Government plans to boost confidence in High Speed 2 by publishing revised costs for the mega-scheme have backfired and now threaten to derail it, senior industry experts said last week.
Soon after the government announced that the construction budget had risen by £10bn to £42.6bn, it was revealed that it had also ratcheted up its level of certainty that the scheme will come in to budget.
Typically, at this early stage, there is only a 50% certainty that would be delivered to the budget assigned to it.
But ministers have decided that increasing the budget would increase the certainty that the project would be delivered on budget to 95%.
Experts expressed surprise at what is seen as an unprecedented decision for a major public project at such an early stage.
They said the move was inexplicable and warned that rather than increase confidence in the controversial scheme, it could instead undermine it.
One senior consultant said that he found the revised projection “very scary”.
Speaking at a panel discussion on the Spending Round 2013 held by cost consultant EC Harris last week, Steer Davies Gleave non-executive director Jim Steer questioned the logic behind the move.
“I simply don’t understand why at this stage … it is appropriate to announce a budget at a P95 level [equating to a 95% certainty that the project would come in on budget], whereas the previous estimates were at a P50 level [50% certainty],” said Steer.
“I think Network Rail, was quite happy with, and had no trouble with, [a] P80 level.”
Officials have done little to quell confusion about the cost increase following the annoucement of the hike on the day of the Spending Round 2013 late last month.
It remains unclear what proportion of the cost increase is due to specific design changes required to mitigate environmental concerns and what proportion is increases in contingency funds.
Speaking at a Commons Public Accounts Committee last week Department for Transport HS2 director general David Prout attempted to offer a breakdown.
“The global figure for phase 1 and phase 2 together is £42.6bn,” he said.
“In addition, there is £7.5bn for rolling stock, which includes £1.7bn of contingency. For phase 1, the total cost at P95 level of contingency is £21.4bn, which includes £5.7bn of contingency. For phase 2, the total is £21.2bn, with £8.7bn at P95 level of contingency.”
But there is still confusion in the construction industry about what the extra costs are for.
NCE understands from sources close to the scheme that the design changes, including introducing a section of tunnel between Old Oak common and Northolt in the London section, are only responsible for relatively small increases in the cost.
One senior source put the construction cost at £37bn, while Steer agreed that he felt the actual cost had not risen dramatically.
“The explanation [for the cost increase] I’ve had is: ‘Well, yes of course costs did go up and we told you they’d gone up for the first phase from £16bn to £18bn earlier this year, and I don’t think we should be surprised at that level of cost increase given that the project definition is being changed in response to local objection, another tunnel and all that shenanigans’,” he said.
Steer and others warned that the confusion and apparent sharp hike in costs were threatening to destabilise support for the scheme.
“To my way of reckoning the cost hasn’t suddenly gone up but it’s certainly triggered some political commentary and reaction,” he said, referring also to an article in the Financial Times (FT) by former Labour business secretary and key Labour party adviser Lord Mandelson. In the article, Mandelson warns that HS2 was at risk of becoming an “expensive mistake”.
“I think that does start to give a real sense of risk to the project,” said Steer.
“This is about thinking about the long term, and I for one have no doubt that if HS2 now, not just suffers a wobble which all big projects do, but is actually put into review, or put into the long grass, we will have a real serious problem that there is no answer to address for our rail network going forward.”
Also at the EC Harris event, Olympic Delivery Authority chairman and former Network Rail chief executive Sir John Armitt warned that HS2’s future was now uncertain.
“This fundamentally is a political issue,” he said. “Mandelson makes the point in the FT that the decision to go ahead by the Labour party was a political decision without an enormous amount of evidence and I think as people in the rail industry we have to recognise that we have a situation still where 88% of all journeys made in the country are not made by rail.
“Clearly there is a risk that this will not happen. Personally I think it is time in this country that we did actually add to something to the 19th century rail network and it’s got nothing to do with speed… What we have certainly not done is sell capacity and the wider economic benefits.
“In current political environment you can see this is a pretty risky time and will get riskier I suspect as the election approaches.”
HS2 Ltd commented on Mandelson’s article by saying: “We recognise the challenge that has been laid down and our need to respond.”