High Speed 2 Full Business Case

The Full Business Case for HS2 Phase One has now been published. This  supports the Government’s decision to go ahead with the entire new rail route from London to the cities of the Midlands and the North, despite the dramatic escalation in construction costs, from £37.5bn in 2011, to £50bn in 2013, to £65bn in 2015, to £109m in the latest business case, and doubtless even more in eventual outturn.

It is noteworthy that the initial increases in the cost of HS2 did not change the supposed economic benefits, as measured by the benefit-to-cost ration (BCR), which held steady at close to 2.0, representing ‘high’ value-for-money according to the DfT’s Value for Money framework for economic appraisal. This was the result of substantial additional benefits being recognised by the promoters, even though nothing fundamental had changed in the business case. However, last year independent reviews by Douglas Oakervee and by the National Audit Office estimated higher capital costs that reduced the BCR to 1.5 or lower.

The new business case recognises these new capital costs but fails to identify any compensating additional benefits, such that Phase One (London to Birmingham) has a central-case BCR of 1.2, while the full “Y” network has a BCR of 1.5. Accordingly, Phase One has been assessed as ‘low’ value-for-money, while the full network would be ‘low to medium’. Any further increase in capital costs would reduce the outturn BCR, as would less demand than assumed for rail travel over the 60-year forecast period.

It is surely remarkable that the largest ever UK transport infrastructure investment is proceeding on the basis of such low returns, given the great number of more attractive potential such investments. Is this a case of politics trumping economics, or are the politicians right to see benefits not recognised by orthodox economic analysis?

The precedent of the Jubilee Line Extension (JLE) to London’s Docklands, with a BCR of less than one on the standard approach to appraisal, indicates the potential regeneration benefits that may be achieved. The increased real estate values, reflecting the economic benefits to businesses locating at Canary Wharf and beyond, were not taken into account since this would supposedly involve doubling counting benefits implicit in the value of travel time savings, the main element of economic benefit in the standard DfT WebTAG appraisal methodology. These time savings comprise small amounts of time saved by large numbers of commuters, valued by market research techniques that require respondents to trade time and money in the short run. Yet it is scarcely credible that the aggregate of such time savings could provide a measure of the long run cumulative real estate value uplift, whether for the JLE or for HS2.

Moreover, orthodox investment appraisal has no spatial content, no indication of the geographical distribution of economic benefits. This is a crucial issue for HS2, the strategic aim of which is to boost the economies of the cities of the Midlands and the North.

More fundamentally, the importance attached to travel time savings is misconceived. The National Travel Survey has been measuring average travel time for 45 years, over which period it has hardly changed, despite many £billions of public investment in transport infrastructure justified by the value of supposed time savings. In reality, people take the benefit of such investment not in the form of more time for work or leisure, but as greater access to desired destinations yielding more opportunities and choices. The purpose of HS2 is to increase the access to London of those living in the Midlands and the North (and vice-versa). Increased access will lead to changed land use and enhanced real estate values, which are the market indicators of economic development.

It is possible that the real economic benefits of HS2 are substantially greater than calculated in the Full Business Case using the WebTAG methodology. It is therefore time to reconsider the basis of transport economic appraisal from first principles.