Waiting for High Speed 2 to get here

High-speed rail is one of the great hopes for the UK infrastructure industry. Unlike nuclear power or wind farms, proposals to develop this 300kmph transport system are relatively free of opponents and all three major parties support it. So it’s well worth positioning your company to pick up work in this sector.

However, on the route to a high-speed future there a number of potential faults on the line that must be resolved. The trickiest of these are the not insignificant matter of resolving disagreements over where the track should go, the massively varying cost estimates and how to fund the building work. Here we look down the line to how these issues might affect the project.

Will it happen?

The good news is that the coalition broadly supports the development of a high-speed rail network in the UK and has pledged to make it a transport priority. They have support from a range of interest groups and are unlikely to face any challenges from Labour. The High Speed 2 (HS2) company was set up in 2009 by the former government and this followed a number of similar initiatives launched by various interest groups, such as Greengauge 21, Network Rail and the RAC Foundation (see factfile, below).

It’s not surprising the idea has such broad support. With so many people living in dense population corridors along the existing East Coast Mainline and the West Coast Mainline and a capacity overload forecast on existing infrastructure, the rationale is clear. Most of the studies agree that a network is needed that connects big cities: London, Birmingham, Manchester, Liverpool, Leeds, York, Edinburgh and Glasgow. At the right speed, a network would significantly cut down the air traffic that operates between Scotland, Manchester and London.

Uncertainties

However, where exactly the track should be laid, when, and by whom, are less straightforward. The coalition is yet to formally endorse the HS2 initiative specifically and it is understood that it believes HS2’s first phase, which would link London to the West Midlands is not sufficiently ambitious.

But just how much further the coalition wants phase one to go is unclear. Transport secretary Philip Hammond has recently asked HS2 to update its work to consider the option of connecting to the Channel Tunnel Rail Link (now called High Speed 1) and Heathrow. This seems to be a vote of confidence in HS2.

However, the multiplicity of rival initiatives has resulted in a number of conflicting views, all competing for government attention, creating further potential for debate and delay. The initiatives disagree on a range of issues, such as where the network should be built, how it should be phased, what should be spent, how value for money should be achieved and measured, funding strategy, and the extent of private sector funding and participation.

One of the biggest areas of disagreement is over the project’s phasing. HS2 has proposed the first phase should create a link between London and Birmingham, with phase two carrying the line on to Manchester and passengers transferring to conventional lines thereafter. Other initiatives propose a more ambitious approach. There is also a divergence of views regarding connections to Heathrow and HS1.

And there is dramatic disagreement over costs, which is causing further confusion. HS2 probably has the most reliable estimate (although one of the highest due to the extensive tunnelling it envisages) as it has hired engineers to work out detailed costs for the specific route it proposes. It says the cost would be about £50m-75m per km. Most other studies use benchmark costs ranging from £9m-50m per km. The vast range is due to different ideas about what is built, including how it is aligned to other networks, how much tunnelling is involved and how complex the network is. Estimates for the total cost of a London to Birmingham link range from £6bn to £20bn. Such uncertainty makes it difficult to carry out a value for money analysis, further delaying progress.

But whatever happens, costs will be relatively high. Historically, rail construction in the UK has been expensive due to the country’s topography and the need to build through dense population corridors. HS1 cost about £50m per km and might be the most expensive rail link globally.

The UK’s slow planning system will not help either. Once the basic plan is agreed it could take some seven years between planning the line and getting started on site. Crossrail, after all, took almost 15 years to reach site. In contrast, Spain and China are able to begin construction within two to three years of planning for a new link.

Funding

Funding is another difficult area. Many of the benefits of the high-speed network are intangible and will pay back over about 100 years. Factors such as the reduction in maintenance needed on the conventional network for National Rail, the regeneration impact on Birmingham and other cities and the boost for the UK economy as a whole are all difficult to measure.

Precedents from other countries suggest that revenues from a high-speed network would not generate much surplus above the operating costs to enable recovery of capital costs.

All this means PPP funders are unlikely to be attracted to high-speed rail. There have been many attempts to use PPPs for high-speed projects but success has been limited and the government effectively had to step in to the PPP structures in both HS1 and in a project in Taiwan. We note that PPPs are under way for one or two high-speed projects in France, though the RAVE project in Portugal is being split into a number of smaller PPP transactions.

HS2 argues that the complexity and scale of the project means it should be structured with a focus on project delivery, rather than PPP. This points to a largely publicly funded solution (as is the case with most other high-speed projects globally), with private sector expertise being leveraged for project delivery, project management, construction, and so on. To minimise the burden on the public purse, private sector funding/PPP solutions could be used for specific components such as rolling stock, stations, signalling, and so on. This is the strategy being deployed in London by Crossrail, which is mostly funded by government and business taxes, and on the vast King’s Cross Central regeneration scheme.

Irrespective of the structure, and possible delays notwithstanding, any development will create a range of opportunities for contractors and suppliers on a scale that could even eclipse Crossrail and the Olympics. In terms of timing, a smart idea would be to schedule construction to begin just as Crossrail completes - likely to be in 2017. This way the high-speed network development would provide continuity to the supply chains already established for Crossrail thus boosting the industry, avoiding stress on the supply chain and controlling costs for the government.

As the new government reviews proposals from HS2 and various organisations, the immediate focus on reducing the budget deficit will influence the timing and phasing of any high-speed network. There is an inherent tension between what the transport department will want and the Treasury’s drive to save money. Much depends on how that tension is resolved in the months leading up to October’s Comprehensive Spending Review.

Contact Manish Gupta, head of transport, infrastructure advisory, at Ernst & Young, at mgupta@uk.ey.com