High Speed 2: the business case, costs and spending

High Speed 2 (HS2) is the ambitious programme to create a new high-speed rail service from London to Manchester and Leeds, via Birmingham and the East Midlands.

The strategic case for HS2

At the heart of the strategic case for HS2 is the desire to address capacity constraints on the north-south rail links in England. In the strategic case, the Government found that even with the train improvements and enhancements that it had already budgeted for, the capacity issue – particularly on the West Coast Main Line – would unlikely improve going forward without major capacity interventions.

The Government also found that there were connectivity issues across the country, which relates to the volume and length of time for journeys between cities.

Beyond the immediate transport concerns, the gap in productivity and economic growth between the South-East and other parts of England was recognised in the strategic case. The Government were of the view that the Core Cities outside London needed to be better connected to thrive and achieve higher levels of growth and to close the gap with the South-East.

The Government looked at several rail and other transport alternatives to address these issues. It took the view that the alternatives to HS2 did not address the long-term capacity challenge, nor did it provide a step change in north-south connectivity.

Capacity constraints

No other scheme can provide the step-change in capacity of HS2, whilst delivering the journey time improvements for passengers.

However, the analysis in the paper shows that much of the capacity constraints on the network, from a passenger crowding point of view, only occur during the peak periods of the day and on confined parts of the network. During most other periods of the day, trains are travelling at less than half of their capacity.

From a passenger crowding point of view, the additional capacity provided by HS2 on the West Coast Main Line appears to be over and above what is required to meet capacity pressures for several decades.

While the strategic alternatives to Phase 1 do not provide this same step-change, the increase would have been enough to ensure that there is sufficient capacity on the network during the busiest periods of the day. They can also be delivered at a much lower cost, and in the case of the West Coast Main Line constraints, they can be addressed for between 20 and 25% of the cost of HS2.

Some have questioned whether it makes sense for such a surplus of capacity to be delivered on one part of the network when other sections remain capacity constrained, particularly the lateral connections in the North of England as observed by the House of Lords Economic Affairs Committee.

The economics of HS2

The economic appraisal for HS2 captures the costs, benefits and changes in revenues for the whole of the rail network – not just those associated with the HS2 infrastructure. The latest business case estimates net transport benefits of £74.6 billion to be delivered from the full Y-network. Most of the benefits are delivered through journey time savings. Although most users of HS2 would be leisure passengers, around two thirds of the quantified transport benefits are forecast to accrue to business users, with 40% of all benefits accrued to passengers starting their journeys from London.

A comprehensive breakdown of the costs for the full Y-network of HS2 has not been published since 2013. The most commonly used estimate of the costs for HS2 is the £55.7 billion for the full Y-Network. It is important to note that this is not a cost estimate, but rather a funding envelope that was determined by the Government at the time of the 2015 Spending Review. The former is an estimate of how much needs to be spent, the latter relates to what is available to spend.

The Government remains committed to delivering the scheme within this envelope. It stated at the time of the 2015 Spending Review in a Written Ministerial Statement that:

The cost of HS2 has not changed since the Spending Review 2013. The Spending Review 2015 confirmed an overall budget of £55.7bn in 2015 prices. This is consistent with the £50.1bn (in 2011 prices) set in 2013, but has been uprated to take account of inflation.

It seems the estimated costs for the full Y-network of HS2 had risen and have been estimated in this paper to be around £65 billion at the time of the 2015 Spending Review. This estimate is derived using figures published by the National Audit Office (NAO) and the Department for Transport (DfT) in 2016 and 2017 about the estimated scale of efficiency savings that would be required to keep the project within the funding envelope.

Since then, HS2 Ltd and the DfT have sought to reduce the costs of the infrastructure for Phase 2b by around 40% from the 2015 Spending Review estimate, with the total savings ambition for Phase 2 of the scheme at around £12.8 billion (in 2015 prices). As at November 2016, £7.14 billion of these savings had been embedded in the Phase 2b cost estimate.

The revised cost estimate for the full Y-network, based on efficiency targets set out in the July 2017 financial case, is therefore £52.6 billion. This assumes that all anticipate savings are delivered. It should be noted that the NAO has expressed some uncertainty as to the deliverability of these savings, although the DfT are confident of achieving at least a high proportion of them.

In terms of spending, a March 2019 letter from HS2 Ltd Chief Executive Mark Thurston to the House of Lords Economic Affairs Committee stated that £4.3 billion had been spent. This figure was based on HS2 Ltd’s 2018 Annual Reports and Accounts. A report from The Times in February 2019 suggested that a more recent estimate of spending was around £5.5 billion, which accounted for the purchase of land and property, legal fees, staffing, consultants and other overheads.

Speculation continues around HS2’s costs and its future deliverability. The House of Lords Economic Affairs Committee concluded in May 2019 “that the costs do not appear to be under control” and the scheme “needs a rethink”.

HS2 going forward

The scheme still retains widespread political support and the Government remains committed to its development. The Transport Secretary Chris Grayling insisted earlier in 2019 that not completing HS2 would be a betrayal of the Midlands and the North. Nevertheless, in June 2019 the Transport Secretary asked the Chair of HS2 Ltd, Allan Cook, to undertake a review of the project to “make sure the costs and budget are right” and “that it is deliverable”.

A full business case for Phase One, with an updated cost estimate is expected later in 2019, which will inform what is called a ‘Notice to Proceed’. This is the formal contractual process that enables each Phase One supplier to move from design and development to construction.