HS2 Rolling stock costs overlooked? Not likely!

Rail Operations and Planning consultant William Barter

There have been suggestions from HS2 opponents the Govt had forgotten to include HS2 rolling stock costs in their calculations. Guest blogger William Barter examines this claim:

Someone seems to have suggested that the capital costs of rolling stock have been left out of the financial appraisal of HS2. Well if true, that would be a bit of an oversight, wouldn’t it? Nice new railway, no trains to run on it. Incredible!

But of course like most things that are incredible, it isn’t true, as anyone who actually reads the published documents can see for themselves.

Look at the document “Economic Case for HS2: Updated appraisal of transport user benefits and wider economic benefits”, published in January 2012. Paragraph 4.1.3 kindly explains that there are two sources of capital costs – construction of the line and procurement of the rolling stock. Having identified that so clearly, they are hardly going to forget about one of them, are they? And indeed they haven’t, as Table 6 on page 33 details the capital costs for construction (£32.67 billion for the Y network), and Table 7 on page 35 sets out the rolling stock capital costs (£6.26 billion, plus a further risk provision of £1.89 billion).

OK so far? Rolling stock capital costs have not been forgotten, have they? So let’s take it a step further and see what they have then done with them.

Table 9 on page 37 brings all the costs and benefits together into the economic appraisal, including the capital costs – item 7, £36.4 billion. Not left out there, then, either. But if anyone wants to be really clever, they could add up £32.67 billion, £6.26 billion, and £1.89 billion, and find it comes to £40.82 billion, a bit more than item 7 of Table 9. Are the DfT trying to lose a cool £4.4 billion and hoping no-one will notice?

Once again, of course not. Check the headings to the tables, and you will see that Tables 6 and 7 are at Quarter 2 2011 prices – in other words the total costs if paid out all in one year right now, 15 years before even Phase 1 of the line opens. But Table 9 does precisely what it should, which is to work out the Present Value of the project, based on the year by year spending over the whole life. And when you do that, future cash flows are discounted (that is, reduced by a small percentage for every year ahead that we look) because money in the future is not worth so much as money now. If I owe you £100, when would you rather I paid you? This year or next year? And if you owe me the £100? Thought so. And no, this isn’t a fiddle to give costs less emphasis than benefits, because future benefits are also discounted for every passing year – discounting actually makes it harder to justify capital expenditure.

But just sticking to these capital costs, not only will they not be incurred in one year but over a construction period between 5 and 15 years into the future for Phase 1 alone, but the rolling stock in particular will fall well towards the end of that period and indeed stretch to the completion of Phase 2.

So the costs for both construction and rolling stock are both spread over a number of future years, and so have been subject to discounting (but not nearly as much discounting as the benefits, because these are being incurred much further into the future).

And that discounting is what makes £40.82 billion in 2011 the equivalent of £36.3 billion in the economic appraisal. That won’t of course be what is paid, as that depends on inflation over the next 5 to 20 years, but the point about inflation is that it affects costs and benefits equally, so doesn’t change the ratio between them, which is what the economic appraisal sets out to assess.

So why would anyone try to make out that such a crucial item as rolling stock has just been forgotten? I suppose “why” is obvious! “How” is by not doing their homework properly, plucking a daft statement out of thin air and hoping it will be swallowed by people who are too busy to read things up for themselves. Incredible? Sadly not.

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One Response to HS2 Rolling stock costs overlooked? Not likely!

  1. Jeff Davies says:

    Big assumption that inflation ‘affects costs and benefits equally’. The effect surely depends on both when those costs and benefits apply, and on their composition (materials & labour may move at different rates, imported rolling stock may – or may not- be subject to higher inflation than UK costs/benefits etc), as rolling stock comes after construction it will be subject to different rates of inflation.

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