In recent months, New Labour’s vacuous mantra – ‘it seems the right thing to do’ – has apparently attached itself to several key public sector projects. Instead,they need more rigorous financial analysis.
The HS2 project, currently the subject of public consultation, is an obvious case in point. It is fast becoming a lobbyists’ paradise. The DfT’s advocacy of HS2 is built around its weak argument that ‘it is these non-monetised benefits which underpin the strategic case for high-speed rail’.
Of course, by 2032/33, Phase 2 of HS2 may have made a contribution to closing the widening North/South gap, but at very considerable cost – of a minimum £30 billion and probably far more.
Revealingly, Transport Secretary of State, Philip Hammond, confirmed last week-end that HS2’s financing was likely to be based on a pay-as-you-go principle. Instead of the much criticised PFI model, Phase 2 of HS2 would be – in part – financed by leasing off Phase 1 shortly after it was completed.
Given that HS1 – the Channel Tunnel Rail Link – was sold on a 30-year lease at a discount of over 60%, major financial shortfalls seem likely, especially if significant operating losses are sustained.
Cost/time overruns would also adversely impact this model.which can hardly be described as robust.
Another controversial transport project, the Edinburgh tram system, is facing continuing problems, despite this week’s decision by Councillors to endorse the Airport-St Andrew’s Square route. The project’s cost is now estimated at over £770 million, with over £200 million of the funding currently unaccounted for.
Given the efficient Lothian Bus service, few expect Edinburgh’s tram network to make a material profit. In reality, Edinburgh’s bus fares may be raised to finance the interest on the additonal cost of constructing the City’s tram network.
With the statue of Adam Smith looking down from the Royal Mile, it is revealing – and rather worrying – how the sound principles of financing public sector projects continue to be eroded.