| The last Government has left HS2 with diminished capabilities in terms of its reach and capacity. This in turn affects its ability to make a substantial cash payback to taxpayers and Treasury. In weighing decisions on HS2, Government needs to be aware of potential returns to HM Treasury as well as to capital outlays. |
- High Speed One
When complete, and high-speed rail services have started, the nation will have an asset which can attract the private sector to bid for and acquire HS2 on a long-term concession basis. This is not speculation: this was exactly what was achieved with HS1.
On 5th November 2010, a concession to operate HS1 for thirty years was sold for £2.05bn. It was later sold on for an even higher price. At the time of sale, the high-speed line was complete and day-to-day operations had proven to be highly dependable. The period of high risk for private sector investors was over.
When the concession for HS1 (the Channel Tunnel Rail Link) was tendered, it produced a cash return to HM Treasury with a cash value equal to one third of its construction cost.
In this respect, high-speed rail has a unique and proven cash value to HM Treasury that is unmatched by other Government funded capital programmes.
- Careful rather than reckless curtailment
Given the constraints on public finances, understandably, the original wider national plan for high-speed rail infrastructure has been curtailed, at least for now.
But curtailment of HS2 needs to be done in a way that has regard not just to Exchequer capital outlays on construction, but also to the subsequent cash inflows available.
The current plan – not reaching Euston and joining the existing line at a bottleneck, rather than at Crewe – will preclude the Exchequer from deriving full value from its outlay on the project. As things stand, the inheritance from the previous Government is a reckless curtailment – not just operationally, but in financial terms too.
The integrity and quality of the infrastructure created will determine the price of an HS2 concession. This could be payable to Government in short order following project completion. It is a unique and proven route to generate a cash return to the Exchequer.
- Two scenarios for HS2
Here we look at what scale of cash value to the public sector could be expected from a concession sale of HS2 and compare and contrast two scenarios:
- The inherited position from the previous Government.
HS2 truncated to an Old Oak Common – Birmingham/Handsacre route – i.e. without Euston or a new line onwards to Crewe
- The recommended position, based on value for tax-payers’ money.
HS2 completed to Euston in central London and with a new line built between Handsacre and Crewe to avoid the main bottleneck on the existing railway.
The value of the concession to tax-payers/Treasury is very different between these two cases. This is because the value created for private sector investors in HS2, following the HS1 example, is based on the number of train ‘paths’ made available, and the length of these train paths. The train paths generate the cash return to private sector investors.
The first – truncated – scenario is seriously restricted in what services can be run.
While other specific ways of realising a cash return to tax-payers/Treasury from HS2 are open to Government to consider, whatever model is chosen, Treasury cash receipts will be derived from the scale and quality of the train paths on offer. This short analysis assumes a model similar to the HS1 case would apply for the HS2 case, although other means of generating a cash return to HM Treasury are available.
Full Parliamentary Powers exist for HS2 to reach Euston and Crewe (but for no further parts of the wider HS2 plan). With completion to Euston and Crewe still possible in the early 2030s, the cash return could be realised within the next ten years (two Parliamentary terms).
Others may suggest other ‘fixes’ for the constraints created by stopping shy of Crewe and Euston. Some will suggest that building to lower specifications could save money. But re-starting the planning process really guarantees just one thing: delay, with planning timescales likely to be longer than were achieved with HS2 plans to Euston and Crewe. Getting planning consents is getting no easier.
On the other hand, Government resolve on the HS2 concessioning approach and its timescale could usefully set in motion a much-needed acceleration of the project’s delivery.
- Concession Value: Learning from the HS1 experience
| The HS1 concession example
“In restructuring LCR before the sale, the Department for Transport removed open-ended taxpayer support and made the line an attractive opportunity for investors. The Department handled the sale well and, at £2,048 million, the winning bid was higher than expected.” This was for a 30-year concession with the option to sell on. Onward sale of the concession in 2016 added a premium to the initial sale price. “The UK government sold a concession to operate and maintain the stretch of railway and several stations between the St. Pancras station in central London and Ashford International in 2010 to two Canadian pension funds. The stretch is the UK’s first high speed rail line and had cost the government £5.7 bn to build (or £6.2 bn undiscounted). The Canadian pension funds paid £2.1 bn to buy a 30-year concession from the UK government, with the consideration exceeding expectations by £600 million.” Six years later the first concession was sold on to the highest bidder for an enterprise value of roughly £3.3 bn. Quotations are extracts from: See also: |
HS1 Ltd’s charging framework was established in 2009 by the DfT in its Concession Agreement. Under the framework, track access charges and station usage charges are levied on train operators that use the HS1 infrastructure.
An Investment Recovery Charge (IRC) was set at a level designed to recover part of the long term capital costs of the HS1 project. The value of the IRC was capped and indexed to RPI. It was set by the DfT prior to the commencement of the HS1 concession and is fixed for the duration of the HS1 Concession Agreement.
The IRC is designed to recover the costs that HS1 Ltd directly incurs in operating, maintaining and renewing HS1, and the long-term project costs incurred from the initial construction, and long-term operation of HS1.
In practice it does not wholly recover the costs of HS1 construction, but it is a very significant payback, nonetheless.
So what would an equivalent arrangement for HS2 look like? We think there are two scenarios to consider.
- The two scenarios for HS2
These are:
- Scenario 1: Truncated to an Old Oak Common – Birmingham/Handsacre route – i.e. without Euston or a new line onwards to Crewe (i.e., the inherited position)
and
- Scenario 2: An HS2 completed to Euston in central London and with a new line built between Handsacre and Crewe (the recommended position).
As with HS1, in letting a concession for HS2, HM Government will be looking to recoup as much of its capital outlay as possible. The amount bid for the concession will depend on the quantity and quality of the daily train paths that are sold for the daily operation of the line. These vary between the two scenarios.
There will be a charge for each path payable by the train operating companies using the line, and this will likely form the primary income stream for the concession holder. The number of, and quality of, train paths is what differentiates the two scenarios and the price that can be expected from any HS2 concession.
- Line capacity
In Scenario 1, trains on HS2 will need to terminate at Old Oak Common. But this station is not designed as a terminus. This means that arriving and departing trains need to cross paths with each other approaching the station.
It is estimated that at most 6 trains/hour could be operated in this way, well under 50% of HS2’s line capacity. And travellers to/from central London will need to take the already busy Elizabeth line to complete their journeys. No other Underground lines are available at Old Oak and the surrounding road network is poor.
In Scenario 2, there would be 10 high-speed London trains per hour, three serving Birmingham and seven serving Liverpool, Glasgow and Manchester. There would also be two trains/hour operating between Birmingham and Manchester via Crewe, so twelve trains/hour in total, twice the Scenario 1 throughput.
- Less value per path
Shorter paths are less valuable. In the HS1 case, the infrastructure cost recovery charge which creates the concession value of the concession was set by the time each train spends on HS1, rather than distance travelled along it (apparently to provide an incentive for service providers other than Eurostar to operate trains at or close to Eurostar’s line speed).
Route length available for high-speed train operation is what is likely to drive track access fees on HS2 and hence the commercial value of any private sector concession.
The net loss of value per train path between the two scenarios has been assessed as shown in the Annex and amounts to an overall reduction per path of 25%.
Other factors such as loss of market appeal for HS2 journeys if they require changing trains to reach central London would be another factor affecting value, ignored here to keep the assessment simple.
- Overall value loss
As described, assuming Government elects to adopt a concession model approach as per HS1 (or similar), there would be a significant difference in the realisable concession value, depending on which scenario is followed.
The overall value difference between the two concession scenarios is a combination of factors – fewer paths and less value/path. Scenario 1 (HS2 completed only from Old Oak Common to Birmingham/Handsacre) offers only half as many train paths to sell through any concession, with each train path worth on average 25% less. This means its value as derived from path charges would be only 37.5% of Scenario 2’s value (the completed Euston-Crewe version).
We conclude based on this preliminary assessment that the concession value of the Scenario 2 railway is between 2 and 3 times higher than the Scenario 1 railway. This could be realisable in the 2030-2034 period, assuming HS2 is progressed without further delay.
- Capital costs of Scenarios 1 and 2
Scenario 1 would save the capital outlays on Old Oak Common-Euston and Handsacre-Crewe. HS2 Ltd’s most recent estimate (7th February 2024) for the capital cost of Phase 1 is that it will be in the range £49 billion to £57 billion (2019 prices) – say £53bn – and this includes completion of the Old Oak Common-Euston section (which might cost around £6bn. To this needs to be added the costs of HS2 between Handsacre and Crewe for Scenario 2, which might be around a further £5-6bn in 2019 prices.
So we estimate the cost of Scenario 1 cost in 2019 prices at around £47bn – of which very roughly 50% has already been spent; and Scenario 2 (complete to Euston and Crewe) at £58.5bn. Additionally, the completion to Euston is expected to generate some private sector contribution from associated development, in due course.
- How much would the concession raise for the Exchequer?
If the same ratio to capital outlay was realisable as achieved with HS1 (a third of capital outlay), the HS2 concession would be worth around £15-£20bn, realisable in the period 2030-34 if the scaled back project is completed to Euston and Crewe without further delay.
This would be a significant boost to the Exchequer finances and it is achievable within two Parliamentary terms. No asset sale besides the precedent of HS1 has been able to realise such substantial amounts of financial return for Government in the last 15 years.
But if the concession was applicable to the inherited truncated project (Scenario 1), its value as noted above derived from path charges would be much less, estimated at only £5-£7.5bn.
- Conclusion
The value of concessioning HS2 is two to three times higher with the project completed though modest extensions to Euston and Crewe.
Ref 2: Sources: https://publications.parliament.uk/pa/cm5804/cmselect/cmpubacc/67/report.html and https://assets.publishing.service.gov.uk/media/5a8222a940f0b62305b92aae/hs2_phase_2a_estimate_of_expense.pdf
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[1] Infrastructure DCOs potentially impacted by Supreme Court ruling on operational emissions | New Civil Engineer
[2] Sources: https://publications.parliament.uk/pa/cm5804/cmselect/cmpubacc/67/report.html and