why residual services should be supported. Kent has seen
other services become slower and worse due to HS1. HS2 could trigger
Beeching 2.0: why maintain massive over-provision in rail systems
that might be 30-50 years old at that time?
11.6 HS2 also has a very restrictive Y-design operating service
pattern, linking only favoured cities and London, with little
inter-connectivity. It is designed to be separate from conventional
services (other than some Scottish services). This severely restricts
network effects but benefits London again.
12. What financial impact might HS2 have on national finances?
12.1 We have done a possible cashflow for HS2, Exhibit 9.
The average surplus cashflow from 2043 is £425 million.
If a pension fund bought the revenues in 2043 (as with HS1), they
might pay £8 billion requiring a £76 billion
debt write off (assuming 3.5% debt interest).
12.2 HS2 cannot cover debt interest—so an interest-free
subsidy is needed. Even with that, it would still "owe"
c £20 billion by 2092 (in 2009 money).
Exhibit 9
HS2 FULL PROJECT CASHFLOWS
12.3 Based on the fare elasticity reported in March 2010,
we estimate that a revenue-maximising HS2 franchise holder would
increase business fares by at least 30% and leisure fares by 10%.
This maximises revenues but diminishes the implied benefits, as
passenger numbers will fall.
12.4 The operator might expect profits of over £400m
in 2009 prices even if fares are not optimised.
13. Where is the hard evidence that HS2 can be nationally
transformational?
13.1 Massive regional benefits are assumed by bodies like
Centro, Northern Way (now defunct) and Greengauge 21. Professor
Graham (Imperial College) notes[386]
that we cannot be certain whether rail drives productivity or
if rail is built to serve areas of high productivity. Benefits
claimed by regional transport lobby groups could be illusory.[387]
Using Graham's estimates, HS2 Stage 1 might deliver £8 million per
annum of benefits. Even scaling up and adding GDP growth, this
is only £266 million PV, c £19 million per
annum in 2043.
13.2 Professor Banister (Oxford Transport Unit[388])
notes that the only extra measurable benefits are higher land
prices and housing. This is very localised near new stations.
Most Stage 1 jobs are in west London.
13.3 Greenfield development in the east Birmingham greenbelt,
in Wilmslow outside Manchester (assuming an airport station),
at any external Leeds-York station and between Derby and Nottingham
could drive the relocation of businesses, pressurising the local
infrastructure. These businesses will often relocate from local
areas made less-favourable by HS2, so net job creation may be
minimal.
May 2011
382
Wendover HS2 was formed in April 2010 at a public meeting
held in response to HS2 proposals published on 10 March 2010.
It is not specifically opposed to higher speed rail as a general
concept but it is opposed to construction of high speed lines
in the Chilterns Area of Outstanding Natural Beauty (AONB) as
it believes that an overwhelming national interest case has not
been made and alternatives have not been adequately considered. Back
383
Manchester, East Midlands, West Yorkshire, Leeds. A new station
at Preston is also a possibility. Back
384
The population series stops in 2037 but we extrapolate to 2092
using the last 0.48% pa growth value. GDP growth per capita from
2051 is 1.91%. Back
385
1 is perfectly correlated and 0 is no link; the figure implies
that at least half the variation is due to other factors. In other
words, historic evidence shows no tight GDP-Rail growth link,
yet this is the basis of HS2L's 83 year forecast. Back
386
Graham, D J and Kender , J V. Estimating the agglomeration benefits
of transport investments: Some tests for stability. OECD discussion
paper 2009-32 December 2009. This effect is termed reverse causality.
Uncertainty in elasticity values is also a limiting factor and
variables are often correlated. Back
387
Laird, J and Mackie, P. Review of Methodologies to Assess Transport's
Impacts on the size of the Economy. Leeds University Institute
for Transport Studies. September 2010. This was a validation study
commissioned by the Northern Way. Back
388
Banister, D and Thurstain-Goodwin, M. Quantification of the non-transport
benefits resulting from rail investment. J. Transport Geography.
2011: 19; 212-223. Back
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