DfT admits to escalating HS2 cost pressures

Figures suggest first phase of high-speed rail line requires £1.9bn of extra cash – up £200m since March
Artist's impression of HS2 trains at platforms. Photo: HS2 Ltd

By Jim Dunton

28 Oct 2022

The Department for Transport has told the firm tasked with delivering the High Speed Two rail project to find new ways of reining in costs as construction inflation hits 18% and projected spending faces pressures measured in billions of pounds.

In a written update to parliament yesterday, transport secretary Mark Harper said the first phase of HS2, which will link London with Birmingham, was now facing cost pressures of £1.9bn – a figure that has increased by approximately £200m since March.

The government’s official budget for the first phase of HS2 is £44.6bn, including contingency funding, at 2019 prices. The following phases 2a to Crewe and 2b Western Arm to Manchester are estimated to bring the total spend for phases 1, 2a and 2b to a range estimated at £53bn-£71bn, again at 2019 prices.

Services to Birmingham will initially run from Old Oak Common in west London and are expected to be in operation by 2033; services to Crewe are expected to be running by 2034; and HS2 trains to Manchester have a target start window of 2035-41.

Plans to extend HS2 to Leeds via a spur running through the East Midlands were scrapped last year. However, proposals for an HS2 East line that would serve Nottingham and Sheffield are in the early stages of development.

In his statement to parliament, Harper – who succeeded Anne-Marie Trevelyan as transport secretary on Tuesday – admitted that the first phase of HS2 is on course to exceed its target budget, which strips out contingency cash.

“HS2 Ltd has indicated that, if unmitigated, the final delivery cost is likely to exceed its target cost of £40.3 billion based upon its forecast of future spending,” he said.

“As a result, in September, the department commissioned HS2 Ltd to develop and implement actions to bring projected costs back in line with the target cost.”

Harper said key pressures included costs stemming from “lower than planned productivity” with the main civil-engineering works, and increased design costs.

He said a design change for the redevelopment of Euston Station to accommodate new high-speed trains alongside existing West Coast Main Line services meant that “significant elements” of work for the original 11-platform proposals could no-longer be used.

Harper’s statement did not put a cost on the written-off design work but referred to an “impairment” detailed in HS2’s most recent annual report and accounts. That document says the cost of moving to a “smaller, simpler 10-platform design” effectively junks £105.6m of design work.

Harper said the overall cost-pressure figure included £400m for Euston Station, but he said opting for a less-complex design that could be delivered in a single stage was expected to offset some expense issues.

The transport secretary also acknowledged that inflation in the construction sector is currently outstripping consumer-price inflation, which was 10.1% for the year in September as measured by the Consumer Prices Index.

“The Department for Business, Energy and Industrial Strategy and Office for National Statistics’ September construction update showed that construction materials across all work in the UK have experienced inflation of 18% from August 2021 to August 2022,” Harper said.

“Whilst inflation is not affecting the overall affordability of HS2 in real terms because the total budgets and cost estimates for each phase are set in 2019 prices, it is creating pressures against its existing annual funding settlements, which have been set in cash.

“I am clear that HS2 Ltd and its supply chain must do all that they can to mitigate inflationary pressures.”

Last month it emerged that a report to the HS2 Ltd board suggested that the first phase of HS2 is running “many billions of pounds” over its target £40.3bn budget and there was only a “50% chance” the additional £4.3bn in contingency funding would cover the overruns.

The report was presented to HS2 Ltd deputy chair Sir Jon Thompson over the summer. Thompson was Jim Harra’s predecessor as HM Revenue and Customs permanent secretary and also a former Ministry of Defence perm sec.

According to the Financial Times, which saw a copy of the report, inflation was described as a “significant and growing challenge” for the project and HS2 Ltd was criticised for its decision to continue to record costs in 2019 prices, which do not reflect “what has been or is being paid”.

The report suggested HM Treasury had asked for possible cuts or “scope reductions” to be identified.

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