UK: The Rising Costs Of HS2

Last Updated: 28 August 2013
Article by Lauren Spencer

The budget for HS2 was revised upwards from £34.5bn to £42.6bn, the Transport Secretary Patrick McLoughlin announced on the High Speed Rail (Preparation) Bill before the Commons on 26 June 2013.   This week it has been reported in the Financial Times that even this figure may be too low with (unattributed) "senior Treasury figures" putting the cost at nearer £73bn.

Officially, the budget for phase one, the proposed high-speed line linking London and Birmingham set for completion by 2026 is now £21.4bn. The budget for phase two, the lines to Manchester and Leeds via Sheffield opening by 2032, now stands at £21.2bn. The new spending plans include a contingency budget of £14.4bn, with £5.7bn and £8.7bn contingency allocated to phase one and phase two respectively. The £42.6bn total does not, however, include the cost of new rolling stock, which is currently estimated at £7.5bn, including £1.7bn contingency. If the cost of rolling stock is factored into the budget, the upper estimate of the total cost of HS2 is £50.1bn. 

The Department for Transport has stated that, in its view, the final cost of HS2 will be significantly lower than the £50.1bn set aside for the completion of the project, arguing that the contingency budgets have been set deliberately high.  HS2 Ltd upholds that this level of contingency is appropriate to secure and plan a project at what is still a relatively early stage.  Readers will have their own views on whether publicly stating how large a contingency is changes the likelihood of its being used.

The Department for Transport's view seems to be at odds with reports in the press that the Treasury consider the figure will be much higher and nearer £73bn as a result of inflation and VAT over the project's lifespan.  This higher figure is certainly in line with the suggestion by Think Tank the Institute of Economic Affairs (IEA) that costs would soar to £80bn.  (Given the magic of project accounting, however, both sets of figures could be correct, depending on which year you use as your basis: for instance, planning in 2012 to spend £1 might require you to spend £1.20 when you come to put your hand in your pocket in 2015, because of inflation. But you can still call this increased amount "£1 in 2012 prices".)

A political project?

The continuing increase in budget estimates has renewed debate over whether such a high cost project is the right approach for the country with criticism from objectors that the cost of HS2 will outweigh any potential benefits.

Peter Mandelson, who had supported the project when he was in Government, stated in the Financial Times in July that he feared it was "an expensive mistake" that was "politically-driven".  Mandelson also challenged the economic benefit to be delivered, warning that the new lines from Birmingham, Manchester and Leeds would come at the expense of "a large number of intercity services".

In response to Mandleson's and others' comments Lord Adonis, the architect of HS2 for the last Labour Government, has come to the project's defence maintaining "the status quo isn't an option - unless we are going to close Britain for business".

It has also been reported that, privately, Treasury officials believe an incoming Labour Government would be forced to look at the merits of the project against such a high price tag, particularly if it was to increase again.

The Economic Case

HS2 Ltd estimates that in addition to revenue from ticket sales, HS2 will generate £47bn in business benefits when the project is finished, as well as between £6bn and £12bn in wider economic benefits. HS2 Ltd maintains that the project will deliver £2 in benefits for every £1 spent when the whole project is completed.

HS2 Ltd also considers that the first phase of the project will support about 40,000 jobs and that this figure does not include broader employment growth supported by the new line and the use of released capacity on existing routes.  Phase Two is forecast to support the creation of a further 60,000 jobs, as well as 5,350 houses.

However, in May, before the HS2 budget increases were announced, the National Audit Office stated that the economic case for HS2 was unproven. The National Audit Office stated that the most recent benefit-cost ratio, publish in August 2012 as 1.4 to 1, is likely to change as it does not reflect the Department of Transport's current assumptions about the relationship between passenger numbers and GDP growth, which is that passenger numbers are now expected to grow more slowly as GDP increases.

Furthermore, the National Audit Office recommended further research into how business passengers use their time on trains, after it emerged that projections of increased business hours enabled by HS2's reduced travel time were calculated using survey information gathered between 1999 and 2001, which fails to reflect the work now completed on trains by commuters using tablets, smartphones and laptops.

It states on HS2 Ltd's website that "as with all major projects, the Government will continue to keep the value for money of HS2 under review. As a next step, an update of the economic case for HS2 will be published alongside the consultation on Phase Two preferred options in 2013."

Irrespective of the outcome of this update (by no means the first) one thing is certain, the debate around the costs of the project and its benefits will continue.  For now, however, the Treasury is continuing to work to deliver HS2 a project George Osborne believes is an "engine for growth".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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