HS2 case rests on flimsy foundations

The plan to build a high speed rail network across Britain is the largest ever single infrastructure project this country has ever seen. In cost terms, at £32.7bn, it dwarfs predecessors such as the Channel Tunnel or the Olympics and is on the scale of, say, the Pyramids or the Panama Canal. While it is, therefore, hardly surprising that the project generates considerable controversy, it is astonishing that the basis of the project is based on flimsy foundations.

When the idea of a High Speed Line running up the spine of the country was first put forward, it was promoted by politicians on the basis of its environmental advantages and its business case. Both arguments, however, have been found to be somewhat wanting suggesting that, despite the support of all three major political parties, the scheme’s promoters face an uphill task in persuading the public of its benefits.

Writing in The Guardian, veteran columnist Simon Jenkins, a former director of British Railways, for example, said it was the greatest waste of money since the decision to build aircraft carriers: ‘HS2 is gesture spending dressed up as growth. It is Concorde for slow learners’. Numerous other economists have debunked the scheme which the government says will earn £1 60 in economic benefits for every pound invested.

In terms of the environmental arguments, the best estimates suggest that the scheme is broadly neutral in relation to CO2 emissions. This first emerged in the original government report setting out the project and while the numbers have been adjusted marginally, the argument that there was a strong environmental case to build the line is no longer used by the scheme’s promoters.

Therefore everything rests on the business case and here the arguments are far more complex. The methodology for transport projects which has been developed over the years is based on the notion of calculating a ratio between the benefits and costs of a scheme. This is done by discounting both sides to obtain a Net Present Value to make them comparable and currently, for the London – Birmingham HS line, the benefit cost ratio is 1.6.

The cost side is fairly straightforward, though clearly the projected expenditure is an estimate since no contracts have been prepared, let alone let. By and large the figure has remained broadly at just under £17bn for the first 103 mile section between London & Birmingham and a similar amount for the Y shaped section to Leeds and Manchester whose route has not yet been determined, giving a total of £32.7bn in today’s money. This figure includes a 40 per cent uprating due to what the Treasury calls ‘optimum bias’ – which would be better termed as ‘pessimism bias – based on the experience, backed by research by the megaproject expert Bent Flyvjberg, that previous big projects have generally overshot original estimates by around that percentage.

It is the benefit side that is the subject of most controversy. This is made up of two main components. First, there are the fares expected to be collected from passengers on the train services. This obviously requires numerous assumptions to be made about the number of trains operated, the share of the market that will be gained, the numbers transferring over from ‘classic’ trains services and so on. While all these are subject to interpretation, one particular assumption has attracted criticism from within the industry, the notion that the capacity of the line would be 18 trains per hour in each direction. In fact, no high speed service in the world operates any more than 14 trains per hour and therefore the assumption seems highly optimistic. In the British case the difficulty of running such an intensive service is compounded by the fact that many trains would be coming from and going to destinations not on the high speed network where they would be much more likely to suffer the type of delay with which all train passengers are familiar. If technically 18 trains per hour is not possible, then the line would not be able to take as many passengers and consequently its benefits would be lower.

Furthermore, there are two overall assumptions underlying the calculation of the benefits. First, the growth rate on the line is calculated at 2.4 per cent annually until  2034 and all benefits over a 60 year period after completion are included. This means, in fact, that half the calculated benefits accrue after 2066, outside the lifetime of most people reading this!

While in recent years indeed numbers have boomed on the West Coast in recent years, much of this is the result of improvements to the line and consequently to train frequencies in the relatively new Pendolinos. Overall, the railways have experienced a rise in passengers numbers of two thirds since privatisation in the mid 1990s, but historically this still represents a high figure over such a sustained period of time. Assuming growth will continue at a high rate is a heroic assumption. Moreover, whereas normal Department for Transport practice in assessing schemes would be to assume this growth rate for a maximum of 15 years, an exception has been made and it is now calculated to continue till 2037 – when thereafter growth is forecast to tail off.

Given all these assumption, fares are estimated, discounted back to Net Present Value, at just under £14bn, but this figure is dwarfed by the other main component, called ‘user benefits’ which are estimated to be worth around £20bn. By far the greatest component of this second component is the time savings made by passengers using the line rather than other forms of transport. It is, in fact, expected that more than half the journeys would be by travellers transferring from conventional rail and more than quarter would be generated by the existence of the new line with only 16 per cent transferring from other modes, equally divided between air and car, a strange assumption given that there are no flights between London and Birmingham.

These user benefits are calculated separately for business travellers – whose time is calculated at a generous £39.19 per hour  – and leisure travellers – valued at £6 52 per hour, which is normally used to value commuters’ time. Therefore of the £20bn benefits, £12.8bn accrue to business travellers. Apart from the rather embarrassing implication – embarrassing for politicians trying to sell the project as a railway for everyone – that most of the benefit will accrue to people who are earning £81,000 per year, these figures are undermined by the fact that many people now work on the train and therefore their time savings could be viewed as almost valueless. While that would be extreme, he importance of the assumption about the value of business travel is shown by the fact that, according to the RAC Foundation Review of the case for HS2, valuing business travel at the lower – commuter – figure would cut the benefit cost ratio from its present 1.6 to 1.2, making it too low for the scheme to proceed.

Despite the vagaries of the methodology, the scheme’s very design seems to depend on keeping the BCR high. For example, the decision to design the line to a speed of 250mph (400kph) rather than the 186mph (300kph) of the most Continental lines. This is surprising given distances are shorter in the UK and the decision will mean higher costs and greater environmental degradation as a slower speed would enable higher gradients and more gentle curves. However, because time savings determine such a high proportion of the user benefits, reducing the line speed would lead to a cut in ‘user benefits’ and therefore much to the surprise of many rail industry insiders, the government is sticking to the higher speed for the design of the line.

When various other less important factors such as environmental degradation and operating costs are taken into consideration the current BCR for the London to Birmingham line to obtain the 1.6 figure, which is just on the border between poor and medium on the Department’s scale. The volatility of this figure is demonstrated by the fact that when the last detailed appraisal was made last year, the BCR was 2 and in 2009 it was calculated at 2.4, but changes since then, notably the current economic situation and various changes in methodology has lowered the figure.

Normally a BCR as low as 1.6 would preclude the department from going ahead with the scheme as a BCR of 2.0 is normally considered a minimum for major projects. However, the above calculations relate only to the first section, London to Birmingham, whereas BCR for the full Y shaped network is higher at between 1.8 and 2.5, because of the high costs of building the London terminal – which has reduced the London – Birmingham  BCR and the added wider benefits of linking major cities such as Leeds, Sheffield and Manchester. However, no detailed design work has been carried out north of Birmingham and therefore the costs and benefits of this section are subject to even greater variation than the first section.

The sensitivity and constant readjustment downwards of the final BCR figure lays bare the extent to which this is the application of a methodology based on theory that holds up poorly to detailed scrutiny. Ultimately, the decision whether to go ahead with the High Speed Rail scheme will be made more on the instinct of politicians, rather than reliance on this methodology which is so easy to manipulate in order to give the ‘right’ answer, both for supporters and opponents of the scheme. The Victorians who built the original railways had no idea of whether, ultimately, they were a good idea or not, and just as the promoters of today’s high speed lines are relying on guesswork to justify their confidence in the project.