HS2: How on earth have costs got so out of control?

“I have three children,” Andrew Adonis told rail industry leaders in 2018. “A son, a daughter and HS2.” You’d be hard pressed to find a birth more traumatic than that of Lord Adonis’s third nipper. Currently £76 billion over its original budget according to leaks this week and 5 years behind schedule, the plan to create a new generation high speed rail network in Britain is shaping up to be a record-breaking white elephant. It is a bewildering mess.

How on earth did the costs get so out of control? Was it a case of overoptimistic costings at the start and bureaucratic bungling?

Rail industry insiders say that for all the government’s attempts to blame the planners, extra costs resulting from government decisions designed to protect the environment and fight off critics have added as much as a fifth to the cost.

Nigel Harris, editor of Rail Magazine, is withering: “Government contracting insanity has turbo-charged costs… equating to £20 billion.”

A weary government insider is also scathing about how the disaster unfolded: “The original proposed cost was based on very flimsy assumptions.”

High Speed 2 was – and still is – pitched as a solution to some of the UK’s most pressing economic, transportation, and environmental problems. It would take pressure off Britain’s overstretched commuter rail routes. It would shrink the North-South divide along with the country’s CO2 emissions. It would create jobs and revolutionise rail travel. The fastest trains in Europe, 400 metres long and travelling at 250mph, would carry 100 million passengers a year between the country’s busiest cities.

The first phase of project, between London and Birmingham, is supposed to open in 2026. The second phase from Birmingham to Leeds and Manchester is meant to be completed by 2032-33. The lines would cut journey times by 29 minutes between London and Birmingham, and by 50 minutes between London and Manchester.

Scotland is also supposed to benefit. HS2 trains would run on the existing routes from Leeds and Manchester to Edinburgh and Glasgow, linking with the new high-speed line to slash commuting times between London and Edinburgh to three hours, down from four.

But the utopian vision of HS2 has collided with reality.

Delays, embarrassments and ballooning costs have plagued the project since its conception, when it was just a twinkle in Lord Adonis’s eye. The Labour peer first pioneered the ambitious new scheme while transport secretary in 2009 under Gordon Brown. The plan for HS2 was published in March 2010, shortly before the general election. The projected cost was £30 billion. By the end of the year HS2 had been adopted by David Cameron’s government as part of the coalition’s infrastructure push and as an alternative to a third Heathrow runway.

But by 2013 the emphasis on speed and the environmental benefits of the project were sidelined. Instead, the creation of “millions” of jobs and the need to increase rail capacity became the new justification. The predicted cost of HS2 had crept up to £42.6 billion and concern was rising. Even Peter Mandelson, one of the original architects and chief flag-bearers of HS2, admitted that it had been “an expensive mistake”.

Things got worse. Later that year, the ambitious plan to rebuild London’s Euston terminus was scrapped. Estimates for the redevelopment had been out by half a billion pounds. The existing station would be adapted instead. In 2015, the budget for HS2 was increased to £56 billion.

In 2016, HS2’s own report raised concerns that there was a risk of catastrophic track failure and derailment at the train speeds proposed. But the incoming May government vowed to keep the show on the rails. In 2018, Sir Terry Morgan resigned as HS2 chairman. He jumped before he was pushed as anxiety mounted that costs were spiraling out of control.

In June 2019, Boris Johnson announced that an independent review into HS2 would be headed by another former chairman, Douglas Oakervee. By the end of the summer, the best guess on cost stood at £88 billion. The first phase of HS2 was at least three years behind schedule and the second phase at least five.

Over the weekend, a copy of the Oakervee report was leaked to the FT. The report gives the notion of continuing with the project a half-hearted thumbs-up. But it also recommends pausing the second phase and seeing whether conventional lines could link Birmingham with Leeds and Manchester instead. The report estimates that the updated price tag could now be as high as £106 billion, or roughly the GDP of Kuwait. This latest costing makes HS2 the most expensive rail project on earth, one which is currently burning through an eye-watering £250 million a month.

But how did the project’s costs reach such dizzying heights?

The government insider told Reaction that there are three main reasons the cost of HS2 has increased so much:

“First, every other cost until the stocktake (£88bn) last year was simply an inflation-updated version of that first costing – bad economics. Secondly, it is basically impossible to know how much a project will cost until you’ve tested the ground conditions and had contractors price up the work. None of that can happen until the Bill has passed parliament, and the Phase 2a and 2b bills haven’t gone through yet. The Phase 1 bill has, and the current cost estimate is now very robust (because they’ve had contractors digging between London and Birmingham).

“Third, when the Phase 1 Bill went into Parliament the route changed massively – huge expensive environmental mitigations were added to protect wildlife, trees etc, including a 17km tunnel under the Chilterns and a 2km viaduct on the route into Birmingham. The Phase 2 costs continue to rise because there is so much political dispute over the routes into Nottingham, Sheffield, Leeds, Manchester etc and the number of houses and businesses being blighted.”

Making even modest cuts to HS2 is difficult because most proposed changes fundamentally undermine one or other of the scheme’s proposed benefits. Slowing down the ultra-fast trains would save, perhaps, £500 million. But then HS2 becomes strikingly similar to a conventional train service. Scrapping the Birmingham to Leeds network would save a lot of money but is politically sensitive. The Oakervee report’s proposal to pause the second phase of HS2 has been criticised as a betrayal of the project’s promise to bring economic transformation to the North.

This being said, a major factor in the scheme’s soaring price tag has been profligate spending. In August 2018 it was revealed that a quarter of HS2’s 1346 staff were earning over £100,000 and 15 were on more than a quarter of a million. The previous year, HS2 had spent £600 million on consultants including £21 million on “environmental consultants”. Having four different Prime Ministers at the HS2 steering wheel has also made comprehensive oversight of spending much more difficult.

These costs are dwarfed by the project’s biggest spending commitments, however.

According to Nigel Harris, one of the keys to understanding why HS2 has gone so over budget could lie in the veiled criticism of HS2’s procurement strategy in the Oakervee report. The government seems to have compelled HS2 to “export design risks” when procuring construction contracts. This involves HS2 demanding a guarantee from a contractor that, for instance, the rail embankment it builds won’t sink by more than two centimetres from its current height over the next 30 years.

The firm is then obliged to reinforce the embankment, at huge cost, and also to insure their business against the possibility of a hefty financial penalty in the distant future. This bloated bill is then passed on to HS2. Contracting inefficiencies such as these are thought to have increased costs by around £20 billion.

With £8 billion already spent and thousands of jobs resting on the completion of the project, rail bosses warned Boris Johnson this week that there’s no Plan B for HS2. But given the jaw-dropping sums now being talked about, many are questioning whether there was ever a coherent Plan A.