NAO’s first report on HS2

22 May, 2013

The National Audit Office (NAO) has published its first report which they describe as “an early look at the Department’s progress in putting in place the foundations for successful programme delivery”. The NAO looked at the business case for HS2, the Phase 1 costs and affordability and the overall management of the programme. On value for money they simply say it is too early to say.

On the business case, the report concluded that the strategic reasons for developing HS2 are not currently presented well, and that the strategic case should be better developed at this stage. In particular, the report highlights a lack of evidence on where and by how much increases in capacity on the WCML is needed, which leads to a lack of clarity on how HS2 will deliver the Department’s strategic objective of delivering and re-balancing economic growth.

The economic case uses a benefit cost appraisal methodology consistent with the normal DfT approach. This, the NAO observes, is useful when making comparisons with similar projects and programmes. But if course, there are few if any similar programmes with which to make such comparisons. The NAO appears to be on the same page as HS2 Ltd on this matter, noting that HS2 Ltd has already commissioned new work to examine regional economic impacts, and to consider the possibility – precluded in conventional DfT appraisals – that land use and the pattern of development might change as a result of the investment. Greengauge 21 commissioned and published work on this subject in 2010 (http://www.greengauge21.net/publications/consequences-for-employment-and-economic-growth/) and it will be good to see it updated. What it shows is a scale of benefit, including a financial return to HM Treasury of considerable magnitude.

Less relevant is the NAO’s call for DfT to research how business travellers use their time on trains (this work has already been carried out and published). Here the NAO is in danger of missing the point. The real question is about overall productivity of the travel arrangements with and without HS2. So the research needs to cover air and car users too if it is to be of any value.

An often repeated objection to the HS2 appraisal is that DfT’s conventional appraisal ignores the fact that it is possible to use time productively while travelling by train (as if this was a new phenomenon, that has somehow been overlooked). But any refinement of the analysis in this area needs to look at the additional productivity benefit that HS2 brings – over and above the conventional time saving analysis – for those transferring from car and short haul flights to rail. Such people will not only get a shorter journey (duly picked up in the appraisal), but also additional time where they are able to work productively (ignored in the appraisal).

The NAO also asks for an examination of premium fares, arguing that these apply on HS1.But this is only true for the Kent commuter services running over HS1, where a premium is applied. Eurostar – which is the more relevant comparator for HS2 – has  fares, that reflect market conditions and have kept a remarkably competitive £69 return to Paris or Brussels.

There are no commuter services planned for HS2, and there is no reason to doubt at this stage a Eurostar style fares regime wouldn’t be the best. In short, we feel that the NAO is wrong to ask for a premium pricing approach. It is based on a false precedent. HS2 should be a people’s railway.

On costs and affordability, the NAO say that there is no cross-government mechanism to agree in-principle funding for the life of the HS2 programme. In reality the Government has not yet decided how to fill a gap they identify (of £3.3bn) between 2017/8 – 2020/1 (the peak construction period). Assuming the DfT budget remains at 2014-15 levels the department has options under consideration on how to do so as part of the current spending round.

Another cost related issue raised by NAO, and one that is likely to adversely affect public perceptions, is that HS2 Ltd may be VAT liable and it is not clear whether it will be able to reclaim it. So be prepared in due course for a bogus argument that the project cots have risen by 20%, even though it won’t cost tax-payers/Treasury a cent. We should thank the NAO for the advanced notice.

On programme management, the report notes the challenging timetable for introducing the hybrid bill (Dec 2013), and outlines the need for DfT to implement better management and oversight arrangements – which they later in the report note have already happened. With regards to programme objectives, the report provides useful evidence showing how one of the three objectives for HS2 is being met, while misinterpreting the second and ignoring the third (on carbon reduction). The objectives for HS2 were identified by the last government and haven’t changed. As summarised by NAO, these are:

  1. To increase capacity to meet projected demand and to relieve the WCML.
  2. To encourage long term (including regional) economic growth.
  3. To reduce carbon emissions, by shifting passengers from air and road to rail.

Actually the report shows very clearly how the first objective (capacity) would be met. It shows % seats occupied in the morning peak hour at Euston, and for commuters this reaches 168% by 2026 and 194% by 2033. As the report says: “A new line (i.e. HS2) would release capacity for extra commuting services as most intercity services would transfer”. (paragraph 2.6)

The report is critical of the evidence on re-balancing economic growth which is a wider aim of this government to which it expects HS2 to contribute. But the stated objectives of HS2 (see (b) above) are not to re-balance the economy, as NAO acknowledges. The report doesn’t touch on the environmental case.

It’s surprising it has taken the NAO this long to examine HS2, and its conclusions are thin. But it is right to identify the need to identify a whole life funding package for the programme – otherwise there is a risk of a start-stop position, and that would not be conducive to cost efficiency in programme delivery.