Greening’s dilemma over HS2

Justine Greening, the new transport secretary, faces a daunting learning curve on the complexities of the rail industry as she prepares to make decisions on a range of railway projects that involve spending hundreds of millions, and even billions, of pounds. The most difficult will be keeping the biggest rail project this country has ever seen, the construction of a high speed line between London and Birmingham on track, in the face of mounting opposition, both from outside and within the ranks of her own party.

Later this autumn, the Department of Transport is due to publish the results of the consultation process for HS2 which will be a truly momentous event since it will determine the future shape of Britain’s railways for a generation or more and a fierce debate is raging over the scheme. The line to Birmingham is planned to be merely the first part of a Y shaped high speed line network that will eventually stretch out to Manchester in the west and Leeds in the east, with connections for onward journeys on classic lines to Scotland. The cost of the first section alone is estimated to be £17bn and the total by the time the two northern towns are reached sometime in the mid 2030s will be at least double that amount. This will not only create a major new railway route linking London with the north, but result in the redrawing of much of the railway timetable as the new line will create considerable extra capacity on the West Coast Main Line and some other secondary routes. Moreover, the high level of spending on the line, expected to be around £1bn per year during construction, will reduce the amounts of investment available for other parts of the rail, and indeed the whole transport, network.

Despite the fact that this is supposedly a consultation process, there is no doubt that the coalition government will be supporting the construction of the line and the route as broadly set out in the preliminary documents. However, although building the line is a firm government policy backed by both David Cameron and George Osborne and work will not start till the end of the decade, Greening will have to prepare herself for detailed rebuttals of arguments against the massive scheme which will be the subject of a hybrid bill to be introduced in Parliament in two years’ time.

Indeed, the debate over HS2 has intensified since the consultation process ended. Despite the scale and cost of the project, so far the promoters have had a relatively easy ride. Opposition has come largely come from the expected sources such as people living along the line and elements within the Tory party who are hostile to rail. With all three main political parties backing the line, the arguments in favour have been winning the day.

All this is happening at a crucial moment for the rail industry following the damning report by Sir Roy McNulty published in the spring on the costs of the industry which found that they were 40 per cent above those of comparable railways on the Continent. Reading the report will be another huge chunk of homework for Greening who will have to try to make sense of the muddled conclusions that seemed to be a recipe for the creation of vast swathes of yet more bureaucracy for an industry already overburdened with red tape. To add to her workload, Network Rail is currently preparing its investment plans for its next five year control period – 2014/9 – and clearly the decision over HS2 will have an impact on these.

Support for the HS2 scheme is based on the need for extra rail capacity, its importance for business, rail’s environmental credentials and the line’s regenerative potential. Each one of these, however, has been challenged and now opponents, who have considerable resources available from rich supporters, are targeting the project in great detail. They have been emboldened by coverage in the press which, particularly in the Tory papers such as the Telegraph, has become more hostile in recent months. The much respected Economist has recently come out against the scheme arguing that Britain’s infrastructure demands were different from other countries: ‘Its regular trains are already faster than most other nations’ equivalents. Britain is sufficiently small that even without pricey futuristic technology, Manchester and Leeds are only just over two hours from London.’ The Economist dismissed regeneration arguments, suggesting more companies had moved to Paris since the Paris-Lyon high-speed line opened in 1981.

The justification of the scheme rests on benefit to cost ratio (BCR) in the business case but the methodology, and indeed, the very concept of these cases, is coming under increased scrutiny. ‘Business cases’ are routinely used to justify megaprojects such as HS2 but there are rising doubts about how they are being used. The term ‘business case’ is in fact a misnomer. The business case is a comparison between two figures, the estimated government subsidy required for the project which is straightforward enough, and an assessment of the benefits, which is anything but. A former consultant with one of the major firms, and who now works in the public sector told Public Finance: ‘When the Crossrail scheme was being put forward to the government, it was clear that the numbers did not stack up. So the Crossrail team simply put anything into the model that would boost the BCR’.

BCRs were originally devised in the 1960s as a way of comparing benefits between schemes. Now, however, they are being used to justify the case for building them which was not their original purpose. Philip Hammond, in one of his last moves as Transport Secretary before Greening took over, even suggested that increasing the 80 mph can be justified through its economic case when he told the Tory party conference that it would result in ‘Speeding up journey times. Improving productivity. Delivering hundreds of millions of pounds of net economic benefit. And putting Britain firmly in the global economic fast lane.’

The promoters of HS2 have struggled to demonstrate a strong enough business case. Normally, the government will only sanction schemes where the BCR is at least 2, and the score for HS2 has hovered between 2 and 2.5 depending on what factors are taken into account. The biggest component in the benefits column are the time savings made by users of the line compared with their present journeys. And this is proving the weakest point of the promoters’ case. All but £3bn of the £32.6bn assumed benefits of the scheme come from time savings made by passengers on the line. These are split between users (£17.6bn) and leisure travellers (£11.1bn). Benefits are calculated by multiplying the time savings by a rate per hour, which is higher for business rather than the, more numerous, leisure passengers.

The business case has a big hole in it. It is based on the notion that time on trains is unproductive, and therefore all the time savings from shifting from classical to high speed rail are included. However, this is clearly not the case. Most business people have mobile phones and laptops and trains are equipped with wi-fi. Given that over half the users will transfer from existing journeys on the railway, the reality of their time savings is that, effectively, they may be worthless in terms of the analysis if time on trains is spent working. And what is the value of leisure users’ time anyway? They are hardly going to be economically productive in the time they save by taking the high speed train.

These benefits are, too, predicated on hugely optimistic assumptions of growth. According to the demand model in the HS2 report, by 2033 there would be 165,000 passengers per day travelling between the London and the West Midlands, compared with 45,000 today. Of those, all but 20,000 would use the new line, implying a growth rate of 3.6 per cent per annum.  Any figures below this would seriously damage the business case. If the growth was just 2.7 per cent, for example, the BCR would be reduced to less than 1.5, well below the level at which the any government would sanction a scheme.

The case for HS2 is principally about capacity rather than speed, and therefore the opponents have focussed on demonstrating that by increasing the number of trains from Euston and improving the line, as well as lengthening them and converting some carriages from 1st to standard class, all the required forecast extra capacity could be provided. This has led to a fierce spat between opponents of the scheme and David Begg, the chairman of the Campaign for High Speed Rail who argued that the disruption caused by improving the West Coast and shortage of train paths made the idea impractical. Nevertheless, opponents are pressing this point and have set out the alternatives in a document, A better railway for Britain.

The other key weakness in the HS2 case is the fact that it cannot be put forward as a Green project. While Philip Hammond never expressed any interest in environmental arguments, Greening has lived up to her name, and has a consistent voting record on measures to reduce climate change. Finding out that the HS2 project has no solid environmental case may come as a bit of a surprise to her. Broadly the scheme is carbon neutral and even that requires an optimistic assumption about the source of electricity which is optimistic.

There is a political dimension to this complex debate. At the recent Tory party conference, while there was no dissent on the floor of the hall, there certainly was at numerous fringe meetings and in the bars and restaurants. Many delegates could not understand the party’s support for the line and will continue to fight it in private. Philip Hammond argued solidly in favour even at the risk of alienating some of his supporters. He said it was ‘a project that would transform the social and economic geography of Britain – and put desperately-needed new capacity on our railways’. Countering the opponents of the scheme, he said: ‘I know that these huge infrastructure projects provoke some strong opposition, just as the building of the original Victorian railways did….But imagine Britain without them now.’

The debate over HS2 raises doubts over the continued high level of investment programme for the existing railway. Several major investment schemes, such as Thameslink, Crossrail and major station refurbishments at Reading and Birmingham New Street were promoted by the Labour government and supported by the current Coalition. Electrification, too, which was belatedly endorsed by Labour is proceeding on the Great Western Line between Paddington and Cardiff, and in the northwest between Manchester and Liverpool.

However, there are fears HS2 will soak up all the available cash. In Network Rail’s proposals for the 2014-9 investment period published in September, no major new schemes were announced, a tacit recognition that HS2 has become the only game in town. Network Rail does want to electrify the Sheffield line, too, from St Pancras, but that would need new money from the government which is unlikely to be forthcoming. Network Rail appears to be somewhat on the defensive, as witnessed by this remark from Paul Plummer, its strategy director, who said: ‘Network Rail is making the case to government that the go ahead for the High Speed 2 line from London to Birmingham, which is treated separately to this plan, should not be a reason to lower investment in the rest of the network.’

That is why it is not only the fate of HS2 that will be at stake when the results of the consultation are published, but the whole future of the rail industry. Justine Greening, who was quietly out of the firing line in her previous job at the Treasury, will now find that she is very much in it, given the strong emotions that the railways engender.

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