High Speed Fail Assessing the Case for High Speed 2
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High Speed Fail Assessing the case for High Speed 2 Nigel Hawkins ADAM SMITH 23 Great Smith Street INSTITUTE London SW1P 3BL www.adamsmith.org High Speed Fail Assessing the case for High Speed 2 Nigel Hawkins The Adam Smith Institute has an open access policy. Copyright remains with the copyright holder, but users may download, save and distribute this work in any format provided: (1) that the Adam Smith Institute is cited; (2) that the web address adamsmith.org is published together with a prominent copy of this notice; (3) the text is used in full without amendment [extracts may be used for criticism or review]; (4) the work is not re–sold; (5) the link for any online use is sent to [email protected]. The views expressed in this report are those of the author and do not necessarily reflect any views held by the publisher or copyright owner. They are published as a contribution to public debate. N.B Although every effort has been made to ensure that the data in this report is accurate neither the author nor the Adam Smith Institute accept liability for any errors that may have arisen. © Adam Smith Research Trust 2011 Published in the UK by ASI (Research) Ltd. ISBN: 1-902737-79-2 Some rights reserved Printed in England Contents About the Author 4 1 Executive Summary 5 2 Background 7 3 The UK Experience 8 4 Route 10 5 Demand Projections 12 6 Costs 14 7 Financing 16 8 Environmental Issues 18 9 Other Options 19 10 Overseas Experience 21 11 Conclusion 23 High Speed Fail | 3 About the Author Nigel Hawkins is an investment analyst, who specializes primarily • Privatisation – Reviving the Momentum; in the electricity, gas, water and telecoms sectors; he also covers • Re-energizing Britain (UK Electricity); several other sectors. He has worked in the City since 1988, • Ten Economic Priorities; notably for Hoare Govett (now RBS), Yamaichi and Williams de • The Party is Over – A Blueprint for Fiscal Stability; Broe (now Evolution). • Privatisation Revisited. He is a regular features writer for Utility Week and Cleantech Prior to joining the City, he worked for six years in politics, magazines and frequently contributes to the financial media. including three years as Political Correspondence Secretary to In addition, he undertakes various research projects on energy, Lady Thatcher at 10 Downing Street. water and economic policies for Westminster-based Think Tanks. For the Adam Smith Institute, where he is a Senior Fellow, he has In 1987, he stood in the general election as Conservative Party written five previous publications: candidate in Sedgefield against Tony Blair. 4 | Adam Smith Institute 1 Executive Summary ‘It is these non-monetised benefits which for just 10% of the length – and stations, especially the Euston underpin the strategic case for high- terminal where extensive construction work will be necessary. speed rail.’ • Within the c£17 billion Phase 1 project cost figure, there DfT Consultation Document, February 2011. are very material provisions for overruns, including the Treasury’s £4.2 billion optimism premium. However, as the • Despite net debt interest payment projections of over £66 billion Department for Transport (DfT) makes further concessions for 2015/16, the Coalition government seems determined to about HS2’s route, the base cost will rise further. Moreover, proceed with the c£17 billion 360 km/h (225 mph) High Speed these figures are based on Q3 2009 cost data; from mid- Two (HS2) project that aims to build, as Phase 1, a new London 2012, construction price inflation may well return with a to West Midlands railway line. Phase 2 plans to expand the vengeance. new high-speed line - via a Y configuration - to terminals near Manchester and Leeds, at an additional cost of over £15 billion. • In terms of the Benefit Cost Ratio (BCR), the DfT’s February In the long term, high-speed rail connections to Scotland are 2011 projection for Phase 1 of HS2 is just 2.0x, even if Wider planned. Economic Impacts (WEIs) are taken account; without them, the BCR falls to a marginal 1.6x. Prior to the DfT’s recent reduction • This report analyses HS2 and raises many questions about the in its aggressive revenue projections, the BCR’s were 2.7x and project, whose Phase 1 is due to be operational by 2026. The 2.4x respectively. eventual cost – assuming one high-speed rail link to Scotland – would exceed £50 billion. At an estimated £130 million per • Despite the proposed pay-as-you-go funding, it is very mile, Phase 1 of this project, according to the Financial Times, difficult to see how HS2 could make a commercial return would cost over four times more than the average EU high- even if the cost of capital were at a modest premium to the speed line. current 2.5% yield on 10-year gilts. Perhaps, the government – given its emphasis on non-monetised benefits - is not • HS2, the project’s promoters, is forecasting a sharp increase seeking one. in passenger numbers on the West Coast Main LineWCML – from c45,000 passengers per day in 2008 to a projected • Once operational, Phase 1 of HS2 could be privatised, in line c136,000 by 2043. Significantly, the promoters of London and with the pay-as-you-go funding proposal. However, HS1 – Continental Railways (LCR) in the 1990s proved to be very which avoided pronounced budgetary overruns – cost c£5.7 optimistic – actual passenger take-up has been around a third billion to build but yielded just £2.1 billion when a 30-year of expectations. franchise, which is underpinned by favourable access charge payments, was sold last November. • There will be real concern, too, about costs and likely overruns – with the WCML upgrade fiasco providing an alarming • Overseas experience of high-speed rail projects has some precedent. Of the projected Phase 1 cost of c£17 billion, the relevance. Spain’s RENFE and France’s Très Grande Vitesse two largest components are tunnels and stations – accounting (TGV) projects can provide some guidance, but there are major High Speed Fail | 5 differences, not least that much of central England is already investment. Phase 1 itself is very susceptible to two major risks heavily developed, unlike the vast plains of rural Spain. And in – those relating to revenue, namely demand and average fare- France, TGV’s operations remain heavily subsidised. box yields, and to construction risk. Moreover, the economic case, especially following the DfT’s recently reduced BCR • Any conclusion about HS2 has to recognise that the project, projections, remains very weak and, if completed, Phase 1 may especially if it is eventually linked up to Scotland, is highly need substantial – and long-lasting - revenue funding from the expensive; it will also crowd out other much-needed railway DfT to cover its operating losses. 6 | Adam Smith Institute 2 Background In recent years, many of the world’s leading economies - France, However, it was the arrival of the Shinkansen train in Japan in Germany, Spain, Japan and China - have invested in high-speed the 1960s, which stimulated global interest in high-speed rail rail as they have sought to meet the need for new transport systems. Originally, the Shinkansen was developed to ply the capacity. With the development of High Speed 1 (HS1), which densely populated route between Tokyo and Osaka. was commissioned in 2007, the UK has followed this trend. Thereafter, several EU countries started to build high-speed In terms of defining the criteria for high-speed rail, the EU has rail lines connecting major cities, including Italy’s Direttissima adopted a definition of a speed exceeding 200 km/h for upgraded route – between Rome and Florence – and Germany’s network track and 250 km/h for new dedicated track. Furthermore, high- connecting Hannover with Würzburg and Stuttgart with speed rail technology is based on first using overhead electrification Mannheim. In France, the roll-out has continued following the equipment and secondly in eliminating – or reducing – the various commissioning of the Paris to Lyon LGV Sud-Est route. factors that slow down a train. In the latter category are level crossings, regular stops, a succession of curves and other trains, More recently, Spain has been particularly prominent in including slow-moving passenger coaches and freight vehicles. embracing high-speed rail. With a generally flat countryside and very dispersed - and small - rural populations, long high-speed In fact, high-speed rail technology has been operational for many rail links between major cities offer many attractions. Its first high- decades, with a Siemens and Halske electrical railcar reported to speed rail line, connecting Madrid with Seville, was opened in have exceeded 200km/h at a military track between Marienfeld 1992; several others have followed. Spain has the second-longest and Zossen in Germany in 1903. high-speed rail network worldwide, after China. High Speed Fail | 7 3 The UK Experience In the UK, where the legendary Isambard Kingdom Brunel built Moreover, Network Rail concluded that ‘the WCML, particularly at the first extended wide-gauge railway, the Great Western line, the the southern end of the route, is effectively full and subsequent high-speed rail experience has been far less smooth. additional capacity could only be provided by exceptionally expensive infrastructure solutions’. In particular, British Rail’s failed Advanced Passenger Train (APR) project, which was based on tilting trains, was ignominiously Hence, against the background of sharply rising rail travel, abandoned in the 1980s. However, with the opening of HS1 services especially on the WCML, and for other more general policy in 2007, the UK had built its first extended high-speed line.