Let’s be courageous, part 1

The decision taken by the new Prime Minister to pause and review the go-ahead for the Hinkley Point C nuclear power station is a welcome indication that the new regime will not blindly take on the sacred cows of its predecessor government. I recall the fictional Whitehall mandarin, Sir Humphrey Appleby, telling his PM that going with a particular decision – one that Sir Humphrey didn’t want him to take – would be “extremely courageous”, and expect that something similar was said in 10 Downing Street about pausing Hinkley Point.

If the desire to review is genuine, and I can’t see why the political risk of pulling out at the last minute would have been taken if it was just window dressing, then it is possibly a welcome indication that the potentially even bigger mistake of indulging in HS2 may also be subjected to a final review before the green button for Phase 1 of the project is pressed. Some fuel was added to this particular fire recently by a keynote speech delivered at the Institute for Government by the National Audit Office Comptroller and Auditor General, Sir Amyas Morse. In his speech, Sir Amyas said that “the Government’s portfolio of major projects is enormous” – he identified that the “estimated whole-life value” of this portfolio stood at £405bn in September 2015 – and that he felt that this had led to the civil service being “over-committed”. In the light of this, he posed a question:

“We need to ask ourselves, can the public sector deliver Hinkley Point C, a third runway, HS2, a northern powerhouse, nuclear decommissioning, Trident renewal and restoration and renewal of the Palace of Westminster, and many more, all at the same time?”

If a review of the HS2 project were to be commissioned – and whoever this is entrusted to should be totally removed from, and independent of, the duplicitous analysts of the Department for Transport and Network Rail – then a briefing paper that has recently been published by the Taxpayer’s Alliance might be a good starting point on which to base a critique.

Yes, I know that the Taxpayer’s Alliance is hardly a nonpartisan player when it comes to the HS2 project. It describes itself as a “grassroots campaigning group dedicated to reforming taxes, cutting spending and protecting taxpayers” and, as such, is hardly likely to be in favour of a £50billion plus planned government disposal of taxpayer funds. The title of the briefing paper, Rich man’s toy: The case for scrapping HS2, rather gives the game away, and the Taxpayer’s Alliance has been steadfastly opposed to the HS2 project from virtually the day that it was first announced. However, the briefing paper, which has been authored by Taxpayer’s Alliance Policy Analyst Harry Fairhead, is a very well-researched and comprehensive summary of the economic and business case against the project and, as such, wouldn’t be a bad starting point for anybody tasked with carrying out a review; after all it is the merits of the case against that would drive any decision to change course on HS2. The one critical area that the paper does not address to any extent is the strategic value of HS2 to the railway network, important in view of the pro-HS2 mantra that the project is about capacity, but it is hardly surprising that the Taxpayer’s Alliance has, on the whole, avoided this territory and stuck to what it knows best.

Of particular value to anybody reviewing the project will be the copious footnotes that Mr Fairhead has provided, enabling his assertions to be checked in his source documents and giving the curious the ability to delve deeper into the subject.

In Section One of his paper, under the subheading Rising costs, Mr Fairhead documents the rise in the total cost of HS2 from around £33bn in 2010, if rolling stock costs are included, to £87.95bn in July 2016 and warns that “given the recent rises it should be assumed that [costs] will rise higher”. However, his analysis conflates three separate mechanisms:

  • True changes in the estimated cost of building HS2 and procuring the rolling stock
  • A shift in the cost base from 2011 to 2015 prices, which is not, of itself, a real price rise
  • The additional cost of mitigation and funding transportation projects designed to support HS2, based upon the analysis prepared by Dr Richard Wellings for the Institute of Economic Affairs in August 2013

The third of these, it should be emphasised, is speculative and controversial.

What there does appear to be recent indications for, however, is Mr Fairhead’s warning that costs will rise higher. In its June 2016 report on HS2 the National Audit Office (NAO) has identified a funding shortfall for Phase 1 of £204m, based upon a P95 estimated cost (i.e. including contingency) of £27,384m, but this estimate is contingent upon making £1,470m of “efficiency savings”, which are “planned” but not “secured” (see Figure 6 in the report). The NAO figures reveal that the point estimate cost of Phase 1 has increased by around 3 per cent in real terms since the last Autumn Statement.

The NAO report reveals that the P95 cost estimate for Phase 2 is £6,974m in excess of its agreed funding. The NAO reports that £2,130m of savings has been secured towards meeting this shortfall, and that the potential for a further £7,018m of savings has been identified (see Figure 7 in the report).

The convenience of identifying these cost savings caused some obvious scepticism amongst Members of the House of Commons Public Accounts Committee and led to the Chief Executive of HS2 Ltd, Simon Kirby, admitting that “we have identified how we are going to drive down costs; we have yet to drive down the costs, which is obviously not unimportant” (see footnote). It will, I suggest, be a key task for any review of the project to determine how realistic are the prospects of securing these savings, and whether costs are really under control or are showing signs of inexorably rising.

(To be continued …)

Footnote: Mr Kirby made this remark at the public oral evidence session of the Commons Public Accounts Committee held on 11th July 2016. It is recorded under Q155 of the transcript.

PS: According to a blog posted on the Stop HS2 website after this current piece was authored, “Whitehall sources have revealed that the new government are currently reviewing all projects”.

 

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