Which is best – HS2 or rail upgrades?

11 February, 2011

There has been debate over the last couple of weeks between the TaxPayers’ Alliance and Greengauge 21 on the merits of HS2 compared with upgrading the existing rail network.

What the exchange of views has illuminated is that there is no getting away from the basic finding that there is a good business case for HS2. Its benefit:cost ratio (BCR) is well over the threshold 2:1 benchmark that DfT sets itself.

It is also true that DfT’s work reveals that there might be a package of measures (Rail Package 2a) that achieves a similar score; whether the BCR value for HS2 or RP2a is higher depends on the assumption made of whether RP2a has rolling stock leased or treated as a capital expense. In practice, the rolling stock for an RP2a-style upgrade, which would be implemented through the franchising system, would be leased, and not purchased outright.

On the other hand, HS2 is a capital project where it would be normal in appraisal to treat rolling stock as a capital item, along with other front end costs. After all, looking at the obvious precedent, we find that Eurostar owns its existing fleet (and will own its new trains too, rather than lease them).

On that basis, RP2a, which is by far the best performing of the rail alternatives to HS2 (see below) has a lower BCR than HS2.

Rail Package 2a is an upgrade of existing lines. The experience of the earlier version of this approach (the West Coast Route Modernisation project) is relevant. Its costs were estimated at £2.1bn. The outturn cost was £9bn and it entailed a decade of on-line works, which was hugely disruptive to rail users. There is much greater risk and uncertainty around early line of route cost estimates than those made for new-build. Upgrades typically take longer than originally programmed too. Custodians of scarce public funds must take such factors into account.

They must also take into account as best they can what will have been achieved upon completion. In the case of RP2a, a situation will have been created in which any further similar developments designed essentially to create additional capacity will have poor benefit cost performance. Rail Packages 3, 4 and 5 which extend the concept of line of route upgrades have BCRs of 1.11, 1.01 and O.85 respectively. So what happens then? Belatedly, the Government of the day would discover it should have built HS2 all along, because that would be the only course left open that represents value for money. Adopting Rail Package 2a would be short-sighted and store up problems for the future.

It is also instructive to look again at what government is trying to achieve with HS2. The objectives were clearly set out in the March 2010 ‘Green Paper’: Cm 7827 High Speed Rail. In summary the objectives were seen as improving capacity, connectivity and sustainability, and supporting growth in the regions. The latter were seen as comprising:

  • Increasing urban economic productivity
  • Supporting growth in Britain’s core cities (where the evidence presented showed very clearly how prosperity (measured as £GVA/head) declines with rail journey time to London
  • Supporting housing growth (the Milton Keynes/South Midlands growth area was highlighted)
  • Supporting London’s long term competitiveness.

Some of these objectives are met by increasing capacity; some rely on much quicker journey times. RP2a delivers a small improvement in journey times and fails to deliver on a good proportion of the broader policy objectives. While put up as an alternative, in truth it is a very partial one.

The overall aim is to develop a truly national high-speed network in which HS2 is a very important first stage, a network  that can, amongst other things, provide an alternative to short-haul flights. Large-scale tinkering with today’s railway in the RP2a mould will never allow rail to win over travellers from air in the large London – central Scotland market, for example.

The Coalition Government has made clear that it wants to see a re-balancing of the national economy, both across sectors and regions, and that it sees high-speed rail as a significant contribution to this over-arching policy objective. We have had a decade of incremental investment, delivering the most valuable of the investments in the West Coast corridor of the RP2a type. The ambitions set for our national economy require a step change in connectivity so that businesses choose to locate development out of the overcrowded wider south east.

Let’s summarise.

HS2 has a good business case – and actually this is not disputed – except that the TPA research note argued the growth forecasts are too high. We disagree, because they are based on growth rates lower than the trends of the last 10 – 15 years, (and this is the case across longer distance rail flows, not just the West Coast, which as has fairly been pointed out, has seen an upgrade in this period) and because the published business case assumes that all growth comes to a halt in 2033 (which can only be described as one of the least likely outcomes!).

One – but only one – of the alternative ways of increasing rail capacity examined by DfT also has a good business case, but:

1.      It creates a position in which, upon completion, the only worthwhile way forward is to build HS2

2.      It has greater risk and uncertainty

3.      It fails to deliver against several of the objectives set for HS2 by both the last and the current Government.