“The capital cost at 2011 prices of building the complete Y network is £32.7 billion. At present values, it will generate benefits of up to £47 billion and fare revenues of up to £34 billion over a 60-year period.”
Justine Greening, 10 January 2012

The background

The first phase of the “most significant transport infrastructure project since the building of the motorways” got the go-ahead today.

The Transport Secretary, Justine Greening, has given the green light to the London to Birmingham section of the High Speed Two (HS2) rail network, which could now be up and running by 2026.

By 2033, the “Y network” stretching further north to Manchester and Leeds ought to be in operation, potentially slashing the journey from London to Edinburgh to three-and-a-half hours.

The news has revived a long-running argument over the cost-effectiveness of the project. The government is sticking to optimistic projections of future economic benefits despite widespread scepticism from HS2′s many opponents.

The analysis

On the same day Ms Greening announced the launch of HS2, the Department for Transport (Dft) published a revised cost-benefit analysis setting out the government’s whole case for the supposed economic benefits of the project.

It’s a document central to the government’s case, so it’s disturbing to find that the numbers contained in it do not match the figures that the government are trumpeting.

In a written ministerial statement, Ms Greening said: “The capital cost at 2011 prices of building the complete Y network is £32.7 billion. At present values, it will generate benefits of up to £47bn and fare revenues of up to £34bn over a 60-year period.”

The first problem with this is that the minister is not comparing like with like. Comparing the 2011 cost with the 2012 benefit of course makes the gap seem wider, as last year’s prices are slightly lower than this year’s.

The next problem is that these aren’t all the costs of HS2. Ms Greening has included the presumed additional revenue from operating the new line without adding the operating costs, like paying the people who will collect the fares. These costs add another £21.7bn to the bill for the taxpayer.

So a more honest comparison would be between the total projected cost of building and running HS2 of £58.1 billion and overall benefits of £73.2bn to £80.9bn.

To these (supposedly) quantifiable benefits – based on fares and increased productivity due to quicker journey times for workers – the DfT adds “wider economic impacts”, such as the positive long-term effects of better transport links between firms in the same sector.

These benefits, the department says, are “harder to quantify to value”, but it has had a go anyway, coming up with a figure of £5.7bn to £12.3bn. If these notional benefits ever come to pass, it means the taxpayer will recoup between £1.80 and £2.50 for every £1 spent on HS2.

Without the “wider economic impacts”, the supposed benefit is a less impressive £1.60 to £1.90 for every £1 spent.

The last and biggest problem is that, even if we go with the 2011 capital cost, the figure given in the study is not the one Ms Greening quotes – £32.7bn – but £34.6bn. The updated figure for 2012 is £36.4bn, about £3.7bn more than the sum the minister mentions.

Not a vast difference in cash, perhaps (although it’s all relative – £3.7bn would employ more than 100,000 nurses) but a bit of a blow to the credibility of the cost/benefit analysis.

We asked the Department of Transport who had got it wrong: the minister or the number-crunchers?

A spokesman was not immediately able to offer a full explanation, but insisted the lower figure is the correct one.

Logically, that casts doubt over the robustness of the numbers quoted in the cost/benefit analysis, but we await a proper answer.

Even leaving these unanswered questions about the details of the government’s analysis aside, many HS2 critics have cast doubt on the whole methodology behind the study.

The Adam Smith Institute points out that passenger numbers have been over-forecasted in previous rail projects like the Channel Tunnel Rail Link.

Another pro-free market think-tank, the Institute for Economic Affairs, says civil servants have failed to take into account “planning blight” – the effect on house prices and growth in the corridor of land along the route, the IEA says.

And the HS2 study assumes that cutting travel time is good for productivity because time spent on a train is wasted time for business travellers, whereas many people can in fact now happily beaver away using WiFi computers and mobiles during long commutes.

The Centre for Economics and Business Research, which claims  to be unbiased, says there is enough capacity in the existing rail network, and says the cost to the taxpayer has been underestimated. For every pound spent, the state will only get 50p back, the think-tank gloomily concludes.

The verdict

All critics agree that economic forecasts that stretch 60 years into the future are very unlikely to be accurate.

The government’s projections of the benefits are based on future ticket prices, demand, economic activity and how the railway line’s competitors are likely to respond. 

If any one of these variable changes significantly over the next few decades – and it seems inconceivable that none of them will – that will throw the assumptions completely out of whack.

We’re not saying that HS2 is definitely a bad idea, but we are saying that assumptions made now about the UK economy and transport network 60 years from now are very unlikely to be accurate.

A more immediate problem is the fact that, on the day it announced the biggest infrastructure project for generations, the DfT released two different figures for how much it will cost, and is currently unable to offer an explanation why.

For that reason, Ms Greening’s assessment of economic pros and cons of HS2 are going to stay at the Fiction end of the FactCheck-ometer.