Railway Infrastructure in Wales Contents

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4Funding

Maintenance and enhancements

80.Our inquiry explored how funding for infrastructure improvements had been allocated to Wales in the past and how they system operates in the present day. Investment in rail infrastructure for England and Wales has been determined in five-year cycles called ‘Control Periods’. The sixth rail Control Period since privatisation in 1994 spans from 2019 to 2024 and statutory statements, High Level Output Specification (HLOS) and Statement of Funds Available were made in July 2017 outlining overall expenditure on rail infrastructure. Rail infrastructure investment is allocated in constituent parts. Rail enhancements improve the capability, capacity, and reliability of the rail network. This is different from the Operations, Maintenance and Renewal Spend (OMR) which maintains the network’s current capability and reliability on a daily basis.117

81.According to data published by the Office of Rail and Road, in 2018–19 Wales received £230 million on enhancements from Network Rail, which is around 7.3% of the total expenditure for enhancements across Great Britain.118

82.In September 2020, the Welsh Government published their analysis of historical investment in rail infrastructure enhancements. It made the case for higher levels of investment as Wales’ rail network was considered “disadvantaged by the current process” as projects were assessed and prioritised on an “England and Wales basis”.119 A report published by the Welsh Government in September 2020 on Mainline railway enhancement requirements identified a lower level of rail enhancement investment in Wales in comparison with the rest of the UK rail network.120

83.During his oral evidence to our inquiry, Ken Skates MS outlined the Welsh Government’s case for further enhancement investment. According to Mr Skates, Wales has “11% of track on the Wales route, as a total of the England and Wales routes. We have 11% of stations and 20% of level crossings, and yet since 2011 we have received less than 2% of enhancements”. He claimed that when compared to investment in rail infrastructure planned between 2001 and 2029, levels of under-investment in Wales amount to about £2.4 billion..121

84.CECA’s written evidence presented similar statistics to those outlined by Mr Skates. They also observed that on a population basis Wales’ share of enhancement funding is disproportionately low and concluded that there is an ongoing disparity in the enhancement funding made available to Wales for rail infrastructure improvements.122 The TSSA said the Welsh Government investment of £1bn in the period 2001–2029 “on projects like the Ebbw Valley and Vale of Glamorgan re-openings and a number of new and improved stations” illustrated “an insufficient level of investment” from the UK Government.123

85.Outlining his analysis of enhancement spending, Professor Mark Barry, said “[t]he enhancement budget, depending on where you draw the line or what assumptions you make, is probably between 1% and 2% of the UK total over a prolonged period”.124 When asked about these figures in January 2021, David T.C. Davies MP, Parliamentary Under-Secretary of State, stressed that the 1% figure quoted by Professor Barry only applied to improvements on the line. He estimated the figure as 4.37% when taking into consideration maintenance, operations, renewals, and enhancements. He felt that the 1% figure was not “entirely fair” and that Wales is more “generously funded” in the passenger per kilometre subsidy.125 However, it was pointed out by the Wales Governance Centre that long-standing “ low enhancement spending has led to a higher-subsidy, higher-maintenance network”.126

86.Sir Peter Hendy said “if you divide investment by track miles, you get a very peculiar number”.127 He told us that he was sceptical about some of the measures that had been used to assess infrastructure spending citing, as an example, the Heart of Wales line which “is a very long piece of railway, but it has only five trains a day, and they are quite short and do not have many people on them”.128 James Price also felt that it was difficult to provide “specific answers” on levels of investment due to the “fluid nature of the border and the way that money is allocated”.129 Nevertheless, he agreed that historical funding was disproportionately low whether measured against the total UK budget, track length or population share.130

87.In contrast to the evidence from the majority of our witnesses Professor Roderick Smith of Imperial College offered some uncomfortable analysis regarding the amount of funding Wales’ rail infrastructure might expect. Professor Smith explained that the Japanese model of appraising the economic viability of railways—Daily Passenger Density—measures thousands of passenger kilometres per route kilometre per day and, by using this measure, he concluded that Wales scores well below the level required to deliver a profitable rail network.131

88.That Wales’s rail infrastructure has been historically underfunded was contested by Professor Smith. He noted that subsidy for the Welsh rail network stands at 26.3p per passenger km whilst for the UK as a whole the subsidy is 5.1p per passenger km.132 Whether funding for rail infrastructure had been sufficient would be dependent on what the ambitions for the railways were, Professor Smith said, but he contested that it “could be argued that the share has been generous when measured against use”.133 Considering whether Wales had received its fair share of infrastructure funding Julian Glover observed that ‘fairness’ is a complex concept and that a commuter who purchases a season ticket and is subject to parking charges on a profitable route may not regard the extent of the subsidy to the Welsh network as ‘fair’.134

89.Julian Glover said Wales’ high subsidy could, in part, be addressed by increasing rail usage and Professor Barry told us that investment in infrastructure could achieve this because it “gives you more capacity, allows you to run faster, allows you to operate more trains and carry more people”.135

Assessment of infrastructure projects

The Green Book and benefit cost ratios

90.A number of witnesses suggested that the Treasury’s rules for evaluating infrastructure projects, published in the Green Book, do not work in the interest of Wales.136 Professor Stuart Cole said that the Treasury’s rules had effectively prioritised infrastructure projects in the South East of England and the Treasury had over emphasised the use of benefit cost ratios (BCR) in their appraisal of projects.137 Professor Cole concluded that “[s]ignificant changes are needed in the Green Book approach if Welsh capital investments schemes are to come further up the priority list for DfT”.138

91.The Wales Governance Centre highlighted the relationship between historic levels of enhancement funding and successful navigation of the appraisal process. They noted that historically low levels of enhancement funding meant infrastructure “schemes will be more at risk of underestimated passenger demand and other factors which compromise assessments of value for money”.139

92.The Welsh Government has made the case that industry forecasting has routinely overestimated the demand for projects in London and underestimated demand for those in Wales and concluded that “the analytical framework which the UK Government rely upon to produce business cases and value for money assessments” [the benefit cost ratio] magnifies underinvestment in Welsh rail infrastructure.140 Ken Skates MS told us that the “really harsh benefit cost ratio assessment” will always favour densely populated areas and it was this method of appraising infrastructure projects that was at the root of underinvestment in Wales.141

93.As a former special adviser in the DfT, Julian Glover’s highly critical analysis of the use of benefit cost ratios to evaluate rail infrastructure projects was significant. He said that “BCR in itself is a pretty foolish thing” adding that it is effectively an invented number. Mr Glover concluded that “it does not relate to a real business or the fares people are going to pay and that the BCR has become “a sort of false reassurance that people like to have”.142 In some cases, such as upgrading the Cardiff to Bristol route, Mr Glover said it was “palpably obvious” that projects should happen and added that “you don’t need a BCR” to prove that HS2 services should connect to an electrified north Wales mainline from Crewe.143

94.Mark Hopwood, Chief Executive of Great Western Railway, felt that taking the “widest view possible” was needed when considering benefit cost ratio for rail projects. He said evaluation of projects should recognise “benefits to communities by improving connectivity, for example, and making it easier for people to get to places of employment”.144

95.It appears that the UK Government has accepted the criticisms made of its assessment criteria. In November 2020 the Treasury responded to a review of the Green Book by making recommendations which would reduce reliance on narrow benefit cost ratio analysis and said, “a refreshed Green Book” would “help achieve the aim of addressing regional imbalances”.145 Explaining how the assessment criteria for infrastructure projects would be revised, the Treasury acknowledged in the Spending Review that: the appraisal process “often fails to properly consider how a proposal will deliver the [UK] government’s policy ambitions, including levelling up”, resulting in a focus on BCR which “does not fully reflect social policy objectives or give ministers the information they need about where costs and benefits fall”.146

96.The Treasury said that any proposal that cannot make a case which aligns with the UK Government’s strategic approach will not be considered value for money and that “appraisals must give a comprehensive picture of cost and benefits, including impacts that are difficult to monetise”. The Spending Review emphasised that “options will be assessed first and foremost based on whether they deliver relevant policy objectives”.147

97.CECA said that within the rail industry there is now some optimism that the changes proposed by the Treasury “will lead to a different appraisal process that is less inclined to favour projects with already high passenger numbers in major population centres”.148 Professor Stuart Cole said the changes “should bring benefits to Wales”, but cautioned that strategic importance has theoretically been factored in to the appraisal of transport schemes since 2013 “ but with little impact on decisions based on strategic importance”.149

98.Discussing how the wider economic benefit to a specific area can be factored into decision making around rail infrastructure, Sir Peter Hendy indicated that the Union Connectivity Review would recommend appraising potential infrastructure investments using a wider economic basis”, and suggested that “if it is believed that the connectivity will drive general economic growth into the future, using a better appraisal methodology to appraise people’s desired investment is very likely to produce more investment”.150

HS2

99.Discussing the implications of high speed rail for Wales, Professor Mark Barry told us that the DfT’s own Full Business Case for HS2 prepared in April 2020 had shown that HS2 will not benefit passengers in Wales and the DfT had predicted a “~£150M pa GDP disbenefit to Wales”.151 Professor Barry said that HS2 will not lead to any increase in capacity on the north Wales mainline and the Civil Engineering Contractors Association said only “improved frequency and speed from Crewe will realise its slated benefits to North Wales”.152

100.James Price was clear that for HS2 to be positive for Wales it should link to the Welsh network as HS2 “if not developed well and correctly, will be damaging to Wales”.153 Julian Glover argued that the Union Connectivity Review is the vehicle by which HS2 could be modified to deliver benefits for Wales. He said “HS2 trains should run into north Wales” and argued that there is “a massive opportunity to put forward the case for doing better things, putting money in, electrifying, linking up, speeding up, working with HS2”.154

101.Chris Heaton-Harris MP said that people in Wales travelling to London would benefit from HS2 by virtue of reduced journey times between Crewe and London. The Minister did, however, acknowledge that the interim Union Connectivity Review report had noted the importance of “faster and higher-capacity connections for passengers from HS2 to north Wales”.155 David T.C. Davies MP said that the UK Government wants “to demonstrate that HS2 is going to be beneficial to people in Wales, particularly in north Wales” and said that getting the “connection right into Crewe” would “reduce journey times down to London”.156

Funding implications of HS2

102.The extent to which Wales has benefited from increased funding as a consequence of HS2 is matter of some debate. Between 2015–2019 “the Welsh Government received approximately £755 million in Barnett consequentials” as a result of an increase in the DfT budget arising from spending on HS2.157 However, the departmental comparability factor—the way in which the DfT budget is classified by the Treasury—”has fallen sharply, from 80.9% in 2019 (which was based on the 2015 statement) to 36.6% in 2020”.158

103.The Wales Governance Centre explained that HS2 is classified by the Treasury as an England and Wales project which means it attracts a 0% programme comparability factor. In other words, although HS2 will run solely in England the Welsh Government does not receive a Barnett consequential because the Treasury has determined that it will bring benefits to Wales. The interaction between the new departmental DfT comparability factor of 36.6% and the HS2 programme comparability factor of 0% “will reduce the Welsh Government’s consequentials for any increase in the DfT budget (for both devolved and reserved programmes) over the remaining lifespan of the HS2 project”.159

104.Professor Barry concluded that “[i]n effect costs for HS2 and rail enhancement are being allocated to Wales -yet none of the benefits apply to Wales”.160 He said HS2 should be reclassified as an England only scheme which would enable the Barnett formula to be used to address wider concerns about funding.161 Similarly, James Price told us that HS2 “ought to be Barnettised in some way”.162 CECA highlighted the extent to which Wales may be disadvantaged by the classification of HS2:

The HS2 business case explicitly disadvantages the south of Wales (with only potential and minimal gains in the north and middle via Crewe and Birmingham). Arguably there are far more benefits to Scotland from HS2 despite Scotland receiving significant Barnett “consequentials” and Wales gaining none. This, as you would expect, is of concern to our members as it will result in less investment.163

Conclusions

105.We welcome the changes announced in the 2021 Spending Review which will reform the process by which the Treasury evaluates infrastructure projects. It is imperative that the Treasury’s approach to evaluating rail infrastructure proposals takes account of a broader range of factors, such as regional economic inequalities and environmental benefits, than just benefit cost ratios. In light of the forthcoming publication of the Union Connectivity Review, we recommend that the evaluation process for rail infrastructure proposals in Wales factors in the UK Government’s strategic ambitions to strengthen connections between all parts of the UK.

106.HS2 is one of the largest infrastructure projects ever undertaken in the UK. It is a project of unprecedented size and complexity and has already created several thousand jobs as part of a supply chain that spans the country, including Wales. However, as rail infrastructure is not devolved, beyond the core valleys lines, to the Welsh Government, Wales will not benefit in the same way as Scotland and Northern Ireland from Barnett consequentials arising from the HS2 project. This is despite the fact that UK Government’s own analysis has concluded that HS2 will produce an economic disbenefit for Wales. We recommend that HS2 should be reclassified as an England only project. Using the Barnett formula, Wales’ funding settlement should be recalculated to apply an additional allocation based on the funding for HS2 in England. This would help to ensure that Welsh rail passengers receive the same advantage from investment in HS2 as those in Scotland and Northern Ireland.

107.The development of the HS2 programme in England could yield direct benefits to Welsh rail passengers if it is accompanied by enhancements to the North Wales mainline, including the upgrades at Chester and Crewe stations which will be required for full electrification of the North Wales mainline to proceed. We recommend that the UK Government, working in partnership with the Welsh Government, should prepare a full strategic case for the upgrade and electrification of the North Wales mainline. Consolidating the benefits of HS2 for Wales by reducing journey times within North Wales, increasing freight capacity and improving connections from Holyhead to the West Coast main line would be consistent with the UK Government’s economic and environmental objectives and with the objectives of the Union Connectivity Review.