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
|
