When to Invest
in High Speed Rail25

Discussion Paper 2013 • 25
Christopher Nash

Institute for Transport Studies,
University of Leeds, United Kingdom

When to Invest in
High-Speed Rail

Discussion Paper No. 2013-25

Prepared for the Roundtable on
The Economics of Investment in High-Speed Rail
(18-19 December 2013, New Delhi, India)

Christopher NASH
University of Leeds, United Kingdom

December 2013

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WHEN TO INVEST IN HIGH SPEED RAIL

1. INTRODUCTION

High speed rail (HSR) is usually regarded as services operating at 250 kmph or more,
and these invariably require construction of new purpose-built lines. According to theInternational Union of Railways (UIC), by 2012, a total of 13 000km of such lines had
been built worldwide, half in Europe and half in Asia. China had the largest network at
3 426km, whilst Japan, France and Spain all had over 2 000km. There are plans for afurther major expansion, with the European Commission calling for a trebling of thekilometrage in Europe by 2030.Yet high speed rail is an enormous investment, with atypical 500km line costing 6-12Bn euros in 2004 prices (Euros 12-24 Bn per km) (de Rus
and Nash, 2009). It is necessary to consider very carefully in what circumstances such an
outlay is justified.
The first such line, the new Tokaido line in Japan, was clearly built with the twin aims ofgiving large time savings (and thus competing effectively with air transport) and relieving
capacity constraints on the existing railway line. These were also clearly the motives
behind the construction of the first TGV line from Paris to Lyons in France. But sincethen, wider motives have appeared, including reducing carbon emissions by diverting
traffic from air and road, and promoting economic regeneration and growth. The firstpart of this paper will consider at a general level the costs and benefits of high speed rail,and evidence to date on what determines their magnitude.
We will then consider specifically evidence from the current debate in Britain. The firstHigh Speed Rail line to be built in Britain, from London to the Channel Tunnel, opened in
2004-7. Possible benefits of regeneration in East London played a significant role in the
choice of route and in the appraisal of this line (later dubbed HS1). It was not until 2001
that the Strategic Rail Authority commissioned a study of the case for high speed rail
linking London with cities to the North. This formed the basis of the current proposals fora line from London to Birmingham, branching near Birmingham to form lines going on to
Manchester and Leeds (HS2). The government is committed to going ahead with thisline, and is just starting parliamentary processes to obtain the powers to build it.
However, the project is very controversial, and consequently an enormous effort has
been put into studying its effects by both proponents and opponents. The evidence fromthese studies will be reviewed, before we draw our conclusions.

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2. COSTS AND BENEFITS OF HIGH SPEED RAIL

2.1

Introduction

The principal costs and benefit of HSR are listed in Table 2.1.
Table 2.1. HSR costs and benefits
Costs
Capital costs
Operating costs
External costs (environment, safety)
Loss of tax revenue (from traffic diverted from road to rail)
Benefits
RevenueTime savings (beyond those recovered in higher prices)
Diversion from other routes and modes – reduced congestion, accidents and environmental costs
Generated traffic
Wider economic benefits

2.2

Costs

We have already noted the high capital costs of high speed rail. In terms of operating cost,whilst energy consumption and maintenance costs may be higher than for conventional
trains, high speed means staff and rolling stock can achieve much higher utilisation rates
per passenger km than conventional rail, offsetting the increased costs. Typical costs forbuilding and operating a high speed line are shown in Table 2.2.

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WHEN TO INVEST IN HIGH SPEED RAIL

Table 2.2. Typical costs of a 500 km high speed line (million euros 2004 prices)
Capital costs
Infrastructure construction

6000-12000

Rolling stock (40 units)

600

Total

6600-12600

Operating costs p.a.
Infrastructure maintenance

32.5

Rolling stock maintenance

36.0

Energy35.7

Labour

19.8

Total

124

Source de Rus and Nash (2009)

Of the external costs of high speed rail projects, noise, global warming and loss of amenity
through land take and visual intrusion are the major issues. Noise costs and loss of amenity
can be minimised at the expense of additional capital cost, ultimately by tunnelling.
Of these costs greenhouse gases has proved particularly contentious. Firstly, there is
obviously carbon used in construction of the line, although in Europe, to the extent that thiswill mainly be undertaken by industries which are part of the European emissions trading
scheme, it may be argued that the cost of offsetting any increase in carbon from thissource will already be included in the capital costs of the project. The same argument may
be applied to electricity for traction (and jet fuel when the ETS is fully implemented foraviation). Ignoring this argument, the greenhouse gas emissions for HSR depend verymuch on the source of primary energy used to generate the electricity, and as electricity
generation is decarbonised this will go down. It is the source of the marginal electricity
generated as a result of the increased demand for electricity generated by HSR that is ofinterest and this may not be the same as the average source at that point in time.
Safety is not a big issue for HSR. New high speed lines are invariably built with cab
signalling and completely segregated from road and pedestrian traffic (i.e. without levelcrossings), and there has never been a fatal accident on a purpose built dedicated highspeed line. There have been several serious accidents involving high speed rolling stockrunning on conventional lines, however (in Germany, China and most recently Spain).
The cost of reduced tax to the government has also been a contentious issue in the UK. The
logic is that if the benefits of reduced congestion and pollution from road traffic are
included as a benefit in the appraisal in full, then the loss of revenue that road transport
would have paid in the form of fuel and other taxes must be seen as a cost.
2.3

Benefits

Turning to benefits, the overwhelmingly important benefit in most transport appraisals istime savings. However, it is not always appreciated than many aspects of comfort andconvenience are included in the value of (generalised) time used in economic appraisal. The
raw values used in current British appraisals are shown in Table 2.3. For leisure andcommuting journeys, these values are based on extensive revealed and stated preference
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WHEN TO INVEST IN HIGH SPEED RAIL

evidence on what people are willing to pay to save time. However higher values are used
for waiting time, for time standing in a crowded train, for time spent walking to accesstrains and for late arrivals (the evidence is that people are willing to pay something liketwice as much to save time walking and waiting and three times as much to avoid being anhour late as they are to save an hour in scheduled journey time). (Wardman, 2004)
Table 2.3. Values of time used in British rail appraisals(GBP per hour, 2010 prices and values)
Business

31.96

Commuting

6.81

Leisure6.04

Source: DfT (2013)

Where passengers are travelling on business, it is assumed that the benefit of fasterjourneys goes to the employer, not the employee. The approach taken to this in Britain, as
in the appraisal systems of most countries, is to assume that this is to be valued at thewage rate of the staff concerned, plus an allowance for the overhead cost of employing
labour. In a competitive market, this will equal the value of the marginal product of labour,and thus represents the value of the additional output produced when labour is released
from its current occupation. It also represents the cost saving to the existing employer, andthus is a key input into models to estimate land-use transport interactions or wider
economic effects of transport investments.
Valuing rail business travel time savings in this way has been widely questioned in recent
years. Firstly, it has been noted that business travellers can and do work on trains, andthat improved information technology has made this easier and more productive. According
to a recent survey a third of rail business passengers in Britain state that this is how they
spend much of their travel time (Lyons et al, 2007). However, Batley, Mackie and Wardman(2013) point out that it is not how people spend their time on average that matters, but
how this would be affected by a marginal change in travel time, and whether the time isused as productively as time spent in the office . Secondly, business journeys often startand finish in unsocial hours and it is not clear that all time saved on such journeys will be
used productively. Hensher (1977) developed a method for adjusting business values oftime to allow for these factors, but one which is very demanding in terms of the informationneeded to apply it. The Hensher approach would generally reduce the value of businesstravel time compared to basing it on the wage rate plus overheads.
On the other hand, empirical investigations using evidence from both revealed and statedpreference studies tends to suggest a value at least as high as currently assumed, withvalues of time being much higher for first class travel than economy (Wardman, 2004).
Possible reasons for this are that employers perceive benefits from staff not being obliged
to work such long days and thus being less tired, from not having to compensate staff for
unsocial hours as part of their remuneration package and from being able to fit moremeetings into a day, thus saving further travel or the cost of overnight stays. (Marks,
Fowkes and Nash, 1986).
The benefits of diversion from other routes or modes take the form of reductions incongestion and pollution. What is needed then is firstly an estimate of how many highspeed rail travellers have diverted from each mode (including existing rail services; where
there are capacity constraints this may lead to additional benefits by freeing up capacity for
expansion of other services, including freight).

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Once the mode from which passengers have switched is known, information is thenrequired on the marginal social cost of the modes in question. The evidence is that, for theaviation, noise and pollution costs not fully internalised in prices, (Tables 2.4a and 2.4b),
the resulting externality might provide a benefit from switching to HSR of the order of 7.5m
euros at year 2000 prices for 1m passengers diverted from air. Thus it would only be if
there was a very large diversion from air, probably on a route where air had previously
totally dominated the market, that this would make a significant contribution to thebenefits of HSR.
Table 2.4a. Air transport externalities(Euro cents 2 000 per passenger km)
Air Pollution

Climate Change

Flight Distance (km)Direct Emissions

Direct Emissions

Indirect Emissions<500 km

0.21

0.62

0.71

500 – 1000

0.12

0.46

0.53

1 000 – 1 500

0.08

0.35

0.40

1 500 – 2 000

0.06

0.33

0.38

>2 000

0.03

0.35

0.40

Note.

Indirect emissions are the climate change and air pollution cost of the production and transport of fuel for air transport.
Obviously there may be offsetting costs for rail which need to be included in the cost of the high speed rail project.

Table 2.4b. Noise costs per landing or take off(Schiphol)
40 seater

100 seater

200 seater

400 seater

Fleet average

180

300

600

1200

State of Art

90

150

300

600

Source: Infras et al (2008)

For car, the evidence of GRACE (2005) is that it is only when there is substantial congestionthat marginal social cost exceeds charges (Table 2.5) for using cars in European conditions.
Whilst we might now believe in a rather higher cost for global warming than applied in
2005, this would not change the conclusion. But that raises the issue that if sufficient traffic
is diverted to significantly reduce road congestion, new demand will be generated to occupy
some of the space. Thus accurate results can only be achieved by use of a full multi modal
model. The additional road traffic would then be the benefit rather than reductions incongestion.
Benefits should also include the net benefits of diverting traffic into the capacity releasedon existing rail lines. This may be more substantial and include the impact of diverting
freight from road (Greengauge, 2012).
Table 2.5. Long distance car trip externalities and charges(Euro cents per passenger km)

Wear

Congestion

Environment

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Accidents

Total Cost

Charges7

WHEN TO INVEST IN HIGH SPEED RAIL

Route 1
Peak

0.016

0.147

0.013

0.015

0.191

0.132

Off-peak

0.016

0.002

0.017

0.015

0.050

0.132

Peak

0.032

0.194

0.010

0.008

0.244

0.156

Off-peak

0.032

0.003

0.014

0.008

0.056

0.156

Peak

0.019

0.123

0.011

0.008

0.161

0.114

Off-peak

0.010

0.002

0.015

0.008

0.044

0.114

Peak

0.020

0.122

0.015

0.006

0.163

0.078

Off-peak

0.025

0.002

0.020

0.006

0.048

0.078

Route 2

Route 3

Route 4

Note: Route 1 is Milan-Chiasso, route 2 Chiasso- Basel, route 3 is Basel-Duisburg and route 4 is Duisburg-Rotterdam.
Source: Grace (2005).

For generated traffic, the standard argument is that, since the person was unwilling totravel at the previous generalised cost and is willing at the new, the benefit must lie
somewhere between that derived by an existing passenger and zero; assuming a linear
demand curve the benefit will be half that accruing to an existing passenger. However, if
new trips are generated for leisure, commuting or business, they may imply a shifting of
economic activity. Whether they also may imply increased economic activity is the sourceof much debate. The long held position amongst most cost-benefit analysts has been that,
following Mohring and Williamson (1969), in a perfectly competitive economy, there will be
no benefits of transport investment over and above the direct user benefits that aremeasured in a standard appraisal. Whilst a transport investment may change relative prices
and lead to expansion and contraction of other industries according to the degree to whichtransport is an input to them, as long as price equals marginal cost in those sectors, there
will be no net benefits of these changes, whilst in the absence of involuntary
unemployment, there will be no net benefits of job creation or removal. Transport
investments may change property prices, but this will simply be a capitalisation of thebenefits received by the users; it will transfer benefits from users to property owners but
have no impact on the overall net benefit of the scheme. Recent arguments in Britain that
there are in fact such wider economic benefits will be examined in section 4.

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3. IN WHAT CIRCUMSTANCES WILL BENEFITS EXCEED COSTS?

3.1

Introduction

Empirical studies (de Rus and Nash, 2009) suggest that three elements of the appraisal ofhigh speed rail dominate the results: construction cost, (generalised) time saving perpassenger and demand. Thus the answer to this question lies in the determinants of thesethree factors.
3.2

Construction costs

Construction cost varies greatly from line to line (Table 3.1)
Table 3.1. Construction cost per route km of new high speed lines(million euros 2005 prices)
Belgium

16.1

France4.7 – 18.8

Germany

15.0 – 28.8

Italy

25.5

Japan

20.0-30.9

Korea

34.2

Spain

7.8 – 20.0

Taiwan39.5

Source: Campos, J, de Rus G and Barron, I (2009)

It is heavily influenced by the nature of the terrain, the length of earthworks, viaducts andbridges and – overwhelmingly – the amount of tunnelling (SDG, 2004). A contributory
factor to the low costs in France and Spain relative to Germany and Italy is said to be thatthese countries design their high speed lines for passenger trains only, with gradients of up
to 3.5%, whereas more than 1.5% is not usually permitted on mixed traffic lines. Other
things being equal, construction in flatter country will obviously be cheaper than inmountainous regions or with a lot of water crossings. But population density is also critical.
Where population density is high, more bridges, viaducts and tunnels will be needed. A
crucial issue is the approach to city centres. In terms of maximising patronage and timesavings, access to a city centre station is critically important. If it may be made on thesurface on existing right of way, as is predominantly the case in France then costs will bevery much lower than if extensive tunnelling is involved (as in the case of HS1 and HS2 in
Britain). One factor which may make this possible is the diversion of local services
underground into a cross city tunnel as a way of improving access to city centres (as in the
Paris RER network, Crossrail and Thameslink in London and many German S-Bahn
schemes).

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3.3

Value of time saved per passenger

The second major element is the value of the time saving per passenger. The amount of
the time saving is determined by the change in the door to door journey time (i.e. amountof in vehicle time, access and egress time) compared with the previous mode. Where theprevious mode was rail, this may be substantial (an hour or more for a 500km line), and it
may be even greater for road, particularly where roads are congested. However, for air, thetime saved may be more limited. For air journeys over the sort of distances where highspeed rail makes rail competitive, a typical door to door time may be of the order offour hours. For a 500km journey by rail, it will be similar. Of course, rail will be favoured
the shorter the length of the trip (as the higher speed of aircraft becomes less significant)and the more accessible the railway station is relative to the airport. So rail will be favoured
in dense cities with good access (probably by public transport) to the central city. Air will dobetter in low density areas with good access (probably by car) to the airport.
3.4

Traffic volume

The construction costs of high speed rail are largely fixed regardless of traffic. High speed
rail invariably requires a double track main line with cab signalling, and this already has acapacity of 14-18 trains per hour in each direction. Only the costs of rolling stock, stations
and depots vary significantly with traffic volumes. Thus high speed rail systems are traffic
hungry.
Volumes of the necessary size may be obtained by linking individual very large cities (e.g.
Paris and London) or by linking a chain of large cities so that flows between different cities
are aggregated together and trains remain busy throughout the route (the so called ‘stringof pearls’). Japan is clearly a case of the latter, with 127m people living at very highpopulation densities mainly in large cities along the coastal strip. France also was able tobenefit from this sort of geography to a degree, but by using the ability of TGVs to run at
reduced speed on conventional lines to serve additional cities. For instance, trains on theoriginal French TGV line from Paris to Lyons, went on to serve cities such as Avignon,
Marseilles and Nice (since then the high speed line has been extended to serve these places
directly). By contrast, Spanish cities are smaller, and arranged around Madrid in a ‘hub andspoke’ pattern, requiring a different line to link each city to Madrid (Table 3.2).
Obviously the difference in volumes is partly simply a question of population served. For
instance, the population of Paris in 2000 was 9.7m and Lyon 1.4, whilst the TGV Sudest
line went on to serve many other destinations, including Marseille (1.4m) and Nice (0.9m).
By contrast, population directly served by Madrid-Seville was around half that of ParisLyon; Madrid-Barcelona is more comparable, but there are no further cities currently
served beyond Barcelona. Beijing-Nanjing-Shanghai has a population twice that of TGV
Sudest in the main three cities alone (although of course per capita inter city travel in
China is way below European levels), whilst Tokyo and Osaka between them have twice asmuch again.

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Table 3.2. Patronage (m) of HSR
Line

Traffic 1st Full Year

1 year on

5 years on

TGV Sud Est

15

17

19.2

TGV Atlantic

21.5

22

29

TGV Nord*

19

20

-

TGV Connexion

9

10

16.6

TGV Rhone-Alps

18.5

-

-

TGV Mediteranne

20.4

Madrid – Seville

2.5

2.8

3.6

Madrid – Barcelona

5. 0

5.4

-

Tokyo – Osaka

35

48

80

Korean HSR

24

27

28

-

-

* Including international trains to London and Brussels as well as French domestic services
Note: some numbers have had to be estimated from graphs
Source : Paix (2010) Sanchez-Borras (2010) Hyunkyu (2010) Toshiji (2007) and RFF (2007)

As well as city size, mode share is obviously important. Table 3.3 examines the relationshipbetween share of the rail/air market and rail station to station journey time. It is often
argued that in European and Asian conditions a maximum three hour station to station
journey time is required for rail to compete with air. The reasoning is that rail fares arenormally competitive with air, that for most passengers getting to a city centre rail station
is faster than getting to an airport and passengers spend longer at the airport going
through security etc than passengers do at the rail station. With flight times themselves notvarying much from around an hour as most time on short flights is taken up with take-off
and landing, a penalty for air approaching two hours in terms of getting to and waiting at
the airport and some other advantages of rail in terms of comfort and reliability, a threehour rail station to station journey time is competitive. Thus it is generally considered thathigh speed rail is most appropriate for journeys of 400-800km. Below that range, even agood quality conventional service is competitive with air, whereas above 800km even highspeed rail finds it difficult to compete (SDG, 2004). (However, high speed rail may still beworthwhile at shorter distances than this in terms of competing with road traffic, although
for journeys below around 150km, frequency and accessibility in terms of convenience ofstops become more important than speed in terms of the comparison with road journey
times).
It can be seen from Table 3.3 that there is some justification for the belief that in Europeanand Asian conditions a 3 hour rail journey time will enable rail to compete with air, in thatin every case where a three hour rail journey time is achieved rail has more than half therail–air market, except marginally Madrid-Barcelona. Whilst 3 hours does indeed seem tobe the sort of rail journey time at which rail typically gains more than half the market, it is
not however a clear threshold effect. Rail gains market share rapidly as journey times comedown towards 2 hours, whilst in some cases it retains nearly half the market with a journey
time of around 4 hours. This diversity is to be expected; quite apart from differences intastes amongst passengers, some passengers will have origins or destinations for which air
is more convenient relative to rail, and the importance placed on reliability and comfort willvary.

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WHEN TO INVEST IN HIGH SPEED RAIL

Table 3.3. Rail share of rail / air market and rail station to station journey times
CorridorYear

Travel Time

Rail Share %Paris-Brussels

2006

1hr 25min

100

Paris-Lyons

1985

2hrs 15min

91

Madrid – Seville2003

2hrs 20min

83

Brussels – London

2005

2hrs 20min

60

Tokyo – Osaka

2005

2hrs 30min

81

Madrid – Barcelona

2009

2hrs 38min

47

Paris – London

2005

2hrs 40min

66

Tokyo – Okayama

2005

3hrs 16min

57

Paris-Geneva

2003

3hrs 30min

35

Tokyo-Hiroshima

2005

3hrs 51min

47

Paris-Amsterdam

2004

4hrs 10min

45

Paris – Marseilles

2000

4hrs 20min

45

London–Edinburgh

1999

4hrs 25min

29

London–Edinburgh

2004

4hrs 30min

18

Tokyo – Fukuoka

2005

4hrs 59min

9

Source: Campos, J, de Rus G and Barron, I (2009), Sanchez-Borras (2010) SDG (2006)

But there is considerable variability in the rail market share for the same station to station
journey time, and there is good reason for this as well. For instance, the advent of low costairlines means that it can no longer be assumed that rail fares will be competitive,
particularly where the journey is composed of legs on different operators, and the throughfare is simply the sum of their individual fares. It is understood that fierce fares competition
from air in one of their biggest European markets has been the reason for thecomparatively low rail penetration of the Madrid-Barcelona rail-air market so far. There is afurther warning in the sharp drop in the rail share of the London – Edinburgh market
between the two dates recorded; this was a period of rapid growth of low cost airlines. On
the other hand, high market shares have been achieved despite low cost airline competition
by Eurostar and the French TGV, both of which make use of the same sort of yield
management systems as the low cost airlines themselves.
Obviously, it is to be expected that where fewer passengers have city centre origins ordestinations, and where more passengers use car as a feeder mode, as is likely to be thecase in countries such as the US, rail will need shorter journey times than three hours toachieve high rail-air market penetration. Thus at best, the hypothesis that a three hour rail
station to station journey time is sufficient and necessary for rail to complete with air, is arough rule of thumb, needing verification by modelling competitiveness for any particularapplication.
3.5

Break-even volumes

De Rus and Nombela (2007) and de Rus and Nash (2009) have explored the key
parameters determining the social viability of high speed rail, and in particular the12

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WHEN TO INVEST IN HIGH SPEED RAIL

breakeven volume of traffic under alternative scenarios. They built a simple model tocompute capital costs, operating costs and value of time savings for a new self contained
500 km line at different traffic volumes. Typical costs were estimated using the database
compiled by UIC (Table 2.2). A range of time savings from half an hour to one and a half
hours was taken, and a range of average values of time from 15 to 30 euros per hour.
Other key assumptions are the proportion of traffic that is generated, and the rate of traffic
growth.
Table 3.4 shows the breakeven volume in terms of millions of passengers per annum in thefirst year, assuming all travel the full length of the line, under a variety of assumptions
about the other factors. If on average passengers travel half the length of the line, then ofcourse the required number is doubled. Note that benefit growth may occur because ofrising real values of time as incomes rise, as well as traffic growth. With exceptionallycheap construction, a low discount rate of 3 %, very valuable time savings and high values
both for the proportion of generated traffic and for benefit growth, it is possible to find a
breakeven volume as low as 3m trips per annum, but it is doubtful whether such afavourable combination of circumstances has ever existed. Construction costs of 30m euros
per km will carry this up to 7m, and a reduction of the value of time savings to a more
typical level to 4.5m.; lower benefit growth and levels of generated traffic will take theresult to 4.3m. An increase in the rate of discount to 5% would take the value to 4.4m. In
other words, it appears to be the construction cost that is the key determinant of the
breakeven volume of traffic; all the other adjustments considered have a similar smaller
impact. All of these adjustments together would raise the breakeven volume to 19.2m
trips per annum, and even worse scenarios can of course be identified. On the other hand amore modest increase of capital costs to 20m euros, with a high value of time savings but adiscount rate of 5%, 30% generated traffic and a 3% annual growth in benefits leads to abreakeven volume of 9m. This represents a realistic breakeven volume for a completely
new self contained high speed line in favourable circumstances. All the breakeven volumes
given assume end-to-end journeys; if some journeys only use part of the route, breakevenvolumes would be proportionately higher.
Table 3.4. Break-even demand volumes in the first year
(m passengers) under varying assumptions
Break-even
Volume(m pass)

Construction cost (£k
per km)Rate of interest(%)

Value of time
saved (euros)% generated
traffic (%)

Rate of benefit
growth (%)

12

3

45

50

4

3

12

3

30

50

4

4.5

30

3

45

50

4

7.1

12

3

45

30

3

4.3

12

5

45

50

4

4.4

30

5

30

30

3

19.2

20

5

45

30

3

8.8

These representative breakeven volumes ignore any net environmental benefits, but wehave given reasons above to expect these to be small. What they also ignore is any
network benefits in terms of reduced congestion on road and air, and also within the rail
sector, and wider economic benefits. If these effects are significant then HSR may bejustified at lower volumes.
The economic success of HSR in France, where the early lines all opened with more than
15m passengers per year and have been found by ex post appraisal to be economically
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WHEN TO INVEST IN HIGH SPEED RAIL

worthwhile, compared with Spain where the traffic was 5m or less and ex post appraisalsuggests that they wre poor investments, tends to support the idea that there is abreakeven level of around 9m passengers per annum in cost benefit terms (de Rus andNash, 2009). The breakeven threshold for success in purely financial terms(i.e. completely
remunerating the capital cost without assistance from the government) must be very muchhigher. It is understood that the only two high speed lines to date to have achieved suchsuccess are the Tokaido line in Japan and the TGV Sudest in France. The Tokaido line
opened with 35m passengers per annum and within 5 years was carrying 80m. Within
France, ex post appraisals suggest that only the Sudest line achieved a financial rate of
return in excess of 10% (with the Atlantique line achieving 7%) (RFF, 2006). TGV Sudest
opened with only 15m passengers per annum (and Atlantique with 22m) but both haveseen very substantial growth since, partly due to further extensions to the system, whichhave not themselves been financially profitable. It is therefore unclear to the current author
to what extent the first two French lines can be said to be fully commercially viable at much
lower volumes than those in Japan.

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WHEN TO INVEST IN HIGH SPEED RAIL

4. THE HIGH SPEED RAIL DEBATE IN BRITAIN

4.1

High Speed 1

Background
The Channel Tunnel Act of 1987 provided for the construction of a rail tunnel under the
Channel Tunnel between Britain and France. This was to be privately funded with nogovernment subsidy either to the tunnel or to services using it. These would compriseregular shuttle services between terminals at either end of the tunnel for cars and roadgoods vehicles, conventional freight trains between terminals across Britain and thecontinent and high speed passenger trains between London and Paris and Brussels. Whilst
France and Belgium both planned new high speed lines between their capitals and theChannel Tunnel, the initial intention was that in Britain the services would use existingheavily used surface lines to a new terminal at Waterloo (Butcher, 2010). The trains were
to be operated by a consortium of British, French and Belgian Railways and services started
with the opening of the Channel Tunnel in 1994.
In the meantime, in July 1988, British Rail published a report suggesting that in the longterm extra capacity would be required to cope with international services. Their initialchoice was a route approaching London from the South. However, in 1991, the then
Secretary of State for Transport, Malcolm Rifkind, announced that the government had
decided on a route entering London from the East, via Stratford, with the intention ofpromoting regeneration of this depressed part of East London. A station called Stratford
International was to be built, and indeed was and still has that name, although the operator
of international services, Eurostar, has never chosen to call there. It is served by domestic
high speed trains under a separate franchise agreement. Subsequent environmentalpressure led to the conclusion that a long stretch of the line of some 19km at the London
end should be in tunnel. The line was to be built by a private consortium, with agovernment contribution in respect of use of the line by domestic services. After acompetition to select a private promoter, a consortium called London and Continental werechosen. As part of the agreement they received, free of debt, the British Rail share of thepassenger operator (Eurostar UK) and extensive lands at Stratford and Kings Cross / St
Pancras on which to develop the necessary terminals but also capable of commercial
development to help finance the line.
Very early in its existence London and Continental concluded, because patronage ofEurostar was running below forecast, it could not raise the capital to finance the line
without further assistance, and in 1998, the government agreed to underwrite its debt. Theline opened in two stages in 2004 and 2007, with the long tunnel into central London being
part of the second stage. In 2009, domestic high speed services between stations in Kent
and London were added as part of the franchise agreement with the operator in that area,
South East Trains.
In 2009, the government bought out London and Continental Railways, with the aim ofrestructuring it and selling it without further government guarantees. In 2010, it wasbought by a consortium of Borealis Infrastructure and Ontario Teachers’ Pension Plan. They

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contract out maintenance and operations to the main British rail infrastructure company,
Network Rail, and are subject to regulation by the British Office of Rail Regulation. There is
now open access for any passenger or freight operator to use the line upon payment of theappropriate access charges; DB Schenker is running a small number of freight trains over it(one attraction is that it can take standard continental wagons which do not fit the loading
gauge on other British tracks) and DB is intending to introduce a passenger service
between Frankfurt and London using the line in due course.
The original appraisal
Because the 1998 arrangement exposed the government to some financial risk, a fullappraisal of the scheme was undertaken to determine whether or not it was sociallyworthwhile. The results of this appraisal are shown in Table 4.1.
The transfer of Eurostar services from Waterloo to St Pancras and the introduction ofdomestic high speed rail services to St Pancras will have made for more convenient accessfor passengers from North of London than Waterloo and other domestic terminals South ofCentral London. However, for much of England south of London it is less convenient.
Eurostar’s international services have compulsory seat reservation, so crowding takes theform of passengers being unable to get a seat at the time they want. This might havebecome a problem on the old route at peak times when track capacity was scarce. Transferof the services to a dedicated high speed line segregated from slower services isunderstood to have brought about a major improvement in reliability. At the same time,
removing these trains and some domestic traffic (by means of the domestic high speed
train services) from existing lines has reduced congestion, crowding and unreliability there
and enabled the system to cope with continued rapid growth of domestic traffic (80% on
the system as a whole in the last 15 years).
At the time of the appraisal, standard methods for appraising reduced overcrowding andunreliability did not exist. Methods do now exist which use a higher value of time for travelin crowded conditions and for time lost in delays as opposed to schedule journey time.

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Table 4.1 1998 Appraisal of HS1(£m1997 NPVs)
User benefits -International Services

1 800

User benefits - Domestic Services

1 000

Road Congestion

30

Environmental benefits

90

Regeneration500

Total Benefit

3 420

Costs to government

1 990

NPV

1 430

BCR (all benefits)

1.72

BCR (excluding regeneration benefits)

1.5

Source: National Audit Office (2001)

It will be seen that benefits to users form the majority of benefits. Benefits from reduced
road congestion and reduced environmental externalities are estimated from the forecast
reduction in road traffic and standard values for different types of road by time of day. The
value of regeneration in the Stratford area was estimated by estimating the number of newjobs that would be created in the area, and multiplying this by the amount the government
was willing to pay under other schemes to create jobs in priority areas for regeneration.
This was not at the time a standard part of the appraisal process.
The costs shown in the appraisal are costs to government, including grants and interest
payments. The standard benefit-cost ratio on which decisions are taken in Britain is theratio of net benefits to others per pound of government spending.
Subsequent appraisals
By the time the National Audit Office examined the project most recently (National Audit
Office, 2012) its estimate of the value of time savings had increased to £7b present value
terms at current prices. The reason for this increase is largely a change in government
appraisal methods, including a lower discount rate (3.5%) and a longer (60 year) assumed
life, as well as rising values of time over time. However, the cost to the government had
increased to £10.2b in present value terms. It made no attempt to quantify the otherbenefits of the line, but noted that these would have to total £8.3b for the line to have abenefit-cost ratio of 1.5, the level required for a project to be seen as offering medium
value for money in the UK. The main problem was a 30% shortfall on patronage ofinternational services compared with the estimate made at the time of the 1998 appraisal(Booz and Co, 2012). It appears that the main reason for this is not a failure of rail to takethe predicted market share, but that whereas the forecast assumed continuing rapid overallmarket growth, in practice the market ceased to grow. The way in which the project was
financed, with a lack of equity capital and the government underwriting the bonds, left theChristopher NASH — Discussion Paper 2013-25 — © OECD/ITF 2013

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WHEN TO INVEST IN HIGH SPEED RAIL

government to pick up the cost of this shortfall (ITF, 2013). The out turn construction costs
were as in Table 4.2 and were within the financial provisions made at the time of theapproval of the project in 1998:
Table 4.2 Out turn capital costs of HS1 (£M)
Section 1 construction costs

1 919

Section 2 construction costs

3 778

Station fit-out

109

New depot

357

Total

6 163

Source: NAO (2012).

It should be noted that section 1 comprises 74km, whereas section 2 is only 39km;
however, section 2 includes a 19km tunnel into Central London as well as a 2.5 km tunnel
under the River Thames. Infrastructure UK (2010) compares the cost per km of building
HS1 with five comparable projects elsewhere in Europe using purchasing power parity
exchange rates. The mean construction cost of the other five was £19m per km, for HS1stage 1 it was £24m and for stage 2 £94m. This gives some indication of the very high costof section 2, which included the tunnels noted above as well as the refitting and extensionof St Pancras station in London and new stations at Stratford and Ebbsfleet.
Regeneration impacts
The opening of the tunnel into central London and the St Pancras terminal has occurred
simultaneously with one of the largest inner-city regeneration projects in Europe. Over a
67 acre site (27.1 hectares) some 8 million square feet (750,000 m 2) of mixed use
development including businesses, 1,800 homes, cultural facilities (cafes, bars, restaurants,etc.) and community (health, education, etc.) facilities is under on-going development1.
The development will end decades of blight and low quality land use in the area with all theattendant social problems.
Hedonic pricing studies have already identified uplift in property values in the vicinity of therail terminals since the opening of the High Speed tunnel link indicating positive economic
impacts. Cascetta et al. (2010) for example estimate house prices in the Borough ofCamden increased by 13% as a result of the opening of tunnel link and St Pancras station.
How much of the increase in property prices is due to the high speed rail tunnel and train
station development and how much is due to the Kings Cross Central regeneration project
is of course debatable. Some regeneration may have occurred anyway with just a remodelling of Kings Cross station and St Pancras. However, the implicit linking by thegovernment of the high speed rail tunnel alignment to the area would suggest that the
improved transport accessibility and image of the high speed rail link were major
contributing factors.
The regeneration effects of the tunnel and link are not just confined to London. The
increased rail capacity permits fast (domestic) trains to run to Central London from Ashford
in Kent. Here it is planned that 13 000 new houses and 10 300 new jobs will be created by
2016 increasing to 31 000 homes and 28,000 new jobs by 2031 (Cascetta et al., 2010).
1.

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Kings Cross Central website: http://www.kingscrosscentral.com/
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WHEN TO INVEST IN HIGH SPEED RAIL

Such re-generation impacts do not enter the cost benefit analysis process, as theoverarching guidance of cost benefit analysis in the UK (HM Treasury’s Green Book) does
not permit the shadow pricing of labour. That is, it is assumed that the economy is in full
employment so any jobs generated will be offset by reductions in employment elsewhere.
Moreover increases in property values are regarded as capitalisation of other benefits, suchas time savings, and are also not allowed as additional benefits. Guidance to decision
makers in the UK includes analysis of non-monetised impacts alongside cost benefit
assessment. Regeneration impacts are included in the non-monetised part of the appraisal
when they are potentially significant and can therefore affect the decision to build new
infrastructure even though they are not part of the cost-benefit analysis.
4.2

Conclusions on HS1

The HS1 project was very expensive because of the need for a large amount of tunnelling
to reach Central London in an environmentally acceptable way, particularly over the routechosen politically on grounds of regenerating a depressed area of inner London. It is notthought that this original decision was based on any detailed appraisal of the options, but
an appraisal was undertaken when the government had to step in to underwrite theproject’s debt in order to enable it to continue. At the time it appeared that the project
could be justified given the forecast growth in international rail passenger traffic, but inpractice the forecast growth did not materialize, leaving a rather more marginal case. NAO(2012) concludes that, despite carrying 18.1m passengers p.a. (9.7m international and 8.4
domestic), the time savings to users were inadequate to justify the capital cost. Its value
therefore depends on regeneration and wider economic benefits. In the original appraisal,quantification of the regeneration benefits of locating a high speed rail station in Stratford
was based on inadequate methods; subsequent work has suggested a much greater impact(Colin Buchanan and Partners/Volterra, 2009), although its magnitude and whether it really
represents a net addition to economic activity remain controversial. In addition substantial
wider economic benefits were estimated. As we shall see in the following section on HS2,
quantification of wider economic impacts has remained an important and controversial
issue.
4.3

High Speed 2Introduction
In 2001 the Strategic Rail Authority, the government body then responsible for railplanning, commissioned the first study of high speed rail between London and the North(Atkins, 2002). The background was steady growth in rail demand over the preceding few
years which, if it continued would eventually impose capacity constraints, plus thepossibility of substantial savings in travel time. The remit thus required the consultants to
examine the case for high speed rail and the route it might take, bearing in mind thecontribution it would make to easing capacity constraints and the amount of travel time
saved. The latter objective required concentration on medium distance routes between
large centres of population where existing and potential rail demand were high, whilst theformer objective concerned routes that would relieve the West and East Coast main lines(the principle constraints on growth) of significant amounts of traffic. Altogether 16 highspeed rail options were examined comprising different combinations of the sections of track
shown in Figure 4.1. Option 1 was a minimal line from London to Birmingham; option 8 afairly complete network with a West Coast line from London to Birmingham andManchester, and a branch to Leeds and on to Scotland. Also considered were building a
conventional line, upgrading existing lines, road widening and airport expansion (although
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WHEN TO INVEST IN HIGH SPEED RAIL

airport expansion was not modelled in the study. Extensive sensitivity testing was also
undertaken, including examining the impact of four different long run economic scenarios,
examining rail pricing policy and sensitivity to costs of other modes of transport.
Figure 4.1 Options considered by the Atkins
study for HSR

20

Figure 4.2 Route chosen for HS2

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WHEN TO INVEST IN HIGH SPEED RAIL

Table 4.3. Appraisal of options 1 and 8 in the Atkins study
Option 1

Option 8

Net revenue

4.9

20.6

Non-financial benefits

22.7

64.4

Released capacity

2.0

4.8

Total benefits

29.6

89.8

Capital costs

8.6

27.7

Net operating costs

5.7

16.3

Total costs

14.4

44.0

NPV

15.3

45.7

B/C

2.07

2.04

Source: derived from Atkins (2003) Addendum. Table 2.1 with transcription errors corrected.

All but one of the HSR schemes gave good benefit cost ratios, with highest NPV comingfrom the most complete option, option 8 (Table 4.2). With a BCR close to the smallest
option and above 2, this looks like the best option if it can be afforded.
A conventional line could be built for 20% less than HSR, but would lose £5b of benefits fora cost saving of less than £2b, whilst upgrading of existing lines appeared even lessfavourable. The road widening option appeared worthwhile but of less value than HSR.
Also tested was the issue of timing; it appeared best to build the full HSR network as soon
as possible (by 2016) rather than deferring it to 2021 or 2026. Charging premium fares
reduced the benefits, although it was noted that the demand model did not permit testingof more differentiated pricing to target less elastic market segments (it is a common
problem of rail appraisals that yield management systems are inadequately modelled,
leading to an understatement of revenue or demand or both.).
Ultimately the value of a study is only as good as its forecasts, and the fact that this study
foresaw the West Coast Main Line running out of capacity by 2016 suggests its forecasts
were not accurate (to be fair, few foresaw the financial crisis of 2008 and subsequentrecession). But in terms of what it considered, the Atkins study seems to have been amodel of its kind, considering a wide range of options, including a road alternative,
alternative economic scenarios and examining both fares policy and timing, which areoften neglected in appraisals. Extensive sensitivity testing was undertaken.
There was no immediate follow up to this study, but in the light of continued growth intraffic, Network Rail (the infrastructure manager) undertook its own ‘New Lines’ study in2009 (Network Rail, 2009). Whilst there was no necessary presumption that new lines
would be high speed rail, as in the Atkins study, the study showed that in general if newlines were built for long distance rail, the extra benefits of high speed would be worth theextra costs. This study again found a good case for HSR but this time favoured the West
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WHEN TO INVEST IN HIGH SPEED RAIL

Coast Route to Scotland, serving Birmingham, Manchester and Liverpool but not Leeds.
(the option of a line diverging to Leeds and the North East was not considered; it wasargued that a separate new HSL might in due course be justified for this route). It founddirect connections to Heathrow and to the high speed line to the Channel Tunnel to be
uneconomic given forecast volumes of traffic.
The response of the government however was to set up a new company, HS2 Ltd, to lookat the case for a high speed line from London to Birmingham as a first stage of a wider
network. After reviewing the options, HS2 concluded in favour of a Y shaped network along
the lines of Atkins option 8 (the extensions to Manchester and Leeds forming phase 2).
Trains would continue on conventional lines to a range of cities including York, Newcastle,
Liverpool, Glasgow and Edinburgh. Euston was chosen as the London terminus for the newline, but it would also call at Old Oak Common, where a high quality interchange would be
provided with the new Crossrail line. This would provide an attractive way of reaching all
the terminals at Heathrow (a Heathrow terminus would only provide direct access to one
terminal with a bus or train ride needed for the others) with Central London, Docklands andEast London. It was important because, were all passengers to arrive at Euston the stationand its underground rail connections would be swamped. Subsequently, political decisions
were taken to provide direct links to one Heathrow terminal (consideration of this is now
postponed pending a review of airports policy) and by a single track link to a heavily usedexisting line for connection to the high speed line to the Channel Tunnel.
Appraisal of HS2
Essentially the British approach to appraisal consists of quantifying as many of the costs
and benefits as possible in money terms; other factors are presented as quantitative or
qualitative evidence to be taken into account subjectively. The aim of the appraisal is toestimate the net benefits of the project to all sectors other than the government per poundof government spending. Given constraints on government spending, the current positionof DfT is that only projects giving at least £2 of net benefits per pound of government
spending are considered good value for money; projects giving a lower benefit-cost ratio
than this will not usually be taken forward.
Regarding wider economic benefits, for many years the British government followed theconventional wisdom that there would be no economic benefits other than the time andcost savings already included in a standard transport appraisal. The first major questioningof this position in Britain came about in the course of the appraisal of the Crossrail project,a major project to link suburban rail lines East and West of London by a major new tunnel
across London, greatly increasing capacity and leading to faster journeys for many
commuters (Worsley 2012). Surely, it was argued, this would both raise the productivity ofexisting Central London employment and permit more jobs to locate in this area of highproductivity. A very influential paper was that of Venables (2007) who used the concept of
agglomeration economies to show that this argument might well be correct. Firms in highly
accessible locations in city centres do indeed tend to have higher productivity (they must to
justify the higher costs of such a location). Investments which increase accessibility willboth provide an external agglomeration benefit to firms already located there and enablejobs to relocate there from lower productivity locations (to the extent that it had previously
been possible to locate there, it may be argued that if additional trips and the consumer
surplus associated with them were correctly forecast then this benefit to the relocating
firms will already have been taken into account in the appraisal, although there will still be
agglomeration externalities accruing to other firms in both the original and the newlocations). However, the increased tax revenue implied by relocation to a higher wage and22

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WHEN TO INVEST IN HIGH SPEED RAIL

productivity location would not be valued as part of the consumer surplus as it is notreceived by the consumer but rather by the government.
Subsequent work, particularly that of Graham (2007), enabled these impacts to bequantified and introduced into the appraisal. A further argument has also been allowed for,in that if a degree of monopoly power is the norm, and prices are generally above marginal
costs, then anything that reduces the costs of employers and thus increases their output
will tend to have an additional benefit of the difference between price and marginal cost of
the increased output. This provides a further argument for a multiplier to be applied to thevalue of business travel time savings in the appraisal. Whilst in principle these effects would
apply to all modes of transport, to the extent that rail dominates commuting and businesstravel in large cities (in Britain, particularly London), they might particularly favour rail
investment in those locations. Elsewhere, car travel dominates and the arguments mightfavour investment in roads.
Graham and Melo (2010) argue that investment in long distance rail cannot have asignificant wider economic impact because of the small overall rail market share of journeys
in the course of work and the fact that most such journeys are relatively short distance.
This is essentially the position of DfT. The appraisal of HS2 therefore allows for thepresence of wider economic benefits from improved commuter services using the capacity
released by HS2, but not for any wider economic benefits of improved inter-cityconnectivity.
Table 4.4 shows the results of the 2013 update of the economic case for the line. The
principal benefits would again be benefits to transport users. Wider economic benefits were
forecast to exist entirely because of agglomeration benefits from the release of capacity on
existing lines to improve commuter services into the main cities (in particular London)
rather than because of improved inter-city connectivity. Whilst even the first phase of theline from London to Birmingham would benefit a large network of origins and destinations,since it would carry trains to major centres of population such as Manchester and Glasgow
which would complete their journeys on the conventional network, the full Y shaped
network actually shows a higher BCR than the first phase alone. The reason is that
extending the line to Manchester and in particular connecting it to Leeds and the North East
permits better use of the first phase of the network giving a better overall result.
Table 4.5 shows the breakdown of transport benefits. It will be seen that over half of thebenefits are time savings, with business travel time savings being around 40% of the total.
But improved reliability and reduced crowding are also estimated to be substantial sourcesof benefits. Tables 4.4 and 4.5 are based on the simple assumption of pricing parity
between high speed trains and conventional trains.

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Table 4.4 Standard appraisal – discounted costs and benefits (over 60 years)(£b 2011 prices)
Phase OneOct 2013

Full Network
Oct 2013

Transport benefits (Business)

16 92140 529Transport benefits (Other)

7 673

19 323

Other quantifiable benefits

407

788

Indirect taxes (loss to Govt)-1 208-2 912

Net transport benefits

23 79357 727

Wider economic impacts

4 341

13 293

Total costs

29 91962 606

Revenues

13 24331 111

Net cost to Government

16 67631 495

Benefit cost ratio (inc WEIs)

1.7

2.3

Source: DfT (2013)

Table 4.5 Breakdown of benefits from the proposed HS2 scheme(£Bn 2011 prices)

Phase One

Time savings

Full Network

17 33445 679Crowding benefits

4 068

7 514

Improved reliability

2 624

5 496

568

1 162

24 59459 8524 341

13 293407

788

Loss to Government of indirect tax-1 208-2 912Total

28 13471 020Car user benefits
Total transport user benefits
Wider economic impacts
Other impacts

Source: DfT (2013)

The project has been strongly criticised by opponents to the scheme, ranging from some
who think the money would be better spent on roads to others who object to its
environmental impacts or want the money spent on local public transport. For a systematicpresentation of the arguments see Castles and Parish (2011). The most significant
criticisms were of:-

The robustness of the demand forecasts

The latest version of the business case assumes growth in demand of 2.2% p.a. until 2036,
and constant demand thereafter. This is considerably slower demand growth than achieved
by long distance train operators in the last 20 years, despite the effects of recession. HS2
Ltd has conducted a risk analysis, which shows a very low probability of the benefit-cost

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WHEN TO INVEST IN HIGH SPEED RAIL

ratio falling below 1.5; if demand growth were to continue beyond 2036 then the benefitcost ratio could rise considerably higher than the standard case estimate of 2.3. Yet it mustbe accepted that demand growth is uncertain. It is possible that past relationships with
GDP might break down and growth stop before 2036. It is argued that, for instance,developments in information technology might lead to its substitution for much travel,although at present it seems that it is encouraging travel by rail for business and for leisureamongst younger males (Le Vine and Jones, 2012).
-

The valuation of time savings

It has already been noted that the standard approach to valuation of business travel time,
based on the wage rate, is argued to be inappropriate for inter-city rail travel sincebusiness travellers work on the train. Castles and Parish argue that the value of businesstravel time savings should be based solely on the loss of utility to the traveller as
represented by the value of commuting time. However, this assumes that all time savings
will be at the expense of work done on the train, that work on the train is as productive awork in the office and that there are no other benefits in terms of scheduling moremeetings in a day, avoiding overnight stays and arriving at meetings more alert. We havenoted above that most evidence suggests that businesses are prepared to pay at least thewage rate for time savings for business travellers.
-

The degree of attention paid to alternatives.

It is argued that too little attention has been paid to optimising a set of alternative
proposals to upgrade existing lines, and that a package of alternative measures (including
some degree of demand management by price) exists which would meet demand at muchless cost. The so-called 51M package was put forward by a group of opposing local
authorities as such an alternative (Castles and Parrish, 2011).
Atkins were commissioned to appraise this package (Table 4.6). It found that the package
would cost only £1.2b, and would yield a benefit-cost ratio of no less than 6. However it
would not provide sufficient capacity to provide for peak demand. Given its BCR, many
people argue that it is clearly a better investment than HS2. However, ranking projects on
the basis of BCRs is not an appropriate way to take decisions. What matters is whether the
additional cost of a more expensive alternative is justified by the extra benefits. If we lookat the incremental costs and benefits of HS2, it shows an incremental benefit-cost ratio ofaround 2, roughly the threshold for the British government to consider a project to givehigh value for money. Thus the additional cost of HS2 is justified by additional benefits,
according to the appraisal. But there remains concern that, at a time of constrained
government spending, such a large investment will squeeze out many smaller investmentsthat might collectively have provided better value for money.
Table 4.6 Incremental benefits and costs over 51M package(£b2011PV)

51M

Y shaped increment

Benefits

7.108

46-52

Costs to gov

1.173

25-23

BCR

6.06

1.6-2.3

Source: derived from Atkins (2012)

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The latest strategic case published by DfT includes a much more thorough examination ofalternative rail schemes (diversion of traffic to road or air is dismissed as incompatible withgovernment policy). Several different packages of schemes, including duplicating sectionsof main line and improving junctions and existing stations were put together. Table 4.7
shows the appraisal of the packages of schemes most comparable to HS2. Neither package
provides nearly as much capacity as HS2. Both provide higher BCRs than HS2, but theincremental BCR from the much greater investment in HS2 remains above 2.
Table 4.7 Capital costs and benefits of alternatives
Phase One
Alternative

HS2
Phase One

HS2
Both Phases

Phase One and Two
Alternative

Capital costs (£bn)

19.4

2.5

38.4

19.2

Benefit-cost ratio

1.7

2.0

2.3

3.1

Benefits £bn

28.1

8.5

71.0

30 .7

Source: DfT (2013)

Wider economic benefit
It was noted above that the DfT appraisal contains no wider economic benefits from
improved inter-city connectivity, although this – and the idea that HS2 will help reduce theNorth-South divide in terms of British prosperity – have been influential arguments
politically. The DfT position has been challenged in work recently undertaken by KPMG
(2013) for HS2. The first step of their methodology is to calculate the impact of HS2 onlabour and business connectivity by location. They do this by looking at journey times
weighted by the distribution of existing journey lengths for the purpose in question (the socalled distance decay function). As seen in Table 4.8, most areas gain, even when notdirectly served by HS2 (long distance journeys may still use HS2 for part of their route,whilst other places gain from improved services using the capacity released on the existing
network), although it is the Midlands and South Yorkshire that enjoy the greatest gains(they gain for journeys to London but also to other cities in the Midlands and North).
Table 4.8 Average change in connectivity by region in 2037 after investment in HS2

City regions

Change in labour connectivity
by railChange in businessconnectivity by rail

Derby-Nottingham

14.7%

23.2%

Greater Manchester

1.4%

18.8%

Greater London

6.9%

8.8%

South Yorkshire

31.8%

22.5%

West Midlands

15.7%

21.1%

West Yorkshire

9.1%

19.7%

Rest of Great Britain

5.3%

11.3%

Source: KPMG (2013)26

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WHEN TO INVEST IN HIGH SPEED RAIL

They then regress labour productivity on rail connectivity and similar measures ofconnectivity by road. The difficulty faced is that these indicators of connectivity are all
highly correlated (and may be correlated with other benefits of a city centre location). The
result is that only one measure of connectivity can be included in a single regression. They
therefore run separate regressions of labour productivity on rail connectivity and on roadconnectivity. They scale down the parameter value on rail connectivity by assuming thatrail connectivity is responsible for a proportion of the benefits equal to the ratio of theparameter values on rail connectivity and road connectivity in the separate regressions.
This leads to an estimate that HS2 could add £15Bn p.a. to GDP. Whilst this is not entirely
additional to the current appraisal benefits, it must represent a substantial uplift. However,there is no theoretical justification for the assumption by which the rail share of the effect isestimated, and a sensitivity test using mode share data to perform this allocation gives amuch lower value. Moreover, it has been argued that inadequate attention has been paid to
the issue of labour quality. Thus the wider productivity impact of HS2 remains very
uncertain.
Conclusions on HS2
HS2 represents something of an extreme in terms of HSR. Its costs are exceptionally high(although they contain a large contingency in view of past experience with projects
overrunning on cost). But its traffic forecasts (more than 40m trips per annum at openingof phase 2) are also very high. The high level of traffic is the result of British geography,
which if not quite the Japanese string of pearls, enables many of the main cities of Britain(London, Birmingham, Manchester, Leeds) to be served by a single line splitting into two in
the Midlands. Moreover, trains can then continue on conventional lines to serve a large
number of other cities including Liverpool, Newcastle, Glasgow and Edinburgh. The result isa high estimated benefit cost ratio.
Of the uncertainties surrounding this ratio, the greatest concerns growth in demand. If
growth in demand slowed or ceased, it would have a substantial effect on the BCR,
although the BCR would be very unlikely to fall below 1. If demand continued to grow longterm (in the current forecast growth in demand is capped at its 2036 value) the BCR would
be still higher.
The question of whether the improvements in inter-city connectivity would bring greater
economic benefits than are included in the official CBA remains uncertain and controversial.

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WHEN TO INVEST IN HIGH SPEED RAIL

OVERALL CONCLUSIONS

From the number of studies undertaken and the experience of high speed lines around theworld, it is possible to reach some general conclusions on the circumstances in which highspeed rail will be worthwhile. Of course, the decision is a trade-off between costs andbenefits; factors which make for higher costs may be outweighed by other factors making
for higher benefits. The dominant factors are construction costs, value of time savings perpassenger and the volume of passengers.
Firstly, high speed line construction costs vary greatly, but a major factor is the amount oftunnelling. If routes can be found which allow access to city centre stations without
tunnelling the savings will be large. This might be achieved by placing suburban services
underground; this may be a lower cost solution and have other benefits if it enables
suburban services to penetrate and cross the city centre.
Secondly, the value of time savings per passenger will vary with the quality of thealternative and the incomes (and therefore value of time) of passengers. HSR will bringgreater time savings per passenger where it is substituting for conventional rail or car thanwhere it depends for most of its traffic on a marginal time saving compared with air. Of
course other benefits – environmental and reduced congestion at airports – may be greater
where it is predominantly diverting from air, but it is unlikely that these will compensate forthe smaller time savings in the appraisal.
Thirdly, serving a large population is crucial. High speed rail requires either to link verylarge cities, or to serve a string of large cities, possibly by running on conventional lines
past the end of the high speed line. High density cities with strong public transport
networks will favour HSR over car and air. HSR journey times of around 3 hours are
required to compete effectively with air, however, so HSR will be most effective for routes
of up to 800 km. For shorter journeys HSR may be worthwhile in terms of time savings toexisting rail users and diversion from car, but below around 150km, the high speed of HSR
will be irrelevant because of the shortness of the journey).
Fourthly, congestion on existing rail, road and air systems will favour HSR by providing acase for more capacity. However, there are always numerous ways of providing morecapacity; a policy which favours rail over road and air on environmental grounds will
obviously favour the case for HSR.

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WHEN TO INVEST IN HIGH SPEED RAIL

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