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High Speed Two: passenger forecasts are a risky business

Passenger forecasts are sure to come under intense scrutiny as the public consultation over Britain’s High Speed Two railway kicks off this week.

Running 14 or more trains per hour, each with up to 1,100 seats, the government claims the line from London to Birmingham could shift as many as six million air trips and nine million road trips a year on to rail.

But late last year HS2 chief executive Alison Munro admitted that the business case for the project was on a knife-edge.

“The business case is clearly sensitive to future demand,” Munro told the Commons transport select committee in November. The committee heard that in forecasting future demand, HS2 has followed guidance from the Department for Transport, and that based on this, predictions were “reasonable estimates” of future demand. From these predictions, it has calculated a benefit to cost ratio of 2.4:1 for the London to West Midlands route. But this is highly volatile. “We did tests for sensitivity if demand were 20% lower. That reduced the benefit to cost ratio to 1.5:1, so clearly it is sensitive,” said Munro.

That sensitivity is already evident. In the economic case for the line, published this week alongside the public consultation documents, that benefit to cost ratio has already been cut to 2.0:1. And this includes benefits such as the release of additional capacity on the existing West Coast Main Line, touted by many, including Network Rail, as the prime factor in deciding whether to build the line.

There are a few projects with many problems. Demand forecasting has failed more than it has worked.

Nicolas Painvin

OK, the benefit to cost ratio for the full £32bn Y shaped network linking London, Birmingham, Manchester and Leeds had been nudged up to 2.6:1. This is based on the route delivering benefits over a 60 year period with a net present value of £43.7bn against a net present cost over the same period of building and operating the line of £17.1bn (calculated as total capital and operating costs of £44.3bn less fares revenues of £27.2bn).

But many keen commentators will be nervous; acutely aware of the pure fiction that the forecasts for High Speed 1 turned out to be. They are acutely aware that the Dutch high speed rail adventure is rapidly heading for bankruptcy; and observing that Florida last week became the third state pull out of President Obama’s high speed rail programme amid fears that traffic forecasts are over-inflated forecasts (News last week).

Nicolas Painvin, head of infrastructure for Europe, Middle East and Africa at credit ratings agency Fitch is aware of the problems.

“There are a few projects with many problems,” he says. “Demand forecasting has failed more than it has worked,” he says, citing statistics that the forecast has been at least 20% out in a staggering 84% of high speed projects studied by Fitch.

“That means the forecast is wrong almost nine times out of 10, and I’m not surprised,” he says. Painvin believes that competition from airlines is the hardest to predict. Traffic forecasts for the Channel Tunnel Rail Link before it was rebadged High Speed 1 were wildly inaccurate, largely because they failed to anticipate the impact of low cost airlines. Competition from ferry operators was also badly underestimated. In bidding for the deal in 1996, operator London and Continental Railway (LCR) forecast that passenger numbers would reach 21.4M a year by 2004. In the end, actual numbers reached only 7.3M.

The miscalculations were disastrous. The whole operation had to be refinanced with £3.7bn of government backed bonds in 1998, as construction was underway. LCR became insolvent in May 2009 with the line taken into government ownership. A 30-year concession for operation was sold to a consortium of Canadian investors in November last year to recoup come of the public investment.

The Netherlands is currently facing similar financial worries on its HSL Zuid line linking Brussels to Amsterdam. Last month infrastructure minister Melanie Schultz van Haegen told the Dutch parliament that the 95% state-owned train operator High Speed Alliance (HSA) could face eventual bankruptcy unless steps are taken to boost its viability after little more than a year of full services.

The reason is simple: HSA has struggled to attract enough domestic passengers to pay its track access charges. Some of HSA’s trains travel with only 15% of their seats occupied.

Even China is struggling. It has already built a high-speed rail network that as of November last year stretched 7,531km, according to the Ministry of Railways. By 2020 China plans to expand the network to a stunning 16,000km. Yet it is unclear whether demand will support all the construction. Last month the ministry’s head was sacked because of an investigation into possible corruption and allegations that the ministry is a staggering 2 trillion yuan (£250bn) in debt.

Of course, not all high speed lines are failures. Spain and France lead the world, aided by geographies that make high speed trains a compelling alternative to air travel. Fitch calculates that high speed rail lines claim increasing market share from airlines as distances and hence journey times decrease – with two hours being the optimum.

Spain has 2,056km of high speed lines open now and a further 10,000km due to be opened by 2020. France is a similar story. It now has 1,896km of high speed lines which work in conjunction with a 10,000km network compatible with high speed trains. Another 2,000km of high speed line is currently in planning, with 1,000km due to be opened by 2020.

And in both countries high speed pays. Spain’s first high speed line – the 471km long Madrid to Seville line - took 52% of all traffic on the route within one year of opening in 1992. Now, the train versus plane battle is over, says Juan Matías Archilla Pintidura, director of international projects at national rail operator RENFE. His high speed trains on that route claim an 85/15 market share versus air. In France it’s a similar story – the Paris to Bordeaux route takes two hours and the train has a 90/10 market share versus air.

Can the UK offer a similar success story? Doubt clearly remains

Readers' comments (3)

  • The guided busway in Cambridgeshire was originally predicted to cost approximately £90m; it is now over two years late and likely to cost £160m
    The 2012 Olympics were sold to the public with a promise that they would cost approximately £2370m; the true cost was revised upwards to £9000m within 18 months of initiating construction
    In light of these and similar cases - which are nearly always linked to wildly optimistic passenger estimates - there can be little confidence in the ability of their sponsors to separate fact from wishful thinking.
    Maybe the time has come to look again at the whole system for the realistic evaluation of cost/fare structure/benefit ratios with the aim of properly directing policy.

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  • Let's just assume for one moment that the predicted BCR is correct. A BCR of 2.0 whilst being OK, is dwarfed by the larger BCRs that other projects (rail and highways) are delivering and could still deliver in the future. That needs to be a major focus of the HS2 debate. Once once we have tackled more fundamental problems across the UK should we be investing such huge sums of money on one project. Have a look at transport select committee views on lack of transport investment in the north for related themes.

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  • So Alison Munro admits the business case for HS2 is on a "knife-edge". That really doesn't surprise me, or anyone else!

    Perhaps that means the huge impact HS2 will have upon the environment and local residents (5000 homes) should be the deciding factor.

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