Committee of Public Accounts - The completion and sale of High Speed 1Written evidence from the Department for Transport

Corrections to the Transcript

Question 28 was answered by Mike Fuhr rather than Philip Rutnam.

The final section of the answer given by Steve Gooding to Question 41 should read “successively 09 and 10–11” rather than “successively, 09 and 10 and 11”.

The answer given by Mike Fuhr to Question 90 should read “This should read a southerly route for what was then the Channel tunnel rail link”.

The answer to Question 107 should read “I have talked to David Higgins, who has recently appointed a transparency director at Network Rail” rather than “I have talked to David Higgins, who was recently appointed transparency director at Network Rail”.

HS2 Consultancy Costs

Costs incurred to date

The expenditure incurred on HS2 consultancy up to the end of March 2012 was £31.2 million.

Future planned consultancy costs

The planned consultancy costs for the remaining of the Spending Review period are:

2012–13—£134.9 million

2013–14—£139.9 million

2014–15—£176.0 million

HS2 Demand Forecasting and Cap Year

Summary

1. The economic case for HS2 Ltd assumes that demand for long distance rail travel saturates at roughly double the level observed in 2008; this is described as the “demand cap”. As a consequence of changing assumptions regarding the economy, fuel prices, competition from other modes, service levels (on HS2 and “classic” rail) etc, the point in time at which demand is assumed to saturate varies between updates to the economic case for HS2.

2. The two most significant influences on the demand cap have been:

March 2010—February 2011: Significant downward revisions to GDP forecasts following the recent economic crisis. These pushed the point at which demand saturates further into the future; and

February 2011—January 2012: Updating the base forecast year to reflect significant increases in long distance rail demand that had already by then taken place. This reduced the amount of growth required to meet the demand cap and hence moved the point at which demand saturates closer to the present.

Background

3. This note sets out the nature of the HS2 demand cap before describing the economic forecasts and other major assumptions that have affected the demand cap through successive iterations of the economic case for HS2.

Table 1

CHANGES TO THE HS2 DEMAND CAP

Date	Release	Cap Year
Mar 2010	High Speed Rail: Command Paper	2033
Feb 2011	High Speed Rail: Investing in Britain’s Future—Consultation	2043
Jan 2012	High Speed Rail: Investing in Britain’s Future—The Government’s Decisions	2037  1

The Approach to Capping Demand

4. Given the uncertainty about long-term demand growth, we have taken the decision to place a cap on growth. We have used a cap level, rather than assuming demand will stop growing at a specific time, as we think that is probably closer to how market saturation might work in practice. The level we have chosen is to cap demand growth at the point at which long distance rail demand reaches roughly double the level seen in 2008.

5. We think this is a prudent assumption. Even though the key drivers of demand such as population, employment and GDP are forecast to continue growing beyond that point, by de-linking these drivers from rail demand we assume no further growth in rail travel beyond that point, and this provides us with a consistent starting point from which to assess both HS2 and the potential alternatives.

6. In undertaking updates to the economic case, changes may need to be made to these input assumptions, such that either rail demand is projected to grow faster than previously and the demand cap reached sooner, or growth is slower and the demand cap is reached later.

The Economic Case for HS2

7. The demand forecasts prepared by HS2 Ltd are based on the Passenger Demand Forecasting Handbook (PDFH) methodology recommended in DfT guidance. They distinguish between the impact of influences outside the direct control of the rail industry (income, employment, population, competition) and those within its sphere of influence (journey times, capacity, punctuality etc.) The demand cap applies to the net impact of those influences outside the control of the rail industry, known as “background growth”.

8. The PDFH methodology also distinguishes between the impacts of individuals becoming more wealthy (measured by GDP per capita) and increases in the number of individuals (measured by population). While population forecasts have changed relatively little between updates of the economic case for HS2, the economic outlook has varied considerably. Chart 1 demonstrates the GVA/capita inputs used in the economic case for HS2.

Chart 1

GVA PER CAPITA ASSUMPTIONS

Source: See “additional information” below.

9. Between March 2010 and February 2011 projections of GDP per capita fell by a total of 5.5% over the period to 2032–33. At the same time forecasts of employment growth were downgraded and assumptions regarding fares were amended to reflect changes to fares policy (moving from RPI + 1% to RPI + 3% for three years). The net impact of all changes to assumptions was to suppress the rate of background rail demand growth so that the demand cap was met in 2042–43.

10. Between February 2011 and January 2012 the economic outlook was further downgraded. All other things equal this would suggest slower rail passenger demand growth and hence imply that the demand cap would be met much later than 2042–43. Over the same period, however, HS2 Ltd implemented a range of other updates, the most significant of which involved updating the year from which their forecasts were based.

11. The economic case for HS2 published in February 2011 predicted a significant fall in rail demand as a consequence of the economic crisis. In practice this was not observed and rail demand (particularly long-distance rail) continued to grow over the period 2008–11 (see chart 2). Indeed, one third of the growth previously forecast to occur on the West Coast main Line between 2008 and 2043 was achieved between 2008 and 2011. By increasing the number of trips in the base year there is subsequently less growth needed to reach an approximate doubling of 2008 demand. This feature of the January 2012 update is a major contributor to the revision of the demand cap to 2036–37 (amended to 2034–35 in April 2012).

Chart 2

PASSENGER JOURNEYS BY SECTOR

Source: National Rail Trends, ORR.

Additional Information

12. The source of the figures provided in chart 1 is summarised in table 2 below.

	GDP		Population
	Short-run	Long-run
March 10	HM Treasury (Apr 09)	HMT trend growth (Apr 09)	OEF and TEMPRO v5.4
February 11	Office for Budget Responsibility (Jun 10)	HMT long-run projection (Jun 10)	OEF and TEMPRO v5.4
January 12	Office for Budget Responsibility (Apr 11)	OBR Fiscal Sustainability Report (Jul 11)	OEF and TEMPRO v6.2

Philip Rutnam
Permanent Secretary

26 April 2012