The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:
"Whilst HS1 provides an efficient service, contributing in an important way to British transport infrastructure, there were costly mistakes in the history of the project. These must not be repeated with HS2.
HS1 was supposed to pay for itself but instead the taxpayer has had to pay out £4.8 billion so far to cover the debt on the project.
The root of the problem is the inaccurate and wildly optimistic forecasts for passenger numbers both when the line was being planned and when the Department restructured its deal with the contractor, London & Continental Railways Limited. International passenger numbers have only been a third of LCR's original forecast and two thirds of the Department's forecast. The Department failed to take into account the growth of low cost airlines or the competitive response of the ferry companies.
This isn’t the first time that over-optimistic planning and insufficiently robust testing of planning assumptions has got the Department into trouble. My Committee's report on the East Coast Mainline raised similar concerns.
HS1 will continue to cost the taxpayer money–£10.2 billion over the next 60 years, so before going ahead with HS2 we need a robust cost benefit analysis.
Some of the Department's assumptions about the benefits of faster travel are simply untenable. For example, the time business travellers save by using high speed rail is valued at £54 per hour yet the time commuters save getting to and from work is only valued at £7 per hour. It is difficult to see how this can be justified. The Department also assumes that all time spent on a train is unproductive. And unrealistic assumptions about ticket prices act to exaggerate passenger demand forecasts.
The Department also told us that it had not considered the benefits and costs of alternatives to HS2 such as investment in broadband videoconferencing or investment in alternative, more local train routes.
It is nonsense that the Department does not have a full understanding of the wider economic impact and regeneration benefits of transport infrastructure, including HS1, to inform future investment decisions.
All these things are crucial for proving the case for investment in long distance travel and demonstrating value for money.
The Department must revisit its assumptions on HS2 and develop a full understanding of the benefits and costs of high speed travel compared to the alternatives."
Margaret Hodge was speaking as the Committee published its fourth Report of this Session which, on the basis of evidence from an expert witness and the Department for Transport, examined the High Speed 1 project and the lessons that need to be learnt from it.
The high speed railway linking London to the Channel Tunnel, known as High Speed 1, has now been fully open for almost five years. Since opening, the line has had a good performance record and the Department for Transport (the Department) can be proud of some aspects of the project. A revised timetable and budget were established in 1998 and the line was constructed within this revised timeframe and revised budget. In 2010 the Department managed the sale of HS1 Limited, which has a concession to operate the line for 30 years, in an exemplary manner. The sale, along with the Department’s restructuring of Eurostar UK, which ran the British arm of the international train service, transferred most of the remaining operational risk relating to the line to the private sector, with the project debt being met by the taxpayer.
There have also been some costly mistakes in the history of this project. The Department originally expected London & Continental Railways Limited (LCR), (which was awarded the contract to build the line in 1996), to service the project debt from future revenues from Eurostar UK (the train operator). However by the end of 1997 Eurostar UK revenues were substantially below LCR’s forecasts. Consequently, in 1998, the Department agreed to restructure the deal and guarantee most of LCR’s debt. The Department’s debt guarantees were called upon in June 2009 and the taxpayer is now servicing and repaying the project debt of £4.8 billion.
Passenger demand for international services on the line has been much lower than forecast and that is the root cause of the failure of the original deal and of the call on the Department’s debt guarantees. International passenger numbers have only been one-third of LCR’s original 1995 forecast and two-thirds of the level the Department forecast in 1998. The Department's planning assumptions for the line were wrong; it failed to properly consider the impact on passenger numbers of the growth of low cost airlines and the competitive response of ferry companies. Over-optimistic forecasting and insufficiently robust testing of planning assumptions is a recurring problem, as our previous report on the East Coast Mainline has demonstrated. The Department must learn the lessons from the past and ensure that cost benefit analysis is solid as it develops its plans for HS2.
The Department still does not have plans in place to evaluate fully the impact of High Speed 1. Total taxpayer support for the line, over a 60 year period to 2070, has an estimated present value of £10.2 billion. Benefits for passengers from shorter journey times over this period have an estimated present value of £7 billion. The basis of this cost/benefit analysis is open to challenge. There is a risk that the value of passenger benefits is overstated, for example because the Department’s methodology assumes that all time on a train is unproductive, and a further risk that the wider economic benefits are not taken into account because no appropriate analysis is made.
While difficult, it is disappointing that the Department has not attempted to understand the economic impact and local regeneration benefits achieved so far from High Speed 1. Also it has not assessed the impact on regeneration of decisions on where to locate stations. The Department will need to evaluate HS1’s regeneration benefits and wider economic impacts worth many billions of pounds if the project is to demonstrate value for money. To learn from past decisions and so make well-informed investment decisions in the future the Department, as well as other government departments investing in infrastructure, must improve its understanding and measurement of the economic and regeneration benefits of new infrastructure.