R979 - Slow speed ahead for High Speed

The Government’s recent announcement slowing down the rate at which HS2 is being built was spun in its press release as part of a record high capital investment level over the next two years. However, hardened mainstream journalists were not misled and seized on the news of a further delay with glee, creating lots of negative headlines along the way. 

The Government would like us to believe, as stated in its press release, that this fresh delay would enable work to proceed “in the most cost-effective way”. It is true that a further delay to the works at Euston will enable time for a fresh take to solve the thorny problem of how best to build the new station there. But in every other way, a delay such as this to a large-scale project such as HS2 is extremely bad news for its cost-effectiveness. We even know from a leaked document that ministers were advised of this fact by officials. 

First and foremost, extending the project’s design and construction timescale to this extent means significant growth in project management costs. On such a large project as HS2, there is a huge and expensive standing army supporting the leadership team. Extending the Phase 1 timescale to completion will likely add billions to the cost even before allowing for inflation. Secondly, the army of contractors, big and small, who make up HS2’s supply chain and who do all the actual work to construct the new railway are all geared up to deliver on the previous timeline. Slowing this burn rate down will make it harder for them to retain their skilled workforces and will inevitably serve to increase costs. 

A new delay also creates more opportunity for changes of mind to occur within government over time. Our Government has some form here, as there have already been several significant changes of scope on HS2 and no doubt there will be more to come. But as any survivor of large projects knows, and many bear the scars to prove it, there is absolutely nothing worse than changing the scope of a large project once it is in flight. This will always result either in delay or cost escalation, and most often in both. 

Quite apart from the increased costs which will arise from this decision, the delay in completion of the various key outputs will have a significant knock-on impact on revenue, as the introduction of new high-speed services will be delayed by years. Even worse, the initial service offer will be restricted by the capacity of the Old Oak Common station layout and will be condemned to start and finish in the suburbs, rather than at the central London terminal most users will crave. Finally, the benefits of freeing up capacity for services on the West Coast Main Line will be both reduced and delayed. 

The combined effect of the increased costs and deferred revenue will have sabotaged the business case for HS2, which was never particularly healthy right from the beginning. We can forecast a future where the line is unlikely to ever make sufficient revenue to enable it to service its debt and repay the capital. 

So, why has this decision been taken? There are a number of factors in play here, of which the biggest is inflation. The rate of inflation for construction activities is reported to be peaking at around 25%. Phase 1 of HS2, which is Britain’s biggest construction project, was always going to struggle to live within its initial tight funding package. Now it will overshoot by a number of billions, and so uncomfortable decisions have to be made.

“The combined effect of the increased costs and deferred revenue will have sabotaged the business case for HS2, which was never particularly healthy right from the beginning.” 

The Government, of course, has to look at the bigger picture. Other sectors of the economy have pressing needs for increased government spending: healthcare, social care, energy and defencetonamejustfour.Railwayinfrastructure is not going to get anywhere close to the top ten of Government priorities at the moment. With public spending under unprecedented levels of scrutiny given other factors in play, HS2 was always likely to face demands to reduce its cash call in the near term. 

Added to which, there is the whole issue of trust between the Government and the rail sector. To say that there is a shortage of this at present would be an understatement. With railway industry revenues continuing to sit significantly below their pre-pandemic level, and a lacklustre response by the industry to Government’s calls for efficiencies and cost control, it’s no surprise that the Treasury has lost faith in the railway’s ability to curb its need for financial support. 

There can be no change to this position while the current industrial disputes continue to disrupt services, inconvenience the country at large, and cause further loss of revenue. In such a situation, it should not come as a surprise that the railway has no friends at the Treasury when it comes to supporting the financial needs of HS2. 

We now see this Treasury reluctance to continue to pick up the tab for the railway starting to be played out across the whole sector. Having all but given up on getting any efficiencies from rail, Treasury demands for cost reductions across the board have reached the point where nothing more can be cut without affecting service levels or quality. Hence the first signs of cutting into the bone are appearing. 

East Midlands Railway releasing its Adelante units will bring reduced formations on the Midland Main Line. Great Western Railway releasing its ‘Castle’ HSTs, and its re-engineered tri-mode multiple units intended for the North Downs, will result in fewer and shorter trains across its network than had been planned for. And now we have CrossCountry forced to abandon its prized HST sets, the backbone of its people-moving ability on the NE-SW axis. 

We can expect to see more of these fleet cuts in the coming months as we move towards increasingly desperate attempts to meet Government demands for cost reductions. It’s not as if people haven’t been warned this would happen if the industrial disputes were not resolved in a way that unlocks productivity. You may not be too keen on our current Government, but it does control the purse strings and so needs to be listened to. 

Michael Holden

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