HS2: don’t expect the private sector to pay up

High Speed 1: originally intended to be built with private finance and a private sector risk, instead it relied almost entirley on government support in the end (Pic: matt3775, flickr)

High Speed 1: originally intended to be built with private finance and at private sector risk, instead it relied almost entirely on government support in the end (Pic: matt3775, flickr)

The private sector will not finance the construction of High Speed 2, and will not fund (that is, without repayment) more than “a small percentage of the core costs” either.

I have been saying that since 2011 in articles, blog posts and an article I did for Modern Railways magazine published nearly two months ago, so it’s nice to hear the same message coming out of the Department for Transport’s own financial case for HS2, published without fanfare on its hard-to-navigate website last month. It says (para 58):

“Due to the scale, complexity and timeframe of the project, the starting assumption is that the funding of HS2 infrastructure will come in large part from central government funds.”

Exactly what Ernst & Young said in their December 2009 report for HS2 Ltd; in line with what HS2 Ltd chief executive Alison Munro said in early 2011, as I exclusively reported; and what HS2 Ltd’s Beth West told me in February. However, HS2 felt the need to commission a ‘Financing Options Study’ in late 2012 in order to make sure that this was still the correct view.

As I have blogged before, it would be unfeasible to expect the private sector to finance the initial cost of designing and building HS2 for several reasons: the huge cost of the project, the complexity involved in delivering a rail project closely interlinked with the rest of the rail network, and the risks involved. Property developers will be asked to contribute to the upfront cost of building stations, as I’ve said before, but this will be a relatively small amount.

HS2’s decision to pay for a study to confirm what any sensible infrastructure investor would tell them for the price of a cup of coffee is understandable given that it’s a government body and needs not only to consider all the possible options, but also to produce a bureaucratic paper trail to prove that it has done so.

Still, this determination to pretend to have an open mind when there’s only one option really on the table results in some rather contorted wording from DfT. At paragraph 58 the financial case says that “we would examine the potential for private financing to reduce the up-front capital demand on the taxpayer and offer value for money”, only to rubbish the feasibility of attracting private finance at paragraphs 87-92.

The financial case rejects the idea of delivering HS2 in full or in part through the project finance model, for reasons outlined three paragraphs above. It also looks unfavourably on raising private finance with government taking the risk (as was done for HS1), as this would be costlier than direct government borrowing and would be counted as a government debt, as well as possibly restricting what could be done with the project if it were tied to private creditors.

More on the financial case for HS2 and its interesting revelations soon.


About René Lavanchy

You can contact me at rene dot lavanchy at googlemail dot com.
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