Just tell us the basis of your calculation

As I reported in my blog Can you smell hot wax? (posted 1 Apr 2014) the incoming Chairman of HS2 Ltd, Sir David Higgins, was tasked with investigating “how to reduce the £42.6 billion cost of the [HS2] scheme”. His comments on this task, as set out in his report HS2 Plus, are not, I find, very clearly expounded; for a start it appears that you have to read the Forward and the section Timescale and cost together to get a handle on what he is saying. I consider that he made a much better fist of it in the speech that he gave at the Manchester launch and so will use that speech as the basis of this blog.

It would appear from what he said that Superman feels powerless at this time to deliver on the expectations of the Prime Minister and the Shadow Chancellor to make reductions in the budget for the HS2 project, and wishes to push the onus back on the politicians. As he told his Manchester audience:

“The simple truth at the heart of this, as any, project is that there is a direct connection between certainty, time and cost. The more certainty there is about the timescale, the more possible it is to control cost through economies of scale.”

All he was able to promise was that “the more clarity parliament can provide, the more I can reduce contingency, and, therefore, the ultimate cost”.

That’s as close to you get to an explanation of why Sir David has not been able to get to grips with the budget. He has failed to explain, at least to my satisfaction, how timescales relate to budget uncertainty, particularly bearing in mind that the budget is “inflation proofed” by being expressed in 2011 prices.

He was given the opportunity to be more expansive about his views in an interview with James Naughtie, broadcast on the BBC Radio 4 Today programme on the morning of the launch.

James Naughtie: Just tell us the basis of your calculation that the more quickly we get on with it the cheaper it will be, or the lower the costs in the long run will be.

Sir David Higgins: Well time is uncertainty. Uncertainty leads into cost, and eventually money. Also getting the scope right at the start is crucially important, hence my recommendations on Crewe, Euston and the High Speed 1 link.

I have to say that I didn’t find that particularly helpful. Either Sir David is the world’s worst communicator, or he is just being plain cagey. He did however admit that he hadn’t done what the politicians had asked.

James Naughtie: Talking of money, Ed Balls the Shadow Chancellor, speaking for the Labour Party, said that he wanted the costs to come down markedly. Is that possible?

Sir David Higgins: Well you’ll see in my report that I set out in the first phase around £7.4bn worth of contingency. Now a reasonable portion of that should be saved, but it would be foolish to say that I’ve saved it now because I haven’t done anything. It’s about reducing risk. Making the right decisions on scope now will help us reduce risk, and that will bring savings.

So he is making no promises – Mr Balls please note.

There is one excuse that Sir David made in his speech that I have considerable sympathy with. He said regarding the budget for Phase 2 that it was “too early in its development to properly assess”. Since the route of Phase 2 has yet to be confirmed, at least “officially”, this is surely right. I therefore have no disagreement with the concentration of Sir David’s review on the budget for Phase 1. In this respect, he advises in his report that he and his team “have undertaken an exhaustive review of the costs outlined in the first phase of the project”. We learnt from his speech that this review had taken eight weeks and he showed a slide (no 15 in the presentation) that summarised the findings, broken down by topic. This showed some small increases in predicted base costs and some small reductions, with the revised overall infrastructure cost forecast of £15.650bn showing a very small increase of £6m.

In slide no 16 he states that the budget for Phase 1 infrastructure is £21.4bn. It is important to note that this is the P95 confidence level estimate, which means that HS2 Ltd feels that there is a 95% chance of delivering Phase 1 at, or below, that figure, expressed in 2011 Q2 prices. In my blog I’m not talking about Crossrail, part 1 (posted 14 Dec 2013) I reported that Parliament had been told by HS2 Ltd, in the Estimate of Expense for Phase 1 document that was deposited with the hybrid Bill, that the budget for Phase 1 was £19.39bn, which is the P50 figure.

In confirming the £21.4bn budget figure to the Manchester audience, Sir David explained:

“Of course the easy thing to do would have been to reduce the contingency budget, but, given the uncertainty, particularly over the parliamentary timetable, that would have been irresponsible to do so.”

But by using the P95 figure, far from proposing a reduction to the contingency, Sir David is actually claiming an increase of £2.01bn. But it is in fact worse than that, because Sir David is also trousering an addition to the contingency of £0.7bn for “potential scope saving (including risk reduction)”. He doesn’t appear to have explained this item, or even mentioned it, in his launch speech, but I take it to be the saving from cancelling the HS1-HS2 link. So, all in all, Sir David is refusing to release his grip on £6.45bn of contingency for Phase 1, representing a massive 41% of the estimated base cost.

Sir David’s political masters appear to be living on a different planet. Transport Minister, Baroness Kramer, told the House of Lords just a few months ago (see footnote):

“As the noble Lord, Lord Davies, will know—he has read the strategic case—High Speed 2 now estimates that, without any contingency, it could bring in phase 1 at £15.6 billion. The Secretary of State has said that we need to have a little contingency, but he wants to see this come in at £17.16 billion or less. That is the pressure being put on Sir David Higgins, and he feels that it is pressure that he can accept.”

Sir David has studiously failed to acknowledge the Transport Secretary’s budget cap. It appears that his technique for coping with pressure is to ignore it.

So what you might ask is the budget for Phase 1 infrastructure; is it the Transport Secretary’s £17.16bn, or the hybrid Bill’s £19.39bn, or Sir David’s £21.4bn?

Footnote: The Minister made this statement during her speech responding to the Lords Second Reading debate on the HS2 paving bill on Tuesday 19th November 2013 (see column 948 in the House of Lords Official Report).

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One response to this post.

  1. Posted by chriseaglen on April 11, 2014 at 11:52 am

    Waffleship arises in the politics of projects. Having the uncertainty in the different numbers occurred in the Dome and the Olympics. The EAC and ES requirements for more tunnels an tunneling will add to all these budgets. Lesson learnt infrastructure cannot be planned by the Government and MPs and Civil servants stewarding consultants. Every nation knows this and the empowerment of MPs to direct infrastructure with Boris on the horizon should frighten most of the population. Power to deliver infrastructure is firmly in the wrong hands currently as appear to be the national priorities. Euston we have a problem.

    Reply

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