August 19, 2013

The IEA assessment of HS2 is pure fantasy

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THE publication today of a highly-critical report by the Institute of Economic Affairs (IEA) into Britain's planned High Speed 2 (HS2) from London to Birmingham and northern England has grabbed the headlines, primarily by claiming that project will cost 60% more than the current figure given by the government.

In its report, entitled the High-Speed Gravy Train, the London-based thinktank claims that the combined cost of both phases of the project will rise from £50bn (including rolling stock) to £80bn because of "lobbying from local authorities for new links to HS2 stations and changes to the route to keep voters on side." However, the report offers precious little evidence of where this vast overrun – enough to pay for Crossrail, one of Europe's largest infrastructure projects, twice over – will come from. Reference is made to supplementary mitigation costs, but it is hard to see how these could run into billions.

Most of the additional mitigation measures, such as extra tunnels, proposed for phase 1 following the public consultation phase has already been factored into the budget by the Department for Transport. Unlike phase 1, phase 2 largely follows existing transport corridors, primarily motorways, meaning additional mitigation costs are likely to be considerably lower than on the London – Birmingham section. Furthermore, the government has included a hefty £14.2bn contingency fund as part of the £42.6bn infrastructure budget for phases 1 and 2, which could cover additional mitigation measures that might be required on phase 2.

So where else could the £30bn come from? Clearly scratching around for anything that can be dragged in to artificially inflate the cost, the report hones in on additional infrastructure, such as improvements to connecting roads, new light rail lines, and upgraded conventional lines. Yet most, if not all of these schemes will have local benefits which are external to HS2, which makes it is difficult to see how they can realistically be budgeted as part of the high-speed line.

Take the East Midlands Hub as an example. The construction of an out-of-town high-speed station for Nottingham and Derby at Toton will need to be supported by frequent rail links to the two cities, which should benefit other towns in the area. Furthermore, the station is likely to be served by regional services to other destinations such as Leicester as well as new bus and tram links on the western side of Nottingham, giving this area much better public transport links at a local and regional level. Far from drawing funds away from other projects, HS2 should be viewed as catalyst for much-needed improvements in local transport in this area.

As cities have yet to determine exactly what investment needs to be made in connecting infrastructure, the report's assessment of these costs is totally arbitrary, and the £30bn figure seems to be based on most of the proposals suggested to date actually coming to fruition. Even the report itself expresses considerable doubt over the actual costs of connecting infrastructure projects that might not be built until the early 2030s – if they are built at all. This is hardly a sound basis for the £30bn figure splashed across the newspapers, which as the Birmingham Chamber of Commerce put it today, looks to be nothing more elaborate than a "wild guess".

It's perfectly easy to take a short-term view and say we don't need HS2. That's exactly what happened with Crossrail in the 1990s, when politicians decided London could do without the £885m east-west link. A subsequent government finally gave the go-ahead in 2007, and construction is now well underway, but the cost has ballooned to £14.9bn. Similarly British Rail's Thameslink 2000 programme (optimistically titled as it turned out) began life in 1989 as a £300m project, is only now being implemented – albeit with slightly larger scope – for £6bn.

History shows that by far the most effective way to ensure project costs go through the roof is to leave the plans on the drawing board for 15 years. As with Thameslink and Crossrail, passengers will pay the price with overcrowding, high fares and longer journey times if the government hesitates on HS2.

The report seems to take the view that infrastructure is economically unviable if its construction and operation is supported in any way by the state, very much in keeping with the free market mantra promoted by the IEA. This analysis excludes many of the social, environmental, and longer-term economic benefits, which have to be considered .

The report's author Dr Richard Wellings told the Daily Mail that the government could get a "massive return from other projects," but is reticent on what these "numerous" projects might be, and where additional north-south transport capacity is going to come from on this densely-populated island if HS2 isn't built. The document does not name specific projects, nor does it give any indication of a preferred alternative to HS2.

However it goes on to claim "alternative, high-return schemes [can] be funded without drawing on taxpayer funds. A policy of commercialisation and/or privatisation would enable viable transport infrastructure to be funded privately." Strangely no mention is made of the M6 Toll, Britain's only toll highway, which was build 10 years ago as a PPP and left its owner with debts of £1.03bn and a £41m loss in 2012.

The IEA argues that transport projects with the highest benefit: cost ratio should be prioritised by the government, but is it realistic to put so much faith in BCR? This is not a foolproof methodology by any means, particularly for long-term investments such as HS2, which needs to be judged on broader range of technical, economic, social, and environmental parameters using a comprehensive suite of modelling tools. As any economist should know, one number very rarely tells the whole story.

Keith Barrow

Keith Barrow joined IRJ as News Editor in 2006 and was promoted to Associate Editor in 2008. He was previously editor of employee publications for the Welsh Assembly Government, G4S, and Thomsonfly, and has written for a range of other publications including the Derby Telegraph. He graduated from Lincoln University in 2002 with a degree in journalism.

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