Committee of Public Accounts - The completion and sale of High Speed 1Written evidence from the New Economics Foundation

Request for an Inquiry into Government Proposals for High Speed Two (HS2)

I am writing on behalf of the New Economics Foundation (nef) to request the Public Accounts Committee investigate the Government’s proposals for a High Speed Rail line on value-for-money criteria. nef has serious concerns about the value-for-money offered by the Transport Secretary’s proposals (announced on 10 January), and the lack of Parliamentary scrutiny they have received.

While we recognise that the PAC does not review the formation or merits of policy, we note that:

The Committee has reviewed three transport-related topics in the past year including rail capacity and the efficiency of Network Rail.

High Speed Two is central to the nation’s long-term strategic transport investment and of critical importance to public finances.

The Transport Select Committee has stressed the need for further work to assess and assure value for money.1

Publicly available figures indicate that spending up to the end of 2010–11 on developing HS2 already amounted to approximately £73 million, with a spending review settlement of £773 million for the period 2011–12 to 2014–15.2

nef has no position on whether HS2 should or should not ultimately go ahead. Our interest is in ensuring that public spending decisions on large scale, long-term projects are accountable. We do not believe that as it stands the case for HS2 is sufficiently robust to give confidence in committing £32 billion of public money.

Our principal concerns are outlined below. They lead us to conclude that more in-depth analysis and scrutiny of HS2 is essential before any commitment can be justified.

1. Ministers have suggested that Britain cannot afford not to invest in HS2,3 but the Department for Transport’s cost-benefit analysis puts the first phase, London-Birmingham, connection in the low value for money category in the central case (BCR = 1.4), or at the bottom end of the medium value for money category if wider economic impacts are included (BCR = 1.6).4

For comparison, it is interesting to note that The Eddington Transport Review found that the average BCR for UK rail investments was 2.83.5

The table below shows HM Treasury’s value for money categories for reference. It is reproduced from latest Department for Transport documents.

Table I

BCR CATEGORY LEVELS6

Value for Money Category

Benefit Cost Ratio

Poor

Less than 1.0

Low

Between 1.0 and 1.5

Medium

Between 1.5 and 2.0

High

Between 2.0 and 4.0

Very High

Greater than 4.0

2. The Department for Transport’s economic case rests on the benefits of time savings to passengers. Time saving is likely to be a meaningful benefit to stakeholders although it may not be more meaningful than other impacts, such as employment creation. However the calculation of aggregate time saving is made using a very high value of time which therefore over-estimates the benefits.

The Dff’s value of time for rail passengers is based on passenger earnings of £70,000 per annum or above, in 2010 values.7 Mean annual pay for workers in the UK in 2010 was £26,510 with even the 90th percentile earning a mean salary of £46,428.8 Basing time savings on such a high pay rate clearly places an extremely high value on time savings for HS2 passengers. Even if average pay of £46,428 were used to estimate the value of time savings, the BCR would fall to 1.3.

3. The alternatives to HS2 have been poorly evaluated. Each alternative scheme was found to deliver a higher BCR than HS2, as shown in the table below. The Department for Transport noted that total benefits from these schemes was substantially lower than HS2, although it should also be noted that their costs were also substantially lower, with resulting opportunity cost gains.

Table II

BENEFITS AND COSTS FOR ALTERNATIVES TO HS29

Package 2, Package 2A, 51M and Scenario B all denote specific packages of proposals for upgrades to the West Coast Main Line between London and Birmingham.

Economic Summary Statistic

Present value of benefits (£bn)

Present value of costs (£bn)

BCR

Package 2

7.9

2.0

4.0

Package 2A

7.0

2.6

2.7

51M

6.1

1.2

5.2

Scenario B

=13.9

9.3

=1.5

4. The ability of HS2 to deliver against the primary objectives for the Government’s investment has not been inadequately discussed:

Tackling the ‘North-South divide’: Evidence on regional economic rebalancing from high-speed rail schemes abroad is equivocal. There is some evidence that high-speed rail can worsen the concentration of benefits on the existing key economic centres.10

Lowering carbon emissions: It is not clear that HS2 will contribute to Government objectives for reducing carbon emissions, especially if reduced domestic aviation is displaced by long-haul flights.11 The process by which the DfT has projected the total carbon emissions impact of the scheme has been poor. As such, it is unclear if HS2 is consistent with the Government’s objectives for reducing carbon emissions

5. We are unconvinced that there have been robust checks and balances in place for adequate scrutiny of the returns for society.

HS2 has already undergone review by the Transport Select Committee. The Committee voiced broad support, but also called for more scrutiny of the financial and economic case. Additional dedicated inquiry into the return for society and value-for-money of HS2 seems vital, particularly at a time of austerity. In addition, the recent loss of the Sustainable Development Commission leaves a gap in the checks and balances offered by independent agencies that will raise questions about financial, social and environmental sustainability.

Given the complex, large-scale and long-term nature of the scheme, procurement processes for HS2 have been underway since July 2011. In light of last week’s announcement, further development will include lining up construction contracts, and commissioning engineering works in advance of Parliament’s final consent.

We fear that without robust accountability processes, this will add to momentum for the investment despite unresolved value-for-money issues. We therefore strongly urge the Public Accounts Committee to conduct an inquiry.

We will be happy to discuss the above with you and other members of the Committee in more detail should you require it. I look forward to hearing your response.

January 2012

1 Transport Committee – Tenth Report: High Speed Rail.

2 House of Commons Hansard – Written Answers: 20 December 2010.

3 See for example, Foreword by the Secretary of State to High Speed Rail: Investing in Britain’s Future – Decisions and Next Steps (January 2012), Department for Transport.

4 Department for Transport: 2012. The Economic Case for HS2: Value for Money Statement.

5 Department for Transport: 2006 The Eddington Transport Study.

6 Ibid. Page 18.

7 Bluespace Thinking Ltd. 2010 A Review of High Speeed Rail – HS2 proposals.

8 Office of National Statistics, 2010. Annual Survey of Hours and Earnings, 2010. Table 1.7a Annual Pay: Gross.

9 Department for Transport: 2012. The Economic Case for HS2: Value for Money Staternent,p25.

10 Transport Committee: The Local and Regional Impacts of High Speed Rail in the UK: A Review of the Evidence, see section 4.6 (Written evidence from Professor John Tomaney).

11 Oxera. June 2010 Review of the Government's case for a High Speed Rail Programme, sections 3.44, 3.43. 3.42 and 1.6.

Prepared 5th July 2012