A review of the HS2 Business Case – presentation by Chris Stokes at the Parliamentary Lobby Day

The following has been produced using an audio file of Chris Stokes’ presentation and his slides: it is not a word-for-word transcription, but captures the spirit and some details of his presentation.

Chris Stokes is a former board member of the Office for Rail Regulation.  He does not live near the proposed route, so will not be directly affected it.

A year ago, he would have said he was in favour of High Speed Rail.  However having looked at the detail of HS2’s business case, he shares John Maynard Keynes view that when the facts change, he changes his mind.

Chris Stokes started with HS2 Ltd’s forecasts of background demand for growth in travel, which they say increases with growth in GDP.  Chris said theirs were high compared with those of other reputable sources, such as the Department for Transport and Network Rail.

The average forecast was for a growth in demand for 75% increase in the period to 2033. HS2 Ltd are predicting growth of 133%: the others range from 35% to 75% increase in demand.  In addition HS2 Ltd say if the background growth is 20% less, then the benefit cost ratio drops to 1.5,  too low to normally be considered worthwhile.

On the demand for HS2 itself – switch from existing rail of 57%.  New trips, 27% – that is journeys which would otherwise not have taken place, a clear environmental negative, which is in addition to the 133% forecast long distance rail growth.  A switch from air of 8% and from car of 8%.

This “switch from air” demand is higher then the current air volumes from Heathrow to the north-west and Glasgow and Edinburgh.  HS2’s switch from car is forecast to decongest the M1 by just 2%.  80% by mileage of the journeys made in this country are by car, and we are contemplating a capital spend of £17.4bn which may take 2% of the congestion off the M1.

27% of HS2’s passengers will only be making a journey because HS2 was built.  HS2’s  overall forecast growth is 267%.  The rail network on this trunk corridor will be carrying three and a half times more people in 2033 then it is now, if HS2 Ltd are correct.  This should be challanged!

Overall transport growth per person has tended to stall in recent years, although rail travel has increased pretty fast.  However, road remains the dominant mode.  Is travel still growing with GDP?  In the early years, distance traveled per person tracked GDP, but in the late ’90s this tended to flatten out.  The assumption that travel will grow with GDP is uncertain.

Domestic air – HS2 Ltd predict a 178% growth by 2033.  However when looking at the CAA data for the last ten years, domestic air travel peaked in 2004 and has declined since, with the decline starting in advance of the recession.  Heathrow domestic air travel is also declining.  2026 is the finishing date for HS2, as published in the report for the previous government, but it will be a lot longer before rail actually becomes competitive with the Scottish air routes.  That’s where the bulk of the remaining air volume is.

Future rail growth.  There has been a strong growth in rail travel over recent years, but the reasons for this have not been fully understood. Chris did not believe there was an independent link between rail travel and GDP, as there is no obvious between relation between rail and the wealth of the country.  Trains are more punctual now, improved services, especially on the WCML, new rolling stock and cheaper advance fares may have all contributed to this increase.

Will the compound growth in rail continue?  There has not been sufficient work done to understand this, but it needs to be done before the country commits to a £17bn project.

There a number of downside risks to building HS2.  Some markets have reached a point of saturation, such as Shinkansen in Japan. Eurostar, a world class product, has the overwhelming share of the market to Paris and Brussels, but it isn’t growing as fast as forecast.

Virgin’s services on the WCML has captured the easy wins, and the modal shift from air to rail has changed.  Virgin has 80% of the market for Manchester to London travel, and rail is very attractive for business travel to central London.  That’s good news for rail!  But not for HS2 – rail has got those markets and running trains a bit faster is not going to change that modal shift very much.

There is a potential for electronic communication to change travel habits further. This may be one of the reasons overall travel has stalled.

Eurostar is a clear success and a world class product, but it has only achieved 37% of the forecast growth from when the contract was won to build it.  We should not bet the farm on the volume forecasts which have been produced by HS2.

There are also known competition risks.  Chiltern railways are upgrading their London-Birmingham route at no cost to the public purse.  It will produce 90 minute journey times, two trains an hour, cheaper fares and lots of capacity to the west Midlands, at no cost to the public purse.  They are likely to have a significant share of the market if HS2 is built, unless there was draconian regulation of service patterns.  This service needs to be looked at during the consultation on the principle of high speed rail.

There will continue to be fast trains on the existing classic route, serving Milton Keynes, Coventry and Wolverhampton.   Otherwise Coventry will not have a London service and Wolverhampton will not have a London service.

We also have to look for the un-anticipated competitive response.  Eurotunnel had convinced themselves that ferry operators would pack up shop and quit the route – but they still have market share, and a lot of people think ferries are a much more pleasant way to get across the Channel.  Eurostar competes with low cost airlines for alternative city breaks and Shnkansen competes with low cost flights within Japan.

The financial case: Capex 17.8 billion,  incremental revenue, on the basis of very toppy forecasts, of £15 billion, but incremental operating costs of £7.6 billion.  Net revenues cover 42% of the capital costs.  There might be a stronger case if the thing actually made money!

Non financial economic benefits: much bigger, but enormously driven by time savings, which assume very high salaries for business travellers of £70,000, but also that all travel is unproductive and unpleasurable dead time.  This is not realistic.  The agglomeration benefits, or regeneration benefits, are only £2bn, which is not very great  – these are HS2’s figures.  The total for non-financial benefits is quite high but not necessarily robust.

Agglomeration benefits are low in relation to the cost of HS2, and principally made up of operating extra trains on the current network, which in many cases would not be profitable.   The benefits directly from a reduced journey time as estimated by Imperial College, are around £8 million per annum.  £8 million plays £32 billion – is this transformational?  The existing WCML upgrade has transformed the services from one train an hour in 2004, to a train every 20 minutes taking 2 hours and 8 minutes.  How much difference will it actually make to Manchester and the North West if its an hour and 15 minutes, instead of 2 hours 8 minutes?

Professor Overman of the LSE, in written evidence to a recent hearing to the Transport Select Committee said “claims about the transformational nature of transport investments should generally be discounted, because they have no convincing evidence base to support them.”

Are there alternative ways of increasing capacity?  Firstly, most but not all Pendolinos are being lengthened to 11 cars, which will increase the number of standard class seats by 51%.  Interesting that we can afford spending £17.8bn on a new railway, but they couldn’t justify lengthening all the Pendolinos to 11 cars.  More capacity could be created by reducing first class: Chris commented that he hadn’t been on a train in the last three years on the WCML which needed more then one first-class coach.  This would give a 65% increase in capacity without new infrastructure.

In addition alternative rail packages were looked at by the Dft, which gave a much better benefit cost ratio at much less capital expenditure with much less risk in relation to demand.  They could be taken forward incrementally.  And the business case needs to stand against the best alternative, not a do nothing situation.

Opportunity cost – speaking as a greyhaired railway man, it would be possible at a fraction of the cost to reinvigorate, to renew, to electrify, to put on new trains in the entire regional network in the north of England, which would have a regenerational benefit for the north of England.  And it would not have leakage.  Because a lot of the serious economic wisdom is that HS2 will increase the London centeredness of this country, not reduce it.  In contrast HS2, if it goes ahead, is likely to dominate rail investment for the foreseeable future.  And the lousy network is likely to stay lousy.  It could be transformed pretty quickly, by using some of the £750million agreed for HS2 in the spending review.

Have other countries got it wrong?  It does depend on the country.  Paul Eddington said the British network provides good intercity links and the distances are relatively short.  So we start with a good fast rail network, not as in Spain say, an appallingly slow, and non competitive network.  The distances are short – Lille is 227km from Paris, Birmingham is 162km from London.  Manchester is 296km from London, Lyon is 427km.  So the fundamental objective case is less good in Britain.

Chris concluded that he didn’t think the business case is yet proven and at best is marginal.  The risks are overwhelmingly downside and there is an enormous opportunity cost.

 

Click here to hear the presentation in full

Click here to hear Chris Stokes on BBC CWR prior to the Lobby Day

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