One of the things that I have been calling for over the last 30+ years is much greater investment in the rail system. But surely now, with the deficit as high as it is, with the economy having shrunk by 5% or more, is not the time to commit to such large projects as Crossrail, Thameslink 2000, or HS2? Wrong! Now is the best time to construct these things, in fact they should be speeded up and work begun straight away.
I’ll look in detail at the new High Speed rail line which Lord Adonis was trying to get all-party support for in the last parliament, as it illustrates nicely how the Conservative Government is throwing out the baby with the bath water, simply because it was thought up by Labour. First, however, let’s look at some general principles.
Any large capital project is given what is called a Cost benefit Analysis, or CBA. If the CBA ratio is 1:1, that means that for every pound spent on the project, one pound is returned in terms of benefit, either as cash or in other forms. The time saved by someone is turned into a monetary value, for instance, so until recently, in order to prove the benefit of a bypass, the time saved by a motorist was charged as if his time was very valuable, when, of course, not every driver on the bypass was a merchant banker. Meanwhile, the time saved by rail passengers was usually considered less valuable. Worse still, road schemes which achieved a CBA greater than 1:1 were approved, whilst rail projects had to get at least 1:1.4 or even 1:1.5 to get anywhere near the department of Transport. As you can see the odds were heavily stacked against rail.
For most of these large capital projects, whether it is a motorway extension, or a new rail line, the Government will have to increase borrowing, hence the need for that CBA. In order to work out the cost of this borrowing, the standard Treasury discount rate is used. In the past, this has been set as high as 20%, but in recent years it has been 8%. Most current projects in the public sector are measured using the 8% rate. These figures are designed to reflect the true cost of borrowing. However, the actual cost of borrowing to the Government is now a lot less than that, with base rates at 0.5% and yields on Government gilts in the latest auctions at around 3.8%. Indeed, the Government is currently paying off some of its previous highly rated gilts which paid 5-6% with new bonds yielding as little as 3 5/8%, dated out to as late as 2038. Government borrowing hasn’t been this cheap since the 1960’s – but that’s another blog. In short, the cost of borrowing is now as low as it going to be.
Another benefit of these large projects is the additional short term benefits they bring in terms of jobs, and the economic activity they generate. Conservative often talk about the public sector ‘crowding out’ the private sector, which is patently rubbish as most of the public sector has no direct comparison to the work done by the private sector – you cant say that spending on the police crowds out the private sector, as there isn’t a private sector police force in every town. However, the creation of large numbers of jobs can put pressure on private sector employers to increase wages, and therefore reduce their competitiveness in a time of low unemployment. The public project will tend to suck workers away from the private sector. But hey! We’ve just lost 5% of our output, and unemployment is over 2 million – and set to rise thanks to cuts elsewhere (see previous posts). Creating new skilled jobs now will not affect the private sector, indeed it will help provide it with a highly skilled and experienced work force once it is able to start investing itself. There is no danger of such a large project adversely affecting the private sector – if it is started at the right time. And that time is now.
Let’s look at HS2 in detail. First some comments about the proposals. The new Governments thoughts are, frankly ludicrous. Several studies have shown that HS2 will actually have only a limited effect on demand at Heathrow, as a large percentage of travellers are changing flights there, and the biggest change will be on those who travel the longest distance. Indeed, even a line which simply goes to central London will still reduce demand at Heathrow, simply because the airport already has, or will have, very good public transport links (Piccadilly line, Heathrow Express, Crossrail, even the proposed Airtrack link from Waterloo). However, a diversion via the airport will be expensive (lots of tunnelling) and time consuming. Even if trains do not stop at Heathrow, 15 minutes will be added to their journey. Now that may not sound much, but when your London-Birmingham journey time was 46 minutes, extending that out to over an hour for the pleasure of a few airport passengers is not a sensible idea. Both Network Rail and HS2 have estimated that the diversion will have a negative impact for virtually all other travellers, who will make up the majority of passengers on the line.
Their next diversion is to avoid the Chilterns, where many (Tory) voters are outraged about the line. For students of railway history, many of their arguments are similar to those used by their predecessors against the original London & Birmingham Railway in the 1830’s. The Government proposal is to bypass the Chilterns, but to avoid the Area of Outstanding Natural Beauty altogether, would result in a line going almost as far west as Oxford (although not presumably as far as Witney). This diversion would also add 10-12 minutes – that quick train to Brum is now at an hour and 15 minutes, and with the current trip only taking 1 hour 22 minutes, it almost doesn’t seem worth it. That’s before I get to their idea of serving Manchester via Leeds. For the latest insanity is that after leaving Birmingham, HS2 will not head to Manchester, but across to Yorkshire to serve Leeds, before heading across the pennies to enter Manchester from the east, or the north east. This will easily add 20-30 minutes onto the travel time, once a stop (or two) has been factored in. Under the Network Rail’s scheme, Manchester was only 70 minutes from London Central. Under the Tories, it is now 2 hours away. A quick check of the timetables shows that I can currently get a train from Manchester to Euston in 2 hours and 2 minutes – so much for ‘high speed’. It almost seems as if they want to draw a line between London and Manchester that goes through as few Tory constituencies as possible. I’m sorry, but on any straight line between London and Birmingham, the Chilterns are in the way. I well remember the outrage at the route of HS1, to the channel tunnel, and the NIMBYs who inflated the cost with the added tunnels. I recall a TV programme where one of the protestors was taken to Northern France to see the high speed line there, commenting on the lovely unspoilt countryside, not realising that 2 TGVs had already passed through a cutting 700 meters away.
So, we have settled the route, so why wait until 2017 to start construction. The best time to start work is now – money is cheap, the economy needs jobs, but will this project actually provide any benefits? Well, yes. The in-depth studies have shown that a CBA in excess of 1:1.9 would be achieved by a full high speed line from London to Scotland. This option achieved the highest CBA ratio of all. The cost, at £34billion is a lot of money. However, there are riders to this valuation. First this includes an ‘optimism bias’ of 66% – that’s the factor that such projects tend to run over budget. If such a project was properly managed, then the base cost is a ‘mere’ £20bn – and that would be spread over several years. That £20bn would not be wasted; it would be spent on engineering and construction jobs, and would have a much wider effect, and these additional benefits have not been considered. Economists talk about a ‘fiscal multiplier’ in spending – the idea that an initial amount of expenditure is multiplied by the fact that its recipients also spend more money and so on. Now there are many arguments over the exact figures, but a textbook figure often used for Government spending is 1.9. That means for every pound the government spends, an additional £1.90 is spent elsewhere in the economy as an indirect result. So by spending this £20bn on this project, the rest of the economy spends nearly £40bn. In total that’s nearly 5% of our economy. Which brings us back to where we started?