It is one of the oddities of the way that the political system works that the amount of effort which goes into assessing major schemes before they are built is never matched by attempts to ascertain their impact after completion. There’s a good reason for that. If the scheme has been a disaster, or at least not performing as well as expected, then it’s best to leave sleeping dogs lie since there is no political mileage to be gained from waking them. On the other hand, if it has been a success, then it was probably down to the other lot, or even some hated predecessor on the same side, and therefore again not worth mentioning.
So the report by the National Audit Office, The Completion and Sale of High Speed 1, is to be welcomed as a worthy attempt to assess the benefits of a major project some five years after its completion. While it provides a lot of ammunition to the opponents of HS2 and no solace for its supporters, it also highlights inadequacies in the methodology surrounding such projects.
Let’s first debunk a myth that has always annoyed me as it has been widely reported but I have always argued that it is quite simply untrue. The promoters of HS1 always say proudly that the line was completed on time and on budget. Well, it depends what ‘time’ and what ‘budget’ they are talking about. The first scheme to build the line drawn up in the mid 1990s was based on a Private Finance Initiative with, supposedly, little direct government funding – apart from various help in kind such as the provision of the trainsets. The scheme was supposed to be paid for by the profits from Eurostar services, and therefore was based on fantastically optimistic projections of usage. The forecast by the successful bidder – a consortium of nine companies including Bechtel, Warburg’s, Virgin and National Express suggested there would be 29 million passengers annually by now, compared with the actual performance of 9.7 million in 2011.
Consequently, by late 1997 it was apparent that the scheme was not viable (as I predicted at the time in a Rail column a couple of weeks before it collapsed) and the consortium brought out the begging bowl, asking for more subsidy. Ministers refused to bail it out, and instead, after much negotiation, a revised scheme was thrashed out in 1998, with the government providing the backing for the borrowing needed to complete the scheme. Even then, the budget was not adhered to. The NAO report shows that the original estimated cost after the renegotiation of £5.2bn was exceeded by 18 per cent in the final bill of £6.2bn. The project has, in fact, according to the NAO cost taxpayers more than £10bn (at 2010 prices) if financing costs and the various other types of support to the original bidder is included.
The project was completed in November 2007 which was effectively almost a year late though, confusingly, ‘within target’ according to the NAO. So much for on time and on budget. And even the revised passenger forecasts under the 1998 deal were for current numbers to be 14.3 million, almost 50 per cent more than achieved. Moreover, the attempt to keep the debt off the public books through PFI failed and effectively the scheme remains in government hands, although the line has been sold on a 20 year concession for just over £2bn. To allow this, the access charge regime has been revised to encourage more usage, but it remains currently at just 55 per cent capacity at peak times. The Department still has a 40 per cent stake in Eurostar which is now a standalone company but it remains unclear whether it can pay for itself in the long term without further support especially as it will soon face competition from other high speed services, Deutsche Bahn initially and possibly other players. Therefore virtually all the attempts to privatise both the project and the operations have proved unworkable. As ever, railways need subsidy and long term financial support.
Moreover, it is clear that the whole project was based on shaky foundations. The NAO concludes: ‘The project highlights the difficulties in basing a business case and financing for a project on demand forecasts where there is only a limited track record on which to base estimates.’ In terms of time savings, the main basis for the assessment of these projects, it is therefore clear that the project will never achieve its target benefit cost ratio of 1.5. The NAO reckons, too, that the Department will struggle to find enough in terms of wider economic and transport benefits to reach that figure. Moreover, the report questions the very basis of these time savings: ‘The estimate for business passengers is based on a simplifying assumption, that all time savings result in additional productive time or reduced costs to employers.’ Rather cheekily, too, the Treasury now counts all the time savings obtained by foreign passengers in the calculation, a measure of its desperation to boost the benefit figure. I mean, why on earth should time savings by a group of American tourists on a world tour count towards the UK economy?
Not surprisingly, the NAO report has been used by those opposing HS2 to press their case. Steve Baker, the skydiving Tory MP for High Wycombe, suggests that the Department’s claim that their forecasting methods have improved since the 1990s is unrealistic: ‘I doubt the Department’s forecasting ability has improved to the extent that it can predict similarly innovative solutions that will emerge from the markets of the future. If that was possible, the Soviet Union’s economy would have left the free world standing. Somehow, it didn’t work out like that. Nor will it with HS2.’
There have been numerous similar comments from HS2 opponents. They are right to highlight the inadequacies of the way the scheme was assessed and the forecasting used to justify it, but that does not necessarily prove their case is right. My own scepticism about HS2 nevertheless remains. I feel it, too, is based on overoptimistic forecasting and I do not perceive the same regeneration benefits as HS1. The NAO report does indeed highlight the flaws in the whole business case methodology which desperately needs replacing with a more qualitative and strategic system.
However, despite the finding of the NAO that HS1 did not deliver ‘value for money’, the extremely dodgy forecasting and the fact that much of Kent’s suburban services were reorganised simply to give HS1 a domestic purpose and stack up the ‘benefits’ I am convinced it was right to build it. To many readers that may seem a contradiction. However, whatever the bean counters may say, the line has delivered many positives. Providing fast and reliable services to Paris and Brussels has been a terrific boon, and the Kent domestic services have helped to regenerate parts of the country, though Ebbsfleet remains a huge unused car park, at least for the moment. There is no doubt that continuing to run Eurostar services that took an hour to get to the tunnel would have resulted in many people continuing to use airlines. Moreover without HS1 we would not have got the Olympics, love them or hate them, and nor would the fantastic regeneration of the King’s Cross area with the new St Pancras at its heart have happened. So in that typical British muddled way, we got to the right answer by luck rather than design.
The usual suspects in for franchises
The Department for Transport made a rather silly attempt to suggest there was wider interest in the franchising process than the short lists for the latest three – Essex Thameside (the old London, Tilbury & Southend), Thameslink and Great Western – suggest. The press release claims that 13 companies are bidding but while that is technically true, it is misleading. The big owning groups create individual subsidiaries to bid and, in fact, there are just 7 players involved once duplication is taken out: FirstGroup (three), MTR, Stagecoach, National Express and NS (Dutch Railways) (two each) and Arriva/DB and Govia. Moreover, shortlists always contain four or five bidders, so there is no surprise that there are 13 for three franchises.
I have already argued in this column that the next round of franchises includes some where the unknowns are so great that it will be very difficult for companies to calculate their bids with any degree of certainty. This is particularly true of Great Western, which will undergo part electrification and the effects of Crossrail during the franchise, and Thameslink, which will take over much of the old Southern Railway network. I have discussed this with several railway managers with extensive experience of the bidding process who are unanimous in saying that some of the risks are almost impossible to quantify. It is therefore, hardly surprising, that the process is increasingly dominated by companies which are backed by state owned railways.
However, this paucity of new entrants is partly the result of the Department’s own policy. It now requires franchise bidders to have a proven track record – even if, in the case of National Express it’s a pretty chequered one in terms of throwing in the towel on East Coast – and therefore it is impossible for new entrants to get a toehold. That seems to negate one of the key original aims of franchising,