Barmy government procurement is a key driver of HS2 costs

31 January 2020 3:19 PM

The fate of HS2 will soon be decided and news of the much-hyped Oakervee Review has started to leak. It seems to recommend that the project should go ahead in full (onwards to Manchester and Leeds from Birmingham) but concedes that potential costs are too high. HS2 now cannot be delivered within its £56bn budget, and £88bn is the more pragmatic figure. I’m the editor of RAIL magazine and we’ve been covering it for over ten years and I’ve noticed how much people aren’t being told. So here’s my attempt to distil the costs story into a few paragraphs.

In the beginning, HS2 costs were estimated at about £34bn. To guard against cost overruns, HM Treasury loaded heavy contingencies – I recall a figure of at least 40 per cent – which helped drive estimates to around £56bn.

In 2010, the Treasury stirred in a further assumption that bedevils HS2 still. It assumed construction would achieve 20 per cent efficiencies through new techniques and technologies. This 20 per cent was fatefully ‘baked into’ the numbers; fatefully because they have not been realised. Critics tell me that infrastructure efficiencies are no better today than when we built HS1 through Kent. This opened in 2007.

So when reality bit, and everyone agreed that these ‘efficiencies’ just hadn’t emerged, ‘the number’ rose again, to £86bn. This figure is arrived at by looking at the cost of HS1, add in construction industry inflation (higher than normal inflation) and you reach c£88bn for the whole project. Still too pricey, but the cost is realistic, given where we are.

The ludicrous £106bn ‘price tag’ endlessly reported as fact by national media is no such thing. My understanding is that this is the number that the still-unpublished Oakervee Report says HS2 could reach only if big problems are not dealt with. One big variable is the contracting and procurement model demanded by the Government for the London to Birmingham part (Phase 1). It is beyond insane because it transfers risk best carried by Government, to contractors, at vast cost.

Government procurement demanded HS2’s builders remain responsible (crucially, financially liable) for design risk for maybe 25 years. Madness. They might, for example, demand that embankments settle by no more than 25mm (an inch or so) over 25 years. Contractors therefore have to do two things. They must insure against future problems – imagine the cost, given how big those problems might be! – because their company might not even exist in 25 years. They also have to ‘gold-plate’ at vast expense. This means they have to take a ludicrously expensive belt-and-braces approach, building to a far more stringent ‘spec’ than would be normally necessary. They might build an embankment as normal – then sink metre-diameter concrete pillars for maybe 40 metres into the embankment, to ‘nail it in place.’ Maybe add a concrete deck, too, thereby building a viaduct actually inside the embankment. All at eye-watering, pointless, and entirely avoidable expense.

As I understand it, this has added about a third to the cost. On the whole project? Around £30bn.

This is what’s jacking up the price of HS2. And it is barely being reported in the national media, despite my magazine banging on about it and my personally tipping off some big-name journalists.

The National Audit Office seems to be onto this, however, and I understand this barmy procurement model has been quietly dropped from the later part of HS2 (north of Birmingham to Leeds and Manchester). If we returned to a normal procurement model – like the contracts used to make HS1 – we’d start to see a much more realistic figure. Perhaps this is why Sajid Javid is suddenly so in favour of HS2. He’s a former financier and worked in infrastructure deals before becoming Chancellor: he might well have cottoned on to this insane procurement model and ordered it to be dropped for the later parts of the project, north of Birmingham. Javid significantly added that no HS2 alternatives either give better value or are practical, which suggests he’s become intimate with the facts. Even the inconvenient ones.

So with a bit of financial realism, Boris Johnson could proclaim that his unique and incisive approach has, within weeks, ‘sorted out’ HS2 and driven its potential costs down from the (nonsensical) £106bn figure to something closer to £85bn.

This isn’t about getting to Birmingham ten minutes faster. It’s a project of rejuvenation on a scale never seen before. The East Midlands have struggled economically: hardly a leisure destination and in business it’s too-often an area you travel through, on the way to somewhere else. Even lottery grants seem lower than elsewhere. With the eastern arm of HS2 and its station at Toton, we will see urgently-required economic, business, social and other benefits. It will be economically transformative for the region.

When liberated from emotion and political manipulation, both the facts and the politics make it pretty obvious that this new railway is urgently needed. Time to get HS2 done.