MPs have been told that the cost of delivering the pared-back High Speed Two rail line could be £67bn in today’s prices – a significant hike on the government’s £45bn budget for the project.
HS2 Ltd executive chair Sir Jon Thompson gave the figure to members of parliament’s Transport Committee at a session on the controversial rail project yesterday.
Thompson said HS2 Ltd’s current working estimate for the cost of the rail line linking London to Birmingham and connecting with the existing West Coast Main Line tracks in Staffordshire was £49bn-£56.6bn in 2019 prices.
He said soaring construction inflation over the past three years would add a further £8bn-£10bn to the figure to bring it up to 2023-24 prices.
In October, prime minister Rishi Sunak cancelled phases of HS2 that would have provided dedicated high-speed rail lines taking trains to Manchester and the East Midlands, blaming a doubling of costs and a weakened economic case for the project in light of the pandemic.
The original cost of the version of HS2 that would have connected London to Birmingham, Manchester and Leeds was £37.5bn, in 2009 prices.
On Wednesday Thompson told MPs the original cost estimate for HS2 had been “poor” and that the budget for the project had been set too early. He said UK infrastructure schemes were routinely affected by “very, very immature” costings at the outset.
The former HM Revenue and Customs permanent secretary said changes to the scope of HS2, such as increasing the proportion of the line that passes through tunnels, had added to cost pressures. He added that “poor delivery” on the part of HS2 Ltd, which is wholly owned by the Department for Transport, had also been an issue.
Thompson said construction inflation running in the region of 27% over the past three years had been a significant issue for the project. But he acknowledged that “extraordinary” decisions to let civil engineering contracts on a cost-plus basis had also contributed to spiralling costs.
“The government decided and the company decided to let cost-plus contracts where 99% of the financial risk is with the government and only 1% is with the contractor,” he said.
“My understanding is that was done to get these contracts away because they were so huge. There are definitely lessons to be learned on what form of contracts [you are] going to let on major infrastructure projects. Because if you’re basically going to say ‘you’ll get a fee of 10%, irrespective of how much it costs’, you’re almost incentivising somebody to go over budget.”
Thompson told MPs that he doubted the London-to-West-Midlands rump of HS2 could be delivered for the £45bn target stated in the government’s Network North document, which accompanied Sunak’s decision to scrap HS2’s Manchester and East Midlands sections.
He acknowledged that the government’s decision to seek to deliver HS2’s Euston terminus in London with private-sector partners would reduce the current cost estimate, but he said it was unlikely to bring it close to the Network North target.
The Network North document contained a list of smaller local transport initiatives that the government said would benefit from £36bn in funding saved by curtailing HS2. Not all of the projects are in the north.
Some HS2 trains will run slower than exising services
Thompson also confirmed to MPs that under the pared-back version of HS2, trains connecting Birmingham and Manchester would have less capacity than current Pendolino train services and would be slower than the older trains.
Unlike Pendolino trains, HS2 trains will not tilt and will face lower speed limits on sections of the West Coast Main Line with bends in the track.
The capacity reduction is a consequence of the need to use shorter HS2 trains on routes north of Birmingham because Sunak axed plans for longer platforms to accommodate the 400m trains at Manchester and Crewe.
Thompson told MPs that despite the issues created by the decision to scrap sections of the HS2 plans, HS2 Ltd’s advice to government had been to not reopen negotiations over rolling stock for the project because of the further impact on cost.
DfT perm sec’s cost-benefit analysis revealed
Also yesterday, the Public Accounts Committee published a letter from DfT permanent secretary Dame Bernadette Kelly expanding on her October 2023 economic-impact analysis of the decision to cancel phases 2a and 2b of HS2.
The letter, written in December, said the analysis took in “a range of demand scenarios” to reflect the impact of Covid on transport demand and suggested that every pound saved through the cancellation of the project came at a cost of benefits ranging from 90p to £1.10.
Kelly said the economic analysis did not cover jobs and skills in the supply chain that would be affected by the decision to scrap the northern extension of HS2.
But she added: “The large majority of jobs on HS2 are currently working on the construction of the line between London and the West Midlands, which the government has confirmed it will continue to deliver, while the reinvestment of £36bn of savings in other transport programmes and projects will also create employment opportunities.”
In her October assessment of the HS2 changes, Kelly told PAC members that the benefit-cost ratio range for continuing with phase 1 of HS2 was between 1.2 and 1.8 – suggesting that every pound invested would deliver between £1.20 and £1.80 in benefits.
However, she underscored that the opinion only related to the “marginal decision” to continue with phase 1 of the project at the current stage of its delivery and that overall the project would represent “poor value for money”.