26 October 2011

In a report released today, the Adam Smith Institute exposes the weaknesses in arguments for High Speed 2 and argues that the case for the project is fundamentally flawed. The research reveals the huge cost of HS2 to the taxpayer, and suggests that many of the uptake projections are overoptimistic. Looking at HS1 (London to the Channel Tunnel) and international examples, it is clear HS2 will not make enough revenue to cover operational and construction costs and will bring very few tangible benefits.

The cost to the taxpayer

• HS2 will become a state financed project. The first phase will cost £17bn and when extended to Scotland, £50bn, – funded at great cost to the taxpayer at a time of austerity and increasing debt interest payments
• The potential for going far above the £4bn “optimism premium” set aside for overspending is high, especially in light of current inflation. Public pressure for more tunnels (which cost much more per km to build) through environmentally sensitive areas such as the Chilterns will push up construction costs.
• DfT will have to pay for HS2 mainly through debt markets. This will put DfT’s budget under strain, meaning there is less money available for investment elsewhere on the UK railway network

Demand and profit predictions

• The figures don’t add up for HS2 to make a profitable return. HS1 (London to the Channel Tunnel) cost £5.7bn but raised only £2.1bn when sold off. Alarmingly, the financial case for HS2 is even weaker than for HS1.
• Over-forecasting of passenger numbers has plagued previous rail projects in the UK. London and Continental Railways (LCR) forecast passenger numbers for Eurostar for 2004 as being 21.4 million. In reality, passenger numbers were a third of this figure.
• Predictions of passenger numbers and demand for High Speed 2 may also be overambitious. This would have huge repercussions for HS2’s profitability.
• Passenger predictions do not take into account the potential response of classic train line franchises and airlines to generate increased demand for their service in the light of HS2 competition.

What benefits?

• Environmental benefits have been cited as one of the key merits of HS2. There is little environmental case for HS2. Carbon emission reduction projections are weak and real environmental benefits won’t be realised until Phase 3 (extending to Scotland) in at least 30 yrs time.
• HS2’s analysis suggests that ‘the impact of HS2 on carbon emissions will be between an increase in emissions of 26.6MtCo2 and a reduction of 25.0MCo2 over sixty years’. This is a tiny change, and over that time frame UK rail operations are expected to have generated a stable or lower carbon footprint than currently.
• The construction of the first phase of HS2 will have a major environmental impact along the route, especially the Chiltern Hills are and may blight house prices locally
• The justification for HS2 is based on intangible benefits such as a narrowing of the North/ South divide. A similar reason was used to justify the investment of the TGV in France – its losses continue to be underwritten by the French taxpayer.
• Looking at Europe we see that nearly all high-speed rail projects are subsidised. The TGV in France has caused SNCF’s debt to rise to c£25billion. The World Bank warned in 2010 of the debt created by high speed rail systems talking of the ‘near certainty of copious and continuing budget support for the (high speed rail) debt. The government should take heed of these warnings.

Commenting on the report ‘High Speed Fail’, Sam Bowman, Head of Research at the Adam Smith Institute, adds:

“The case for High Speed 2 is based on wildly unrealistic projections. It will probably end up making a loss, and will mean a lot more borrowing for the government in the mean time. There are no significant benefits to HS2: it will cost a lot of money and achieve virtually nothing.

“Governments are spectacularly bad at predicting the future – taxpayers should not be forced to pay for a project with no significant benefits. To spend at least £17 billion and up to £50 billion on a train network for which there is no demand is wasteful enough; to do so at a time of austerity is obscene.

“The HS2 project has itself become a runaway freight train. If the government is serious about getting tough on wasteful spending, it will hit the brakes on HS2.”