The Law of Diminishing Returns
CP 946[1], the command paper published by the Government in support of the decision to cancel HS2 north of Birmingham, also addresses the fundamental question that has hung over HS2 right from the start, whether it represents value for money. As is standard practice for transport, and other, projects, value for money has been assessed and reassessed by calculating a Benefit Cost Ratio (BCR) as various stages have been reached. As is prescribed by the Department for Transport[2], the benefits that will accrue from the HS2 scheme over time, such as saving in travel time, have been monetarised at present value (i.e. stripping out the effects of inflation) and compared with the total cost on a present value basis to calculate a ratio. This BCR therefore represents the value returned on each £1 invested in the scheme.
Every time that the BCR has been calculated for the full HS2 route the value returned on each £1 invested has decreased from the previous calculation, a trend that is illustrated in figure 7 on page 15 of CP 946. Aside from the impact of some changes that have been made in methodology, the main reasons for this decline have been increasing project cost estimates and, since 2020, a decrease in passenger demand for rail that is a legacy of the Covid-19 pandemic[3].
So, the original estimate for the full ‘Y’ network suggested HS2 would return £2.30 in economic value for every £1 invested by the taxpayer, but it is now forecast that £2.30 has dwindled to possibly as low as 80 pence[4]. In terms of the Department for Transport’s standard value for money categories[5], the project that originally merited a “high” value for money categorisation is now rated as “poor”.
In contrast, in paragraph 8 on page 9 of CP 946, some examples of typical BCRs for some smaller transport schemes are given. We are told that a group of thirty-three major bus-related schemes which qualified for funding had a combined benefit-cost ratio of 4.2:1. The Erdington Transport Study of 2006 estimated that urban transport investments have an average BCR of 3:1, whilst inter-urban schemes average 5:1, if heavy rail infrastructure options are removed[6].
When Phase 1 of HS2 is considered alone, the BCR has always been considerably lower than for the full network. The Phase 1 business case continues to be threatened by the spiralling cost estimates. Figure 5 on page 14 shows that the estimated budget of £44.6 billion when Notice to Proceed was granted in 2020 is more than twice the estimate of £20.5 billion that was attached to Phase 1 when the original decision to proceed was made in 2012, when both are expressed in 2019 prices.
You will not be surprised to hear that we learnt last month (January 2024) that the latest cost estimate for Phase 1 continues this saga of cost spiralling. Sir Jon Thompson, the executive chair of HS2 Ltd, told the House of Commons Transport Committee that the figure is now between £49 billion and £56.6 billion, at 2019 prices and, in response to subsequent questioning, advised that inflation had added to that by somewhere between £8 billion to £10 billion when the total is expressed in 2023-24 prices[7].
Whatever the total bill for HS2 spirals to, it is already far too high by international standards. For whatever reason, or combination of reasons, HS2 Phase 1 is financially up in the stratosphere when compared to equivalent schemes in Europe – paragraph 15 on page 13 of CP 946 cites a 2016 report that puts the difference in terms of cost-per-mile at five times and advises that more recently it has been reported that the Paris-Strasbourg high-speed link has been delivered for thirteen times less per mile than HS2.
Quel dommage!
[1] Transport Committee, Oral Evidence, 10 January 2024, House of Commons, Q393 and Q407 (https://committees.parliament.uk/oralevidence/14053/pdf)
[1] Network North: Transforming British Transport, CP 946, Department for Transport, 4 October 2023 (https://assets.publishing.service.gov.uk/media/65290f86697260000dccf78b/network-north-transforming-british-transport-print-version.pdf)
[2] Value for Money: Framework, Moving Britain Ahead, Department for Transport, 2015 (https://assets.publishing.service.gov.uk/media/5f6237408fa8f5106d15640c/value-for-money-framework.pdf)
[3] Paragraph 18 of CP 946 advises that demand is down more than 20% compared to pre-pandemic levels and comments that “while 53% of the benefits of HS2 identified in its 2019 business case were due to business travel, rail travel for business purposes is only around half of what it was before the pandemic”.
[4] CP 946, op cit, paragraph 17.
[5] See box 5.1 on page 25 of Value for Money op cit.
[6] But this average BCR falls to 2:1 if heavy rail infrastructure options are included.