Will the HS2 railway line really offer value for money?

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Ministers say it will improve the transport network and boost the economy. Sceptics say it will saddle taxpayers with debt thanks to over-optimistic passenger forecasts and spiralling construction costs. Steven Perryman crunches the numbers of the proposed High Speed 2 (HS2) railway line

Energy firms aside, there has only been one subject dominating the corridors of Westminster this week: HS2. Initial work on the proposed railway line between London Euston and the Midlands, North West England and West Yorkshire got the initial go-ahead this week with the passing of the The High Speed Rail (Preparation) Bill in the Commons.

What is the HS2 route?

HS2 is a Y-shaped route which will be built in two phases, first between London and Birmingham, then to Manchester Piccadilly running under Crewe railway station and via Manchester Airport, and to Leeds via the East Midlands and Sheffield Meadowhall.

The Bill passed this week gives the Government the green light to spend money planning the route in detail and purchasing property from residents and businesses situated along the proposed track. Construction is then set to begin in 2017 with an indicated opening date of 2026. In January 2013, the preliminary phase 2 route was announced with a planned completion date of 2032.

The economics of HS2

In June this year the Government revised the cost of the project upwards, due to an increase in the amount of tunnelling required on the route. This took the estimated budget from £32.7bn to £42.6bn – with the cost of phase one increasing from £16bn to £22bn alone.

And just this week, the Department for Transport (DfT) announced that the benefit-cost ratio (BCR) – a widely accepted ‘value for money’ metric – has dropped from 2.5:1 to 2.3, meaning the line would now return £2.30 for every £1 spent. The revised figure is due to increases in projected costs and attributing a lower value to time savings. The figure has been calculated on the assumption that demand for rail travel will stop growing in 2036. If passenger numbers increase until 2049, the benefits would increase to £4.50 for every £1 spent.

Despite the budget increase and BCR downgrade, the DfT argues that the alternatives to building HS2 – such as trying to provide additional capacity through upgrading existing rail lines – would cost more than £20bn and require at least 14 years of weekend closures across the intercity network.

Why is the HS2 route such a headache for Labour leader Ed Miliband?

Although Gordon Brown’s Government announced it was committed to building a new high speed rail line, the party now says it is not convinced HS2 should be built, even if costs don’t rise any higher than the revised budget.

The move has upset Labour leaders in big cities in the north and Midlands, who see the line as vital to economic prosperity in their respective regions. This has led to them warning Miliband that he risks ‘protracted conflict’ in his own party unless he throws his weight behind the line. Any inter-party conflict with a General Election less than two years away is unthinkable and has left Miliband facing accusations of playing politics with the proposed railway line.

Do we actually need HS2?

According to the DfT, yes we do. It says the project will cut Birmingham-London journey times from 1hr 21min to 49min. After the second phase, Manchester-London journeys would take 1hr 8min (down from 2hr 8min), and Birmingham-Leeds 57min (from 2hr).

It also argues its creation would free up capacity on over-crowded commuter routes, and deliver an annual boost of £15bn to the economy as a result of productivity benefits. It also estimates the new line could transfer 4.5 million journeys a year from the air and nine million from the roads, removing lorries from busy routes.

Former Conservative minister, John Redwood, disagrees. ‘The forecasts for use of HS2 services are very optimistic,’ he wrote on The Spectator blog this week. ‘The forecasts assume a large proportion of the passengers on HS2 will be switchers from current West Coast Main Line services. There are simply not nearly enough current passengers to do this, so the forecast relies on an assumed surge in travel on this particular route. It is not clear why.’

How does the HS2 route compare to other large transport projects?

Redwood’s concern is understandable given the furore over the previous attempt to build a high speed rail line in the UK – the Channel Tunnel high-speed rail line (HS1).

The Public Accounts Committee (PAC) argued in a report in 2012 that taxpayers had been saddled with a £4.8bn debt from HS1 to date, and predicted that the final bill would rise to £10.2bn by 2070.

It blamed over-optimistic forecasts about the number of passengers using the service as the reason for the financial burden, pointing out that international passengers on HS1 were a third of the original 1995 forecast and two-thirds of the DfT’s 1998 forecast.

Can HS2 really offer value for money?

Given the experience of HS1, sceptics are right to be concerned. The budget has already increased by nearly £10bn, whilst the value for money estimation has been downgraded once already and construction hasn’t even begun yet.

But, assuming the passenger forecasts are correct, the budget doesn’t increase any further and the BCR remains in a state of inertia, HS2 could offer the value for money and economic boost it promises. But that scenario glosses over the political mud-throwing that has blighted the project so far.

The project’s biggest hurdle isn’t necessarily funding or its BCR, but the fact that there will be a General Election in less than two years’ time. Whether the project can make it past that without hitting the buffers altogether is another matter entirely.

Steven Perryman is AAT‘s Editorial Manager

Steven Perryman is AAT Comment's former Content Editor.

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