Written evidence from Professor Robert
Cochrane (HSR 171)|
1. I have read the separate Evidence submitted
to the Select Committee by Professor Peter Mackie of the Institute
for Transport Studies, University of Leeds and agree with the
points he has raised. My evidence is additional to his and does
not repeat those points.
2. My evidence sets out some of the issues, primarily
organisational and financial, which I believe to be important
in the assessment of British high speed rail projects. It is based
on my experience of high speed rail demand forecasting and operations
in England, Continental Europe, the Middle East and East Asia.
This includes both the 1970s studies for the Channel Tunnel Project,
when I was a consultant with Coopers and Lybrand, and the British
Railways studies for this project in the 1980s. The latter studies
were carried out when I was responsible for introducing financial
cost benefit analysis and project appraisal within the British
Railways Board and subsequently as a Deputy Director of InterCity
3. My comments relate principally to the "business
case" for the projectthe financial feasibility, financial
engineering and public sector financial support aspects of the
HS2 project, which I consider to be the areas where the work to
date has been weakest. In addition, I would like to amplify the
comments made by Professor Mackie regarding the role of HSR in
shaping land use in England.
WebTAG BCRthe Ratio of Benefits to Subsidy
on an Integrated Rail Network
4. The HS2 project has been appraised using the
DfT WebTAG principles, on which it has what is referred to as
a benefit/cost ratio (BCR) of about 2. What is not widely appreciated
is that this is not a conventional benefit-cost ratio. Putting
to one side the secondary effects of indirect taxation, it is
the ratio of the present value of benefits to the present value
of costs less the present value of the revenue, with the a priori
assumption that costs exceed revenues. Hence it is the ratio of
the benefits received by the community to the Government subsidy
required. So in simple terms, the time adjusted ratio of community
benefits to Government subsidy is of the order of two. The ratio
is calculated over a period of 60 years, using relatively low
discounting factors of 3.5% and 3%. This means it may not reflect
the ratio of benefits to Government subsidy in the early years.
5. The BCR is calculated for the rail network
as a whole, assuming that the fares on the high speed trains will
be similar to those on existing franchised services and that the
service levels on competing services can be altered to balance
capacity without changing fares. These assumptions correspond
broadly to those which would be adopted for the appraisal of a
nationalised railway network in which the high speed line is an
additional Government owned service which does not charge a premium
for what is clearly a premium service.
6. In reality, our railway network has an entirely
different financial structure. Following privatisation, we have
a rail network with a two tier structure in which private companies
operate services under franchise over rail infrastructure provided
by a not for profit company with a very substantial Government
subsidy. This structure was adopted specifically to promote competition,
yet the HS2 analysis does not take it into account. The McNulty
Report contains recommendations for modifying this regime, but
there is no political appetite for radical restructuring, so it
is reasonable to assume that high speed rail services will be
introduced under an organisational structure broadly similar to
the present regime.
7. There is at present no business model setting
out how HS2 services would be franchised within the existing (and,
presumably, the future) structure, no discussion of the degree
to which competition between franchisees would be permitted and
no analysis of the impact of allowing the HS2 franchisee freedom
to set fares in a profit maximising manner.
The Absence of a Financial Model of the HS2 Project
8. Promoters of private sector projects almost
invariably prepare financial cash flow models of their projects,
taking account of year by year expenditure, revenue and financing
costs in the case of private sector projects or financing constraints
in the public sector. Both the revenue stream and the operating
cost streams take account of changes in fares and operating costs
due to competitive reaction within the market which is to be served.
9. This is also the approach which we introduced
into British Railways some 30 years ago at the request of the
Transport Department and Treasury, to ensure that we could estimate
both the short term annual financial effects and the long term
benefits of rail investment. To my continuing surprise, no such
analysis has been carried out of either the impact of HS2 on the
overall level of annual financial support required by the railway
network as a whole or of the financial performance of the HS2
services themselves. This is despite the rapid financial collapse
of the two most recent Asian HSR systems, those in South Korea
10. In the case of HS2, two related cash flow
analyses are needed. At the national network level, we need an
analysis of the annual cash flows for the network as a whole,
so that the level of subvention (subsidy) required from Government,
particularly in the early years, can be forecast. This analysis
needs to take account of the use which is made of the released
capacity on conventional lines. If this is taken up by local services,
which generally have higher operating subsidies than the long
distance services currently operating on these lines, the support
costs for the conventional rail services could rise. A benefitcost
ratio of two for a project dependent on long term growth over
30 to 60 years may hide an increased short term rail financial
support requirement in the early years.
11. We also need a detailed financial analysis
of the HS2 services in isolation to evaluate the business structure
under which it is to be operated and their separate capital and
operating subsidy requirements. Economic theory indicates that
there are situations (such as market failure, externalities, social
justice and economies of scale) where operating subsidies may
be justified. None of these arguments appear to apply to long
distance travel by rail.
12. Theory also indicates that public welfare
is maximised when prices (fares and other secondary revenues in
the case of rail) are equal to the marginal cost of providing
a service. There may be an argument for subsidising the capital
cost of providing rail infrastructure, but theory suggests that
except in very special circumstances operations (including labour,
fuel, rolling stock, and maintenance) should be covered by fares.
13. This also simplifies management, since operations
can be transferred to the private sector under a franchise arrangement
and operated without subsidy. On average, "InterCity"
services currently appear to be operating close to this important
economic, financial and management boundary.
14. In the absence of a separate financial analysis
of HS2 construction and operation, it is not at all clear whether
HS2 could be operated on a profitable basis without subsidy in
the early years even if the Government absorbed the capital cost
of the new infrastructure. Given the high level of subsidy which
is certain to be needed even to provide the infrastructure, a
year by year cash flow analysis which takes account of competition
and assesses the change in subsidy needed as fares are varied
(taking account of both revenue and operating cost changes) is
essential to assess whether the service can operate without an
ongoing operational subsidy, particularly in the early years,
and to assess the risks associated with any shortfall in demand
Distributional Issues - who pays and who receives
15. Since HS2 passengers receive the benefits
of premium service without paying premium fares, there is also
a distributional issue - who pays for the new transport infrastructure
and (possibly) operating subsidies, and who obtains the benefits.
For a new railway, there are three issues to be faced. The first
is that the public funds come in a large part from taxes paid
by those living in areas far from the line and who will rarely
16. The second point applies in particular to
high speed lines. The benefits are predominantly obtained by those
living close to the few railway stationsfew, since otherwise
the benefits of high speed operation are lost by frequent stops.
But those living between the stations may suffer dis-benefits
from construction and noise.
17. The third issue is that of the income distribution
of long distance high speed rail passengers. There is a great
deal of evidence provided by the Governments own ongoing National
Transport Survey that long distance travel and long distance rail
travel journeys in particular are predominantly made by higher
income groups. The highest income quintile makes three times as
many long distance trips as the lowest, and they make a higher
percentage of these trips by rail.
18. The combination of these three factors means
that the benefits of high speed train services primarily accrue
to a small sub-set of the population which has to pay for the
infrastructure and possibly, an operating subsidy in the early
years. These are predominantly higher income personal and business
travellers with origins and destinations relatively close to the
few railway stations.
What will be the source of capital funding?
19. Very large projects such as a high speed
line raise a fourth distributional issuethat of the efficient
and politically fair distribution of available Government funds.
When funds are in short supply, a basket of small projects tends
to show better value for money than a smaller number of large
projects and also spread the benefits of Government spending more
20. HS2 is at the other end of the scale. In
recent years, total Government financial support for railways
has been of the order of £5 billion pounds per year.
An analysis of the Government's responsibilities suggests that
on the one hand, there would have been little likelihood of this
budget being increased even without the current financial difficulties
and that on the other hand, the very severe problems of rail access
into London on almost all lines (not just the WCML and the a lesser
extent MML which are relieved by the HS2 proposals) will require
at least this level of financial support, even with fares rising
in real terms year on year.
21. Against this background, the initial stage
of HS2 is likely to require capital funding of the order of £17 billion
in 2009 prices with a peak expenditure of over £3 billion
per year. A system covering the north of England as well would
need about three times this sum. It is not clear where this money
can come from. "New" money is currently unavailable
and there is no scope for the transfer of existing funding for
Wider Benefits and shaping National land use patterns
22. Finally, I turn to the question of the "wider
benefits" of high speed rail to the economy which many supporters
have emphasised without explaining in any detail what they are
and who are the recipients.
23. The better understood additional benefits,
such as agglomeration benefits, may add another 10% to 15% to
the standard welfare benefits which are based essentially on reductions
in travel time. There are also benefits to those with businesses
or owning land close to stations, but research suggests that much
of the development would have occurred over a larger area and
is merely concentrated. The net incremental benefits are low.
24. However, there can be benefits if the line
is used effectively to help trigger new development. Professor
Mackie has suggested a new town. Interestingly, this approach
has been used in Germany. New stations are introduced in spaces
between the existing cities. The extra stops reduce the "headline"
time savings over long distances but may be more effective in
shaping future land use. But it will require a major change in
the approach to the use of high speed rail in Great Britain, away
from seeking the highest speeds over the longest distances to
assessing the role high speed rail can play in shaping long term
land use over shorter distances of the order of 50 miles or so.