Yesterday I tried to explain the problems with the business case for investing in HS2 during the debate. Everyone agreed that the private sector would not finance this big scheme. The main political parties have all decided that nonetheless it should go ahead with borrowed public money. Even more remarkable, they evaluate the finances of the project without putting in any cost of capital. They claim it will be a good investment, but they do not even ask themselves will it generate sufficient money to pay the interest on the borrowings, let alone eventually pay the money back.
Their idea of a good investment is something which brings “economic benefits” which expensive consultants have put a cash value on. This is misleading. The so called repayment is not money paid to the providers of the trains on HS2, and certainly not money paid to the providers of the capital, us the taxpayers. When you decide on an investment in the private sector, you add up all the costs of providing the new capacity or facility on the one side, and compare that with all the additional revenue you will receive from users. Judged on this more normal basis HS2 will not work.
Consider the cost of capital. The taxpayer has to borrow £50 billion to complete HS2. Next Parliament the government forecasts higher interest rates than at present. Let us suppose the government can over the next few years of buying this railway borrow all £50bn for an average of just 5%. That means the railway will need to generate £2.5bn of extra revenue over the costs of running the trains, just to pay the interest. That is before taxpayers get a penny of profit or return, and before we receive a penny to start paying off the collosal debt. To put this into context, the total revenues of the entire existing railway in England, Scotland and Wales derived from fares are just £7.7bn at the moment.
I have long argued that the West coast mainline is the train line least in need of capacity improvements. The project’s own figures reveal the truth of this. By 2037 they reckon the West coast mainline will only be 31% full following the construction of HS2, which it elf will only be 52% full. That is after they have made substantial cuts to services on the existing lines to try to reduce costs and remove empty seats.Trains out of Waterloo and Paddington are far busier than trains out of Euston, and there are serious capacity problems on shorter haul commuter routes.
The project assumes there will be no price competition once HS2 opens. Given the huge amount of capacity that will be provided on a route that is far from busy, experience suggests there will be a vicious outbreak of price competition leading to even lower fares revenues . This week, as a traveller to northern cities, I have been offered trips to Birmingham for £7.50 and to either Liverpool or Manchester for just £12.50. This does not sound like a railway suffering from a huge shortage of capacity, nor does it sound like a great business opportunity to make money from providing more capacity.
Much of the alleged cash benefits from running the extra railway comes from the saving of time on the journey. Business travellers are assumed to save £31.96 an hour for every hour of travel time saved, and this sum rises over the forecast period of the train project. As business people normally work on a train it is difficult to understand this calculation.
The wider economic benefits are said to come from the sudden acceleration of growth in Birmingham, Leeds and Manchester which will come from the arrival of faster trains. This needs to be set off against the adverse impact on cities like Coventry,Leicester, Wakefield,Chester, Carlisle,Durham and all the others that will have worse train services following the cuts on existing lines. But will it anyway generate more activity? East Kent has not experienced any lifting of its growth rate following the arrival of HS1.