HS2- cost vs benefits - Dissertation Example

? HS2-COST VS BENEFITS By Presented to Greatrisks are linked to High Speed 2 (HS2) although it is viewed as the latest long term government project. Its risk lies in the higher-than-forecast in costs and lower-than forecast in benefits. Its commercial viability is at stake and will a need increased subsidies. The tax payers are entitled to pay high proportions of financial risks not indicated by DfT in the Economic Case. The financial risks in HS2 are greater than that of HS1. HS2 route is not economically viable but only gold-plated to comply with certain political demands. The Government’s base of argument is on the projected forecasts that are unreal. The painful experience gathered from HS1 project is concrete evidence for evaluation of the project. The project will create demand for high-costs and taxpayer-funded transport capacity. The benefits alleged by the Department for Transport remain wanting. BACK GROUND KNOWLEDGE ON HIGH SPEED RAIL The high speed rail entered the UK in 2007 following the completion of Channel Tunnel to London. It was called Channel Tunnel Rail Link, currently referred to as High-Speed 1 or HS1. A political consensus on the construction of HSR network in UK for trains running with a maximum speed of 350 kmph is currently preferred. The next project is the construction of High Speed 2 that will connect London and the northern parts of UK. According to UK transport policy, HS2 is viewed as the most appropriate mode of transport for the region in relation to the increased demand for rail network and transport. An extensive study on the program in the year 2004 by different countries in the world revealed that UK had not implemented the High-Speed rail. Other countries like Germany, Japan, France and Spain had already adopted it. The study revealed that UK had not seen the need for High-Speed rail because of demand in the transport sector. The available modes of transport were in a position to hold the capacity. Several reports drawn from the table show that a growing demand for rail transport cannot be met with the current network and therefore a viable solution should be sought to hold the situation. A further forecast for the future has enhanced its implementation. TABLE 1: Report of HSR Documents in the UK YEAR REPORT AUTHOR KEY NOTES February, 2004 High Speed Rail: International comparisons Commission for Integrated Transport (CfIT) Geographical and demographic factors created differences in international markets. The current railway network in Britain’s network was in order. The rail network capacity was good. 2005 High Speed Line Study WS Atkins A forecast made on overcrowding of lines. There was need for investment in HSR with a check on economic case. 2016 proposed as the opening date for the project. December, 2006 The Eddington Transport Study Sir Rod Eddington The long distance connections never provided better connectivity in relation to the local connections that are short distanced. Doubts on real benefits of HSR considered. HSR could not reduce carbon emission. Other viable options for transport in long distances considered of lower costs than HSR. June, 2007 HS2 Proposition, the WCRL corridor Greengauge21 Due to capacity shortfall, HS2 proposed as the best option to solve the crisis. The costs earlier predicted about HSR seen as not logical. HSR network offered a continuation for HS1. A growth predicted on demand for WCML which will boost connection in the corridor and boost economic growth. January, 2009 High Speed Two Department for Transport The new government to consider construction of HS2. HS2 Company to be created so that it deals with network planning. HSR to address the problem of overcrowding. September, 2009 The case for new lines Network Rail A network configuration and service pattern proposal created. London was considered to be the main area in focus. WCML was the first HST alignment to be built. September, 2009 A step forward Greengauge21 East Coast Rail Line and Great Western Main Line to be considered in the network. Conventional lines considered for upgrading rather than creation of new ones. Since it will be cost effective for HSR network. The total length of network doubled the Network Rail. The reports were based on Cost-Benefit Analysis of the UK HSR rail network. The reason backing HS2 was lack of capacity in UK rail network. The proposal for HS2 by Rail Network was after careful consideration on possible alternatives using WCML alignment. For effective deliverance of HSR project, several principles must be put to consideration. These are: Effective planning of the rail network and preparation of detailed plans, business cases as to all land acquisition procedures. The appropriate design concepts for the project and all parties involved in the designing stage. Construction of the rail network Maintenance incurred and procedures for the infrastructure. Infrastructure operation systems. Manufacture and maintenance of rolling stock. Operations of the train. Stations and depots to be constructed and Property maintenance (Greengauge21, 2010 p.4). This paper critically analyses the viability of the project in relation to costs versus benefits (Dr. Givoni, 2009 p.3). GENERAL KNOWLEDGE ON HS1 The Channel Tunnel Rail Link (CTRL) connects St.Pancras and London. It is a 108km high speed line with a travel time of 2hours and fifteen minutes between London and Paris with less than two hours journey to Brussels. The infrastructure was constructed to a total cost of ?5.2 billion. The project was categorized under Public Private Partnership (PPP). The private partner was London and Continental Railways (LCR). It was awarded a 999 year concession. It was responsible for the funding, construction and operation of the link. The resources for the project relied on a forecast of revenues from Eurostar UK. The project faced financial crisis in 1998 although it was restructured with a reduction in the lease period to 90 years. A recovery program initiated enabled LCR to issue the Government to pay construction cost incurred in phase 1 which connected Channel Tunnel to North Kent. In 2001, a restructuring was done when LCR started phase 2 that connected North Kent and St. Pancras. LCR completely owns High Speed 1 Limited and London & Continental Stations and Property (LCSP). The demand for HS1 project was wrongly estimated by DfT, in relation to competition it was to face from other modes of transport. The estimated number of travellers projected was 21.4 million while the actual figure arrived at reached 7.3 million. The revenue accrued from the project was to be used to pay for costs incurred in construction. For a good evaluation of the project, the downside risks related to the project must be considered greatly. The government seems to have ignored this aspect in the implementation of HS2 project. GENERAL KNOWLEDGE ON HS2 The economic transport model created by HS2 Ltd argued and revealed that the future demand for high speed trains will increase. The capacity of conventional rail network cannot meet the demand. A combination of the future demand estimates on the basis of value of time serves as the basis of implementation of HS2 project. HS2 Limited developed a business case for the project. DfT complied with the webtag methodology and assessed the project in relation to economic cost benefit. Further benefits were declared about the project by government officials. It was granted as an unbeatable option for travelling between cities. New regenerated opportunities were connected to its implementation. It was seen as a project that will merge UK centres to a single economic hinterland. Its prospectus that it will transform Britain and spur prosperity was highlighted (Aizlewood and Wellings. 2011 p.8). GOVERNMENT REPORT The UK Government has seen the need for improving its rail network through construction of a national high speed rail network. The motivation issue for the project is providing an infrastructure that will enhance economic growth, spur development and serve the country for a long period of time. In its commitment, it has given its citizens first priority. An intensive consultation was conducted by the Department for Transport. Employment opportunity was created to more than 172,000 people. 41 road shows conducted during the five months consultation period. More 55,000 responses collected were reviewed by the Government. The responses were collected from individuals, businesses and organizations across the UK. Room for further consultation in relation to project aspects is to be considered. The need for high speed rail The motivating factor for construction of HS2 was due to growing demand for travel between inter-cities. The study conducted and the forecast made revealed a crowded rail network system. In case the Government fails to strategize well, the services will be overcrowded and unreliable. To solve the problem, the UK Government opted for construction of a national high speed rail network. The network connects London and Birmingham Manchester and Leeds (Y-network). The network would ease the rail capacity as well as enhance performance on south corridors. The search for alternatives failed since the high speed would offer the best services. Although the option of upgrading the existing lines was viable, it was limited by long term solution in relation to capacity constraints, connectivity and time spent when travelling. The costs to be incurred in upgrading the current rail network surpassed that of constructing a high speed line. It was noted that it could not offer a step-change in connectivity hence create less benefits (Department for Transport, no date p.4). SUMMARY OF BENEFITS The benefits of HS2 are: Increased capacity in rail network that can accommodate 18 trains per hour, constructed to international standards and potential for double-deck trains. The conventional railway will be eased, creating space for commuter, regional and freight services. Intercity connections will be improved and less time will be wasted in changing trains because of international connections. Time spent in rail journeys will be minimal hence offer an alternative for air transport. Regional connections will be enhanced, saving time spent in journeys. Business travellers will enjoy improved links that will improve market accessibility, improved production and economic growth. Many jobs will be created within the areas which the HS rail network will pass and It will offer future expansion opportunities for high speed rail. Delivering HS2 For efficient delivery of the benefits of the project, the Y-network will be constructed in two phases. The first phase will connect London and West Midlands line linking Europe through High Speed 1. The second phase extends the rail network to Manchester and Leeds and Heathrow airport. The existing lines could be used by high speed trains to access areas not served High Speed lines. The locals affected with the implementation phases of the project will be compensated by the Government. The following package will be offered: An improved hardship scheme People affected by the construction will be supported and measures taken to build their confidence on their property that the tunnel will pass through. Compulsory purchase process will be simplified, Homeowners within the hub of the project will be offered with a flexible sale and rent back scheme (Department for Transport, no date p.5). SUMMARY OF COSTS Business Case TABLE 2 HS2 Cost Summary HS2 Phase 1 HS2 Phase 2(Full Y network) Capital cost ?17.8 ?30.4 Operating cost(net) ?7.6 ?13.9 Total cost ?25.5 ?44.3 Additional revenue ?-15.0 ?-27.2 Indirect tax ?1.5 Included Net cost to government ?11.9 ?17.1 (Data from: The accessibility impact of a new High-Speed Rail line in the UK-A preliminary analysis of winners and losers) The construction cost for the project is estimated at 30.4 billion. Occasionally, the totals in capital and revenue soars twice high to ?44.3 billion. Commercially, the revenues to be collected from ticket sales are valued at ?27.2 billion. The projected loss of the project will be estimated to ?17.1 billion. When reflected to tax payers, it will be 565 per tax payer. Demand Forecast The demand forecast for the project is unrealistic. The DfT methodology highlights a relationship between GDP growth from history and long-distance travel and future estimates of the project. It projected that demand will increase to 267% by 2033. The forecast cited that about 136,000 people will use HS2 on daily basis (Aizlewood and Wellings. 2011 p.19). The effective demand and the cost of buying a ticket The projected demand was to increase revenues. The assumption used was on internalized pricing policy between HS2 and West Coast Main Line route. Secondly, passenger fares would increase in real terms steadily above inflation. Supporters for high speed rail term the fare as fair and affordable. In reality, the rail services are subsidized by the taxpayer. Two issues are assumed in the HS2 pricing model. They are: Impact of spare capacity in the short term could create more options for passengers and The impact of price differentiation in pricing model was not considered. Price differentiation reduces consumer surplus hence reduce Government subsidy. Omission of these issues affects the future demand curve for HS2. Competition from other modes of transport also poses a threat on the earnings projected in the pricing model. Cost Benefit Analysis DfT applied webtag method in constituting its business case. The reality of the methodology puts the project at stake. The presumption made was that time is money. It creates the benefit of HS2 by reducing time spent in journeys that is translated to money. The approach used by DfT is New Approach to Appraisal (NATA) but does not include WEI. The Net Benefit Ratio is applied only to phase 1 of the project. The second phase of the project has not yet been established. Stark fluctuations in need of HS2 are revealed in a comparison between Economic Case to published views. The NATA methodology only focuses on one aspect of medium for money. This makes the project possess high opportunity costs and fewer risks. From the discussion, it is derived that: The proposal will proceed to phase 1because it offers good returns at reasonable costs on assumption that Completion of phase 2 will revitalize the project to a reasonable level although little work has been done on the project. Time Savings This methodology draws attention to travellers to value their time. The argument is that time spent on board by business travellers can be saved by efficiency which translates to profits. The notion created by this theory is that time spent when travelling is merely wasted. This implies that time is wasted when making a train journey, when waiting on the platform, in transfer points and when finding a seat. This methodology is impractical. Therefore, the benefits in the CBA are unrealistic because of two reasons: Business travellers are in a position to work even while travelling because of the enhanced technology, The costs incurred in train fares are match with the short time spent in the journey. Technology has improved the conditions of the trains. Distributional Analysis This methodology looks at the beneficiaries of the project and its clients. Public sector projects aim at benefiting the public. The benefits could also be accrued indirectly for example, expenditure on defence and policing. (Aizlewood and Wellings, 2011 P.29-30). A viable transport infrastructure should benefit the public. The cost benefit analysis of the project singles out business travellers as the beneficiaries. Most UK citizens do not prefer rail transport as their mode of transport and those that do use it, live in London and South East. Those who travel by rail prefer the WCML rather than HS2 because: Inconveniency created by connecting through one of the new stations, The locals in South Coventry travel directly to London rather than travel back to Birmingham’s HS2 channel Premium pricing model of HS2 makes it relatively expensive in comparison to other modes of transport. The projected shift from road and air was estimated at 7% and 6% consecutively to HS2. Despite this shift, this could be nullified by lack of scheduled flights between Birmingham and London. From the discussion of distributional analysis, the beneficiaries for HS2 will be: Business travellers and firms located in big cities like Birmingham, Manchester, Leeds, and Sheffield that develop London hub. Frequent commuters from Birmingham or East Midlands working in London could use this means of transport because of increased labour mobility. Leisure passengers living near the hub stations and can access London Property owners who can easily access the new stations The principal contributors for the project are: Potential taxpayers Passengers living in towns accessed by the high speed trains Property owners blighted by the proposed route Regional firms not accessed by London/satellite cities HS2 network CONCLUSION The cost versus benefit analysis reveals a fundamentally flawed economic case for HS2. The government seems to be insensitive from the previous painful experience from HS1. The projected net value income of the project is less than its construction costs. It is a planned loss-making service from its initial stages. It has no commercial case and lacks commercial attitude to costs implicated in the proposal. Costs allocated to planning blight are neglected. The risks incurred in the project because of excess demand in forecast are not considered. This lesson was learned from project demand for HS1. Many uncertainties are linked to the forecast are down sided and insufficient. The assumption of future demand does not justify investment of public funds on such a project. HS2 is predicted on a single scenario of demand forecast. Other scenarios are ignored yet they could be vital in providing structural changes. The cost-benefit analysis methodology assumes the value of time without comparing HS2 with an alternative. The pricing policy on demand levels assumes risks. The impact of competition experienced from other transport modes has been ignored. Stiff competition from other transport means will automatically reduce profits for the project. The assumption used is new rail monopoly that optimizes prices between WCML and HS2. Furthermore, the model fails to address logic in its forecast between supply and demand. Alternative strategies are also neglected. The taxpayer will therefore bear the burden of losses incurred in the project. Reference Aizlewood, K and Wellings, R., 2011. High Speed 2: the next government project disaster? IEA Discussion Paper No. 36. London; The Institute of Economic Affairs. Department for Transport, no date. High Speed Rail: Investing in Britain’s Future. The Government’s decisions. UK. Dr. Givoni, M. 2009. The accessibility impact of a new High-Speed Rail line in the UK-A preliminary analysis of winners and losers. London; Transport Studies Unit, University of Oxford. Greengauge21. 2010. Fast Forward- Funding Report. Delivery of High Speed Rail in Britain. London; Pricewater Coopers. Read More