High Speed Rail - Transport Committee Contents

Written evidence from David Henderson and David Sawers (HSR 200)


(i)  The HS2 proposal offers too low a prospective return to deserve governmental support. On the government's best estimate, the line to the West Midlands would produce discounted benefits of £20.7 billion for costs of £24 billion. The government would lose £10.3 billion on its investment. These results must be uncertain; benefits may be over-stated, and they are based on forecasts of traffic extending for 60 years, though growth is capped at 2043.There will be a wide range of possible outcomes. A project that would produce environmental losses should produce a surplus of benefits over costs if it is to be accepted.

(ii)  There is no evidence that HS2 would help to rebalance the economy. Most of the £4.1 billion of benefits from wider economic impacts are attributed to increased efficiency produced by attracting businesses to the areas around railway stations. These estimates are questionable; £1 billion is more plausible than £4.1 billion. Estimates of benefits to more distant regions are trivial. The reasons for giving so large a subsidy to the project are unclear. Subsidising this project is inconsistent with the government's policy of reducing support for the railways.

(iii)  The method used by the government to present the results is misleading. It treats the financial loss to the government as the cost against which the benefits should be set; it is usual to compare the total cost with the benefits. The government thus claims that HS2 London-West Midlands provides a benefit-cost ratio of 2.0, although a conventional approach gives a BCR of 0.86. The government's method was devised to allocate funds within the Department for Transport's budget. HS2 might displace higher yielding transport projects in that budget; in any case it would compete with other government expenditure.

(iv)  The government's claim that a high speed network would produce greater benefits than any alternative is not justified by the evidence. The alternatives to HS2 as ways of increasing capacity on the West Coast Main Line have not been studied with sufficient thoroughness to establish what would be the best option. The methods used in the Strategic Alternatives Study should have been more objective. The study may therefore exaggerate the expenditure needed to increase the capacity of the WCML. It suggests, however, that the forecast increase in traffic on the West Coast Main Line could be met by incremental improvements.

(v)  We recommend that the high speed rail project should be abandoned. Efforts should be concentrated on improving the performance of the existing network, with more emphasis on reducing the subsidy to the railways.


1.  The most significant feature of the economic case for the HS2 is that it relies on estimates of revenue extending over 60 years. Although growth in traffic is capped in 2043, the risk that basic assumptions like travel habits, available technologies, and the rate of economic growth will change and affect revenue becomes greater with the passage of time. If forecasts of traffic are made for so long a period, a wide range of assumptions should be employed, which implies that the results would have to be expressed as a broad range of possible outcomes. Presenting the results as a single figure, as the Department for Transport has done, gives a false impression of certainty. A better approach would be to calculate the results over a shorter period, perhaps 30 or 40 years.

2.  Despite incorporating expected benefits for so long a period, the forecast return on the HS2 is low. Employing the government's discount rate of 3.5%, reducing to 3% after 30 years, the present value of costs is expected to exceed that of benefits by £3.4 billion. The internal rate of return has not been published, but is probably less than 3%. The government should reveal this figure. The return on the longer Y route is forecast to be higher, with benefits £0.6 billion less than costs, but the costs of the longer route have not been studied in enough detail for the estimates to be considered reliable. A rate of return of less than 3% cannot be considered adequate for a large industrial project like HS2. It would represent an inefficient use of national resources.

3.  The return on the project could well be even less than the DfT's evaluation suggests. Apart from the uncertainty created by the 60 year timespan of the revenue forecasts, traffic is sensitive to the level of fares, and so to government policy on subsidies to the railways. The main traffic forecast assumes that fares rise by 1% a year in real terms; if they increased by 2% a year, the sensitivity analysis in The Economic Case for HS2 shows that traffic in 2043 would be 24% lower, and benefits would also fall. What is more, the benefits to business travellers from faster journeys may have been over-estimated. This class of benefits, which provide 54% of all benefits, assumes that travel is unproductive time; but many travellers work in a train. The benefits of faster travel may therefore be smaller than predicted. If benefits to business travellers were halved, the benefits from HS2 would be £8.9 billion less than its costs.

4.  The cost estimates for HS2 contain a large contingency allowance, derived from experience of overruns on previous projects, and should therefore be reasonably accurate. The estimates do not, however, include costs that may be incurred by London Underground. The introduction of HS2 is predicted to lead to a near-doubling of peak hours traffic on the underground at Euston by 2043. If so large an increase in traffic occurred, the investment needed on the underground could run into billions.

5.  The return on HS2 is all the more inadequate when the construction of its track would cause substantial but uncosted damage to the environment, as the result of building its track through unspoilt and attractive countryside, and inflicting noise on those living near the track. DfT states that 7,400 homes would be within 100 metres of the line, but that only 4,700 would experience a noticeable increase in noise. This assertion is somewhat surprising. An effort should have been made to value the environmental costs, and include them in the economic appraisal. If they could not be valued, their description should have been incorporated in the economic appraisal, and not hived off into the separate Appraisal of Sustainability. A project that would cause significant environmental damage could only be justified if it produced large economic benefits to offset the losses. HS2 is not likely to produce such benefits. Its construction is not therefore justifiable.


6.  The DfT forecasts that the HS2 will produce wider economic impacts worth £4.1 billion over 60 years. These benefits derive mainly from increases in the economic efficiency of businesses which, it is predicted, would gather around the new stations on the HS2 route and the existing stations on the WCML as a result of the improved train service. The service to intermediate stations on the WCML, such as Milton Keynes, is assumed to improve after HS2 is opened, because there will then be spare capacity on the WCML. It is assumed that these new or enlarged collections of businesses will be closer to one another than they would otherwise have been, and will therefore be more efficient than they otherwise would have been. This effect is estimated to produce benefits worth about £3 billion over 60 years. It is also predicted that there will be further benefits, worth about £1 billion over 60 years, from the effects of better train services, which are expected to open up areas in London and the West Midlands to the effects of wider competition and wider markets.

7.  These benefits are not very plausible. New railway stations on a high speed line are likely to attract businesses, but it is a bold step to assume that these businesses would be more efficient than they would otherwise have been, because they are closer to one another than they otherwise would have been. This seems to be no more than an assumption. What is more, these businesses will have moved to the HS2 station from some other location, as the Sustainability Appraisal recognises; and there could be losses from this move. The density of businesses in the former locations may well decline, and so would the efficiency of the remaining businesses there. This loss should be set against any gain in efficiency among the businesses collected around the HS2 stations. The £3 billion of benefits attributed to this factor are best ignored: their generation is uncertain, and they may be offset by losses elsewhere.

8.  It is widely accepted that improvements to transport services, especially of commuter services into urban areas, can improve economic efficiency by producing "agglomeration" effects - enlarging labour markets and increasing the interaction between businesses in the area. The £1 billion of benefits attributed to this effect are therefore more plausible; the improvements in train services made possible by the construction of HS2, especially any consequential improvement in commuter services on the WCML, may produce benefits - especially in London.

9.  The estimates of WEIs therefore appear excessive, and much of the more probable benefit appears to arise in London. There is no evidence, in the appraisal of HS2, to support the assertions of Ministers that high speed rail would reduce inter-regional economic differences and rebalance the economy. Indeed, HS2 Ltd commissioned Daniel J Graham and Patricia Melo of Imperial College to advise on the assessment of WEIs, and they concluded:

"Thus, while urban economic theory does not preclude the existence of agglomeration benefits across inter-regional distances, the empirical evidence suggests that these may be very small indeed"[471]

10.  Their illustrative examples were that an increase of 25% in travel speeds that affected 25% of long distance rail journeys might produce agglomeration benefits of £8 million, while a 50% increase in speeds might produce benefits of £16 million. High speed rail cannot affect inter-regional economic links and reduce inter-regional economic differences unless these estimates are in error by a factor of one thousand or so.

11.  This conclusion should not surprise anyone. It is evident that the UK is a small country, that it already has a well-developed - if often congested - transport system, and that journey times between major urban centres are already short. The Eddington Transport Study of 2006 emphasised that the UK is already well connected, and suggested that the key economic challenge was to improve the performance of the existing network. Investments which unblocked pinch points were expected to offer the highest returns. But large projects, with speculative benefits and relying on untested technology were not expected to generate attractive returns.


12.  The government has presented the results of the HS2 project in a misleading way. It treats the government's loss on the project as the relevant cost, and so obtains a cost-benefit ratio of 2.0. The normal method of presenting the results of an investment appraisal is to compare the total costs with the benefits. The costs of HS2 exceed the benefits, even on the government's estimates, so a conventional appraisal would conclude that the cost-benefit ratio was 0.86. The internal rate of return is also commonly used to assess the merit of a project, and the return it produces will be compared with the organisation's target return. In the government's case, its target is 3.5%, falling to 3% after 30 years, and the return from HS2 is probably less than 3% on the government's estimates. The government should publish the internal rate of return earned by HS2, to clarify the position about the return it might produce.

13.  The government's method of calculating the cost-benefit ratio for HS2 was originally chosen to help allocate the budget of the DfT, because the department's criterion for selecting investment projects was the amount of transport benefits they would produce for each pound of government expenditure. Even at this level, the criterion is defective; a government department should be concerned with the efficiency with which national resources are used. At the level of the HS2, the criterion has no merit at all. There is no DfT budget for so large a project, so far into the future. If it was to be built, the DfT budget would have to be greatly increased. The cost of HS2 would be competing with other possible government expenditure a decade from now.

14.  Further, the DfT already has a large portfolio of projects that have been appraised, so their expected returns are known. It is relevant to compare the expected returns to HS2 with those from the other projects in that portfolio, which it could displace or preclude. Without knowing whether these alternative projects are expected to yield more or less than HS2, it is impossible to judge whether HS2 would represent a good use of limited DfT funds.

15.  The government in fact needs to consider whether it should provide any finance at all for a project like HS2. When the railway system was run by a nationally owned corporation, it was told that investment in long-distance travel should be judged by a purely financial criterion. Now the railways have been privatised, it is ironic that such investment should be judged by cost-benefit appraisal, and that of an idiosyncratic kind. We believe that the best test for investments like HS2 is whether the public is expected to be willing to pay enough for the new service to make it profitable. Faced with the results of the government's present appraisal, decision-takers should compare total costs with benefits, and recognise the uncertainty of the forecasts.


16.  The government has published a report, the Strategic Alternatives Study, which shows how the expected need for additional capacity on the WCML could be met by upgrading the existing track, to show what investment might be needed if HS2 was not built. Its authors, Atkins, state that the proposed works would make the WCML four track throughout and grade separated as far north as Crewe, and would provide extra terminal capacity at Euston and Manchester.

17.  The Study provides for more work on the WCML north of the junction with HS2 than does the HS2 proposal, which assumes that high speed trains would run to Manchester. It therefore plans to increase the capacity of the WCML to permit just as much traffic as would be carried by conventional trains in the alternative case. Surprisingly, it considers that fewer improvements are needed than Atkins does in the alternative case. The HS2 proposal allows for some work on infrastructure and signalling in the Stafford area, but no work in the Manchester area because improvements there are already planned. The Strategic Alternatives Study proposes three extra platforms at Manchester Piccadilly station and grade separation at Ardwick, costing £395 million. At Stafford, it proposes spending £1,111 million on three grade separated junctions and a stretch of new line to bypass two stations.

18.  South of Stafford, the larger proposals in the Alternatives Study are providing four tracks for nine miles between Coventry and Birmingham at a cost of £903 million, to allow fast trains to overtake slower trains, and providing a grade separated junction south of Leighton Buzzard at a cost of £243 million, so that trains can switch between fast and slow lines at 100mph.

19.  It is not self-evident that it is necessary to provide nine miles of four track, rather than one mile, or just to provide additional tracks in some stations, to permit fast trains to overtake slow trains, nor that it is worth spending £243 million to permit trains to change tracks at 100mph. Combined with the heavy expenditure proposed around Stafford and Manchester, one wonders whether the proposals represent good value for money.

20.  The defect in this study lies in its methods: it does not try to establish whether the proposed improvements represent the best value for money. The scale of the increases in capacity on the WCML that are worth undertaking can only be established by calculating the return that each increment in capacity will produce. This methodical approach is essential if the scale of the desirable investment is to be established. The Alternative Study relied on expert opinion to establish what investment was worth undertaking, not methodical analysis, but such an approach is unlikely to produce the optimal answer. Our subjective judgment of the exercise is that it suggested more expenditure than is likely to be proposed by the rational analysis we recommend.

21.  For all its limitations, the Alternatives Study gives an initial impression of the scale of improvements needed on the WCML to accommodate the anticipated growth in traffic; and this impression is that the scale is small. The Study identifies only three projects between London and Birmingham that it considers worth undertaking, and the biggest of them - four tracking nine miles between Coventry and Birmingham - is one of the more questionable of the proposals. This small number of infrastructure schemes comes despite the failure to incorporate longer trains as a means of increasing capacity; it appears technically feasible to increase the length of trains from 11 to 12 coaches, but this option was ignored.

22.  The deficiencies of the Alternatives Study imply that the government cannot claim that HS2 offers the greatest benefits of all possible means of increasing capacity on the WCML. A rationally-conducted Alternatives Study might well produce a means of increasing capacity that gave a better return than the HS2. The ability to phase any increases in capacity to match increases in demand - which the builder of a new line does not possess - also increases the potential return from investments that increase the capacity of an existing line. Incremental improvements therefore seem a better policy than large scale investment. They would also fit better with a policy of improving the financial performance of the railways.

23 August 2011

471   Advice on the Assessment of Wider Economic Impacts: A report for HS2. Daniel J Graham and Patricia Melo 2010. P. 37. Back

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Prepared 8 November 2011