Yesterday evening I was in Broadcasting House, the headquarters of BBC News, watching a big screen carrying an exclusive report from their business editor, Kamal Ahmed. China, he reported, is seeking to finance the construction of High Speed 2, the planned north-south rail network in the UK. Fascinating, and I don’t have a problem with the delicate way it was reported; but it will almost certainly never happen.
Ahmed wrote that Chinese construction firms were interested in building HS2, and that China Development Bank was interested in financing construction; this news was helpfully briefed to him on the occasion of the Chinese prime minister’s visit to the UK.
However, the idea that the Chinese are going to build and finance HS2 lock, stock and barrel is somewhat far-fetched. In fact, Ahmed almost acknowledged this himself when he wrote, on his blog:
“CDB’s position will be a welcome boost for supporters of the line.
Downing Street has previously insisted the route will be wholly funded by the tax payer, but a large investor could come in to run the service or to build stations and ancillary connecting services. The first part of the 250mph line to Birmingham is due to open in 2026.”
Note that: he doesn’t expect Chinese finance to pay for most of the HS2 infrastructure. There’s always been a plan to get private property developers to contribute to the cost of stations, in return for rental income from commercial developments (as I blogged about in March), so the idea of CDB backing this is not new or surprising. But that will only account for a small portion – less than 10 per cent – of the budgeted £42.6 billion cost of HS2. As for ‘ancillary connecting services’, that refers to one specific, small project in the Birmingham Airport area which is not part of HS2 but a private proposal to build an additional rail link.
“Premier Li offered direct help to build HS2 during Mr Cameron’s visit to China last December. That offer, which came as surprise to Number 10, was quickly followed by China Railway Group, a subsidiary of the state owned China Railway Engineering Corporation, saying that it could also help with construction projects connected to HS2.
“HS2 could be an attractive investment opportunity,” Sir Gerry [Grimstone, a City lobbyist involved in the talks], who is also the chairman of pension provider, Standard Life, said. “This is not some wishy-washy diplomatic gesture.””
This bit requires unpicking. Sir Gerry there is chairman of a pension provider, Standard Life, and I’ve written frequently on how pension funds can help finance infrastructure. But they can also be averse to taking on the risk associated with construction. I think it much more likely that Sir Gerry was referring to the prospect of operating the line once it’s built – the “run a service” Ahmed refers to above.
Such a deal would require the private operator to pay a lump sum fee to the government in return for a concession contract – just like was done with HS1, the Channel Tunnel Rail Link, in 2010. That deal cost £2 billion and required nine banks to provide the £1.3 billion of debt. A concession for HS2 would cost significantly more; plenty of scope for CDB and other banks to get involved.
But what CDB will not do, regardless of what either the British or Chinese prime ministers or even Sir Gerry may think – is finance the construction of HS2 or the bulk of HS2 upfront, either on its own or with other banks.
For one thing, as I’ve noted over and over again for over three years, government has decided that paying for HS2 on the government balance sheet makes the most sense on risk allocation, financial liquidity and interface risk grounds.
But for another, despite CDB being an enthusiastic backer of infrastructure projects, HS2 wouldn’t really be within their remit. CDB provides development finance of the sort that is made available to institutions, like provincial Chinese governments and cash-strapped African states, who have limited access to finance. This lending is done at the bidding of the Chinese government, which owns the bank, as a financial tool of government foreign policy, ‘soft power’ in other words. CDB does not do on any significant scale the kind of ‘project finance’ of public infrastructure that underpins PFI and other public-private partnership projects.
The British government is not strapped for cash to build HS2; they can afford to borrow money through their usual gilts to pay for it. They’ve never considered going for what CDB usually offers foreign governments, which is to lend the money to pay a Chinese contractor to build some infrastructure and then have the government pay it back – because they don’t need to. The financial case for HS2 published earlier this year explicitly rules out one private financing option for HS2 – project finance – and implicitly rules out the kind of sovereign finance the CDB would offer.