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.

  • Christian,

    I find your position on the business case very convincing.  The problem seems to me that the politicial consensus for HS2 is built on an unlikely coalition of two very contrasting interest groups.  Firstly big business – whom £32bn of our money will largely benefit (rather like many years worth of RBS bonuses), but secondly the citizens and politicians of the big cities of the north and midlands, who feel that London has had all the investment for years and now it is their turn.  I wrote about this issue in the latest post on my own blog, which also gives you a plug, and which you can read here.

    Any of us from the south who argue against HS2 can easily be caricatured as simply opposing investment which doesn’t benefit us.   My interest in the project started when I walked the whole route last July (of which there is plenty more on my blog and on a separate blog I wrote at the time called “HS2 the slow way” http://hs2theslowway.blogspot.com if you’re interested),  and I admit that my scepticism was fuelled by the environmental impacts that I saw it would bring.  However it does seem to me that any proposed alternative to HS2 has to involve £32 bn worth of alternative infrastructure spending in the regions if it isn’t simply to be characterised as the bleating of well heeled southern nimbies.

    What do you think?  

  • Ian Raymond

    Good comment Christian, but you really, really, don’t want to quote Simon Jenkins decrying aircraft carriers; these actually tend to have far more tactical value than, oh, let’s say, Trident!!! For all the use of UAVs these days as intelligence assets, geographic projection of air power remains key in any conflict, and an aircraft carrier that supports this is invaluable. 

    Of course, that’s IF any military action is considered and if we still “need” a military force; from experience I find the concept of a ‘just war’ to be a hypocrisy – “An eye for an eye making the whole world blind”. But then, I am now an idealist…

    BTW on the topic I still support HS2… but thoroughly agree with Christian that some decidedly dodgy figures have been used to justify it.

  • Lizzylouise

    Tim please stop saying you have walked the whole route! You know you haven’t! I have however and as mentioned would be happy to redo the Lichfield stretch together. There are plenty of alternatives. The problem with HS2 is that decided on a North South new route and developed a route based on that decision without bothering to look at anything else. That is a monumental and irresponsible error by the Government economically and environmentally.

  • Rich

    “Any of us from the south who argue against HS2 can easily be caricatured as simply opposing investment which doesn’t benefit us.”

    Because sir, that is precisely what is going on. You only have to listen to the Bucks mob who constantly bleat it won’t benefit them. I can guarantee that if the government announced a new, fast commuter line to be built from Bucks into central London, any complaints about their precious “ANOB” would be non-existent. Tax-payers north of Watford Gap have seen their money endlessley pumped into transport projects in the south-east (£2,700 is spent per person in London compared with £5 per head in the north-east of England according to: http://www.bbc.co.uk/news/uk-england-16235349), and the griping about it that you are seeing from the likes of Mr Wolmar is borne out of nothing but pure selfishness. No-one in the south-east or anywhere else will be looking at their take-home pay and thinking “wow, I have more money because HS2 got cancelled”. The true benefits of a railway simply cannot be calculated (freight and death off the roads, helping us compete against European countries with HSR as a place to invest etc), and it simply is about time we had some of our hard-earned spent on a railway system which will properly link us up to Europe, just like the south-east enjoys.

    From CW’s piece: “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.”

    I love this assumption that anyone who supports HS2 is relying on guesswork – presumably anyone against it has access to cold hard facts that patching up the existing rail network will serve us equally well. For example:

    “Assuming growth will continue at a high rate is a heroic assumption.”

    I would suggest that given immigration levels and extended life-expectancy, they aren’t “heroic” at all – quite the opposite seems the more likely, and as people against the scheme are keen on demanding hard evidence, it’s about time we had an explanation from the nay-sayers on why there won’t be this sort of growth, given the population boom which is clearly going to happen.  

  • Isambard Brunel

     Rich makes a very good point, where were all the defenders of the Buckinghamsire countryside (dressed up as business case analaysists) when the Wendover, Amersham and Aston Clinton Bypasses being built?

  • Touché Lizzy.  The whole route from London to Birmingham (not including the 20 mile link to the WCML) to be pedantically precise.  Still, if the Government comes up with two routes from Birmingham to Leeds and Manchester for phase 2 which trample regardless over as much attractive countryside as Phase 1, that will at least create two more long walks worth doing.

    My suggested alternative of following a transport corridor like the M6 or M1 all the way  (for more of which see here: http://timstansfeld.planningresource.co.uk/2011/10/24/what-price-tranquillity/ ) would be a much better solution for the environment – but not provide such a nice walk unfortunately.

  • Paul Holt

    Agree that CW has missed the target quoting Simon Jenkins – completely irrelevant.   The aircraft carriers under construction are the long overdue replacements for Ark Royal (R09) and Eagle (R05).   What would help is CW’s vision for transport, covering road, rail and air.   Naysaying HS2 does not identify the way forward.

  • David Riddell

    One of my neighbours moved into the wendover area in the early 70s and was told the bypass was imminent. After much debate and opposition it opened in 1998. Not sure about the other 2.

  • Mike Powell

    Forgive my branching – pun intended – into the issue of the Government investment in the rail line to the East Midlands but I feel I have to get it off my chest. My point relates to the benefits of upgrading existing rail provisions versus a high-speed line. Christian, in his latest book, refers to 100 trips each way from Birmingham to London under existing arrangements. To this the government is talking of adding 180 on HS2. What are the total number of trips anticipated when both provisions are up and running? I think the point about business people working on trains, now that laptops and mobiles are available, is a telling one as they are unlikely to gawp out of the window was travelling and then start working upon their arrival/return, unless tied up in meetings. To turn to the East Midlands, however. My friend recently had the pleasure of standing on a packed train from St Pancras to Leicester, having bought a £140 return ticket. Instead of the massive expense and prolonged disruption of electrification, would not a small capital/revenue subsidy by the government, to provide a few more improved diesel trains better meet the needs of the travelling public? Short-termist, perhaps, but far more customer orientated.