High Speed Rail - Transport Committee Contents

Written evidence from Kyn Aizlewood (HSR 44)


The Department for Transport [DfT] has published plans to invest in a new High Speed Rail [HSR] network across England including an Economic Case and Business Case for HS2, the next stage of investment. However the reports published do not address many key areas highlighted in the Treasury's Green Book approach re the "Five Case Model", which sets out an approach to ensure value for money from public sector investment projects.

This approach considers public sector investment proposals, seeking assurance that a compelling case is made, justifying the use of taxpayer money, under five headings:

1.  The strategic case [Paragraphs 1-7]

2.  The economic case [Paragraphs 8-35]

3.  The financial case [Paragraphs 36-39]

4.  The commercial case [Paragraphs 40-47]

5.  The management case [Paragraphs 48-54]

I have presented analysis in regard to the "Five Case Model" as it may apply to HS2, also drawing upon the experience and lessons learned from HS1.


If there is a robust Business Case for HS2, it has not yet been made by HS2 Ltd or by DfT. In terms of the Treasury's Five Case Model, the proposals to date are substantially deficient.

Instead, the evidence suggests that HS2 is an investment programme built on shaky foundations and offers nothing for 15 years. More modest, incremental investments that match new capacity to demand have been discarded in favour of a Grand Design, a loss-making project beset with huge risks and provided at enormous cost to the taxpayer.

Without a valid business case and in almost any other walk of life, the proposals for HS2 should/would be rejected.



1.  In presenting the business case, at the HSR Business Debate, 29 November 2010, the Rt Hon Phillip Hammond MP and Minister for Transport declared a range of "strategic" benefits of investment in High Speed Rail eg:

—  [it will become] "the preferred mode of travel for the overwhelming majority of passengers between London and its hub airport and Britain's great provincial cities";

—  "High speed rail will be an unbeatable option for inter-urban travel";

—  "Achieve a step change transformation of our economic geography";

—  "lead to huge regeneration opportunities…in Birmingham, in London and in due course in Manchester, Leeds and South Yorkshire";

—  "deliver a transformational change to the way Britain works";

—  "tackling the North-South divide in economic growth rates more effectively than half a century of regional policy"; and

—  "High speed rail will merge our great population centres into a single economic hinterland".

2.  Clearly, as the plan for HS2 is to attract the majority of its passengers from existing inter-city, high speed lines, if it goes ahead it will, de-facto become the main way of connecting a small number of English cities ie a faster connection to London from Birmingham and, latterly from Manchester, Sheffield and Leeds. However most people do not actually live in these cities and it is likely that most people, most taxpayers, will never travel on HS2.

3.  The original business case for HS2, prepared by HS2 Ltd and published March 2010 is far more modest in terms of its contribution to wider economic transformation, offering an estimate of £3.6 billion "wider economic benefits". This assessment looked at three areas:

—  Agglomeration benefits ie benefits of improved linkages between businesses.

—  Labour market impacts ie benefits to commuters.

—  Imperfect competition ie benefits to consumers of higher output, caused through investment in HSR.

4.  HS2 Ltd's analysis using DfT guidelines indicated potential Agglomeration benefits of £2 billion and £1.6 billion arising from imperfect competition, with hardly any benefit on labour markets.

5.  HS2 Ltd also commissioned further work from the Centre for Transport Studies, Imperial College to ascertain any further benefits and DfT concluded that "this suggests there may be some additional benefits that are not included in our estimates of wider economic impacts, it is unlikely that they will change the conclusions presented in this report".

6.  Subsequently in the Economic Case, DfT has increased this projected benefit to £6.3 billion, reflecting the impact of the Y network. Whilst there has been much talk in the media of "new jobs created", this DfT estimate for wider economic benefits only represents 5% of the total benefit claimed in the Economic Case and it is a modest return on the £30.4 billion capital investment required to create the infrastructure.

7.  It is also likely that many "new" jobs - in areas close to new HS2 stations -simply represent a re-distribution towards these centres of investment and away from towns and cities further from the line.


Distributional analysis

8.  One of the first questions for government about a new, major investment programme is "who benefits; who pays"? Some public sector projects easily gain public support because people can see the "public good" or they can recognise some indirect benefit eg in provision of free education [for the next generation], the NHS [we may all become ill one day], defence and policing [we collectively benefit from living in a safe environment].

9.  We already have a good transport infrastructure in the UK, however the proposal for HS2 develop a new "super system" on top of the existing network.

10.  The cost benefit analysis argues that most of the benefits of HS2 will be from passengers who use the service; the wider economic benefits, as described earlier, are quite modest given the scale of investment. However HS2 offers a new choice, as the cities to be part of the y-network are already served with relatively quick, subsidised, rail transport links to London eg few major cities in Europe can access their capital city within two hours, as we can in the UK.

11.  So, unlike with health, education and other "public services", the proposal for HS2 is to provide an upgraded service, heavily subsidised by the general taxpayer, from which a relatively small percentage of the general population will benefit; most people living in the UK and paying the taxes to fund HS2 will never make use of the service.

12.  The Business case argues that HS2 will "free capacity" on other parts of the network, allowing non-HS2 users to gain benefit. However [1] this only represents another small part of the population and [2] the train operators run a business and they will need to close down "spare capacity", if passengers switch to HS2, as speculated.

Option Appraisal

13.  No systematic appraisal of wider transport options has been presented in the Economic case i.e. does a £30 billion investment in the rail network add more value than an equivalent level of investment in road? In the development of super fast broadband networks? In integration projects for existing metropolitan areas?

14.  Assuming the answer is "yes", details of option appraisal work found in supporting papers to the Business Case indicate that an option termed "Rail Package 2", a major transformation programme of the existing WCML route achieved a significantly higher benefit to cost ratio than HS2, at a fraction of the cost. This was rejected because it did not provide the spare capacity offered by HS2 and therefore was insufficiently transformational. How to put a value on "spare capacity"?!

15.  The criteria used in the option appraisal on alternative routes for HS2 placed little value on local amenity or environmental factors. For example, an earlier route considered, using an existing transport corridor [M40] would achieve substantially less degradation to the environment and probably much lower levels of compensation to land/property owners affected. This was a lesson from HS1. Instead, the route chosen is the quickest, by about three minutes, through the Chilterns, based on a highly questionable methodology used by DfT which [somewhat ironically, given the positive spin placed on "modal shift to rail"] values time spent on a train at nil.

Demand forecast

16.  The economic case rests upon a complex, long-term econometric model, predicting a future level of demand for long-distance rail travel into London. The modelling is over 75 years and we might say that the parameters of uncertainty around this "best guess" get wider with every year.

17.  In its White Paper, Delivering a sustainable railway [2007], DfT identified a more progressive approach:

"While the Government must plan 30 years ahead, it recognises that it is impossible accurately to forecast demand that far into the future. Some cities and regions will grow faster than others. People and firms are likely to respond to the challenge of cutting carbon emissions by changing travel patterns and re-engineering supply chains. The pace of technological change is equally unpredictable.

"Forecasts have been wrong before, and any strategy that tried to build a rigid investment programme based on fixed long-term forecasts would inevitably be wrong again. Such an approach could well deliver additional capacity in the wrong place.

"To overcome this challenge, the guiding principles in this strategy are:

To invest where there are challenges now, in ways which offer the flexibility to cope with an uncertain future; and to put in hand the right preparatory work so that, as the future becomes clearer, the necessary investments can be made at the right time"

18.  These principles, which seem sound if unexciting, appear to have been dropped in favour of a vision founded on a straight line econometric forecast.

19.  In estimating demand for HS1 i.e. the Channel Tunnel Rail Link, the DfT failed to give consideration to the potential for competition from low cost airlines and the ferry companies, which had spare capacity. The House of Commons Committee of Public Accounts, in its 38th Report of Session subsequently reported in May 2006:

"In bidding for the project in 1996, LCR forecast that passenger numbers using Eurostar would reach 21.4 million in 2004 but actual passenger numbers were only 7.3 million. Where future income from passengers is expected to provide a major element of the revenue needed to repay the cost of constructing transport infrastructure, it is crucial that realistic forecasts are prepared from the start. Downside risks need to be given due weight, drawing on both UK and international experience, in considering future projects".


20.  There is little consideration given in the Command Paper or by HS2 Ltd to pricing policy, other than assumptions that pricing policy would be "optimised" between the new HS2 route and the existing West Coast Main Line route and that passenger fares will increase in real terms, year on year above the rate of general inflation

21.  Rail services are already heavily subsidised by the taxpayer, a balance that the Coalition government has recently pledged to change. In his speech of 14 September 2010, on Sustainable Transport, the Rt Hon Phillip Hammond declared "We have one of the most expensive railways in the world . . . That is not acceptable. The taxpayer is contributing almost as much as the farepayer".

22.  The Coalition Government has since announced plans to reduce the level of fare subsidy it offers to the rail industry: fares for Year 1 of HS2 Ltd's 30 year revenue projection will rise by 5.8% and from 2012 fare increases will be based on "inflation + 3%".

23.  If this new rule is applied to the business case for HS2, the cost of a return, off-peak fare would be the equivalent in today's money of £210, with a peak-time day return fare at £360. Are these pricing assumptions - summarised below - consistent with a 267% increase in demand? Is a doubling of demand for rail travel consistent with a doubling of passenger rail fares? Usually, more people are likely to buy a service if the price falls.

24.  Ticket Pricing Assumptions:
Birmingham New Street to London Euston 20102043
Inflation +
1% pa
Inflation +
3% pa
Peak, return fare£140 £200£360
Off peak, return fare£82 £120£210


All prices at 2010 levels
Based on current, published West Coast Main Line [WCML] fares Birmingham to London, see www.nationalrail.co.uk

25.  The assumption used in the Economic Case is that the "inflation + 3%" formula will revert to the earlier "inflation + 1" after three years, restoring the principle of continued high levels of public subsidy. Table 3 is indicative of a range of future ticket prices. It is likely that HS2 prices would be based on a "premium service", resulting in higher rail fares for passengers eg reflecting the experience of travelling HS1 in Kent.

26.  Supporters of HS2 agree that demand for long-distance rail travel is more than proportionately sensitive to changes in income; an average demand elasticity of about 1.5 is used by HS2 Ltd in the business case and this provides the basis for the unusually high demand forecast of 267% growth discussed earlier. By the same token, if government decided to reduce public subsidy on rail ticket prices, this would be expected to have a disproportionately large impact on forecasts of future revenues from HS2.

27.  Herein lies the basis for the accusation that HS2 is potentially a White Elephant ie it is so expensive that government will be required to sustain high levels of public subsidy in order to keep ticket prices low enough to generate viable levels of effective demand.

Income, substitution and competition effects

28.  The business case for HS2 combines an assumption of a big increase in the demand for the service with rising fare prices. However, the calculation of demand has been based upon modelling a trend of rising incomes and takes no account of the increasing real price of rail fares. It therefore over-predicts demand for two reasons:

—  an income effect of a price rise - some consumers choose not to travel eg they choose to take a shorter journey elsewhere, use the internet or video-conferencing; and

—  a substitution effect, customers switching to an alternative, cheaper mode of travel eg as we saw with HS1, consumers switched to cheaper alternatives such as low-cost airlines or the cross-channel ferries.

29.  The overall conclusion to be drawn from the above is that the Economic Case over-estimates the future demand for HS2, as it did for HS1. This over-estimate is a consequence of ignoring the impact of potential competition and by not modelling the impact of higher rail prices.

Cost Benefit Analysis

30.  HS2 Ltd has rigorously applied DfT methodology for cost-benefit analysis. However, does the methodology make sense in the context of HSR? At first glance the Benefits appear to easily justify the cost. However how much is your time really worth?

31.  HS2 Ltd's model puts a premium on business travel, based on a generous assumption that the average business traveller has a salary of £70,000 per year. A lower value is put on leisure time, and a value of nil is assigned to time spent on a train.

32.  Now, many passengers read a newspaper, a magazine or book on the train; others work on a laptop, listen to i-pod players, make phone calls, send texts, play computer games and so on, all of which, if they were not on a train, would be termed either business or leisure activities. But because passengers choose to do these things on a train, they are assigned "nil value" ie DfT assumes that 100% of time spent on a train is 100% wasted time. This provides the basis for calculating huge "benefits" arising from shorter journey times: when people stop travelling their activities are given value!

33.  Clearly there is some wasted time in making a train journey, mostly near the start and end of a journey, the transfer points eg getting to the station, buying tickets, waiting on the platform, finding a seat etc. However by reducing a journey from 84 minutes to 49 minutes, there is good reason to think that passengers are losing the most productive 35 minutes of that journey!

34.  Furthermore, the impact of mobile technology means that people increasingly utilise their travelling time, engaging for much of the journey in some activity, business or leisure, which they would otherwise do if not on a train.

35.  Whilst the detailed CBA is complex, the assumption that all travelling time is wasted is empirically not true and therefore the "conclusion" that taxpayers will get a £2 benefit for every £1 spent on HS2 is without foundation.


36.  The level of investment required to support the implementation of HS2 is summarised in the table below, taken from the DfT Command Paper, updated by the Economic Case report.

HS2 Cost Summary
Net Present Value—£ billion
HS2HS2 + Y network
Capital cost17.830.4
Operating cost [net]7.6 13.9
Total Cost25.544.3
Additional revenue-15.0 -27.2
Indirect tax1.5included
Net cost to government11.9 17.1

37.  To develop HS2 + Y network, Government requires taxpayers to find the equivalent of £30.4 billion in capital cost at current prices.

38.  To put this into an everyday context, the National Statistics Office estimate that in 2010 there were 30.2 million individual income taxpayers; each would be required to contribute the equivalent of an additional one-off tax premium of about £1000, now, to enable the project to go ahead, with the first trains scheduled between London and Birmingham from 2026.

39.  The biggest risk to the financial case ie the affordability of HS2 lies in the assumption of £27.2 billion [NPV] of revenues, with:

—  none forecast for 15 years;

—  revenues based on highly speculative assumptions about growth in demand;

—  a substantial real-terms increase in rail fare prices; and

—  the value of the NPV substantially inflated by the use of discount factors that does not fully reflect long-term commercial risk.


Commercial feasibility

40.  It is clear from the outset that HS2 loses money; there is no business case for HS2 in commercial terms. The sum of capital and revenue costs, discounted over time, is nearly twice as high [£44.3 billion] as the projected stream of revenues from ticket sales [£27.2 billion]. Therefore, in commercial terms, if the project went ahead as planned, and people behaved as predicted over the 75 year time horizon, the project would achieve a present value financial loss of £17.1 billion.

41.  It has been widely reported that London and Continental Railways Limited [LCR], the company that operates the lease for HS1, has been sold for about £2.1 billion to Borealis Infrastructure and Ontario Teachers' Pension Plan, approximately 40% of the £5.8 billion estimated to have been invested in its development.

Commercial risk

The reliability of revenue forecasts

42.  From a commercial perspective, the risks around financial projections grow as the parameters of uncertainty widen. The revenue forecasts for HS2 do not even kick in for 15 years, making these hugely uncertain. The commercial approach to this uncertainty would be to adjust the forecasts through a discounting approach. DfT has actually reduced the discount factor from 3.5% to 3% for later years of the forecast; neither rate represents anything close to a commercial discount rate in these circumstances. Consequently the revenues from estimates of future ticket sales included in the Business Case are vastly over valued.

43.  With regard to HS2, there are only two certainties: firstly, that the precise econometric forecast will not be accurate and secondly that HS2 will achieve nil revenue for the next 15 years, as the service will not operate before 2026, at the earliest!

Spare capacity and competition policy

44.  The Economic Case for HS2 + Y network predicts that more than one in five passengers who will use HS2 will be new passengers, people attracted by the prospect of shorter journey times, who would not have travelled by train before. However, when HS2 enters service this is likely to create substantial spare capacity, at least in the short-term, a key issue in the development of HS1.

45.  It is not clear what the competitive impact of this may be. At a meeting on 17 August 2010, officers from HS2 Ltd confirmed that the forecasting model treated HS2 and WCML demand "as one", therefore assumed no price competition. Potentially government might seek to franchise the WCML and HS2 together, to create a single, monopolistic rail provider on the route. Alternatively, government may prefer to see competition between HS2 Ltd and WCML operatives, which with spare capacity would serve to drive down rail prices.

46.  Whilst this is conjecture, we might recall the PAC review of HS1 and note that the lessons to be learned focussed on issues of price competition and alternatives not considered by econometric modelling. This failure resulted in fare-paying revenue targets being substantially missed and further loss to the taxpayer. The costs of HS2 + Y network dwarf HS1, so this is potentially a key point of discussion in assessing the "strategic" decision to invest in HS2.

Procurement strategy

47.  There is no procurement strategy published at this time. The Hybrid Bill will provide powers to acquire land and buildings for compulsory purchase, however the land / property owners living near the route have not been contacted to confirm which land / property would be subject to compulsory purchase, should the project proceed.


48.  A business case involves assessing risks to the investment programme and developing a strategy to manage those risks: what are the risks to achieving the benefits? Are costs robustly assessed? What strategies will help with these? Neither HS2 Ltd nor DfT offer any serious, quantified analysis of the risks or a risk management strategy as part of a plan requiring £30.4 billion capital funding from the taxpayer.

49.  Achieving most of the benefits is closely linked to the reliability of the demand forecasts discussed earlier. HS2 Ltd include a sensitivity analysis that concludes that if demand is 20% below its predicted level, the Net Benefit Ratio of HS2 falls from 2.7 to 1.5, a level generally interpreted by DfT as a marginal investment. It is clear that:

—  the demand forecast is a very critical assumption;

—  there is considerable uncertainty over the estimate of future demand; and

—  passenger revenue, based on demand, is related to the fares that passengers will be asked to pay, which is scarcely considered.

50.  For these reasons the sensitivity analysis undertaken seems wholly inadequate for the purposes of assessing programme risk.

51.  The extract below from 3.2.5 of the Economic Case summarises the government's uncompromising stance:

"One of the key uncertainties for forecasting is the future level of demand. There are different views of the future - how the economy will grow, and how that will drive growth in demand. However, the rate of growth in demand actually defines when, rather than whether, a scheme such as HS2 would be justified. Slower growth would not necessarily mean that HS2 would not be a worthwhile investment, though it might suggest that the opening year of HS2 should be later and/or that a lower level of service should be provided in the early years of operation. A higher growth rate, by contrast, would argue for the project to be accelerated if that were possible".

52.  Government and the Treasury would not countenance a Business Case for a hospital building programme based on this premise! With the pace of technological change, HSR may be redundant technology in 50, let alone 75 years time and technological risk has to be a consideration for any long-term programme of this size.

53.  Given that the demand forecast starts in Year 15 and runs to Year 75, the parameters of uncertainty over the reliability of future income forecasts are very large indeed. Conventionally, in the private sector, this would be reflected in the level of interest rate used, higher rates reflecting higher levels of perceived risk. Perversely DfT uses a 3.5% "discount factor" reducing this after 30 years to just 3%. Whilst this is standard practice for public sector transport projects, the impact of this is to substantially inflate the discounted value of future revenues against the projections that the private sector would make for the same project. From a commercial perspective this seems an entirely inadequate approach to assessing risk.

54.  Any investment carries risks that the purpose of the investment will not be realised, so a risk analysis may be useful in comparing the relative risks of one project against an alternative. Almost every other alternative investment strategy eg Rail Package 2 offers:

—  greater flexibility and therefore a much closer matching of capacity to future demand; and

—  delivers benefits sooner than HS2.

55.  Other commentators eg the HS2 Action Alliance have noted, that "Rail Package 2" meets the DfT predicted growth in demand, through a staged approach to investment and does so at considerably lower cost. This option was dismissed by DfT for not providing the spare capacity that HS2 might offer. It is unclear what benefit the DfT attaches to taxpayer investment to produce spare capacity, particularly when spare capacity will impact upon prices, revenue forecasts and potentially future levels of taxpayer subsidy.

56.  HS2 provides an all or nothing solution to the demand forecast for 20 + years hence and nothing beforehand - if the demand forecasts are correct, HS2 implies a sustained degradation of the WCML service for at least the next 15 years.

May 2011

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Prepared 8 November 2011