High speed fail: Assessing the case for HS2

  • Despite net debt interest payment projections of over £66 billion for 2015/16, the Coalition government seems determined to proceed with the c£17 billion 360 km/h (225 mph) High Speed Two (HS2) project that aims to build, as Phase 1, a new London to West Midlands railway line. Phase 2 plans to expand the new high-speed line - via a Y configuration - to terminals near Manchester and Leeds, at an additional cost of over £15 billion. In the long term, high-speed rail connections to Scotland are planned.
  • This report analyses HS2 and raises many questions about the project, whose Phase 1 is due to be operational by 2026. The eventual cost – assuming one high-speed rail link to Scotland – would exceed £50 billion. At an estimated £130 million per mile, Phase 1 of this project, according to the Financial Times, would cost over four times more than the average EU highspeed line. • HS2, the project’s promoters, is forecasting a sharp increase in passenger numbers on the West Coast Main LineWCML – from c45,000 passengers per day in 2008 to a projected c136,000 by 2043. Significantly, the promoters of London and Continental Railways (LCR) in the 1990s proved to be very optimistic – actual passenger take-up has been around a third of expectations.
  • There will be real concern, too, about costs and likely overruns – with the WCML upgrade fiasco providing an alarming precedent. Of the projected Phase 1 cost of c£17 billion, the two largest components are tunnels and stations – accounting for just 10% of the length – and stations, especially the Euston terminal where extensive construction work will be necessary.
  • Within the c£17 billion Phase 1 project cost figure, there are very material provisions for overruns, including the Treasury’s £4.2 billion optimism premium. However, as the Department for Transport (DfT) makes further concessions about HS2’s route, the base cost will rise further. Moreover, these figures are based on Q3 2009 cost data; from mid2012, construction price inflation may well return with a vengeance.
  • In terms of the Benefit Cost Ratio (BCR), the DfT’s February 2011 projection for Phase 1 of HS2 is just 2.0x, even if Wider Economic Impacts (WEIs) are taken account; without them, the BCR falls to a marginal 1.6x. Prior to the DfT’s recent reduction in its aggressive revenue projections, the BCR’s were 2.7x and 2.4x respectively.
  • Despite the proposed pay-as-you-go funding, it is very difficult to see how HS2 could make a commercial return even if the cost of capital were at a modest premium to the current 2.5% yield on 10-year gilts. Perhaps, the government – given its emphasis on non-monetised benefits - is not seeking one.
  • Once operational, Phase 1 of HS2 could be privatised, in line with the pay-as-you-go funding proposal. However, HS1 – which avoided pronounced budgetary overruns – cost c£5.7 billion to build but yielded just £2.1 billion when a 30-year franchise, which is underpinned by favourable access charge payments, was sold last November.
  • Overseas experience of high-speed rail projects has some relevance. Spain’s RENFE and France’s Très Grande Vitesse (TGV) projects can provide some guidance, but there are major 1 Executive Summary 6 | Adam Smith Institute differences, not least that much of central England is already heavily developed, unlike the vast plains of rural Spain. And in France, TGV’s operations remain heavily subsidised.
  • Any conclusion about HS2 has to recognise that the project, especially if it is eventually linked up to Scotland, is highly expensive; it will also crowd out other much-needed railway investment. Phase 1 itself is very susceptible to two major risks – those relating to revenue, namely demand and average farebox yields, and to construction risk. Moreover, the economic case, especially following the DfT’s recently reduced BCR projections, remains very weak and, if completed, Phase 1 may need substantial – and long-lasting - revenue funding from the DfT to cover its operating losses.