Economic Case for HS2 (Economic Affairs Committee Report)

Lord Wolfson of Aspley Guise Excerpts

Wednesday 16th September 2015 Lords Chamber

[Lord Wolfson of Aspley Guise (Con)]

My Lords, HS2 from a business perspective is a conundrum: a great idea, an inspiring vision and yet, sadly, a very bad investment. Of course there are manifest benefits, but they simply do not justify the costs. In his committee’s excellent report, the noble Lord, Lord Hollick, rightly asked why businessmen like me should not pay for the supposed benefits we receive from faster journeys on this railway. The answer, I am afraid, is that it would bring into sharp focus the fact that we would not pay the extraordinary price required to justify this faster railway: a 30% to 100% premium on fares to travel a little bit faster for people who are making better and better use of their time on railways simply would not be worth it.

There is another and deeper reason why the failure to translate benefits into revenue streams is financially dangerous in this appraisal. It allows the benefit cost ratio to pull off an extraordinary accounting trick. The BCR is essentially designed to appraise government services that are provided for free—schools, hospitals et cetera—but it begins to fall down and is not fit for purpose when it assesses revenue-generating projects because the BCR assesses only non-financial benefits. It conveniently assumes that much of the capital cost can be eliminated from the appraisal by offsetting it against discounted future revenue streams. In doing so, it effectively eliminates £30 billion of costs from the returns calculation, vastly overstating the BCR and the returns on sunk capital.

I gather that some may not be hugely interested in this, so let me give an example. Be wary when the Government claim that HS2 will deliver £2 of benefit for every £1 invested. It is simply not true because it does not include the dead weight of capital that has been offset against future revenues. It is like a business promising you a return of 100% on a £1,000 investment and only in the small print mentioning that you have to invest a further £10,000 at 2.5% in order to get this special return.

This problem relates directly to a second and more fundamental problem of the BCR. In business terms, it assesses only the net present value of an investment and ignores the equally, often more, important measure: the internal rate of return. In doing so, it conceals the fact that this project delivers pitifully low returns. It is like being asked to choose between two options: Option A, which doubles your money, and Option B, which gives a 20% increase. Everyone would choose Option A until they were told that Option A would take 100 years to give you your return and Option B would do it in 18 months. Then you would change your mind. That is the difference between looking at internal rate of return and net present value alone.

This might sound like an accountants’ tragedy that will not affect real people, but it will. If we have learnt anything since the credit crunch in 2007, it is that the Government’s capacity for debt is finite, and by frittering away the nation’s balance sheet on this project we will miss the opportunity to invest much more wisely in other infrastructure. This project will decimate our transport capital budget for years to come.

The alternative to HS2 is not another grand project, it is myriad small, high-return projects that would deliver benefits in the near future: bypasses, flyovers, underpasses, junction improvements, filter lanes, bridges, commuter line upgrades, carriage improvements, platform improvements and more. Such projects would serve people every day of their working life rather than just for the odd long-distance journey. They would be projects that would serve the many rather than the few. Transformative projects in every town and city of our nation could improve the quality of life and productivity of millions of people who will instead be stuck in slow, crowded commuter trains and unnecessary daily traffic jams—all so that a relatively small number of the people can whizz past on a very fast train while they are sitting there. If they are lucky, they will see them.

Listening to this debate, my worry is that the proponents of HS2 have made the terrible business mistake of falling in love with their investment, and that that love in its ardour has blinded them to the costs, risks, debt, downsides, potential redundancy and, most importantly, lost opportunities. I hope that this excellent report brings a little sense to this debate because it seems that for the proponents of this project there is literally no cost too great for HS2. So I finish with a simple question for the Minister: at what price would we not build HS2?