House of Lords - The Economics of High Speed 2

The Economics of High Speed 2 - Economic Affairs Committee Contents

CHAPTER 2: THE COST OF HS2

Cost of construction

21. The Government has made allowance in its projections for public spending for construction of HS2 of £21.4 billion for Phase One, £21.2 billion for Phase Two and £7.5 billion for rolling stock, a total of £50.1 billion (2011 prices, excluding VAT).[28] The cost of constructing each phase of the line including contingencies is set out in the Strategic Case:

Table 1: HS2 total allocated funding (£ billion)

	Phase One	Phase Two	Rolling stock	Total
Target cost	17.16	n/a
Estimated cost	15.65	12.5	5.8	33.95
Contingency[29]	5.75	8.7	1.7	16.15
Total	21.4	21.2	7.5	50.1

Source: Strategic Case, Figure 7.1. Figures in 2011 prices, excluding VAT.

22. The total funding allocated for the construction of HS2 and purchase of rolling stock of £50.1 billion includes £16.15 billion contingency as shown above.[30] Contingency is lower for Phase One as the route is more defined, enabling a more accurate estimate of the cost. David Prout of the Department for Transport told us that the Chancellor had made clear that "the budget is the budget" and that costs could not exceed the funding envelope of £50 billion.[31]

23. We asked the Rt Hon. Patrick McLoughlin MP, Secretary of State for Transport, to provide the costs for HS2 in 2014 or 2015 prices. He told us that "in order to ensure consistency across the programme, we are maintaining the prices for programme delivery in 2011 prices."[32] The Department for Business, Innovation and Skills publishes Tender Price Indices, which measures the movement of prices in tenders for public sector construction contracts in the UK. This showed that the cost of public sector construction contracts increased by 13 per cent between the first quarter of 2011 and the first quarter of 2014 (the last date for which figures were available).[33] Applying this increase to the £50.1 billion cost of HS2 would give a figure of £56.6 billion in 2014 prices.

24. We note that Mr Prout told us that costs of construction could not exceed the funding envelope of £50 billion. It is not clear whether this refers to the costs in 2011 prices and the funding envelope will expand with inflation, or whether the cost should not exceed £50 billion in absolute terms. The Government should make clear whether the absolute limit for the construction of HS2 will increase in line with inflation.

25. Rt Hon. Lord Adonis, former Secretary of State for Transport, argued that HS2 was not a £50 billion project but "a £28 billion project with a 50% contingency";[34] he suggested that quoting the cost as £50 billion was misleading. Sir David Higgins, Chairman of HS2 Ltd, cautioned however that while "you should not assume that contingency will be spent", it was included for a reason and he did not want to "suddenly declare that I had found savings." He noted that use of contingencies would be "rigorously enforced" in the same way that it had been for the Olympics[35] and Crossrail projects. In the case of the Olympics:

Box 2: What is the cost of HS2?

In this report we refer to two figures for the cost of HS2:

· £50.1 billion: This figure refers to the expected cost to construct HS2 in 2011 prices and purchase rolling stock (see Table 1) including all contingency.

· £31.5 billion: This figure refers to the net cost of HS2 to the Government of HS2 after 60 years of operation of the full line and includes the cost of construction, operating costs and revenue. The figure is derived by adding the capital cost (£40.5 billion) to the operating cost (£22.1 billion) and subtracting the expected revenue income (£31.1 billion). These figures are present value figures and have been discounted as is standard practice to reflect that people prefer to receive goods and services now rather than later.

IS £50 BILLION A REALISTIC ESTIMATE?

26. Some witnesses expressed scepticism that the cost of constructing HS2 could be kept within £50 billion (2011 prices). Professor Stephen Glaister noted that "There are lots of things that may happen between now and Royal Assent to the hybrid Bill that will change these numbers, typically, I suspect, adversely."[37] Dr Richard Wellings of the Institute of Economic Affairs, also thought there was a "massive cost risk" because of "interest group pressures" leading to changes to routes and increases in cost. He estimated that HS2 would cost a total of £80 billion, which took account of other factors including "the economic activity that is suppressed by the extra taxation needs flowing from HS2".[38]

27. The Secretary of State told us that the Department for Transport had proved it could deliver projects without cost overruns: "Crossrail has been a fantastic achievement; it has been delivered on budget and within the estimations for the next two years on time. That has shown that we have some tremendous advantages in the delivery on costs."[39] Sir David Higgins and Simon Kirby, Chief Executive of HS2 Ltd, were brought in to ensure that the project was delivered successfully.

28. Sir David Higgins agreed that "HS2 is a lot of money. We have to prove that we spend it very wisely." He said that the Construction Leadership Council, which he co-chaired, had set itself the objective to be achieved by 2025 of "reducing both the time of construction and the cost of construction, in each case by 25 per cent in real terms".[40] Lord Deighton said that Sir David Higgins had been given the task of looking at how to reduce the cost of construction of HS2, including by learning from examples from abroad.[41]

Redevelopment of Euston station

29. Several witnesses used the progress of plans for the redevelopment of Euston station as an example of how costs were already at risk of running over budget, although no money has yet been spent on the redevelopment. HS2 Action Alliance told us that there had been reports that the estimated cost of the redevelopment of Euston had risen to £7 billion from the £2 billion quoted in the Economic Case for HS2.[42] Mr Prout said that the development of Euston was not over budget:

30. An HS2 station at Old Oak Common, located in West London three miles west of Paddington station, has been proposed as part of plans for HS2 to provide an interchange between HS2 and Crossrail. It has been suggested that the possibility of overruns at Euston has led to consideration of terminating HS2 at Old Oak Common.[44] This would avoid the cost of developing Euston station and of a tunnel from Old Oak Common to Euston. When we put this suggestion to Mr Prout he said that terminating at a central London station was "an essential part of driving demand on HS2. The capital investment required would not justify terminating [at] a station out at Old Oak Common."[45] Alison Munro, Managing Director of Development, HS2 Ltd, said that one-third of HS2 passengers travelling to London would choose to use Old Oak Common so "If you stopped the trains at Old Oak Common that would be a disbenefit to two-thirds of people."[46]

31. The Government should estimate the overall reduction of cost to HS2 of terminating the line at Old Oak Common (in the London Borough of Hammersmith and Fulham), including any necessary redesign of the station at Old Oak Common to make this possible, and calculate the effect on the cost benefit analysis.

32. We consider other options for the terminus in London in Chapter 6.

LEARNING FROM ABROAD

33. The cost of construction of high speed lines in France has been much lower than the construction costs expected for HS2. A report of the French Cour des Comptes (the French equivalent of the National Audit Office) on the construction of high speed lines in France said that: "In 2014, the French TGV network is 2,036 km long and was developed for a cost of over €23 billion [in 2010 prices]."[47] The report collated the information on construction and length of TGV lines in France:

Table 2: Cost of construction of main high speed lines in France

Line	Date completed	Length (km)	Cost (€m, 2010 prices)	Cost per km (€m, 2010 prices)	Cost per km (£m, 2010 prices)[48]
LGV Paris-Lyon	1983	380	2,079	5.5	4.7
LGV Atlantique	1990	285	2,972	10.4	8.9
LGV Nord	1993	350	3,767	10.8	9.3
L'interconnexion Nord-Sud	1996	102	1,579	15.5	13.3
LGV Rhône-Alpes	1994	106	1,425	13.4	11.5
LGV Méditerranée	2001	250	4,929	19.7	16.9
LGV East	2007	299	4,702	15.7	13.5
LGV Rhin-Rhône	2011	148	2,588	17.5	15.0

Source: Cour des Comptes, La Grande Vitesse Ferroviaire: un modèle porté au-delà de sa pertinence rapport public thématique, pp 19-21

34. Taking the target price of Phase One (there is no target price for Phase Two) of £17.16 billion (excluding contingency, 2011 prices) and its length as the commonly reported 192 kilometres, HS2 Phase One will cost around £90 million per kilometre.

35. Mr Prout told us that for HS2 the Government have targeted cost of "£43 million per mile".[49] The cost of construction for HS1 (the Channel Tunnel to Kings Cross link) in 2011 prices was £37.6 million per mile.[50] A direct comparison with costs in other countries such as France is not straightforward as HS2 requires expensive tunnelling and includes the cost of a new station at Birmingham and renovation of Euston station while no stations are included in the French costs. Sir David Higgins suggested to the House of Commons Transport Select Committee that the UK could not "hide behind the idea that our country is much more densely populated than France" as the reason for why it was more expensive to build high speed lines in the UK.[51]

36. We asked Sir David Higgins why costs of construction were lower in France and what could be learned from experiences abroad to reduce the cost of constructing HS2. He told us that access to the track and planning constraints were "the reason the costs here are substantially higher." Sir David said that a team had considered the lessons from the construction of the Tours to Bordeaux TGV line in France. They had found that "rigorous planning, just in time construction where you look at the logistics and you plan for that in advance, can deliver substantial savings in all construction sectors."[52]

37. The expected cost of construction per mile of HS2 is up to nine times higher than the cost of constructing high speed lines in France. This is too high. Were HS2 proceeded with, we welcome the Government's and Sir David Higgins' commitment to learning from international examples to reduce this cost.

The UK construction industry

38. The state of the UK railway construction industry was also cited by Sir David as a reason why constructing railway lines in the UK was so expensive. He described the industry as "fragmented, low-cost, low-margin, buying on the lowest common denominator, not investing in long-term skills". This was in contrast to "the big Spanish, German or French multidiscipline contractor companies that have strong revenue streams from owning airports or telecommunications companies" who invested in research and development and skills.[53]

39. The Department for Transport acknowledged in their written evidence that the UK had "a skills gap in railway engineering and advanced construction" and that a recent report had identified "a need to substantially increase the supply of engineers in the UK." They said that an HS2 skills college would be set up to complement existing work to meet the skills gaps and help to deliver a UK workforce equipped for the future.[54]

40. HS2 Ltd told us in written evidence how this college would focus on "designing and delivering the high level skills needed for high speed rail, and other major engineering projects of the future." They said that their contractors had already given more than 700 graduate trainees or apprentices the experience of working on HS2 and expected that HS2 would lead to a further 2,000 apprenticeships in construction alone. This would "create a lasting legacy for the UK as a country that can deliver major infrastructure projects."[55]

41. Other witnesses were not so confident that UK industry would be the main beneficiary of the construction of HS2. HS2 Action Alliance said that as the UK had "no indigenous high speed rail industry" much of the technology required for the railway would be imported from foreign manufacturers.[56] William Avery, a private individual, agreed that "the UK construction industry is reaching full capacity so the only effect of HS2 will be the importation of resources to achieve the construction and mostly focused in the south east which needs it the least."[57]

42. We are concerned to learn that the UK construction industry does not have the capability to deliver a project of the scale of HS2. A national transport strategy that envisages steady investment in the UK's transport infrastructure, whatever the project, may help the UK develop a construction industry capable of delivering large infrastructure projects and competing internationally.

Cost of complementary projects

43. HS2 could prompt a number of complementary transport projects designed to maximise the benefits of HS2, which are not included within the anticipated cost. Witnesses suggested that these projects meant that the budget that would be funded by the Government and local authorities would be far higher than the funding announced for the construction of HS2.

CROSSRAIL 2

44. Crossrail 2 (a new line proposed to run from north to south across London) was cited as a project which was separate from HS2 but would be required if HS2 was built. Michèle Dix, Managing Director, Planning, at Transport for London, told us that Crossrail 2 "needs to be in place before phase two of HS2 is completed" as "we will need additional Underground capacity in the form of Crossrail 2 to help with that dispersal." However, she made clear that Crossrail 2 was needed regardless of HS2, so was being progressed independently. The total cost of Crossrail 2 was expected to be £27 billion including rolling stock and contingency.[58]

OTHER COMPLEMENTARY PROJECTS

45. Mr Prout told us that the costs for HS2 included "All the infrastructure that is required to allow HS2 to run on the dedicated line and the train-service specifications for the classic lines" and deliver all of the economic benefits set out in the economic case.[59] In response to our question about what the total cost of HS2 and all complementary projects would be, Lord Deighton said that:

46. Rt Hon. Cheryl Gillan MP, Member of Parliament for Chesham and Amersham, told us that "the cost of regional economic and transport spending necessary to realise the wider benefits should also be included in the BCR [benefit-cost ratio] but it is not."[61] Councillor Martin Tett, Leader of Buckinghamshire County Council and speaking on behalf of the 51M Alliance, said that "If you just substitute for 'realising the benefits', 'additional costs because of', then you actually have the reality behind it."[62]

47. Other witnesses noted that these additional projects brought their own benefits which were not included within the cost-benefit analysis of HS2. Jim Steer of transport consultancy Steer Davis Gleave said that "all of this will also bring its own benefits … You need a really efficient, bigger-capacity transport system, which is what HS2 provides, and you need these other things too; they create joint benefits."[63] Professor Roger Vickerman, Professor of European Economics, University of Kent, acknowledged that defining how to classify the costs and benefits of these related projects was problematic: "how much of that is part of the cost of the project and how much is the benefits?"[64]

The effect of speed on the cost

48. HS2 will be built to accommodate trains travelling at a maximum speed of 400 kilometres per hour (250 mph), although it is initially expected that trains will only run at a maximum of 360 kph (225 mph) on the line. This compares to a maximum speed of 300 kph (185 mph) on HS1.[65] Tables 3 and 4 shows the maximum speed of high speed trains in the UK and other countries.

Table 3: Maximum speed of high speed trains in UK

	HS1 (Channel Tunnel to Fawkham Junction)	HS1 (Ebbsfleet to St Pancras)	HS2 (planned)
Speed (kph)	300	225	400[66]

Source: Letter from David Prout to the Chairman, 7 January 2015

Table 4: Maximum speed of high speed trains in selected countries (kilometres per hour)

	China	France	Germany	Italy	Spain	Japan	US
In operation	350[67]	320	300	300	300	320	240 (300)[68]

Source: UIC High Speed Department, High Speed Lines in the World (September 2014): http://www.uic.org/IMG/pdf/20140901_high_speed_lines_in_the_world.pdf

49. Several witnesses argued that the proposed ultra-high speed of HS2 added a great deal to the cost. Stop HS2 said in written evidence that the "unjustified design speed … reduces both connectivity and capacity, and removes the possibility to run heavy freight on the new line. It also means the line has to be straighter than a conventional railway, increasing the effect on communities, woodlands and habitats." It continued "a conventional speed railway would mean lower cost to build and run, greater connectivity, more freight paths, greater versatility."[69] Witnesses also suggested that a lower speed would allow for a different route configuration. This is explored in further detail in Chapter 5.

50. Other witnesses argued that the line should be built with the flexibility to take advantage of future advances in technology. Mr Steer described it as a "bit of a non-issue" and asked "Why would you not build in a bit of flexibility for uplift in technologies?"[70] Bridget Rosewell of Volterra Consultants agreed that if the line was not built to accommodate higher speeds to provide the flexibility if required "technology regret is where you might end up. The East Coast Main Line electrification was done about 30 years ago and it was done on the cheap, and as a result we are regretting it."[71]

51. Mr Prout told us that "the additional cost of designing to a 400 kilometres per hour capacity as opposed to conventional railway is roughly 9 per cent." He did not accept that designing for a lower speed might allow a different, lower cost route:

52. Sir David Higgins explained to us that considerable work had been undertaken to ensure that design changes were made when accommodating a lower maximum speed would lead to savings:

53. Sir David Higgins did not agree that substantial further savings could be made by reducing the maximum design speed: "I have heard all the stories that we can save a huge amount of money—9 per cent of the whole project cost—by cutting the speed down by 50 kilometres an hour. The answer is that I do not believe that; I do not believe you can save that money."[74]

54. The Government should review opportunities to reduce the cost of constructing HS2 through a change in the design of the scheme to one with a lower maximum speed—such as that used on continental railways—and publish the results of this exercise. This should include an assessment of the effect a lower speed would have on journey times, which is likely to be small.

Cost of disruption

55. Witnesses suggested that the cost of constructing HS2 did not include the cost of disruption caused by the building of HS2. This could include the disruption to passengers from stations under development, delays to road users because of the major construction work required, and connecting HS2 to the existing network.

56. Joe Rukin of Stop HS2 said that "HS2 Ltd completely ignores the disruption that HS2 will cause, even on the railways".[75] He said that HS2 would cause "massive disruption for everywhere that has trains coming into Euston" and at locations where the HS2 track would cross the West Coast Main Line.[76] Professor Henry Overman, Professor of Economic Geography, London School of Economics, argued that the monetary cost of disruption through building HS2 should have taken into account.[77]

57. Paul Plummer, Group Strategy Director, Rail Delivery Group and Network Rail, wrote to the Chairman explaining how disruption had been calculated for the strategic alternatives to HS2:

"The investigation of Strategic Alternatives conducted by Network Rail in 2013 included an allowance for disruption averaging 10% of the cost of each scheme. This was an estimate based on potential payments that might be incurred under Schedule 4 of the track access contracts between Network Rail and train operators. This sets out the compensation arrangements for both fare revenue losses and costs such as those associated with running replacement buses."

58. He noted, however, that this method of calculating the costs disruption was based on experience of projects lasting "weeks or months rather than the years required for the construction of schemes required to deliver the strategic alternatives." He said that the damage to the rail brand caused by years of weekend closures was not easily assessed and the calculations did not take account of the economic effect of the disruption felt by cities on affected routes.[78]

59. When asked about the cost of disruption for HS2, the Secretary of State told us that "There will be some disruption in certain areas while HS2 is being built, certainly, but nowhere in the lines of the amount of disruption would that be required for an upgrading of the West Coast."[79]

60. The Secretary of State clarified in a letter to the Chairman that "HS2 cost estimates include an allowance for disruption". He explained that the detailed information required to apply the method of assessing disruption used by the Office of Rail Regulation was not held at the time of writing the business case: "Instead we have adopted an approach which approximates the ORR methodology, recognising interactions between construction of the infrastructure and the existing rail network."[80] He noted that a qualitative assessment of disruption was included in the Strategic Case. This is considered in Chapter 5.

61. The Government should make clear the full cost of disruption as a result of HS2 by publishing the expected costs of disruption from building HS2 separate from the overall construction cost, and the monetary value of disruption to rail passengers and road users caused by the construction.

Expected net cost of HS2 to the Government

62. We asked the Government for its prediction of the net cost of HS2 taking account of total capital and operating costs and deducting revenue. Lord Deighton wrote to the Chairman providing details of the expected present value of the cost of HS2 over 60 years:[81]

Table 5: Expected net cost of HS2 (£ billion over 60 year period)

Capital cost	Operating costs	Revenue income	Net cost to Government
£40.5	£22.1	£31.1	£31.5

Source: Letter from Lord Deighton to the Chairman, 5 December 2015

63. Lord Deighton also explained that HS2 was expected to generate an additional premium to the taxpayer of around £0.3 billion a year: "This comprises an operating surplus for HS2 services of around £2.8 billion and an additional subsidy of classic services of around £2.5 billion (owing to classic customers moving over to HS2)."[82]

64. We asked the Secretary of State and Lord Deighton whether the £0.3 billion annual premium could be considered as contributing towards the paying off of the £31.5 billion net cost of HS2. Mr Prout wrote to the Chairman following our evidence session and explained that the two figures were not directly comparable because the revenues which contribute to the net cost calculation "are significantly discounted compared to the construction costs incurred earlier in the appraisal period."[83] The prediction of a £0.3 billion operating annual premium therefore does not take account of repaying the capital cost of building HS2.

WHO WILL PAY FOR HS2?

65. The Government has committed to reducing the dependence of the rail network on public subsidy. The 2012 command paper, Reforming our Railways, said that: "We must also help to reduce the demand on taxpayer subsidy, ensuring that the railways are financially sustainable in the longer term and can contribute towards the country's economic growth and environmental goals."[84]

66. The Office of Rail Regulation report, 2013-14 Annual Statistical Release: Rail Finance, described how "Government support to the rail industry increased in 2013-14 for the third year in succession but remains lower than the highest level of Government support which was during 2006-07."[85] The total level of Government support for the rail industry in 2013/14 was £5.3 billion. The highest level of support was £6.3 billion in 2006/07.[86]

67. The net cost of HS2 to the Government will be met by the taxpayer, but business travellers are forecast to derive the most benefit from the project (70 per cent of the net transport benefits—see Chapter 8). Some witnesses suggested those who benefitted from HS2 should pay for the cost of its construction. Stephen Plowden, a private individual, said that "Business or other travellers who valued the time they would save by switching from conventional rail to HS2 should also pay for it themselves."[87] Aberdeen and Grampian Chambers of Commerce noted that "some regions will see greater economic benefits from HS2 than others. Nevertheless, tax revenues from businesses in Aberdeen and Grampian will disproportionately help pay for the project."[88]

68. Ticket pricing would be one way in which the cost of HS2 could be shifted to the users, by charging premium prices to recoup costs. We consider in Chapter 3 the Government's assumption that fares on HS2 should be in line with fares on the rest of the network.

69. The Government should explain how the £31.5 billion net cost to the taxpayer of building and running HS2 can be reconciled with their objective of making rail less dependent on public subsidy.

70. The Government should consider the fairness of the large taxpayer subsidy required to fund the construction of HS2 as many taxpayers will derive no benefit from the project. The Government should look for opportunities to reduce the burden on the taxpayer, including by charging higher prices so those that receive the benefits of HS2 pay for more of the cost of its construction.

Chapter 2: Conclusions and recommendations

71. The Government should make clear whether the absolute limit for the construction of HS2 will increase in line with inflation. (Paragraph 24)

72. The Government should estimate the overall reduction of cost to HS2 of terminating the line at Old Oak Common (in the London Borough of Hammersmith and Fulham), including any necessary redesign of the station at Old Oak Common to make this possible, and calculate the effect on the cost benefit analysis. (Paragraph 31)

73. The expected cost of construction per mile of HS2 is up to nine times higher than the cost of constructing high speed lines in France. This is too high. Were HS2 proceeded with, we welcome the Government's and Sir David Higgins' commitment to learning from international examples to reduce this cost. (Paragraph 37)

74. We are concerned to learn that the UK construction industry does not have the capability to deliver a project of the scale of HS2. A national transport strategy that envisages steady investment in the UK's transport infrastructure, whatever the project, may help the UK develop a construction industry capable of delivering large infrastructure projects and competing internationally. (Paragraph 42)

75. The Government should review opportunities to reduce the cost of constructing HS2 through a change in the design of the scheme to one with a lower maximum speed—such as that used on continental railways—and publish the results of this exercise. This should include an assessment of the effect a lower speed would have on journey times, which is likely to be small. (Paragraph 54)

76. The Government should make clear the full cost of disruption as a result of HS2 by publishing the expected costs of disruption from building HS2 separate from the overall construction cost, and the monetary value of disruption to rail passengers and road users caused by the construction. (Paragraph 61)

77. The Government should explain how the £31.5 billion net cost to the taxpayer of building and running HS2 can be reconciled with their objective of making rail less dependent on public subsidy. (Paragraph 69)

78. The Government should consider the fairness of the large taxpayer subsidy required to fund the construction of HS2 as many taxpayers will derive no benefit from the project. The Government should look for opportunities to reduce the burden on the taxpayer, including by charging higher prices so those that receive the benefits of HS2 pay for more of the cost of its construction. (Paragraph 70)

28 Strategic Case, p 139 Back

29 Contingency for Phase One and Phase Two is measured at a 'P95' level of certainty. This is the additional contingency required to give a 95% degree of confidence that the project can be delivered at that cost with no change in scope. Back

30 Q231 Back

31 Q64 Back

32 Letter from Secretary of State to the Chairman, 12 February 2015 Back

33 Department for Business, Innovation and Skills, Quarterly Construction Price and Cost Indices: January to March 2014, June 2014: https://www.gov.uk/government/statistics/bis-quarterly-construction-price-and-cost-indices-january-to-march-2014 [accessed February 2015] Back

34 Q117 Back

35 Sir David was Chief Executive of the Olympic Delivery Authority from 2005 to 2010. Back

36 Q236 Back

37 Q42 Back

38 Q91 Back

39 Q231 Back