David Mowat MP
Is there a Business Case?
1) Introduction-What Problem are we Trying to Solve?
Before spending over £30 billion on a railway line it is right that any proposal is subject to rigorous scrutiny. It is right that the business case and cost estimates are challenged and evaluated. But the first question must surely be what is the point? What problem are we trying to solve?
But before examining that issue let me state clearly three reasons which should NOT be used to justify the project.
a) The fact that France, Germany , Span and Italy are all investing in this type of infrastructure at an accelerating rate (for example Germany currently has a high speed network 10 times the size of the UK). It is feasible that we are right and they are wrong, certainly “keeping up with the Jones’” is not, in itself, a good argument.
b) The published business case is considerably superior to that of Crossrail (or indeed the Jublilee Line Extension), the scheme which links Heathrow to the City and whose construction we have latterly accelerated. After all, just because we have invested £16 billion in one scheme is no reason to invest a further £32 billion on another.
c) The fact that the UK has a capital city which has nearly double the economic activity per head (GVA) of the regional economies, where the majority of us still live. Such a disparity exists in no other OECD economy and it should be a clear policy objective to address the gap. That said, building a railway line is not the only way to deal with this issue and it is certainly not a justification for spending £32 billion.
We should only go ahead if we are satisfied that the project has a solid business case in its own right and, furthermore, that it will deliver strategic benefits and prosperity which would not be easily accessible through other schemes. This article aims to identify the real drivers of the project and considers the validity of some of the arguments which are routinely used against it
2) The Drivers of the Decision
Over 30 million people live in and North of Birmingham’s hinterland. Increasingly they travel and need access to London and, as importantly, Paris and Brussels. The existing West Coast mainline was a piece of brilliant Victorian engineering and the recent upgrades have improved the service immeasurably, but it is close to full capacity. Even now it is not unusual to have to stand on services between London and Manchester and passenger growth remains uncompromising. In the short term, increased capacity could be delivered by train and platform lengthening, but these changes are only incremental. Over the last decade, growth in inter-city rail usage has grown at an accelerating rate. Going forwards, even if the current rate of increase were to halve, that would still swamp both the East and West Coast mainlines by 2025. If not fixed now, we would have to return to this issue in less than a decade. If capacity is not increased, growth and prosperity will be choked off.
Similar arguments apply to freight: one of the benefits of the new line is that it will be possible to transfer more freight movements to the old line, helping us get more lorries off the roads with all the additional benefits which that would entail.
b) Base Business Case
In broad terms the Dept of Transport will not authorise a project unless the benefits are about double the cost estimates. The measure which is used for this is called a benefit/cost ratio (BCR).
Current Estimated Benefit Cost Ratio (BCR)
HS2 London to Birmingham 2.6
HS2 London to Manchester and Leeds 3.1
Source Dept of Transport: HS2 Updated Business Case
It is true that the majority of costs are tangible in terms of construction cash outlays while the benefits are mainly time savings which accrue to business users, but that is true of all major transportation schemes. It is also true that this base business case takes no account of wider economic benefits which will occur due to the economic impact of lower journey times and which are considered in more detail below.
The principal driver of these BCR figures are the demand forecasts of passenger numbers. The Dept of Transport has assumed demand growth of only 2% per year, much lower than the historical norm, of over 5%, and furthermore have assumed even that growth is going to stop in 2026. But their conservatism does not stop there:tThe life of the scheme is estimated at only 60 years, which means that benefits after that point are not included at all. Given that the West Coast mainline is nearly 150 years old, assumptions such as that imply that if the business case is wrong, it is because the benefits are under-, not overstated.
c) Wider Business Case
The base business case considered only the benefits which would accrue from the travel time savings and are therefore quite narrow. The strategic business case factors in wider issues such as the benefits to productivity and general economic activity which will accrue due to closer links to London, Paris and Brussels. Naturally such benefits are more speculative than those estimated in the narrower case which is used to justify the project, but considerable work has been done by parties as diverse as the local chambers of commerce and KPMG.
The West Midlands, Yorkshire and North West Chambers of Commerce estimate total benefits of £28 billion, while KPMG believe that around 50,000 new jobs will be created by the new line.
Wider Economic Benefits as Estimated by Regional Chambers of Commerce (Nov 2009).
West Midlands £6bn
East Midlands £2bn
Yorshire and Humber £6bn
North West £10 bn
North East £2bn
The economic theory which underpins these estimates is driven by the ability of businesses to specialise and aggregate activity combined with the increasing productivity and access to different markets. In the case of Manchester, Liverpool and Leeds many of these benefits will not accrue until 2032 and they are clearly therefore somewhat speculative. That does not mean they are not real. We have seen that high speed rail delivered regional benefits in Germany (Frankfurt), Japan (Osaka) and France (Lille) at least on a scale with these projections.
d) The North South Divide
In the last year of the last Government the difference in economic activity per head between London and the English regions reached an almost incredible 100%. In no other country in the world does such a stark and unacceptable contrast exist. Much has recently been written about London being a country within a country. Part of the solution to this is a better balance of infrastructure spend between the capital and the regions. A recent IPPR report stated that the average proposed spend per head over the next three years is planned to be £1800 in London versus £160 in the North West and £60 in the North East. Clearly this is not acceptable and HS2 will go some way towards reversing these priorities.
Planned Infrastructure Spend per Head 20012-2014
North East £60
North West £160
Soiuth East £280
West Midlands £160
Source IPPR (January 2012)
e) The Environment
There are two potential environmental advantages. A modal shift from air and road to rail will assist by replacing fuel oil products with electrical energy which can be sourced from either nuclear or renewables.
Additionally, linking Birmingham and Manchester airports to Heathrow by fast rail will go some way towards addressing the capacity constraints caused by a lack of a third runway at Heathrow.
f) Linkage to Scotland
None of the business cases produced to date factor in the potential continuation of the line North to Edinburgh, Glasgow or both. Yet it is certain that in time this would happen linking Scotland to the rest of the UK. It is worth noting that such an extension would almost certainly increase the business case as, in general, the further North the construction the better the benefit cost ratio(BCR).
3) So what are the Issues? Why is the scheme so contentious?
So what are the principal arguments against the scheme? First and foremost there is a concern that the track will traverse some of the most beautiful parts of the country. In particular, the Chilterns and parts of Warwickshire. As the future route is announced there will be similar issues in Staffordshire and Cheshire. It is important that the issues raised by this are addressed seriously and that the route is as sympathetic as possible. It is also right that where necessary adequate and reasonable compensation is paid. But in the end this is a project of national significance with a robust business case, it is not reasonable that it does not go ahead because of the impact of the route on a small, but vociferous minority.
Another argument is that the country simply cannot afford the cash outflow at this time of austerity. The facts are that the annual cost – of around £2billion a year – only begins as Crossrail (which has similar annual costs) begins to wind down. It is also right that, as we emerge, painfully slowly, from recession, large capital programmes such as HS2 and Crossrail provide a platform for much needed capital expenditure.
The next argument is that the business case is optimistic. In particular, that the growth forecasts are aggressive. But the truth is that if anything, they are conservative. It is assumed that growth over the next decade will be half of what it has been and that it will stop altogether in 2025. The reality is that HS2 is just the start of what our country will eventually need in terms of infrastructure.
Various other criticisms are levelled at the business case: recently the whole concept of productivity loss due to travel has been challenged because “these days we can access ipads and computers” while travelling. There is some truth in this but the reality is that given the capacity constraints of the existing line, many of us will soon be standing anyway. Indeed, if the Dept of Transport were to include this in the analysis the business case would increase due to the productivity loss of so many passengers standing in the absence of capacity improvements.
Finally, and most incredibly the impact on the North and Midlands is challenged. Apparently, better links to London, Paris and Brussels will hasten the decline of these regions as economic activity will be sucked South. This is tantamount to saying that, the M6 and existing rail links should be closed as they reduce not increase economic activity. Clearly, arguments such as these are increasingly desperate and need to be robustly rebutted.
4) Next Steps
It is important that the Government comes forward with the hybrid bill necessary to progress this programme as soon as possible. There will be many future issues to address and many difficult decisions to be made, but the scheme needs to be progressed. The sooner the better.