Sunday, 21 October 2012

HS2 is not a franchise (thankfully)

On October 12 at 1815, crowds gather at London Euston, defying the so-called 'cliff' effect when off-peak fares become valid at 1900. HS2 Ltd predicts significantly lower volume growth on inter-city servives between London and the northwest than do recent franchise bidders.
Several days on from the storm breaking over the flawed award of the Inter-City West Coast operating contract, it is becoming increasingly apparent that the government’s franchising reforms are in tatters and the very franchising edifice itself is teetering on the brink.

As a regular passenger as well as an industry observer, it does not especially surprise me that the West Coast Main Line should be the straw to break the camel’s back. Although not always recognised as such, the route is arguably Britain’s most strategically important and certainly its most high profile, thanks most recently to Sir Richard Branson’s vituperative criticism of the ICWC bid process. Whilst the government’s decision to halt all live franchising processes clearly indicates the flaws in the system are structural, not route-specific, it is inevitable that the West Coast would be cited as a microcosm of the railway’s wider woes.

The response to the fiasco has in some ways been predictable – widespread calls for renationalisation, and speculative assertions about the implications for High Speed 2. Personally I am not quite sure how alleged errors by civil servants and/or ministers helps the case for renationalisation, but that is no doubt a debate that will run at length elsewhere. But on HS2, the accusation is simple: if the Department for Transport can’t tot up the sums on ICWC, surely the same applies to HS2? According to the Daily Telegraph’s London Editor Andrew Gilligan, ‘some of the same statistical models are being used, in different ways’ to appraise the project, whilst former cabinet minister and Amersham MP Cheryl Gillan claims ‘elements like inflation figures and passenger numbers are common to both’ ICWC and HS2.

Ms Gillan is now leading calls for ‘a root-and-branch re-examination’ of HS2. But why? Whilst the franchising system is no doubt in crisis, it pains me to state the obvious: HS2 is not a franchise, it is an infrastructure project, just like Crossrail or the prospective third runway at London Heathrow. In terms of scrutiny, HS2 could not contrast more starkly with ICWC. Consider the reams of documentation available on the website of project promoter HS2 Ltd and DfT's own site, whilst franchise data is squirreled securely away, notionally on ‘commercial confidentiality’ grounds. Since GNER’s controversial ‘back the bid’ campaign in 2005, DfT has banned bidders even from releasing details of proposed service changes for fear of compromising the byzantine competition.

But on HS2, parliamentary committees, academics and a plethora of dubious think tanks have all had their say. Those parties which strongly disputed HS2 Ltd’s consultation process and economic appraisal have challenged it under judicial review, which inevitably brings further scrutiny. Yet the comparison with ICWC here is perhaps telling: it took Virgin Rail Group’s lawyers barely a week to seize upon DfT’s flawed model for calculating franchise bid guarantees; DfT’s own lawyers then instructed it not to contest the judicial review. However, more than three years since the formal launch of HS2, and no equivalent ‘smoking gun’ appears to exist, and HS2 Ltd insiders confirm that legal advice has been taken at every decision point, for example when whittling down potential London termini from 50 to a single option. Can Mr Gilligan’s ‘it’s the same, but different!’ argument really carry the day?

As for Ms Gillan’s arguments, inflation is straightforward on HS2: inflation is by definition excluded, with all costs cited at ‘Year X’ prices. That is appropriate to make a go/no go decision or choose between options on the basis of a benefit:cost ratio where inflation affects B and C equally and so has a neutral effect. This does not apply to a commercial contract like a franchise where there is revenue and expenditure coming in and going out, as would be the case for any operating concession let for HS2 in the early 2020s.

But the most compelling ‘like for like’ comparison is to read across the volume growth assumptions for both the next West Coast franchise and HS2, noting of course the substantially similar markets that both would serve either side of 2026. So whilst First Group’s now-aborted franchise bid assumed volume growth (ie. passenger numbers irrespective of price point) of 6% per annum, HS2 Ltd's figure would be less than 2.5%, and this includes a premium for new journeys created by the faster journeys and the inevitably-significant reliability gains from brand new infrastructure. (For the record, ICWC volume growth over the past 10 years has been 6.3% per annum). Furthermore, all growth on HS2 is forecast to cease at the ‘cap year’ of 2037, a mere four years after the completion of the Y route to Leeds and Manchester; this is analogous to all traffic growth on the M6 motorway ceasing in 1975!

Indeed, it is ironic that if and when a long-term West Coast franchise is eventually re-let for the years to 2026, its volume growth forecasts may well be more modest, and much closer to the ultra-cautious HS2 assumptions.