No recessions for 80 years: The fanciful world of High Speed Rail 2’s business case

AFTER the well-flagged decision this afternoon to press ahead with the first stage of the High Speed 2 rail project (HS2), the City and business will be pressed to “contribute” to the strong business case. An aspect that MPs are singularly ill-equipped to consider, but that the City will focus on, is the way the case has been fiddled by selective manipulations buried in the detail of the Department for Transport’s (DfT) spreadsheets.

What is likely to be approved is a scheme designed to boost capacity for Northampton-based commuters (who need new trains now) by building a new, high-speed line to Birmingham opening in maybe 2026-27, mostly on the promise of the benefit to people who will be travelling to work after 2050. That will make three fast rail routes to Birmingham: the West Coast main line, the Chiltern line and HS2. All are fast, Chiltern just had an upgrade, and could be faster still with decent signals.

The basis for this is an 80-year GDP forecast from DfT – a forecasting paragon. Further, the discount rates used have no provision for error in this forecast. It is 100 per cent correct. Please be reassured, there are no recessions due before 2093.

The rosy DfT outlook means that the average business rail user by 2092 will see their real incomes rise 4.26-fold in 2009 money – there is no inflation. While their ancestors struggled on about £65,000 in 2009, the 2092 crowd will be on salaries of at least £240,000, maybe more as the overall cost of employing them is estimated by DfT to be £370,000. By travelling on HS2, these highly-paid executives (about 72,000 per day of them) save time and generate extra profits for their employers. Minor things like radical changes in the UK demographics after 2050, the rise of China and Asia and technological changes are irrelevant. Even pensioners will be 3.2-fold better off by 2092.

This is a neat trick and all done on a couple of lines in a spreadsheet that MPs will never look at. It means that 88 per cent of benefits arrive after 2043.

The largesse is not even, though. Most staff who will work on HS2 remain on 2009 wage levels. And construction costs, which are £45bn in cash terms at 2009 prices, are not affected by GDP growth either. So construction workers lose out. Fares do not inflate by GDP, though real price rises are assumed till 2043, so fares will eventually fall relative to income – if the DfT is right.

Why the 2043 cut off? – well, there are not enough passengers until then. To make it work financially, HS2 also needs 30 per cent growth in rail passengers over the DfT optimistic case. If the “sophisticated” demand model is not arbitrarily ended at a convenient level in 2043, it predicts that very quickly we’d all be travelling daily on HS2, all 60m of us. And it only goes to five places apart from London.

What does this do for the economics of the project? Well, it is in two stages: first to Birmingham and then two arms of the eventual “Y” route: to Manchester on the west arm and to near Nottingham, outside Sheffield and rammed into Leeds on the east. Less a network and more a corridor. If anything breaks down, like the elaborate computer-controlled signals (not yet designed) it will cause chaos.

The whole thing will cost £45bn in 2009 cash to build. So far, no one north of Birmingham has seen any details but the costs of the northern extensions are small relative to this first section – oddly cheap, as there are things called hills in the North.

We all have to make forecasts but one can accommodate uncertainty to some extent by using a present value with a discount rate to reflect inherent risks and uncertainties. The Treasury dictates a rate of 3.5 per cent falling by 2092 to 2.5 per cent. This is not a financial present value as there is no financing cost and no debt calculation involved; it’s all free, tax, money. By increasing real GDP after 2043, the benefits are exaggerated and costs diminished when assessing the benefit ratio. Far from this ratio being over 2 as needed, it falls to under 0.9 if 2009 GDP levels are used. In other words, the UK is still not rich enough to get any benefits from HS2 and will lose 10p for every pound spent.

The government hopes that HS2 will bridge the North-South divide – after 2033, when the extensions finally reach Leeds and Manchester – but spending £45bn cash upfront to get few benefits before 2043 seems odd. And there is no evidence it will make any difference. In the meantime, Northampton’s commuters can stand. At least, according the DfT, they are getting steadily richer. What has always been puzzling is why such a badly-thought-out plan is so eagerly adopted by David Cameron. We will see what the latest excuse is at 3pm today, when the latest secretary of state to be duped by the rail lobby stands up in Parliament.

Dr John Savin is an investment analyst and lives in Wendover, an affected village in the Chilterns’ Area of Outstanding Natural Beauty.