Economic Case for HS2 (Economic Affairs Committee Report)

Debate between Lord Vinson and Lord Hollick

Wednesday 16th September 2015 Lords Chamber

[Lord Hollick (Lab)]

My Lords, it is a privilege to introduce the report of the Economic Affairs Committee entitled The Economics of High Speed 2. Speaking in June this year, the Secretary of State for Transport said:

“The time to debate the various merits of high-speed rail is over”.

I am delighted that so many Members of your Lordships’ House are here this afternoon to prove him wrong.

I would like first of all to record the committee’s thanks to Tom Worsley, our specialist adviser, and to committee staff Rob Whiteway, Ben McNamee and Stephanie Johnson for their valuable support.

When he appeared before our committee last week, the Chancellor of the Exchequer made it clear that, despite the very high cost of HS2 and the many controversies over aspects of it, each generation had a responsibility to take big controversial decisions to improve the national infrastructure. In his view, HS2 is just one such decision facing this generation. The Chancellor’s enthusiasm could not be faulted, but in the absence of a rigorous, independent and transparent appraisal of the costs and benefits of this huge undertaking, HS2 has become a project of faith, all too often supported only by overblown rhetoric.

The construction of the new railway and the cost of the rolling stock is estimated, in 2011 prices, to amount to £50 billion. The committee estimated that this would be £56.6 billion in 2014 prices. The overall cost of £50 billion includes an estimated £21.2 billion for phase 2, from Birmingham to Manchester and to Leeds. This estimate is a number imposed by the Treasury and, in the absence of a detailed cost plan, is simply a placeholder. The Treasury estimates that the net cost to the taxpayer is expected to be £31.5 billion at 2011 prices, or £35.6 billion at 2014 prices; the net cost taking into account the cost, the running cost and all the income—that is the final bill that lands with the taxpayer.

This cost will be borne by all taxpayers, many of whom will derive no benefit from the project. Yet the Government assume that fares on HS2 will be the same as on the existing network. Would it not be more sensible to make those benefiting most from the railway, principally business travellers, contribute more towards the cost through higher fares and relieve the burden on taxpayers generally?

It was unclear from the evidence whether all the necessary infrastructure improvements to complement HS2 were included, and this could push the overall cost much higher. The cost of construction is, surprisingly, up to nine times higher than the cost of constructing high-speed lines in France. Sir David Higgins said that the UK cannot hide behind the idea that the UK is more densely populated than France. We welcome his commitment to learning from international examples to reduce cost.

We heard that there are a number of ways that HS2 could be built at a lower cost. The Department for Transport told us that the additional cost of designing the train to run at 400 kilometres per hour, as opposed to 300 kilometres per hour as in Europe, was 9% of the total cost. Significant savings could also be made by terminating the line at Old Oak Common. This would eliminate the need for expensive tunnelling under London and substantially reduce the cost and disruption over many years of redeveloping Euston station, which has already risen to £7 billion from the original £2 billion estimate. Many witnesses raised concerns about cost escalation. These concerns appear to be shared by the Major Projects Authority, whose recent report gave HS2, for the second year in a row, an amber/red rating. Will the Minister please explain the reason for this high-risk rating and why the Government are refusing to publish its report?

The Government’s principal justification for building HS2 is to provide capacity to meet long-term rail demand and for long-distance travel. From the limited information on rail usage in the public domain, the capacity problem on the west coast main line is caused mainly by commuter traffic, particularly travelling into London. The Government have failed to make a convincing case that there is a capacity problem on long-distance services. The Secretary of State for Transport told us that long-distance services arriving in London in the morning peak hour,

“are already at full capacity”,

but that is not borne out by the statistics that we received. Long-distance services arriving in London between 7 am and 10 am have 57% seats taken on average. Virgin Trains, the operator of long-distance services on the west coast main line told us that its busiest train is the first off-peak train leaving London on a Friday evening. That is hardly surprising when the ticket cost of the last peak train to Manchester is six times more than the cost of the first off-peak—one would wait another 10 minutes or so. This cries out for the introduction of variable pricing to manage capacity bottlenecks, which is often routine in the airline industry.

The crowding statistics published by the Department for Transport last week showed that the busiest trains from Birmingham, Manchester and Sheffield, are the local services. The Secretary of State has now acknowledged that HS2 will mainly relieve congestion on commuter trains, principally into London, yet he continues to claim that intercity west coast services will be overwhelmed by the year 2033-34 under the projections of a 2.2% annual growth in long-distance travel. However, in the Government’s economic case for HS2—a document published last year—a chart showing projected demand for Virgin services from Manchester Piccadilly to London up to 2026, which assumed not 2.2% growth but 5% annual growth, revealed that the trains are only 75% full most of the time. The spike in demand between 4 pm and 6 pm is again most likely to be commuter traffic as the Manchester to Euston services stop at Stockport, Wilmslow and Macclesfield.

The problem with the statistics on long-distance rail is that no distinction is made between passengers travelling between Manchester and London and between Manchester and Stockport on long-distance trains. Both are counted as long-distance journeys. In the absence of detailed ticket sales data, it is difficult to assess the actual demand for intercity travel and therefore assess the validity of the Government’s growth projections.

We were not satisfied that the alternative ways of improving capacity have been rigorously and fully assessed. Additional capacity could be provided by incremental improvements to the existing network—longer trains, fewer first-class carriages and in-cab signalling to allow trains to travel more closely together, for instance. Professor Stephen Glaister told us that these incremental improvements could provide significant extra capacity at a much lower cost than HS2 and at the very least delay the need for the decision to be taken on the need for an additional railway line for some years.

Incremental improvements were rejected by the Government, however, for two main reasons. They would provide only a third of the number of extra seats that HS2 would and the work required would be too disruptive. But the committee concluded that the Government had failed to make a convincing case for why the capacity that HS2 would provide was required. The Government have yet to reveal the price of disruption that HS2 would cause. On both grounds, the comparison is unproven.

The Government’s other reason for building the line is that the improved connectivity between cities would support economic growth and contribute towards rebalancing the economy. That is an important objective that we fully support, but is HS2 the right answer?

While investment outside London is long overdue, the committee was not convinced that the Government had shown that HS2 is the best way of stimulating growth in the cities of the north and the Midlands. Evidence from other countries suggests that London will be the biggest beneficiary economically from a project like HS2. We heard evidence from Emile Quinet, an expert on TGV, that although cities such as Lyon had indeed benefited from TGV, it was Paris which had benefited the most. Studies in Spain and Japan came to similar conclusions. If London commuters benefit the most from the increase in capacity and London benefits the most economically, HS2 could actually widen the north/south divide.

We heard widespread support for improving the regional links between cities in the north to stimulate growth. We agree with the noble Lord, Lord O’Neill, now the Commercial Secretary to the Treasury, who told us in January when he was chairman of the City Growth Commission, that connecting cities in the north is,

“‘way more important’ than making it faster to travel to London from those cities”.

The 2006 Eddington study came to a similar conclusion. As east/west links are poor and north/south links are already good, there is a strong case for prioritising the former over the latter, but following the recently announced pause to work on the electrification of the TransPennine railway, the Government are doing precisely the opposite. This pause seems to be an excuse straight out of “Yes Minister”, dreamt up by Sir Humphrey himself. Can the Minister please decipher its meaning for us?

The cost-benefit analysis of HS2 published by the Government in 2013 relies on evidence that is out of date and unconvincing. To calculate the value of a rail project, the Department for Transport places a value on time saved as the result of a faster journey. For business travellers this is calculated at £31.96 an hour. But this assumes that time spent on the train is unproductive, and that 70% of the transport benefits, which come to a whopping £40.5 billion, derive from this business value of time. As many witnesses have pointed out, time spent on a train is not at all unproductive. Virgin told us that it plans to introduce free superfast internet connectivity on board for all passengers. Following a review by the Institute for Transport Studies which concluded that there is no consensus on how business travel time should be valued, the Department for Transport admitted that fresh evidence of businesses’ willingness to pay was required, due, in their words,

“to the uncertainties and inconsistencies in the existing evidence”.

A further 33% of net transport benefits worth some £19.3 billion are derived from the value placed on non-work travel time; that is, people either commuting or travelling for leisure. These values are based on a survey of motorists that was carried out in 1994. This cannot be the best basis on which to assume almost £20 billion-worth of benefit for a major rail project. Again, the department concluded that the data are old and that fresh evidence is required. We simply do not understand why this work did not take place before the project was launched.

Much of the evidence presented to justify HS2 is either defective, unconvincing or out of date, and the process of oversight falls short of what is required for a major infrastructure project relying on substantial taxpayer money. The Department for Transport and HS2 have both carried out significant analyses of the benefits and costs of HS2, but as the sponsoring body and the implementation body respectively, neither can claim independent objectivity. That, and the failure to put into the public domain the information on capacity that is essential to evaluating the case for additional capacity for HS2, means that we have a £56 billion project requiring £36 billion of public subsidy on which no return is expected and which has failed to be independently and objectively assessed. In my opinion, this points to the urgent need for the creation of an independent body—an OBR for public investment, if you like—charged with the responsibility to review major publicly funded infrastructure projects. Such a body could provide the public, Parliament and the Government with a robust and dispassionate assessment of projects like HS2 and Hinkley Point and help us to determine whether these great schemes are the most cost-effective and appropriate way of investing public funds to meet the infrastructure needs that our country so badly requires.

[Lord Vinson (Con)]

My Lords, I think the House may be interested that I saw Professor Richard Wellings of the Institute of Economic Affairs this morning to get the latest figures. He has done a great deal of research on this, and is mentioned in the publication today. Allowing for all the enormous add-ons that are bound to happen and the linkages necessary to link the new system with the old system, which is an apparent weakness, he considers that the overall cost will be at least £80 billion.

EU: Budget Report

Debate between Lord Vinson and Lord Hollick

Thursday 25th April 2013 Lords Chamber

[Lord Hollick]

My Lords, I want to discuss the political and policy judgments that have been made since the financial crisis. The previous Chancellor, my right honourable friend Alistair Darling, like everyone else, did not see the 2007-08 banking crisis coming, nor the damage that it would do to our public finances, but in the eye of the financial storm, he did an excellent job of judging what needed to be done. He organised the huge recapitalisation of the banks. He sought to find the most effective balance between policies to repair the public finances and reduce public debt and also to promote growth. He recognised that the UK’s ability to finance its ballooning deficit would require the support of the bond markets, which would need to be convinced that the Government were prepared to take the tough and correct measures to achieve those joint objectives. He rightly anticipated that external events might call for additional rebalancing of the policy mix, over and above the deployment of automatic stabilisers. His was a pragmatic and thoughtful response to an unprecedented crisis, and it commanded broad support at home and abroad.

What happened next? One of the present Chancellor’s first and very important decisions on coming into office was to ratchet up the austerity targets and to shun the flexible, carefully nuanced approach of his predecessor and instead opt to wear a very tight financial straitjacket. That approach, which we now know as plan A, was given intellectual credibility by a report from US economists Rogoff and Reinhard, which Osborne cited in a speech as,

“Perhaps the most significant contribution to our understanding of the origins of the financial crisis”.

Buoyed by that report and the plaudits from the hedge funds and bond investors in the City and, crucially, strong backing from the IMF, the Chancellor believed that he had struck exactly the right policy balance between austerity and growth which would lead to the elimination of the structural deficit by 2014-15. Crucial to that judgment was the forecast of strengthening economic growth over that period.

As we have heard from all sides of the House today, that has not come to pass. Indeed, recent employment, bank lending, government borrowing and GDP numbers all confirm that the economy is flatlining. The UK is now the worst performing major economy. As the UK’s performance has weakened, as each forecast is missed and as austerity measures are tightened and extended, confidence—an ingredient vital to economic growth— has evaporated. Domestic consumer spending is depressed, export performance has fallen well short of forecast and companies continue to defer investment projects. Rating agencies downgrade the UK, citing a weaker economic and fiscal outlook and, specifically, the lack of growth.

The high priest of the international bond market, a group that I am sure is high on the Chancellor’s Christmas card list, Bill Gross of PIMCO, the world’s largest bond investor, declared last week that,

“the UK … have erred in terms of believing that … fiscal austerity … is the way to produce real growth. It is not. You’ve got to spend money. Bond investors want growth”.

The intellectual prop of Rogoff and Reinhard turns out to be a shoddy piece of research from the “garbage in, garbage out” school of analysis, with the corrected model—

[Lord Vinson]

Before the noble Lord sits down, he is leading up to a rather important figure. Earlier in his most interesting speech he recognised that Darling had the problem of a ballooning deficit of borrowing. Everything that he is saying now would increase the deficit of borrowing. Would he like to give us the sort of figure that he would like to see that borrowing figure go up to?

[Lord Hollick]

I am coming to that.

The intellectual prop of Rogoff and Reinhard turns out to be a shoddy piece of research because the corrected model shows that highly indebted economies can grow at 2% or more. Perhaps the unkindest cut of all, though, is the IMF’s verdict that plan A is not working. In the light of the weakening economy, it is urging the Chancellor to show greater flexibility and adopt measures that will help the economy to grow. The Chancellor has sought to rubbish this assessment by asserting that the IMF is itself not united in that view. However, my own inquiries suggest that this is not the case and that the damning criticism of the Chancellor’s stewardship is a widely held view within the IMF.

The forthcoming Article IV assessment of the UK economy by the IMF will provide a detailed analysis of the economy and recommendations for policy changes. It will be interesting to see whether the Chancellor chooses to fight the IMF every inch of the way, which may be his instinct, or whether he will see it as an opportunity to recognise that his experiment has failed and that new measures are needed.

As it happens, the IMF assessment coincides with the arrival of Mark Carney, the new Governor of the Bank of England, who last week described the UK as a crisis economy. Billed as an advocate of a more activist monetary policy whose monetary bazooka, according to one recent Treasury briefing, will leave us knee-deep in newly printed money, Mr Carney in recent weeks has begun to row back hard from the far reaches of monetary adventurism. He has made it crystal clear that Governments should not be looking to central banks to return countries to prosperity. Mark Carney will also have noted that his predecessor, who has one vote on the committee, has failed to persuade the MPC in recent months to increase quantitative easing.

I have suggested before that we should not be surprised if, as part of the extended negotiations to secure Mr Carney’s services for the next five years, the Chancellor privately acknowledged the need for more supply-side reforms and fiscal measures to stimulate demand to help to promote growth. The coincidence of the IMF assessment and the new governor’s arrival could just provide the opportunity for the Chancellor to alter course. To do that, though, the Chancellor and the Prime Minister would have to move off their favourite mantra that you cannot borrow your way out of debt. In one sense, that particular fox has already been shot, as the automatic stabilisers have allowed increased borrowing to fill in the financing hole left by no growth. The Chancellor now needs to take that lesson one step further and introduce fiscal measures such as lower NIC and measures to promote investment in infrastructure and new housing stock. Borrowing to invest to promote growth will pay back in increased economic activity, greater confidence and rising tax receipts.

The Government need to stop the endless tinkering with banking rules on capital, funding and liquidity. Alistair Darling bequeathed the coalition a well funded banking sector, with bank shares trading above the levels where the Government had invested. On assuming office, the coalition began reworking the banking rules, a project that continues to this day. Since the start of this Government, bank lending to non-financial businesses has fallen by an unprecedented 19%. This collapse in bank lending will not be reversed until and unless the Government allow them to get on about their real business, which is to provide credit to finance growth.

Will the Chancellor heed the advice of the IMF, the bond markets and business and acknowledge that the public finances can be repaired only if meaningful growth can be achieved and sustained? Waiting for something to turn up is the wrong policy choice. Business, hard-pressed citizens and many on his own Benches will be hoping that he has the political courage to do so. Rather than wasting his time on ludicrous Enron-like efforts to massage the deficit numbers and issuing endless press releases on growth projects that never see the light of day, the Chancellor should deploy his intellect, his energy and his ingenuity in devising and implementing growth policies that will get Britain moving forward again.

[Lord Vinson]

Perhaps the noble Lord could attempt to answer my question. He would give his whole contribution much more cogency if he could come up with a figure for the sort of level that he would like to see the Chancellor increase his borrowing to.

[Lord Hollick]

I am not talking about figures; I am talking about the importance of using the public finances to invest in growth. That is what we need. Without growth, we simply will not be able to repair the public finances.