House of Lords

Economic Affairs Committee

Inquiry into the Economic Case for HS2

Response by

Transport-Watch

HS2 – THE QUESTIONS TO ASK, THE COMMENT TO MAKE

April 2014

Notes expanded August 2014

1. The cost, including the trains and the often omitted links to the new stations, will be at least £80 billion.  That is equivalent to over £3,000 for every household in the land.  Is it right to ask for such contributions?  After all, 45% of us use a train less than once a year and 99% of us will seldom, if ever, use a high speed one.
2. The financial loss faced by those living in 2036, assuming the fares out to the remote year of 2096 actually arise, will be £74 billion at 2011 prices – equivalent, in purely financial terms, to wasting the wages of 74,000 working men’s lives.
3. Transformational? HS2 Ltd say that the project will generate 76,000 new passengers-journeys per day, (FoI request 13-873).  The 76,000 corresponds to roughly 22.8 million per year.  It is only those new trips which can be “transformational” since all the rest (obviously) pre-exist.  There are currently 1.5 billion passenger-journeys per year by surface rail, and 43.5 billion passenger-journeys by all modes (walk and cycle excluded).  Hence generated, or new, passenger-journeys may account for only 1.5% of all surface-rail journeys and for only 0.05%, or one in 2,000, of all passenger-journeys.  How can that be transformational?
4. Regeneration? The network is said to generate 100,000 jobs although many, if not most, may be relocations.  Hence each of these supposedly new jobs will cost the taxpayer £800,000.  How many will that destroy in that part of the economy which makes a profit? 
5. Wider Economic Benefits, the WEBs:  The KPMG report claims that the proposal will generate WEBs worth £15 billion per year.  Those can arise only because of new business and commuter trips (the supply side).  They number circa 7.75 million per year.  Dividing the £15 billion by the 7.75 million yields £1,930 or close to £4,000 per return trip.  In contrast, the average WEB from existing commuter and business trips by all modes amounts to only £141 (£282 for a round trip); 14 times less than supposedly arising from the new HS2 trips!!
6. Existing Trips on the West Cost Main Line must have higher WEBs than those generated merely because HS2 has reduced a journey time somewhat. The usual theory suggests double.  Hence, if KPMG’s £15bn is to be believed, existing trips on the West Coast Main Line generate WEBs with an average value 28 times as high as the national average (the £141 from (5) above). That seems unbelievable – a reality check which suggests the £15bn from the KPMG report has to be rejected.
7. The passenger forecasts: The original forecasts for HS1 were three times as high as the numbers which materialised.  Those for HS2 require eighteen 1,100-seat trains per hour, an extraordinary thing not yet achieved on any high speed network in the world.  In the light of that, and of the HS1 history, it is regrettably that no risk factor has been assigned to the HS2 forecasts. 
8. A key driver for the forecasts is the growth in Gross Domestic Product.  Between 1955 and 1995 GDP grew by 150% but rail use did not change.  In contrast, since 1995 GDP has grown by 40% but rail use has increased by 70%.  The comparison casts doubt on the rational which underlies the forecasts.  Instead of GDP growth, it may be the razzamatazz of privatisation which has lead to the recent surge in rail use.  If so, the case for applying a risk factor to the forecasts is greatly strengthened.
9. Capacity: The proposers point to lack of capacity and the forecast growth on the West Coast Main Line.  However (a) as above, the forecasts may be far too high (b) Virgin’s trains carry an average of only 166 people.  In comparison an 11-car Pendolino offers over 600 seats and could offer over 700 if 1^st class, shopping and restaurant areas were converted to 2^nd class (c) In the peak three hours half the seats out of Euston are said to be empty (d) substantial increases in capacity could be achieved at relatively low cost by lengthening the trains and some platforms.

More importantly, the sensible approach, when demand exceeds supply, particularly if a product makes a loss in the billions of pounds, is to balance supply and demand by raising the price.

10. Extraordinarily the CPRE and DfT claim that HS2 will have the same capacity as a 12-lane motorway.  The railway is said to provide eighteen 1,100-seat trains per hour, offering 19,800 seats.  In comparison one lane of a motor road may carry 1000 75-seat express coaches per hour at 100 kph.  At that speed the headways would average a comfortable 100 metres.  The single lane would then offer 75,000 seats, nearly four times that of the railway. The difference between the DfT / CPRE claim and reality is unnerving.
11. The “Willingness to pay calculus”, upon which the economic analysis depends, allows fares to be subtracted from costs and the difference, the net cost to the Government, to be compared with the supposed social benefits.  However, the theory reduces to the absurd when it is realised that changing the economic boundary of the scheme, or changing the tax regime, changes the net costs. Instead of that, where there is a market, as there is for rail fares, it would be better for the nation if the rule were: “If it makes a loss, particularly if the loss is in the tens of billions of pounds, do not build it”.
12. The North-South divide: Proposers suggest HS2 will reduce the North South-divide.  However, Phase 1 is said to generate 40,000 jobs with 9,000 in construction and 1,500 attributed to operating the line.  Of the remainder, 70% would be in London. … Begging the question, will HS2 worsen rather than reduce the divide?
13. International comparisons confirm that such schemes benefit capital cities rather then the regions and that the financial losses are vast.  For example the debt due to the much lauded Japanese system is $300 billion, see Ronald D Utt’s paper, “America’s Coming High Speed rail Financial Disaster” – it’s a frightening read. Why should the UK aspire to that?

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At what point is irrational enthusiasm mis-selling and at what point is mis-selling plainly fraud?

Calculations and notes:

Item:

1. Cost –the October 2013 economic case provides, at table 5, £43.3bn for construction and at para 3.3.3 6, £7bn for the trains all at 2011 prices.  To that should be added £30bn for connections (page 45 of the IEA report The High Speed Gravy Train, August 2013) providing a total of £80bn.  The UK population is circa 60m.  Setting the family size to 2.2 provides £2,933per household.  That ignores tax at 20.9%, included in the economic assessment.  (That ignores tax at 20.9% added to costs within the economic analysis).
2. Financial Loss.  Table 15 of the October 2013 Economic analysis shows a financial loss at the 2011 price and discount base of £31.5bn for the “standard case”.  Rolling that up at the Treasury Discount rate of 3.5% to the presumed opening year of 2036 provides £74bn.  That represents the actuarial loss, at 2011 prices, faced by those then living - supposing the very high passenger forecasts, and the corresponding fares, out to the remote year of 2096, actually arise.
3. Transformational?  The claim has been made be a variety of politicians, Phillip Hammond, Justine Greening and McLoughlin, and by HS2 Ltd in its web site see: http://www.hs2.org.uk/press/phase-two-professional-service-contract-framework-agreements  Also the slide show by Alison Munrow, Chief Exec HS2 Ltd available here http://assets.hs2.org.uk/sites/default/files/event_speakers/Presentation%20-%20Alison%20Munro.pdf  See also The Strategic case for HS2  October 2013
4. Regeneration – cost per job.  If the scheme cost or the long term financial loss are both circa £80bn, see above, and if the supposed 100,000 generated jobs, widely canvassed in the reports, (e.g., the DfT Guidance Note ‘High Speed Two: and engine for growth’, 11^th September 2011 at  https://www.gov.uk/government/publications/high-speed-two-an-engine-for-growth/high-speed-two-an-engine-for-growth)  actually arise,  and are indeed new, and not relocated jobs, then the cost per job is, by division, £800,000.
5. Wider Economic benefits. KMPG’s report, High Speed Two Ltd, Regional Economic Impacts, September 2013, in Table 2 page 13 claims £15bn per year.  These can only arise from generated or new business and commuter trips, the supply side, since all the rest obviously pre-exist.  HS2 Ltd refuse to say how many of the 76,000 new trips (FoI request 13-873) are for business and commuting purposes.  However, paragraph 5.2.13 of the April 2012 Demand and Appraisal report says one third of the HS2 trips are for business purposes.  Increasing that by 25% to allow for commuting provides 41%.  Here we will use 40%, which appears very high indeed compared with the 20% which applies to the nation as a whole. There are 255 effective days per year for such tips.  Hence the new business plus commuter trips may number 76,000 x 255 x 0.4 = 7.75 million per year.  Dividing the £15bn by that number provides £1,930 or close to £4,000 for a round trip.  Nationally Travel Survey Table 0409 provides 177 commuter plus business trips per year per head per year.  The GDP is about £1,500bn. Dividing that by the population, 60mn, and by the number of trips per head, the 177, provides £141, which is 13.7 times less that the £1,930.  The value associated with a round trip or a return trip would be double that.  (The £141 is a high estimate since a proportion of people work, or do business, from home).
6. References not applicable – it’s all in the text and follows from (5)
7. NAO report ‘The completion and sale of High Speed 1’, Para  6,  p 6,  28 March 2012.
8. Is well established data. Passenger-km from Transport Statistics Great Britain.
9. Capacity; The Office of the Rail Regulator’s data provides passenger-km and train-km by train operating company.  For Virgin.  In the year 2012-13 there were 5958.4 million passenger-km and 35.8 million train-km.  Dividing passenger-km by train- km provides the average occupancy of 166 passengers.  An 11-car Pendolino has over 600 seats.  The 166 amounts to 27.6% of them.  If first class, shop and restaurant areas were converted to second class there would be over 700 seats
10. McLoughlin: A speech at the Conservative party conference of 2013, HS2 Engine for Growth 29^th October 2013 available at https://www.gov.uk/government/speeches/hs2-engine-for-growth  -  The transcript provides. ‘It (HS2) will provide the capacity of a 12-lane motorway, but only take the space of a dual carriageway’.  Similar is in The Strategic Case for HS2 published in October 2013.  The CPRE repeat that although in its report, ‘Getting back on track’, February 2011, a 10-lane motorway is cited.
11. The Willingness to pay calculus is well known theory developed by Professor Sugden of the University of East Anglia and adopted by the DfT and the Treasury...  However, others, such as Dr Richard Wellings, Deputy Director of the IEA disagree.  Payments for fares are transfer payments of no interest in a social cost-benefit analysis.
12. North South divide: the HS2 report, High Speed Rail: Investing in Britain’s Future – Consultation - 2011 provides estimates of job creation associated with Phase 1 as follows: 9,000 construction jobs, 1,500 operational jobs, of which 340 are in London and 420 in Birmingham, 30,300 from regeneration around the stations, of which 22,000 would be in London (Euston and Old Oak Common), and 8,300 in Birmingham (Curzon St and Birmingham Interchange).  Hence 70% of the new permanent jobs would be in London.
13. The paper “America’s Coming High-Speed Rail Financial Disaster” by Ronald D Utt, Ph.D is available here http://www.heritage.org/research/reports/2010/03/america-s-coming-high-speed-rail-financial-disaster