Opinion: The Opportunity Costs of HS2

HS2 Brick WallToday’s publication (pdf) by the Liberal think tank Centre Forum, “Build the infrastructure: bin the wish list”, ought to make every Liberal Democrat stop and think again about the wisdom of spending £50 billion on HS2.

The report concludes that “projects must be prioritised with full consideration of opportunity costs”, saying:

The debate on major infrastructure projects needs to take account of opportunity costs as well as individual project benefit-cost ratios.

Opportunity cost measures the difference in benefit-cost between chosen investments and others that are given up as a consequence. Thus, deciding to invest in one set of projects which consume the entire budget means that other projects cannot go ahead because there is no money for them.
The High Speed 2 (HS2) rail project illustrates the point. Current estimates are that it will cost about £50 billion which would fund beneficial projects across a range of sectors. One commentator noted that for the cost of HS2 you could fix the nation’s potholes, upgrade the existing West Coast Main Line, fix other rail bottlenecks, turn busy A-roads into dual carriageways, build a third runway at Heathrow, invest £2 billion in cycle networks and provide superfast broadband across the country.
Alternatives to HS2 can be built for a fraction of the HS2 projected costs. The Atkins report on alternatives to HS2 has concluded that investment of £2.6 billion could increase long distance capacity on the West Main Line by an additional five trains an hour, with journey time reductions to Birmingham and Manchester.

No doubt the debate over HS2 will rumble on for some time to come. What is clear is that a deliverable and affordable programme means one in which some pet projects will need to be canned so that others can be prioritised.

Difficult choices have to be made. But that is why we elect governments.

A welcome dose of hard-nosed economic reality, perhaps, but will it be enough to burst the bubble of wishful thinking that has surrounded the whole HS2 project from the beginning?

* John Whitehouse represents Kenilworth Abbey division on Warwickshire County Council

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23 Comments

  • The opportunity cost of HS2 will not be the best £50bn of alternative projects but the worst £50bn. The best £50bn will be done anyway as well as HS2.

  • Oh no, not again….sigh!

    “Today’s publication by the Liberal think tank Centre Forum, “Build the infrastructure: bin the wish list”, ought to make every Liberal Democrat stop and think again about the wisdom of spending £50 billion on HS2.”

    Yes, I’ve stopped, thought, realised it won’t cost nearly as much and even then will be spread over decades and that is a great and far sighted investment in the capacity and speed of the UK’s rail backbone.

    “One commentator noted that for the cost of HS2 you could fix the nation’s potholes, upgrade the existing West Coast Main Line, fix other rail bottlenecks, turn busy A-roads into dual carriageways, build a third runway at Heathrow, invest £2 billion in cycle networks and provide superfast broadband across the country.”

    Upgrade the existing West Coast Main Line – waste of time and money that would cause disruption for decades
    Fix other rail bottlenecks – already being done e.g. Northern Hub
    Turn busy A-roads into dual carriageways – likely to be held up more by local environmental considerations than anything else
    Build a third runway at Heathrow – A disastrous move that would blight the lives of millions of people across a swathe of west London, so why would we want to do that in the first place?
    Invest £2bn in cycle networks – agreed we should do this, but that’s only a 25th of the sum involved
    Providing super fast broadband across the country – I thought we already were investing in that

    Pretending that we’re somehow sacrificing all other infrastructure investment to fund one project is a classic and now rather tired ruse on the part of anti-HS2 campaigners.

    “Alternatives to HS2 can be built for a fraction of the HS2 projected costs.”

    No they can’t. Not satisfactory ones. We’ve already been through one West Coast upgrade. Wasn’t that bad enough? It went over time and over budget and in the end failed to deliver the speed improvements promised.

  • Eddie Sammon 2nd Dec '13 - 5:11pm

    Regardless of the minutiae, I think the matter of opportunity costs needs to be tattooed on the forehead of many MPs and political activists who think “this is good so we’ll do it”. Far too many mediocre policies seem to get approval, create unnecessary complication and are in fact less efficient than letting people just spend their own money.

    I am not confident that opportunity costs have been considered with HS2, because hardly anyone banging the drum for it has demonstrated sufficient consideration of this.

  • Richard Dean 2nd Dec '13 - 5:14pm

    What about the opportunity costs of those other projects?

  • Simple its a Vanaty project by the rich for the rich Lets be honnest the ticket price on HS2 will be beyound most traverlers ability to pay so you rob the majority who are poor to build a project for the well off SO SO WRONG SCRAP HS2 NOW

  • John,

    I was where you were about 12 months ago on HS2. I understand where your coming from I really do (and I have a lot of time for Centre Forum), but the political ship has sailed on this one. The reality is its going to get built, no matter how many reports say its amazing value for money / good value for money / bad value for money / atrocious value for money.

    With something like this (and a lot of the time in politics) unfortunately arguments are not won by hard nosed logic, but by winning over the key influencers – who in the case of HS2 (Clegg, Cameron, Osbourne, Milliband etc) are almost all for it. It’d be a better use of energy to scrutinise the details of the current HS2 proposal and try to get the best out of it.

    We need HS2 *and* improvements to the rest of our infrastructure. I don’t really see it as an either/or issue any more. We should all be lobbying to make sure that the expenditure on HS2 doesn’t reduce investment in other parts of our infrastructure, which (according to the early 2015 manifesto discussions anyway) will be Lib Dem policy next parliament.

  • David Allen 2nd Dec '13 - 5:37pm

    While we’re worrying about opportunity costs (which in itself is a sensible thing to do), what about the new Hinkley Point nuclear plant, estimated as costing £16bn for just 7% of our projected electricity needs?

    When it comes on stream, the government guarantees to pay about twice the current electricity price. What will happen if coal, gas, and even solar and wind are by then a lot cheaper than that? Will somebody invent new nuclear safety standards which the plant cannot meet, so that the 2025 government can find an excuse to welsh on its promises and leave the white elephant to sit around doing nothing?

    http://www.bbc.co.uk/news/business-24604218

  • Gareth

    I wouldn’t be certain that the political ship has sailed on re HS2. According to my local (Tory) MP, there’s not a “cat in hell’s chance” of the HS2 hybrid bill becoming law before the next General Election – and as an ex-whip I suspect he knows what he’s talking about. The political climate could be VERY different after the 2015 elections, especially if the big three parties get an electoral mauling in the constituencies up and down the route.

  • Peter Watson 2nd Dec '13 - 6:38pm

    Joe Otten “The opportunity cost of HS2 will not be the best £50bn of alternative projects but the worst £50bn. The best £50bn will be done anyway as well as HS2.”
    You seem to be suggesting that since we will not be burning £50bn in £5 notes, a very bad project indeed, then HS2 is worthwhile.
    Or, a little more sensibly, you are considering the best way to invest £100bn, not £50bn, and assuming that HS2 makes it into that; perhaps it does not.

  • Vincent Nolan 2nd Dec '13 - 8:06pm

    Interesting how every independent study, e.g that of the New economics Foundation and now this one from Centre Forum, concludes (as did the Eddington Report of 2006 and the white Paper of 2007) that we do not need High Speed Rail in the UK. And not surprising, now that we know (from ex-ministers Peter Mandelson and John Harris) that the Lobour government U -turn in favour of HS2 was based on electoral considerations rather than any detailed analysis of the case for it.

    The LibDem Transport strategy was part of a plan for a zero carbon economy by 2050. Its foundation was a commitment to road pricing, to drive traffic off the roads and provide funds for investment in rail. Without the road pricing,the commitment to high speed rail does not make sense. HS2 will in fact increase carbon emissions: a train travelling at HS2’s initial design speed of 360km/hr uses three times as much energy as one travelling at the current intercity top speed of 200km/hr. Only 5% of HS2 passengers switch from road and air; 95% move from less polluting modes or did not otherwise travel.

  • “I cant take a report seriously that deliberately uses a wrong figure for the cost of HS2. The projected cost is £28bn with a 50% contingency.”

    Do keep up! The March 2012 report by HS2 put the mean cost for HS2 at £33.4 billion at 2011 prices – this includes a ~25% contingency, plus £7.5 billion for rolling stock; so we can expect the monetary cost to increase since the construction project won’t start until a year or so after 2015. Plus we need to remember that it is the government’s intention to fund this project through borrowing in one form or another and hence is likely to cost the tax payer more than twice the project cost. This funding needed to do the project needs to be included in the business case – if you don’t believe me then I suggest you present a business case to an investor and omit the cost of money and their risk reward see what response you get.

    As for this project is “going to get built”, whilst I understand where you are coming from, Cameron (and others) must be really worrried as otherwise why would they be trying to get China involved once again? Which goes back to my above point. China as an investor will be looking for cost of money plus a few percent on top (not to forget a good slice of the construction activity). No there is no guarantee that this vanity project will go ahead and whilst there is a chance of derailing it, I see no reason to throw in the towel, certainly not before the before the 2015 election…

  • Mick Taylor 2nd Dec '13 - 10:50pm

    Goodness me, this is just Luddite. If the Whig and Liberal Governments of the last century had listened to those who said railways were the work of the devil and that all we needed to do was upgrade the canals and turnpikes we wouldn’t have had the huge projects of new business and (relatively) swift travel at all.

    I have never understood the tendency of many so-called Liberal Democrats to attack anything and everything that the coalition government is doing, even if it was in our manifesto in 2010. In Japan they call this harakiri!

    The railways are groaning at the seams, the current lines can take little more and are in any event not capable of being upgraded to high speed. HS2 could be the start of the fight back against excessive air travel by providing swift and reliable transport at least as fast as planes. What’s not to like?

  • Ian Hurdley 3rd Dec '13 - 7:39am

    According to yesterday’s news – and looking purely from a commercial perspective – the Chinese are interested in investing in HS2, which lifts the bulk of the cost off the shoulders of the British taxpayer. I doubt they. Would be keen to fix our potholes.

  • When we haven’t got the energy infrastructure to keep the lights on when it’s dark or the water flowing when the sun shines, why in the name of *anything* are we spending money on this white elephant?

  • jenny barnes 3rd Dec '13 - 8:55am

    test comment

  • Tom Snowdon 3rd Dec '13 - 11:07am

    @ Mick Taylor
    I’m no Luddite, but I do want to see proper investment in transport, and not vanity projects to generate political headlines.
    The point is that we need investment in our transport infrastructure. In a climate where the government consensus is to ever decrease public spending, we need to make sure that what investment is actually made, gives the country the best possible outcomes. That’s why in any investment decision the opportunity cost needs to be considered.

    Do we need faster trains that use far more energy and can only be afforded by the wealthy ? or do we need a major increase in rail capacity ? In Europe you see far bigger trains in terms of the number of carriages and passengers. Why can’t we extend our platforms so that the length of trains can be increased ? We need to invest in the improvement of the overall system, so that more ordinary travellers will select the train over the car.

  • Peter Chivall 3rd Dec '13 - 12:27pm

    Leaving aside the question of whether Centre Forum is really a Liberal Democrat think tank rahter than a well-funded bunch of neoLibs with some well-placed fellow travellers in the current Party leadership, there are 3 salient facts to the HS2 controversy.
    The first is that the cost is highly unlikely to be anywhere near £50bn. The Treasury estimate, with contingency upon contingency is £42bn, nearly 20% less. HS1’s outturn costs were well under the Treasury contingency amounts – the original estimates were fairly good, depending whether you count all the cost of the ‘showcase’ St. Pancras. (The NAO says total costs were 18% higher than original estimates.) Interestingly, Crossrail (not a tube line but a full-size railway tunnelled across central London) has a total cost now estimated at £14.6bn plus £6bn for rolling stock (statement in Commons 9/7/13) not so different from HS2 Phase 1 to Birmingham. Although businesses in London have had to make substantial contributions, including a special business rate supplement, very little criticism is heard of a project which is effectively a ‘London Bypass’ from Canary Wharf and the City to Heathrow.
    Nationally, and for the sake of combatting Climate change, HS2 will need to compete with domestic flights from London to Birmingham, Leeds and Manchester (and eventually Newcastle, Edinburgh and Glasgow. This seems to be the motivation for the 250mph top speed and the lack of any intermediate connections. Here, I think HS2’s planners have shown a lack of imagination. If Parkway stations were planned for the places where HS2 crosses major local routes, such as the A46 and the Coventry-Leamington rail line, or near Bicester/ Buckingham for the M40 and the East-West Rail link from Oxford to Cambridge, public support in much of the affected route would increase greatly and be felt politically, as well as potentially increasing ridership from outside London and the major Cities.
    Centre Forum are wrong in pretending there will be a large ‘opportunity cost’ in HS2. Large amounts of investment are already committed to investment elsewhere on the railways. I live in Peterborough. Before Phase 1 of Hs2 is built, major upgrades, already committed, will renew both rolling stock and overhead wiring on the route to Edinburgh and bottlenecks such as twin lines only across Holme Fen and through Welwyn will have the track doubled. At the same time, the widening of the route from Felixstowe (still our largest port) to the Midlands and North to take Continental freight wagons will be complete and electrified before HS2 reaches Birmingham.
    Alltogether, much of the critiscism of the HS2 project appears ideological, together with a few well placed nudges from such as the British Roads Federation. If Centre Forum pretend to be Liberal democrats, they should be prepared to apply for Associated Organisation status in the Party.

  • @MickTaylor
    Throwing the “Luddite” label at people hardly helps rational debate, which is what LDV should be about. You seem to be of the “I believe in infrastructure investment/HS2 is infrastructure/therefore I believe in HS2” school of thought., rather than being prepared to even consider alternative ways of spending £50 billion.
    Contrary to what you state, HS2 was not in the Lib Dem manifesto in 2010, although high speed rail was. One does not equate to the other. Vincent Nolan is right in his summary of Lib Dem policy.
    I take Joe Otten’s point that the best £50 billion of alternative projects might be delivered anyway, but what about the next £50 billion? Are people really saying that they can think of nothing else to spend it on rather than HS2?

  • I look forward to the publication by Centre Forum of a report showing why a new generation of nuclear power stations is not the best use of billions of pounds that would be much better spent on solar, hydro, wind and wave.

    Should I hold my breath?

  • @JohnTilley
    I wouldn’t hold your breathe, but actually you do have a point!
    Currently the government has taken the first step of commissioning a new nuclear power station and the assumption is that a further n nuclear reactors will get built, along with a bunch of other generators. What I’ve not seen (and I do admit to not having researched this to any substantive depth) is an overall business plan for the renewal of our generating capacity ie. what will get built when etc. so that we know what capacity is projected to be required when and hence what needs to be spent when. In this context we can debate and make decisions about whether we really need to have an ever increasing supply of energy and whether investing £8 billion now in new nuclear is really such a good thing compared to delaying that spend and spending the monies on alternatives such as other sources of energy or on energy efficiency. But this is going off the topic of HS2.

  • chriseaglen 27th Dec '13 - 9:20pm

    excavating 100 million tonnes of soil and subsurface ground for phase 1 takes keyensian economics to a ridiculous extent. Buckinghamshire people with no local connectivity to hs2 is of little local transport value . Hs2 is an example of mistaken group think. Shame the UK lacks corrective acting politicians to correct phase 1 of this misguided rail project the is stuck in the political mire wasting current account cash currently.

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