High Speed Railways such as HS2
Transport systems are central to moving people and goods around the country, and not only are they central, but the choices we make have implications for CO2 emissions, greenhouse gases and the impact on daily lives. Now the infrastructure investment in these projects is also a key part of driving supply chains, and they have supply chains themselves to get the raw materials, the people and all the equipment needed to build the project to the places where they’re needed. So you can see that major infrastructure projects are a critical element of building successful supply chains in the country. When new transport infrastructure is built, it allows new capacity, which means that supply chain services can improve, not necessarily by the immediate investment in the piece of infrastructure that’s happened directly, but because of the relief that that infrastructure presents to other parts of the system. So, for example, if you were to invest in something like HS2, that will relieve pressure on capacity in other parts of the rail network, which releases those resources for the movement of goods and services around the system and people, of course, and more broadly in the whole transport system. So it goes wider than the rail network. It has impact on roads, road traffic, air traffic and sea transport, because we’re talking about what Theodore Levitt identified as the strategic options. So it’s important not to be myopic focusing just on railways. To use Levitt’s argument, the infrastructure can also help companies not to be myopic assessing their options. They can reach a broader market by allowing people, as well as goods and services, to get to places they need to be on time leveraging the transport system not simply rail. Increasing capacity gives more options for growth.
Governments have a major responsibility in ensuring that the infrastructure is in place so that the nation can increase its productivity and its output, in other words, grow its national income. Infrastructure improvements increase the transport system capacity, reduce congestion and improve reliability of the system. So you can see that these are all benefiting supply chains. Through the improvement of the infrastructure, supply chains will also benefit. It’s important that governments have the vision to understand the implications of infrastructure investment decisions to the wider economy.
Now today is all about investments in major infrastructure projects and I’m going to focus as a central piece on the High Speed 2 project, which is an ongoing project in the United Kingdom, or at least we think it is until the government changes its mind. The project is under development to make a high speed rail network in the UK with transport links between major cities, including London, Birmingham, Manchester and Leeds originally, but the project has been the subject of much debate, scrutiny and, of course, ever increasing costs.
BREAKING NEWS
HS2 was scrapped by the UK PM Rishi Sunak and the decision was communicated to the Conservative Party Conference held in Manchester on Wednesday 4th October 2023. It was stated this would save £36 billion which would be repurposed. The problem for the PM is now one of credibility and trust as critics are doubting that this will happen as described. There was little detail in the speech and that will probably unfold in future although many doubt that the Conservative Party will be in government after the next General Election next year. The Financial Times (5th October) reminded us that Rishi Sunak in bidding for the PM post last year said he supported HS2 including the both parts of the Y legs (Birmingham to Manchester and Leeds). Less than one year later he was the PM to pull the plug. This is why people are so distrustful of politicians. Previous Conservative Prime Ministers all supported this project during the past 13 years of their government (Truss, Johnson, May and Cameron). Claims that facts have changed are ludicrous as former PM David Cameron said after the announcement. Many Conservatives including Andy Street, Mayor of Birmingham have rebuked the PM and Government for this short sighted decision. It demonstrates how politicised and divisive large infrastructure ibvestments can be. It raises many questions about the so called levelling up agenda that this government has been keen to promote. Many Northern polticians and voters doubt this commitment and are furious about this failure of policy and waste of public money with ‘spades in the ground’. Devolution may not only be just for Scotland I overheard one say.
The project is expected to stimulate economic activity and create jobs. It will reduce travel times between major cities, improving connectivity and accessibility, and it will increase capacity on the rail network system. It will trade traffic away from short distance air travel and it will reduce the carbon footprint as a consequence, the use of green tunnels and tree planting will help mitigate any environmental impact. The downside to the project it’s experienced significant cost overruns. The current projected cost of phase 1 is £44.6 billion. The environmental impact of the project has been some concern, particularly in relation to the loss of ancient woodlands, and the project has faced opposition from some local communities who would be affected by the construction.
The Birmingham to Leeds leg of the project has been scrapped, as has the Golborne spur from Manchester, and currently under threat is the Birmingham Manchester leg, and that won’t leave much of the HS2 original plan intact. The northern part will be completely missing, and that was the big plan in the initial project not just the link between London and Birmingham, but to open up to major cities in the north Manchester and Leeds. And there’s a separate project, of course, Northern Powerhouse Rail (NPR) going from Liverpool to Hull, but that’s already been scrapped. The other thing about this project is it’s due to finish 6 miles short of Euston Station, and the government are contemplating cutting the link from Old Oak Common, which is six miles west of London, to the centre of London to save £4 billion. But for many that destroys the whole project because it means you won’t be in central London in the times they’ve given. You’ll be six miles out.
In the past, infrastructure projects have often overshot the budget. I’m going to just list a few here Crossrail had an initial budget of £14.8 billion and it ended up costing £17.6 billion. It first opened in June 2022 and stage three May 2023, and the final cost overall for the project was £18.9 billion, so significance increase in cost. I’ll return to some of the detail a little later.
Heathrow Airport
Heathrow Express original budget £4 billion. A joint venture between BAA and British Rail work began in 1993 6.8 km (4,2 miles) one single bore tunnel. The project was conceived in 1983. The line opened in 1998. It took twenty years to complete the project. Tunnel collapse and subsidence added £150 million to costs which were not planned.
The construction of a third runway at London Heathrow had been delayed since plans were first approved by Gordon Brown and the Labour government in 2009. As Europe’s busiest airport before the pandemic and the only hub airport in the UK, the economic case for expansion estimated it would generate £61 billion worth of economic growth and create about 77,000 local jobs by 2030. It increased capacity by about 260,000 flights a year. However, the plans have consistently been opposed by environmental groups. It was cancelled by the coalition government of 2010 but re-adopted as a policy once again in 2016. But it was successfully challenged by opposition groups in February 2020 and it now looks as if it will never get built in the immediate future with the Net Zero targets for 2050 which came out of the Paris Agreement in 2015. The Supreme Court overturned the decision, though, in December 2020, when Heathrow said it would be built with the climate change policy being considered. So, they can now once again reapply for planning permission for the third runway. But the pandemic has seen numbers decline at the airport and Heathrow made losses of about £3.8 billion over the course of the Covid-19 pandemic. Battersea Power Station was another project that went on for a number of years. It was led by a Malaysian consortium and originally projected to cost about £9 billion. That was back in 2013. It’s on a 42 acre brownfield site on the south bank of the River Thames and you’ll have seen it. It’s an iconic building. If you ever go to London, you’ll see it standing there proudly. It closed back in 1975 as a power station. It had a number of proposals. One was for a theme park and Chelsea Football Club did at one time consider building their new stadium where the site is. It did eventually begin to redevelop and the first stage was completed in 2017 and that included a number of flats, restaurants and leisure facilities and a small cinema and theatre, and an extension to the northern line on the underground system connected the station to London’s underground network and that opened in 2022. The next phase of regeneration will see the building open to the public and it’s going to host Apple’s London campus. The US tech company will occupy six floors of the Brick Power Station with about 1400 employees in situ. Beneath the office there’s shops, a food hall and the old turbine halls will become a 2000 capacity event venue. It’s a mixed use development 20,000 new homes, 250 shops, cafes and restaurants and 19 acres of public space with panoramic viewing platforms at the top of one of the power stations four chimneys.
Hinkley Point C
Hinkley Point C is another major infrastructure project. It will be completed in June 2026, had an original budget of 18 billion and it’s currently estimated to be costing 23 billion. It will be a 3.2 gigawatt nuclear power station, generating 7% of the UK’s total electricity supply enough for about 6 million homes. Over 22,000 people have worked on the erection of the new nuclear power station. It suffered from delays but will be completed by 2026.
Crossrail London
Crossrail London is probably one of the longest projects. It took many years to finally develop the Crossrail system, but it now takes about 10 minutes to get from Liverpool Street in the east to Paddington in the west of the city. The third stage of the project is completed this year and that means passengers from Reading to Heathrow Airport. There are 41 stations on the line, including Bond Street, Tottenham Court Road, Farringdon and Canary Wharf. It was approved in 2007 and construction began in 2009, but of course it had been going a long time before that. There were many plans to have this Crossrail system, but it’s such a major project and would cause quite some disruption across the city as properties were taken out to accommodate the Crossrail project. It’s about 4 billion over budget, which doesn’t seem a lot, and it’s over time by about four years. 38 meters of tunnel were completed every day and there are 42 kilometres of new tunnels making up the Elizabeth line. It was the largest infrastructure project in Europe. British Rail had to build special trains. Class 345 trains were built by Bombardier for use on the network and they carry about 1500 passengers at one time. 200 million passengers will be served by this underground line every year.
If we look at the world’s largest railway projects and the cost of those in recent years High Speed 2, HS2, US$136 billion was the sum set aside for that in 2020. Chuo, shinkansen US$84 billion. California High Speed Rail US$80 billion. Northern Powerhouse Rail had a budgeted cost of US$47 billion. Suburban rail loop US$34 billion. Grand Paris Express US$31 billion and the Crossrail project US$24 billion. So, you can see, building railways is a costly business.
HS2
In the United Kingdom the rail system needs some serious investment to ensure capacity. You have to remember it’s the oldest railway system in the world. It began in the 1830s in Liverpool, Manchester and Darlington (Northern Towns and Cities) with Stevenson’s Rocket Trials and, of course, prior to that, there was a race for the development of the most efficient type of engine to run on tracks. Trevithick’s Cornish Mine was the other example of an earlier rail system, but for passenger transport, it started around the 1830s and it was a very efficient means of getting large numbers of people around the country. The HS2 project was a new high speed railway that was developed to link London, the Midlands, the North and Scotland, and it was supposed to link more than 25 stations while serving 30 million people and planned to be developed in three phases. The project was expected to be complete by 2035. The original estimated cost was £56 billion, that’s about US$72 billion, and that was according to the 2015 UK budget. But the estimated project has since more than doubled in cost and the latest figures in 2020 were said to be £136 billion and £106 billion, but of course today they’ve gone up further. But no project ever stays at the original budgeted price, and you might ask well, why isn’t that the question? Well, all sorts of things happen. Inflation happens, the value of the pound decreases, the price of materials rises and even if you’ve got fixed price contracts, you can’t expect contractors to pay for the inflated price of materials that occurred during the period of the project. And of course, labour costs go up too, because every year they’ll be budgeted for wage increases, but not perhaps at the rate at which they actually happen. And of course, some of these major projects have so many supply chain partners that they’re overly complex to manage, and to keep all the things to budget and on cost is an exceedingly difficult challenge.
The HS2 project was anticipated to cut travel time from Birmingham to London. It was estimated to cut travel time from 1 hour 21 minutes from Birmingham to London to about 52 minutes. Now that’s not the real essence of the project, although that’s impressive in terms of time. The real focus of attention was to build capacity for an aging rail infrastructure and it was supposed to run between Birmingham and Leeds too, and it would reduce from 2 hours to 49 minutes. Journey times between Manchester and London were to reduce from 2 hours 7 minutes to 1 hour 7 minutes, which is quite impressive. So, the times are impressive in themselves and that’s fit for a 21st century economy where time is of the essence.
The bullet train, as it’s known in Japan, runs between Tokyo and Nagoya has an investment of US$84 billion, that’s 9 trillion yen. It’s a 286km line passing through tunnels. It’s a 40 minute journey with a maximum speed of 500km per hour. California High Speed Rail runs from northern to southern California through the Central Valley. It’s a 1300km long high speed train system and the California Highway Speed Rail Authority estimates the cost to be US$80 billion. It’s scheduled to be completed by 2040 and it’s the first high speed train system being developed in the United States. It’s expected to offset more than 3500 tons of harmful pollutants and it’ll take about 400,000 vehicles off the road each year.
Northern Powerhouse Rail has currently been scrapped. It was to be a new rail network in the north of England, enhancing the rail capacity at an estimated cost of £39 billion, and it was touted as being the largest investment in transport in the region since the Industrial Revolution. Transport for the North is responsible for the development of the NPR program and Prime Minister Boris Johnson committed to funding for the first stage, which involved the development of the line between Leeds and Manchester in July 2019. It would have improved journey times between major economic centres in the north and access four more cities within 90 minutes once it was operational in 2040, but this is no longer government policy. It would also have improved rail capacity relieving congestion on the routes between west to east of the UK. With freight removed from the passenger routes.
Now you can see that all these major infrastructure investments are very costly. But you have to compare the distances and the complexity of the investment to understand the cost. And it’s not just about cost. It’s about securing a future that benefits people, jobs and jobs throughout the supply chain. Hs2 was estimated to generate about 30,000 jobs and 1300 apprenticeships, so it’s a significant investment in employment, and to cut it doesn’t seem sensible. The railway system in Britain is still suffering from the cuts made by Dr Beeching in the 1950s, with many local lines destroyed during that period, and probably what we’re witnessing right now is an incredible waste of money on the spilt milk in this project of HS2, plus a lack of faith in the future. Leadership is the key to all major investment programs. You have to have belief in what you’re doing. The leadership has to be strong and it has to bring people with it in the way it talks about the project and the way in which it manages the project, and the management of the project is key to making a project work. You have to be involved, you have to be hands-on and you have to be confident that the people you put in place and in charge of these projects are the right people to deliver the project on time, on cost.
So, what’s gone wrong? Well, let’s look at a few economic truths before we begin to unravel the HS2 project, particularly because it’s a live project, it’s one in progress, or it may not be, depending on government policy but we need to understand the economic proposition. Any project starts off with a plan and that plan for the project has to be costed. And once the plan is costed, approved and signed off, it’s in development, as Prime Minister Sunak in the UK puts it – spades in the ground, and so, from a financial point of view, you have to have the finance in place to continue with that plan. And this usually involves some kind of investment appraisal. And often these big projects continue over a number of years and therefore they have to discount the future cash flow of the project to the present cost estimate, the cost budget, and that depends on how they see the value of money change throughout the lifetime of the project to set a discount rate that’s appropriate, and it also requires a critical path to be developed that manages the time of the project throughout its life.
So, for example, if I said I’m going to invest £100,000 over a 10 year period, I have to estimate how much the value of £100,000 is going to change over that period, and account for that by putting in an additional sum for inflation over that period of time. In other words, as money loses value, it will be more costly to buy labour materials and incur the overheads for the project. And so, time and the discount rates are critical to the management of any project. And this is why projects never and I say never will never come in on time. And, of course, how you manage the communication around that to the public is especially important. The public think well, you said it was going to cost £30 billion. It should only cost £30 billion. Why is it costing more? That’s taxpayers money. Well, of course it is, but it’s always going to cost more because it goes into the future and, as I’ve explained, money loses value over time. Now, of course, there are also wasteful things that happen and those are caused by delays in the elements of the project, so key parts of a project could be delayed. If you’re digging to make lots of tunnels and you hit a problem underground, then that could delay any project significantly and that might require unforeseen expenditures to put the problem right. So, any major project like this is going to face problems, and I just say this as a caveat to what comes next.
Spending on the HS2 project so far is about £20 billion, and that’s for phase one. A further £11 billion is already contracted out. That means that most of the scheme’s current £40 billion target cost is already earmarked, and these figures date to January 2023. Hs2 has Britain’s new zero carbon high-speed railway. According to the UK government, the turbulence that surrounds HS2, some would call chaos really stems from the instability of government and the change of leadership, perhaps in the past couple of years. Prime Minister Boris Johnson committed to HS2 and to building Northern Powerhouse Rail back in February 2020. He said at the time he had the guts to take a decision, no matter how difficult. That will deliver prosperity to every part of the country. But there have been a series of changes since then. In 2015, net transport benefits included wider economic impacts and phase one would bring 32.8 billion, the full phase including 2A2B, that’s, the full Y network. The Manchester Leeds elements of the HS2 project were then costed at 94.7 billion pounds of wider economic impact, the total cost of the project £108.9 billion and the revenues £45.4 billion. Net cost to the government £63.5 billion. So, the benefit to cost ratio with the wider economic impacts for all stages of HS2 were estimated to be 1.5 billion, and it was always expected right from the start that the value for money category would be low to medium. The Northern Powerhouse partnership has a lot of detail on the website about this and I suggest, if you’re really interested, you should get along there and take a read through what’s happened. It’s all highly informative.
After David Cameron gave up the Prime Ministership following the Brexit vote, he was on the wrong side of that. You may recall. Theresa May took over as Prime Minister and she supported HS2. Boris Johnson, when he took over as Prime Minister, supported HS2. Liz Truss, when she became Prime Minister after Boris Johnson left government, supported HS2. It is not clear if Rishi Sunak, who is now the Prime Minister, ever supported HS2 but he was part of a Conservative Government that did under previous Prime Ministers including being in cabinet under Boris Johnson. There seems some doubt about his position and he repeats the same replies repetitively when asked about HS2, almost an AI like PM response. With all the conjecture in the press right now it appears that it the project is abandoned or at least put on hold for a future government to address. If you’re listening to this program at a future time, of course you’ll already know what happened and I guess it will either be good news or bad news from your point of view, depending on what happened.
The Future
Capacity is a major part of the decision making process when it comes to rail investment. Often existing infrastructure is congested and to relieve it is necessary to build new lines that can share the burden and improve the flow. It is the same for road building and for airports or shipping ports. There are a few things that we can be certain about, and one of them is that transport infrastructure investment including railways are a good for productivity. Railways in particular are a way to move large numbers of people around a country at relatively low cost and low impact on the environment compared to other forms of transport. That being the case, rail projects tend to be a good investment and if we were to look across different continents in Japan, they’ve made big investments in the railway. In California, they’re making a big investment in a railway system and that’s the land of the automobile, remember. And across Europe, the rail system has been heavily invested in, and rail systems and transport infrastructures are always a public service and a public cost. They need big government to invest. Railways cannot be created without support from government, and we should expect governments to invest in infrastructure that’s going to bring benefit to communities across the country, not in any single geographical location, but to all in the nation. Railways are an important part of the supply chain, moving goods around, moving people around, and governments have to hold their nerve. We expect governments to have a window on the future and to understand the implications of big decisions. The most interesting thing is that, if we look back, in 20 years’ time, the beneficiaries will be the younger generation. This is why it is important to make big decisions today and invest in infrastructure.
Over 10K people have signed up To the blog.
Join those in the know.
Enter your mail to get the latest to your inbox, delivered weekly.
TONY HINES BLOG 