The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:
“The Department for Transport has yet to present a convincing strategic case for High Speed 2.
“It has not yet demonstrated that this is the best way to spend £50 billion on rail investment in these constrained times, and that the improved connectivity will promote growth in the regions rather than sucking even more activity into London.
“The pattern so far has been for costs to spiral - from more than £16 billion to £21 billion plus for phase one – and the estimated benefits to dwindle.
“The Department has been making huge spending decisions on the basis of fragile numbers, out-of-data data and assumptions which do not reflect real life, such as assuming business travellers do not work on trains using modern technology.
“As usual with NAO reports, the Department had agreed the facts in the report as accurate before publication. However, as soon as the report was published, the media reported unnamed departmental sources as claiming that it contained errors and was based on out-of date analysis. These claims were quite unfounded.
“The Department has ambitious and, in our view, unrealistic, plans for passing the Bill for High Speed 2. The timetable is much tighter than for either High Speed 1 or Crossrail, despite the fact High Speed 2 is a much larger programme.
“In my Committee’s experience, not allowing enough time for preparation undermines projects from the start. A rushed approach contributed to the failure of the InterCity West Coast franchise award.
“The Department has increased its High Speed rail team, but getting the right mix of skills is challenging and the Department lacks the commercial skills necessary to protect taxpayers’ interest on a programme of this size.”
Margaret Hodge was speaking as the Committee published its 22nd Report of this Session which, on the basis of evidence from the Department of Transport, examined the early preparation of the High Speed 2 programme.
1 In January 2012 the Department announced its decision to proceed with High Speed 2; the proposed Y-shaped high speed rail network linking London, the West Midlands and the North of England. Phase one, from London to Birmingham, is due to open in 2026 and phase two, from Birmingham to Leeds and Manchester, is due to open in 2033. The indicative budget for the network has now been increased to £42.6 billion plus £7.5 billion for rolling stock. The Department is advised and assisted by HS2 Limited, a company that is wholly owned and funded by the Department. The Department plans to present the High Speed Rail Hybrid Bill, required to provide the necessary powers to construct and operate the line, to Parliament by the end of 2013, with the aim of receiving Royal Assent by the end of March 2015.
2 The Department has not yet presented a convincing strategic case for High Speed 2. The Department has yet to demonstrate that this is the best way to spend £50 billion on rail investment in these constrained times; that this is the most effective and economic way of responding to future demand patterns, that the figures predicting future demand are robust and credible and that the improved connectivity between London and regional cities will enhance growth and activity in the regions rather than sucking more activity into London.
Recommendation: The Department should publish detailed evidence which clearly shows why it considers High Speed 2 to be the best option for increasing rail capacity into London, improving connectivity between regional cities and rebalancing the economy.
3 So far the Department has made decisions based on fragile numbers, out-of-date data and assumptions which do not reflect real life. The overall budget for phase one, including all contingency, has risen from £16.3 billion to £21.4 billion. The Department has set HS2 Limited a target cost to deliver phase one of £17.16 billion. The estimated economic benefits have gone down, in part due to an error by consultants in 2010 when they double-counted expected benefits worth nearly £8 billion. On top of that we have concerns that the Department’s calculation of benefits for business travellers is based on out-of-date survey information which is more than ten years old. It assumes business travellers cannot and do not work on trains using modern technology. Furthermore, the business case does not include a complete cost for the impact of disruption, for example, to local businesses during construction.
Recommendation: The Department’s decision on phase two, due by the end of 2014, should be based on a business case for the Y-network prepared using up to date information and realistic assumptions, particularly on the benefits to business travellers.
4 The programme’s large contingency appears to be compensating for weak cost information. The Department is 95% confident that it will stay within the £42.6 billion indicative budget it has agreed with HM Treasury for the full Y-network (excluding the £7.5 billion cost of trains). This figure includes £14.4 billion (a third of the total budget) for contingencies, although even this large contingency would not cover significant changes in scope, such as new stations or tunnels. The Department has allocated a higher level of contingency for phase two because its cost estimates are not as developed as those used in phase one.
Recommendation: The Department should allocate its contingency allowance to specific risks to the programme to justify the large amount it has set aside for unexpected costs. It should also set out the processes it will use to keep tight control over the use of the contingency allowance.
5 The Department’s aim to present the Hybrid Bill by the end of 2013 is ambitious and its timetable for receiving Royal Assent by the end of March 2015 appears to be unrealistic. The Department’s timetable for planning and passing the Bill for High Speed 2 is significantly shorter than either High Speed 1 or Crossrail, even though it is a much larger programme. In our experience, not allowing enough time for preparation undermines projects from the start, something that was evident in the Department’s rushed approach that contributed to the failure of the InterCity West Coast franchise award. The Department assesses that costs will grow by between £7 million and £10 million for every month of delay. Given the scale of this programme and the extremely challenging timetable, we remind the Accounting Officer that he has a responsibility to advise ministers on whether the work needed for both the Hybrid Bill and the programme as a whole can be delivered to the required quality within the existing timetable.
Recommendation: The Accounting Officer should assure himself and advise ministers on whether the Department and HS2 Limited can deliver both the Bill and the programme as a whole within the set timetables and to a high standard.
6 The Department has a shortage of the commercial skills it needs to protect taxpayers’ interests on a programme of the scale of High Speed 2. The Department has significantly increased its high speed rail team with, at the time of our hearing, some 70 staff in post out of a target of 100. However, getting the right mix of skills is challenging and the Department has identified that it has a shortage of major projects expertise. This expertise is vital if it is to ensure that relationships and roles between the Department, HS2 Limited, and the many consultancies supporting the programme, are crystal clear.
Recommendation: The Department should set out how and by when it will secure the right level of resources and mix of expertise to enable it to oversee a programme of this magnitude, and challenge HS2 Limited and its contractors effectively.