Published: 28th June 2016
Why is the cost of trains for HS2 included in the construction budget when they will be subject to commercial contracts between manufacturers and the HS2 train operator?
The National Audit Office (NAO) has published a report on progress and finance issues about the High Speed 2 (HS2) project. They report suggests that the project is facing cost and schedule delivery problems and optioneering taking place to see if the opening should be delayed by a year.
The NAO also says that the HS2 team is looking at reducing costs to the available budget which could bring a delay of a year to save money despite good progress being made with some major procurements. The Department for Transport (DfT) has instructed the HS2 team to review the project delivery plan to increase confidence for delivery from 60 % to 80% but crucially without increasing costs. The DfT has also asked the HS2 team to look at the ramifications of delaying the opening from 2026 to 2027.
The report claims that the DfT set HS2 Ltd an ambitious schedule to deliver the scheme. For example, HS2 Ltd in May 2016 had the capability it had planned to reach in July 2015 and can be said to have been 10 months behind the demanding DfT schedule.
Phase 1 is currently forecast to cost £27,384 million or what seems a massive £204 million over budget but in reality and ignored by objectors, well under 1% over budget which many would consider a good result. This fact has been ignored by media outlets.
Phase 2 is not nearly at an advanced planning stage as Phase 1 being at a much earlier development stage with some parts still not in any official budget. The 2015 Spending Review forecast that the estimated cost of phase 2 exceeded available funding by £7 billion but following this the DfT and HS2 Ltd in a review commissioned by the Cabinet Office identified potential savings of £9 billion of which £2 billion has been made.
But as in any project when something is cut out, the benefits may reduce affecting what is known as the cost benefit ratio (CBR). For phase 1 if it is opened as forecast in financial and time terms the CBR is estimated at 1.7 but if there is a £200 million overspend the CBR reduces to 1.5 and will reduce further if the opening date is deferred.
The budget is set at £55.7 billion INCLUDING new trains which will be subject to commercial contracts between the manufacturers, leasing companies and the eventual HS2 train operator so it could and should be argued that the train costs should not be included in construction costs. When a road is upgraded the cost of vehicles is not included so why is the cost of trains included in the cost of HS2? A new runway at Heathrow or Gatwick will not include the cost of the planes that will use it.
If the scope and benefits of HS2 are reduced then the resultant spending by local authorities needed to deliver local regeneration may also be hit. The exception to this is Euston station where the DfT has allocated £417 million to upgrade the HS2 station.
The report says that the DfT and HS2 Ltd have developed a structured plan for delivering regeneration benefits at an early stage and that HS1 benefits have not materialised as expected. Locals in Ashford put this down to local authorities lack of foresight and subsequent action meaning the town did not become a destination in the way Lille did for example.
The NAO report suggests that linking HS2 with the existing railway poses the biggest risk in financial terms. The DfT has already quietly extended the Virgin franchise to match up with the HS2 engineering works’ timetable and they will need to work out the relationship between existing and new services. Will they complement or compete with each other is a vital strategic question which if the right choice is made will increase benefits but if they get it wrong, will increase costs. Not an easy call.
Amyas Morse, head of the National Audit Office, 28 June 2016
“HS2 is a large, complex and ambitious programme which is facing cost and time pressures. The unrealistic timetable set for HS2 Ltd by the Department means they are not as ready to deliver as they hoped to be at this point. The Department now needs to get the project working to a timescale that is achievable.”
The DfT and HS2 ltd are looking to raise their level of confidence that phase 1 of the programme will be delivered by 2026 from the current 60% to 80%.
HS2 issued a statement saying that they welcomed the NAO report “and its confirmation that, whilst many challenges remain, the project is on track both to deliver its strategic scope and to do so on budget.”
They also correctly added that major engineering projects such as HS2 are a learning curve in which the method of construction as well as cost control evolve as they reach a more mature and detailed design stage which incorporates the lessons learned from other projects both here and abroad.
HS2 is going through this process now and is that which gives it the confidence that it can match both its ambitious strategic objectives and the budget for Phases One and Two. The company has led to contracts being bid for valued at £11billion for Phase One so far.
These contracts include specific incentives for partners to work with HS2 to keep identifying further ways in which costs can be saved and efficiencies realised, without compromising the strategic scope and objectives of the project.
HS2 Ltd also welcomed the report’s acknowledgement of the “significant achievement” made in navigating the parliamentary process and recognition of HS2’s creating internal capability to deliver such a massive project and to do so in the most innovative and, therefore, efficient and effective way.
HS2 chief executive Simon Kirby, said:
The role of the NAO is to challenge projects such as HS2 and through that challenge improve the way they deliver for the taxpayer. This report does this and we accept that challenge. It also, however, recognised the real progress we have made in taking the concept of HS2 and moving it nearer reality.
As the report says, HS2 remains a highly ambitious project, but as it also demonstrates there are real and substantial grounds why the public, government and parliament should have increased confidence in our ability to deliver the project. Our job is to keep earning that confidence going forward.
Stop HS2 Campaign Manager Joe Rukin said:
“The National Audit Office has raised serious questions about the timescales for HS2, the increasing costs, reducing benefits and that parts of the project are still unfunded, but none of that should be a surprise, as this has been the story with HS2 since the start.”
“Of most concern is that it is absolutely clear the costs are still control, and the NAO state the Cabinet Office have identified potential savings of £9bn. If this leads to the speculated outcome of the western side of HS2 only running from Wormwood Scrubs to a field outside Crewe, after links to Heathrow and HS1 have already shelved, you really have to ask if there is any point to it at all anymore.”
“This is another in a long line of devastating reports about HS2, which in the past no-one has listened to. We can only hope that with a new Prime Minister on the cards, someone will finally pay attention and cancel this white elephant.”
Stop HS2 Chair Penny Gaines added:
“There are some obvious issues over their timescale, such as the Phase 2 decision which is already two years late and counting, and even HS2 Ltd are only 60% confident it will open in 2026.”
“What is most astounding from this report is that over 7 years from when HS2 Ltd was set up, the Department for Transport still does not know how HS2 will work with the rest of the rail network. And yet this is a fundamental issue with the project. Get it wrong, and many of the supposed benefits of a new high speed railway will turn to costs to the conventional railway.”
But this Stop HS2 statement underlines the fact that the objectors are ignoring, or do not understand how such a major project develops its scope from a blank sheet of paper and its consequential costs and benefits.
The final part of legislation should be completed in the next four months or so thus creating the legal framework for the project.