HS2 – Full Steam Ahead
Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
More than a decade after its first conception, the UK’s ambitious High Speed 2 (HS2) rail scheme has been granted government approval (for the second time). Beset by delays, route changes and vast expansions in cost projections, the entire HS2 project is highly controversial. Indeed, the first phase of the project, linking London to Birmingham, was originally scheduled to be completed by this year; services are now unlikely to start until 2029 at the earliest.
While these delays and budgetary overruns will not endear the project to many, proponents of the project claim bolstering rail capacity will confer material benefits on commuters, UK productivity and the overall functioning of the UK economy.
The case for and against the project is worth revisiting.
The Case For HS2
According to the scheme’s proponents, the poor levels of UK productivity growth exhibited since the financial crisis can be partly attributed to inadequate infrastructure. Additionally, a sizeable productivity gap of 32% exists between London and the rest of the UK. If this gulf is to be closed and wider productivity growth restored, improved infrastructure must form part of any solution. Advocates of the project claim:
- HS2 will enhance connectivity between London and other major population centres, leading to faster commuting times and increased efficiency and accessibility for businesses;
- journey times between London and Birmingham will be cut from 81 minutes to 49 minutes and commuting times between Birmingham and Manchester will be more than halved to just 41 minutes;
- building new lines will ease pressure on existing routes, allowing more journeys into northern cities and cutting travel times; and
- the multiplier effect from infrastructure spending is a direct form of economic stimulus to business and the wider economy.
The Case Against HS2
The most vociferous opposition to HS2 has been driven mainly by cost considerations:
- at the time of HS2’s first approval in 2011, £37.5 billion was the cost projection;
- 2 years later, this had gone up to £50 billion, increasing to £65 billion in 2015 and finally in excess of £100 billion in 2019; and
- upgrades to existing rail infrastructure and adding new regional lines are deemed to be a more appropriate allocation of resources.
Graph 1: The Rising Projected Costs of HS2
Source: Department for Transport, data July 2019
Critics claim these spiralling costs do not represent value for money. They also assert any return made on this capital investment will be sub-optimal, as the sheer costs associated with the project undermine any of the benefits that will accrue from the construction and operation of HS2.
As with any large infrastructure project, cost scrutiny should be a major influence on decision making. The latest estimate of £106 billion represents a vast outlay, making greater budgetary discipline highly desirable. But it is worth bearing in mind, infrastructure projects rarely adhere to their initial cost estimates or timetables.
The same issues appear to have plagued infrastructure projects globally and are not unique to HS2 or the UK. According to academic research, around 98% of capital projects are subject to cost overruns, with budgetary jumps of 50% occurring frequently:
- the Channel Tunnel’s budget ran over by 80%;
- the Boston-New York-Washington railway registered a cost overrun of 130%;
- Switzerland’s Furka Base tunnel had final costs 300% higher than originally estimated; and
- the cost of Boston’s ‘Big Dig’ tunnel project is projected to be 220% higher than initial estimates.
Perhaps the most appropriate comparison is with a similar high-speed rail project linking San Francisco and Los Angeles currently under construction in California.
Traffic on California route 99 passes construction on the high-speed rail line at Fresno’s Cedar Viaduct
Source: Los Angeles Times
Projected expenditure for the scheme has exploded by $26 billion in just three years. The final cost is estimated to be $80.3 billion and rail passengers are unlikely to benefit from any increase in rail capacity until 2030 at the earliest.
The expensive examples above reflect the complexity and arduous nature of completing infrastructure projects under budget and on time. We are not suggesting such profligacy is acceptable; budgetary discipline must be enforced, especially if taxpayers are to be convinced they are not merely underwriting expensive white elephants born from political ambition.
Thankfully the new government appears cognisant of these challenges. The Prime Minister is calling for the restoration of cost discipline through reorganisation and greater private ownership of stations. According to Cabinet Office cost projections, savings amounting to £34 billion could be achieved.
While £72 billion is still a large sum of money, the UK sorely needs infrastructure upgrades outside London if productivity growth is ever going to resume a normal path and the Prime Minister’s ambition of ‘levelling up’ the UK is to be achieved. Infrastructure which connects the UK’s faster-growing regions to its laggards will serve to underpin these aims.
From its earliest stages, HS2 has been a controversial endeavour due to budgetary concerns and delays.
However, the costs of comparable infrastructure projects are rarely remembered, and any controversy tends to recede upon completion once the benefits become tangible.
According to The Economist, infrastructure spending as a proportion of global GDP is now higher than at any previous point in human history. Should the UK neglect to invest in infrastructure while its economic competitors enhance their own, any competitive advantage possessed by the UK economy is at risk of being whittled away.
It is also worth bearing in mind we are living through a period characterised by exceptionally low costs of capital, meaning governments can borrow at low rates of interest. In that context, the opportune moment for beneficial infrastructure spending has arrived.