HS2 | Billions of pounds and significant benefits squandered by cancellation, NAO reports

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The government spending watchdog’s final report on the status of the Department for Transport (DfT) and HS2 Ltd’s management of the response to the changes of HS2 following the cancellation of Phase 2 in October 2023 has been published following the General Election. It goes into detail about how the cancellation of half the project has made the purposes unclear, seen significant resources wasted and impacted plans for greater capacity on the nation’s railways that must be addressed.

As of the end of March 2024, HS2 Ltd had spent £30.1bn on the project (in 2019 prices), with £27.8bn of that being on Phase 1. There had been £2.3bn spent on the various parts of Phase 2, as shown in the table below.

Source: NAO (all figures in 2019 prices)

Additionally, the NAO reports that the government has spent £592M on buying land and property for Phase 2, which is no longer needed.

HS2 Ltd also estimates that it will cost up to £100M and take until 2027 to fully shut down work sites for Phase 2 and restore the land on which work had commenced. Early enabling works had had been underway, including investigative boreholes and utility diversions. HS2 Ltd is required to remediate the land to its previous state.

The NAO reports that the DfT is planning to sell back the land it bought for Phase 2 in 179 parcels across 63 farms in its first phase of disposals. However, it will take several years to dispose of it all. The DfT is currently determining its strategy for these sales, as it is aiming to establish a value for money framework for these properties.

HS2 Ltd was not involved in the decision to cancel Phase 2, a move that “created uncertainties in a range of complex areas”.

Immediately after the decision, HS2 Ltd started to work with the DfT to identify which parts of Phase 1 had to be reassessed to avoid unnecessary costs.

The report explains that some work on Phase 1, between London and Birmingham, will be completed to the specifications required for the complete line to Manchester, despite it no longer being needed, because it is cheaper to continue to deliver it this way. Among these is the full seven platforms being constructed at HS2 Curzon Street in Birmingham, despite only three being required for the services that will run on the new infrastructure.

Euston

The NAO reports that the DfT’s plans for resetting the Euston station project and developing the surrounding line “are at an early stage” and that it has not yet decided on its scope, funding or governance.

The transport secretary Louise Haigh said this week that she is working “at pace” to develop a proposal for Euston.

The NAO reports that the DfT is continuing with the plans of the previous government to attain private funding for developing Euston and the surrounding area.

“DfT has progressed with developing minimum requirements for the station and options for a new delivery model ahead of ministerial approval,” the NAO reports. “However, it is at an earlier stage in considering how cost and risk will be transferred and what the long-term governance arrangements at Euston will be.

“DfT expects it may be several years before it could put all these arrangements in place. Some works may need to proceed ahead of this to avoid delays and potentially higher long-term costs, and these may require public funding.”

Cost issues

All costs mentioned below are in 2019 prices.

As of the end of March 2024, HS2 Ltd had spent £27.8bn on Phase 1.

There remains a discrepancy between the DfT and HS2 Ltd on the cost to complete Phase 1 of the project, but both are predicting it to go beyond the £44.6bn funding envelope. The DfT expects the final cost to be between £45bn and £54bn, while HS2 Ltd expects it to be between £49bn and £57bn. New cost estimates are in the process of being calculated.

The cost will also be reliant on the speed of funding from government. In March 2023, the previous government had requested that HS2 Ltd slow down (“rephase”) delivery of the project to help it manage costs.

Referencing this approach, the NAO says: “Continuing to manage the schedule of work to meet spending limits would reduce short-term funding needs but extend the schedule of work and increase overall costs.

“DfT and HS2 Ltd should agree on the final cost of Phase 1 before they agree with HM Treasury a revised funding envelope for the HS2 programme, as well as establish revised financial controls, including an approach to annual funding beyond 2024-25 and the programme’s overall contingency.

“These elements must be in place to provide the longer-term certainty needed to plan activity and manage the supply chain.”

The costs have particularly ramped up in the civils area, with HS2 Ltd estimating a £6bn increase since 2020. This has been attributed to the budget and schedule for the project being set too early, before plans were properly matured. HS2 Ltd accepts that, in hindsight, the cost estimations and planning schedule were overly optimistic given the level of maturity of the plans at the time.

The project has also suffered from planning delays that have pushed up costs alongside significant inflation.

Additionally, the cancellation of the second phase has reduced commercial opportunities in the supply chain, which has had an impact on delivery cost.

“HS2 Ltd has not driven the cost performance it expected through its contracts, and contractual incentives to control costs and improve productivity have not worked as intended,” the NAO states.

“DfT and HS2 Ltd are finalising a plan which identifies actions that aim to provide greater certainty over, avoid, and reduce costs. An important element of this plan is for HS2 Ltd to renegotiate its four main construction contracts to better incentivise cost control and achieve greater certainty on costs. However, DfT and HS2 Ltd acknowledge that successfully renegotiating major contracts that are already in progress will not be straightforward.”

The four main works contractors are:

• SCS JV: Skanska, Costain, Strabag
• Align JV: Bouygues Travaux Publics, Sir Robert McAlpine and VolkerFitzpatrick
• EKFB JV: Eiffage, Kier, Ferrovial, Bam Nuttall
• BBV JV: Balfour Beatty, Vinci

The NAO reports that HS2 Ltd is planning to improve the efficiency of delivering its rail systems and stations. This will see it target improvements in productivity of its main civils construction works and engaging with third parties to speed up consents.

“As well as known cost increases, areas of risk and uncertainty remain within the Phase 1 cost estimate where costs may increase further,” the report states.

Benefits and capacity issues

The DfT is not yet clear how it will maximise or achieve the benefits of the new scope of HS2, the report states.

The programme’s intended benefits include passenger benefits (such as more seats along the route) and environmental benefits (such as decarbonisation), as well as wider economic benefits from regeneration and business investment around the new railway.

However, the decision to cancel HS2 Phase 2 “reduced the scale of the benefits that can be realised by the programme”.

“DfT’s focus since then has been on what it can deliver through a revised train service specification for the Phase 1 route and the infrastructure needed to support this,” the NAO states. “Maximising the wider economic benefits from this revised scope will require DfT to work with other government departments, local authorities and businesses to develop a shared vision for what the programme intends to achieve. This is particularly important where benefits are outside of DfT’s direct control and may require further investment to be realised.”

The DfT is reportedly planning to update its planned benefits and how it will achieve this, as part of an updated business case that will be delivered this year.

The cancellation of HS2 Phase 2 means that the capacity issues on the West Coast Main Line (WCML) will not be solved. The DfT now believes that the WCML will reach capacity in the mid-2030s.

The DfT is now working on updating requirements to address this.

The NAO’s report confirms that running HS2 trains on the WCML to go north of Birmingham will have detrimental effects. The HS2 trains will offer fewer seats than existing conventional services unless changes are made to existing infrastructure and stations are modified to accommodate longer trains.

“DfT will need to balance trade-offs in developing options while considering the impact on and operation of the national railway as a whole,” the NAO states.

Conclusion

The NAO believes that the DfT and HS2 Ltd “need to reset the programme successfully to avoid repeating past failures and maximise its value”.

To do this, they will need to be clear on the desired benefits of the programme and how to achieve them. A “realistic” budget must be agreed and control must be re-established so that risks and costs can be managed effectively.

Reaction

A spokesperson for HS2 Ltd said: “This is a project of unprecedented scale and complexity and the cancellation of Phase 2 has increased our cost challenges.

“We are now making sweeping reforms to control costs better and deliver the next stage of the programme – passing peak construction between London and the West Midlands and starting the transition to a working railway.”

A spokesperson from the High Speed Rail Group said that the report “makes clear the plan the incoming Labour government is inheriting – a truncated HS2, and a West Coast Main Line operating at capacity – is not going to help grow the national economy, nor is it going to allow train performance on the West Coast to return to acceptable levels”.

They continued: “A line which fails to reach central London, and which worsens the bottleneck north of Birmingham is an inheritance that needs amendment.

“High speed rail is essential to increasing capacity across our transport networks. Yet this report shows that current plans would cause the West Coast Main Line to be full up within a decade. What’s needed is extra capacity, not new bottlenecks.

“Most of the suggested alternatives to delivering phase 2a – the link between the West Midlands and Crewe – will take longer to implement, and add risk and uncertainty, which are the enemies of efficient major project delivery. And no plan can be considered final until the line reaches Euston.

“Done properly, high speed rail can stimulate growth in our regional economies. Sadly, as this NAO report demonstrates, the current plan falls far short of this objective.”

Railway Industry Association (RIA) chief executive Darren Caplan said: “The Railway Industry Association has consistently argued in the past that to get the full benefits of HS2 investment you ultimately need to build the full scheme. With large parts of the planned HS2 scheme scrapped, the problems of a lack of current and future capacity on the UK’s north-south railway corridors remains.

“The West Coast Main Line (WCML) transport corridor is clearly a vital artery for UK economic growth, carrying millions of rail passengers and tonnes of freight. Today’s NAO report is a stark reminder that the current position of no new significant capacity to ease congestion on this rail corridor is simply untenable.

“Ministers in the new Labour government now need to ensure it has all the powers and approvals required to facilitate rail growth north of Birmingham – without which Birmingham risks becoming a terminal, rather than the national hub it should be. The government needs to set out a plan for how more capacity can be provided north of Birmingham, given, as the report points out, WCML will be full by the mid-2030s. This work is particularly urgent to prevent bottlenecks in the future with the UK population set to increase by 10% until the mid-2030s and, according to the recent RIA-commissioned Steer report, passenger numbers set to grow between 37% and 97% to 2050.

“The report also highlights the need for the government to urgently provide a coherent plan for HS2 connectivity to Euston station. Delivering the route into central London – without delay – is crucial to avoid changing HS2 from what is supposed to be a strategic piece of national infrastructure into an Acton to Aston line. So getting the right station design at Euston is the next urgent step if we are to get value from all the investment already made.”

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