Spending Round 2013 - Treasury Contents

5  Infrastructure

The Economic Case for High Speed 2

59. "High Speed 2" (HS2) is a high speed rail project planned for construction in the UK. The project comprises two stages. Stage one is a high speed line between Birmingham and London. Stage two extends the stage one line to both Leeds and Manchester in a "Y" network. In the 2013 Spending Round, the Government reiterated its commitment to the project as part of its long term UK infrastructure plan.[140] An economic case for HS2 is produced and maintained by HS2 ltd and the Department for Transport. First completed in March 2010, the study initially estimated a long term cost to benefit ratio of 2.4 to 1, without wider economic impacts. As HS2's plans matured, the economic case was revised and the cost to benefit ratio has fallen. At the last update performed in August 2012, the full HS2 "Y" network was estimated to generate a cost-benefit ratio of 1.9 to 1 without wider economic impacts. Including wider economic impacts, the cost-benefit ratio rises to 2.5 to 1.[141] HS2's full "Y" network's projected costs have risen since the latest assessment, increasing by around 17% from £36.4bn to £42.6bn.[142] The entire project is now expected to cost £50.1bn, including £7.5bn set aside for rolling stock. [143]

60. Whilst broadly supportive of rail infrastructure investment, John Cridland, of the CBI, described the increased cost of HS2 as "a matter of concern"[144] and called for a reassessment of the project's value for money:

    I find it hard to envisage in 30 years' time that the UK, as a major economy and industrial nation, will not have excellent rail infrastructure. I am quite convinced that there is a strong case for more rail capacity, both for intercity transport and for commuter and rail freight transport on the west coast main line. For High Speed 2 to go ahead, it has to wash its face. I am quite convinced that the value for money test needs properly applying.[145]

61. The National Audit Office has also questioned several aspects of this economic appraisal in a recent report.[146] Amongst other concerns, it questioned three key areas: the calculation of transport benefits to business users, forecasts of ridership on the new line and a lack of evidence on regional rebalancing.

62. On the calculation of transport benefits, the NAO noted that to "calculate benefits for business travellers, the largest estimated benefit, the Department is using data which are over ten years old."[147] It recommended that the methodology for calculating business travel benefits should be updated, saying:

    The Department's methodology uses a simplifying assumption that time spent travelling is unproductive and business travellers will use all the time saved from faster journeys to work. While this approach is used in appraisals in other countries, it has been challenged by opponents of the High Speed 2 programme on the basis that it is unrealistic for rail travel.[148]

The NAO also highlighted a problem in the demand forecasts HS2. It said that:

    HS2 Limited has not yet analysed the effect of premium pricing on forecast passenger demand, revenues and the benefit-cost ratio. To forecast passenger demand, HS2 Limited uses the same average fares for high-speed and conventional rail in its models, although premium fares are charged on High Speed 1.147

Professor McWilliams, Chief Executive of CEBR, raised a similar point regarding passenger numbers, and its effect on the economic case for HS2. He said:

    research we did two years ago showed that demand [for HS2] was way overstated and if you put realistic demand numbers in [...] the costs way outweighed the benefits and [...] there would be a very large funding gap.[149]

63. HS2 ltd have acknowledged "sensitivity" in their analysis to "the approach taken to modelling fares growth and its interaction with passenger demand." In August 2012, they said "HS2 Ltd and DfT will consider whether these approaches can be improved upon for future decisions. Where there is uncertainty around demand forecasting parameters we will reflect this is in our analysis."[150]

64. The NAO also believed there to be insufficient evidence to support the need for increased rail capacity and how HS2 will achieve regional rebalancing. Its report into HS2 said:

    In presenting its case for investment, the Department has poorly articulated the strategic need for a transformation in rail capacity and how High Speed 2 will help rebalance economic growth. The [DfT] and HS2 Limited have started a lot of work recently to strengthen the evidence and analysis on which the case is based.[151]

The role of HS2 in regional rebalancing was also raised by Professor McWilliams, who said "it is a very expensive way of promoting regional growth", [152] and that "skills and technology look a lot better as candidates than a high speed rail project, although urban transport in these regional economies is also important."[153]

65. When challenged on the economic case for HS2, the Chief Secretary to the Treasury and the Chancellor questioned the role of cost benefit analyses in infrastructure decisions, criticising their inability to capture all of the benefits of HS2. The Chief Secretary to the Treasury said:


    the specific analysis of transport projects does not, in general, take into account the much wider economic benefits of these sorts of projects. [...] If we simply followed the economic model in the way you are suggesting, this country might not have built the M1 in the 1960s, for example, or completed the M25 in the 1980s. These are transformational projects that go beyond just the travel time benefits of a particular rail service.[154]


    We have made a very strong commitment to it on the basis not just of the short-term economic analysis but of our view about the longer-term economic transformational potential that this project has in the context of what is still a very divided economy, especially across England. [155]


    We know from countries around the world that improved connectivity of this sort makes a big difference to balance of your economy over a number of decades. We also know that capacity constraints on some lines are really starting to bite now, so this investment not only creates a very important infrastructure improvement in its own right but also releases capacity for existing services.[156]

The Chancellor of the Exchequer argued that:

    [...]If you look at economic returns on transport projects, they will basically tell you to spend everything in the south-east of England and around the M25. We reject that because, as a country, we do not want to see the only investment going into the south-east of England. We also want to improve the economic performance of the rest of the country, so a huge amount of investment is going around the country more broadly.[157]

66. Since we took evidence on the Spending Round, the former Chancellor of the Exchequer and Secretary of State for Transport in the previous Government, Rt Hon Alistair Darling MP, has warned that building HS2 might cause a "nightmare" on the rest of the rail network if there was not enough money to maintain the rest of the network.[158] Subsequently the Institute of Directors has also criticised the value for money of the scheme, suggesting that the money would be better spent on the existing rail network and other infrastructure projects.[159] The Chancellor of the Exchequer has restated his commitment to HS2:

    We have set the budget for £42bn for the construction costs. That includes, by the way, a big contingency. As we demonstrated with the Olympic Games, we can deliver these big projects actually sometimes under budget.

    I think we have got a good budget, which has got a very big contingency in it, we've set a budget.

    I'm passionate about this project because time and again, we have this debate in our country about how we're going to bring the gap between north and south together, about how we're going to make sure that our growth is not just based on the City of London.

    High Speed 2 is about changing the economic geography of this country, making sure the North and the Midlands benefit from the recovery as well.[160]

On 11 September 2013, HS2 Ltd published a report produced by KPMG entitled HS2 Regional Economic Impacts.[161]

67. On 11 September 2013, HS2 Ltd published additional material on HS2. We will wish to examine whether the material published by HS2 Ltd, and any further material published by the Government, meets the following requirements:

  The National Audit Office has highlighted a number of problems with the existing cost-benefit study that, combined with the increased cost of the project, could have a large impact on its value for money. The Treasury should not allow HS2 to proceed until it is sure the cost-benefit analysis for HS2 has been updated to address fully the concerns raised by the National Audit Office.

  The Treasury has based the need for HS2 upon the existence of benefits that are not captured by the existing economic appraisal. The Treasury should publicly quantify these benefits.

  Prior to any decision by the Treasury to proceed with HS2, it should publish its own comprehensive economic case supporting its decision.

Once these requirements have been met, the Government should formally reassess the project before deciding whether to proceed. In the event that it does proceed, Parliament can then consider the hybrid Bill in the light of that reassessment.

Infrastructure spending plan

68. At the time of the Spending Round 2013, the Treasury announced a long term infrastructure plan for the UK. The Treasury document Investing in Britain's future detailed spending plans in a number of areas including roads, railways, energy and science. John Cridland spoke favourably regarding elements of the infrastructure plans:

    [...] The package announced by the Chief Secretary the day after the Spending Review was a source of some encouragement to business, both in energy and in transport, and I think complemented the announcements in the Spending Review on forward capital.[162]

69. However, there has been some scepticism amongst commentators regarding the Government's ability to deliver on its announcements. Adam Marshall, director of policy at the British Chambers of Commerce, said:

    Infrastructure projects are too often promised and too rarely delivered in this country, and that cycle must be broken. If these announcements are to translate into short-term confidence, medium-term construction jobs and long-term competitiveness, the Whitehall machine must be judged by the number of diggers on the ground, not strategies and press notices.[163]

Some of this scepticism may have been caused by re-announcements made by the Treasury in its infrastructure plan. For example, the Department for Transport had already confirmed the construction of HS2 as early as January 2012, [164] and had announced the allocation of £470m for the Mersey Gateway Bridge in October 2011[165]—both of which were also contained in the Government's Investing in Britain's Future. [166] Nick Prior, Head of Infrastructure at Deloitte said "there is little here that we hadn't heard already and there may be scepticism in the sector about turning this rhetoric into reality."[167]

70. The Committee welcomes the creation of long term plans for infrastructure investment. It is now crucial that the projects are delivered in a timely and effective manner. To aid transparency and public accountability, the Treasury should provide infrastructure plan updates on an annual basis at every Budget. The updates should set out progress on each infrastructure measure announced in Investing in Britain's Future.

140   "Investing in Britain's Future," HM Treasury, 27 June 2013, p.25, para 3.16 Back

141   "High Speed 2: A review of early programme preparation," National Audit Office, 16 May 2013, p 7 Back

142   "Updated Economic Case for HS2," HS2 ltd, August 2012, p 4, Table 2 Back

143   "Investing in Britain's future," HM Treasury,27 June 2013, p 25, para 3.16 Back

144   Q 72 Back

145   Q 72 Back

146   "High Speed 2: A review of early programme preparation," National Audit Office, 16 May 2013, pp 6-8 Back

147   "High Speed 2: A review of early programme preparation," National Audit Office, 16 May 2013, p 8 Back

148   "High Speed 2: A review of early programme preparation," National Audit Office, 16 May 2013, p 28 Back

149   Q 68 Back

150   "Updated Economic Case for HS2," August 2012, HS2 ltd, p 5, paras 6.1 - 6.2 Back

151   "High Speed 2: A review of early programme preparation," National Audit Office, 16 May 2013, p 11 Back

152   Q 68 Back

153   Q 70 Back

154   Q 134 Back

155   Q 134 Back

156   Q 132 Back

157   Q 248 Back

158   HS2 costs could mean rail nightmare, says Darling, BBC News website, 23 August 2013, http://www.bbc.co.uk/news/uk-politics-23808993 Back

159   Institute of Directors calls on the Government to abandon HS2, 27 August 2013, http://www.iod.com/influencing/press-office/press-releases/institute-of-directors-calls-on-the-government-to-abandon-hs2 Back

160   George Osborne 'passionate' about HS2 rail link, BBC News website, 1 September 2013, http://www.bbc.co.uk/news/uk-politics-23919949 Back

161   High Speed 2 (HS2) Limited, HS2 Regional Economic Impacts, Ref HS2/074, September 2013 Back

162   Q 91 Back

163   "Quick delivery of infrastructure projects is crucial for jobs and confidence," British Chambers of Commerce Back

164   "Britain to have new national high-speed rail network", Department for Transport press release, 10 January 2012 Back

165   "New bridge over the Mersey," Department for Transport press release, 3 October 2011 Back

166   "Investing in Britain's Future," HM Treasury, 27 June 2013, pp 6,9, paras 1.8, 1.16 Back

167   "Spending Review: Deloitte comments on infrastructure measures," Deloitte press release, 27 June 2013 Back

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© Parliamentary copyright 2013
Prepared 19 September 2013