Derail HS2: The Flawed Nature of Government Policy

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By Becky Ward (BSc Business Economics)

Since its inception, HS2 has been highly controversial and the government should review the project before any more taxpayer money is wasted. Investment in infrastructure is a very important economic decision because it requires large upfront costs which cannot easily be recuperated. If done right, infrastructure can help raise productivity and create job opportunities. However, not all projects are equal, and some may not deliver economic benefits effectively or efficiently1. This can result in ‘white elephant’ projects, whereby an investment delivers significantly lower economic dividends compared to alternatives – as well as wasting public resources. The issue for the government is evaluating which investments will prosper and which will fail.

There are many examples of contentious infrastructure projects: from the 3rd runway at Heathrow to extension of the Jubilee Line. However, one of the best examples is HS2. When it comes to the initiative to build new high-speed railway linking up London, the midlands and the north, the aim of HS2 is good, but the execution has been poor. The investment decision is flawed, and the government is making mistakes that are similar to others in the past.

Lack of Strategy

We are all taught in school that ‘proper planning prevents poor performance’. One of the greatest issues with investment decisions in the UK is the government’s lack of strategy. There is no department that articulates how the development of new infrastructure in the UK fits into broader goals. Further, there is not even a definitive guide to how infrastructure investment should be approached or prioritised.

When it comes to HS2, this wider issue can be seen most clearly in the project’s continually shifting objectives. Initially, HS2 proposed to expand the West Midlands and North West of England, with a central objective of stimulating employment2. Subsequently, the project has been sold as a way to reduce travel time between London and Birmingham as well as limiting overcrowding on the route3. The lack of clarity over the project’s aspirations has led to delays in decision making and the government have had to reword analysis and communications at a large cost4. HS2 has been continually criticised as a “solution in search of a problem”5. In a 2011 review of HS2 the House of Commons summarised the vital issue well:

“The absence of transport strategy makes it hard to assess how HS2 relates to other major transport infrastructure schemes, regional planning and wider objectives such as bridging the north-south divide… The biggest single transport investment proposed in this Parliament should be grounded in a well thought-through strategic framework and we are disappointed that the government has not developed a strategy”6.

The Losers

In life there are winners and losers; in Economics, this is no different. When examining investment decisions, it is usually the case that benefits and costs are spread between many people. In the case of HS2, though, ‘concentrated losers’ bear the majority of negative consequences, including noise, environmental pollution or landscape implications7. Despite the government trying to help those who are negatively impacted by compensating them through compulsory purchases, the majority of these concentrated losers think this compensation is too low8.

If there is a lot of opposition towards the infrastructure project, it is more likely there will be delays. The people opposing HS2 have raised concerns about property, the environment and landscape in areas such as the Chiltern Hills. Groups include Extinction Rebellion, the 51m group (consisting of local authorities along the phase 1 route) and StopHS2. There is also some political opposition, but all three of the main parties back the investment decision in general. Most importantly, though, there are currently no opponents in Boris Johnson’s cabinet, which means HS2 is unlikely to be halted. Whilst this means that the project itself may not be delayed, it raises concerns about how opponents’ worries will be addressed. This is shown by a House of Lords committee on the phase 1 bill stating that they could not “stress enough the importance of effective and timely public engagement, something which, we were told time and time again, could be improved on”9.

Costing

The cost of HS2 is inflating at every stage of the project, which the diagram10 below shows:

Even if we account for inflation (changes in the price level), it seems the initial cost estimate of HS2 was very wrong. The Treasury recommend that appraisals and evaluations of proposals should be completed using a cost-benefit analysis (CBA) — which compares the positive and negative impacts of options to determine which has the best overall consequences. The government’s criteria for deciding whether an action is justified is ‘net present value’: basically, if the benefits over the lifecycle of a project exceed the financial costs. Extensive and complicated economic modelling is used, which presents problems because for these models to work the economists must make assumptions and outcomes can be very difficult to model. An even more difficult task: economists explaining their models! Although the company behind HS2 had “identified where savings could be found, they did not develop these… into a programme of activity to achieve them”11. For example, the scheme has already driven up costs because they did not analyse how hard it would be for different soil types to be dug up. If the costs of a project are underestimated, the justification for completing that project is flawed.

Another important economic concept to consider is opportunity cost: the cost incurred by not enjoying the benefit of an alternative choice. By choosing to continue building and prioritising HS2, transport projects with higher cost-benefit ratios may not be fulfilled. Using benefit-cost ratios, economists have found that strategic road network investment returns are relatively high (4.7 benefits to 1), in comparison to the lower predicted return of 1.4:112  for HS2. This suggests this is not the best use of taxpayer money — a view that is summed up by transport economist Stephen Glaister: “The state of public finances suggest that each £1 dedicated to HS2 is £1 not available for something else”.13

Evaluation of Projects

An important aspect of any project is determining how well it went – if the benefits really did outweigh the costs. The case of HS1 (linking Ashford to St Pancreas/Eurotunnel) is a useful comparison to HS2 as it had comparable goals and has already been completed.

One of the main issues surrounding HS1 was private financing: the government contracted the project out to London and Continental Railways (LCR) in 1998, which is similar to HS2. However, when the government was presented with a forecast of the demand for the project they did not challenge the accuracy of the figures. The National Audit Office (NAO), found the actual demand was third of the predicted amount; and also suggested that the public sector lacked the expertise to challenge the investors’ proposed returns. LCR did not raise enough finance and, in 1998, the government guaranteed £3.75bn of the company’s debt to complete the project 14. This meant the government and now the taxpayer were exposed to the risk that had originally been transferred to the private sector. The NAO said this was not a single mistake and noted Governments have not always taken a realistic view of the likelihood of associated risks materialising 15.

There have been two economic impact studies commissioned to examine the effects of HS1. In 2009, the evaluation focused on analysing cost and transport user benefits. While they did estimate that wider economic outcomes had been achieved, specifically factors relating to regeneration, they were unable to come to any definitive conclusions about what impact HS1 had. If a much lower cost project had minuscule and uncertain benefits, continuing to build the more contentious and expensive HS2 seems like the wrong idea.

However, this could be explained by a more general problem in the way the UK government makes decisions about large infrastructure: it often lacks measurable targets for economic benefits at the outset16. Evaluating the direct benefits of major projects is difficult because it is complicated identifying direct cause-and-effect links between specific projects and wider economic outcomes. Due to so many factors being considered and compared, there is no simple way to make decisions. Tools such as CBA do not fully account for some changes, and decision makers should use judgement, evidence, and instruction from their constituencies.

Final words

The government does not always make wise investment decisions, which the case of HS2 shows. While infrastructure decisions are difficult to make, they are made even more challenging through a lack of economic targets or strategy. For example, a policy maker would make different infrastructure investment decisions depending on which outcomes they seek in an economy: these aims can vary hugely, from a short-term boost to generating employment in the long term.

Using CBA to help make the decision seems like a good idea on the surface. However, if the costing is wrong, the analysis will be too. Estimating benefits are a particular issue for larger projects like HS2 because of how big they are: measuring and calculating return on a national scale is a difficult task. The imperfect method of using CBA has previously justified costly schemes that are difficult to complete at the expense of smaller infrastructure projects with better short term benefits.

Thankfully, though, we have recently seen a shift towards local transport investments in the early March budget released in 2020 by Rishi Sunak, which dedicates £2.5bn to fixing local potholes, bus routes and improving ferry services. Continual investment in smaller projects is better value for tax-payer money and mitigates the negative effects inflicted on concentrated losers.

It is never too late to abandon investment decisions. As all economists know the maxim, ‘sunk costs are sunk’. It is not too late to stop the HS2 project before further costs are committed. There are other alternatives. They should be explored.

Bibliography

  1. Institute for Government. What’s wrong with infrastructure decision making? June 2017. Retrieved 5th May online, https://www.instituteforgovernment.org.uk/sites/default/files/publications/Infrastructure%20report%20%28final%29r.pdf] Accessed 18th June
  2. Department for Transport, Delivering a Sustainable Transport System: Main Report, Southwest Regional Assembly Website, 2008, Retrieved 5th May 2020, http://www.southwest-ra.gov.uk/media/SWRA/RFA2%202008/dastsreport.pdf
  3. HS2, Helping Reduce Overcrowding. Retrieved 6th May 2020, https://www.hs2.org.uk/why/how-hs2-helping-reduce-overcrowding/
  4. Wellings, R. ‘The High-Speed Gravy Train: Special Interests, Transport Policy and Government Spending’.  Institute Of Economic Affairs, August 2013. Paper No.46, page 34. Retrieved Online 6th May, https://iea.org.uk/publications/research/the-high-speed-gravy-train-special-interests-transport-policy-and-government-s
  5. New Economics Foundation, Andrew Pendleton: HS2 is a solution in search of a problem, Retrieved online 6th May 2020, https://neweconomics.org/2020/01/hs2-is-a-solution-in-search-of-a-problem
  6. House of Commons Select Committee, High Speed Rail: Tenth report of Session 2010-2012, p.16, November 2011. Retrieved 1st May 2020, https://www.gov.uk/government/collections/the-strategic-case-for-hs2
  7. BBC News: HS2 ‘losers’ revealed as report shows potential impact. October 2013. Retrieved 5th May online https://www.bbc.co.uk/news/uk-24589652
  8. My London Proposed HS2 compensation ‘too low’ and too restrictive, Hillingdon Council will tell government. September 2014. Retrieved 5th May 2020, https://www.mylondon.news/news/local-news/proposed-hs2-compensation-too-low-7833996
  9. House of Lords, Select Committee on the High Speed Rail: London-West Midlands Bill, Parliament UK website, December 2016, page 4, retrieved 5th May https://www.parliament.uk/business/committees/committees-a-z/lords-select/high-speed-rail-london-west-midlands-bill-select-committee-lords/news-parliament-2015/hs2-bill-committee-publishes-report/
  10. Financial Times Why HS2 rail line is way over budget and badly delayed. September 2019. Retrieved 5th May online, https://www.ft.com/content/cf3ff750-d92a-11e9-8f9b-77216ebe1f17
  11. The Guardian Where did it all go wrong for HS2? January 2020. Retrieved 5th May online, https://www.theguardian.com/uk-news/2020/jan/24/hs2-high-speed-rail-europe-infrastructure-project
  12. Wellings, R. ‘The High-Speed Gravy Train: Special Interests, Transport Policy and Government Spending’.  Institute Of Economic Affairs, August 2013. Paper No.46, page 49. Retrieved Online 6th May, https://iea.org.uk/publications/research/the-high-speed-gravy-train-special-interests-transport-policy-and-government-s
  13. Glaister, S HS2 high-speed rail plan offers insufficient return on investment. January 2013. Retrieved 5th May online, https://www.theguardian.com/uk/2013/jan/28/hs2-high-speed-rail-insufficient-return-investment
  14. Institute for Government. What’s wrong with infrastructure decision making? June 2017. Retrieved 5th May online, https://www.instituteforgovernment.org.uk/sites/default/files/publications/Infrastructure%20report%20%28final%29r.pdf
  15. Ibid
  16. ibid

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