The only cost-benefit analysis of HS2 that matters

The UK government has published the fifth installment of the strategic case for High Speed 2. The changes to the cost-benefit analysis are summarised below:

For phase one – the line running from London to Birmingham scheduled to open in 2026 – the benefit-cost ratio remains 1.7. Given reports about rising costs and the fact that the presumed benefits to faster journeys have been overstated, this seems odd.

Two things have happened. The first is that costs, as expected, are up (see the blue arrows). The second is that, lo and behold, benefits are up, too. Why? Because the sums have been done again and there are more benefits from more capacity. Here is the government’s explanation for the rise depicted by the red arrows above:

Upward influences on the benefit-cost ratio are associated with improvements in services through use of released capacity, including to towns such as Preston, York and Milton Keynes, and better evidence on travel patterns which mean we are now forecasting more business travellers on key routes served by HS2.

The word “capacity” is mentioned 231 times in this strategic case. Although what follows is a bit silly, the word “capacity” was used 5 times in the short update from August 2012, 51 times in the economic case made in January 2012, nine times when made in April 2011, and 25 times in February 2011. In the ABC of HS2, capacity is the best argument: not only does increasing the possible number of journeys to and from urban centres generate economic benefits but it also highlights that something must be done to relieve present and future pressures on the current railways. In effect, this is a return to the case Andrew Adonis was making as transport secretary when the command paper was presented to parliament in March 2010. (199 mentions of “capacity”, in case you were wondering.)

Furthermore, arguments about capacity could open up the charge that HS2 will be of more benefit to London than the rest of the country. Depending on your view of “rebalancing”, this could be neither here nor there, but underneath much of the analysis regarding the benefits to increased capacity is the idea that it is easier to get to the capital.

Below is a chart from today’s report showing how the full HS2 could shorten travel times. I couldn’t help but look at this, think about London house prices and wonder whether anyone would ever consider commuting to the capital from Manchester:

The first chart above includes “wider economic impacts” – without these the updated benefit-cost ratio is 1.42. And if you were to reject the idea of these new capacity calculations, while making the government’s adjustments to the producitivty of business travel, the BCR quickly approaches 1 – dangerous territory.

Of course, the BCR is not what should be forcing decisions. The argument that HS2 is the least worst way of relieving capacity is a better argument. So too is the idea that this is simply the sort of thing that countries competing in the modern world must do.

But this review of the costs of benefits is important in what it might tell us about the only cost-benefit analysis that really matters to the future of HS2: the one in the minds of Ed Miliband and Ed Balls, respectively Labour leader and shadow chancellor. If they were to withdraw support for the project, then it would literally be the end of the line.

This morning, the BBC’s James Lansdale suggests that talk of Labour resistance may be overblown.

I think there is also another important point of context: there is no obvious middle ground between building all of HS2 and not building all of HS2. The estimated benefits are higher over time and the further it goes towards Manchester and Leeds. And if the money is not spent on HS2 a large share of it will still have to go on increasing capacity. So far at least the opposition has accepted the argument that HS2 is the best way to do that.