By Christian Wolmar
18 March 2010
Last week’s high-speed rail white paper confirmed that – despite the recession – the government’s £40bn programme is being given the green light. Christian Wolmar reports
The government’s announcement last week of an ambitious high-speed rail link between London, the Midlands and the North seems, on the face of it, to come at a strange time. In the bad old days of boom and bust, cutting investment in transport infrastructure, especially big railway schemes, was a hardy perennial of Budgets. With the Treasury unwilling to distinguish between revenue and investment expenditure, carefully prepared projects that had been on the stocks for years, if not decades, were summarily scrapped, consigning much hard work and millions of pounds of planning to the dustbin.
Today, the juxtaposition of record levels of investment in the railways with the worst recession in a generation would suggest that transport was as ripe for cuts as ever. Unlike health and education, it is not a sacrosanct area.
Yet, even before the latest announcement, the government’s rail programme read like a trainspotter’s dream. It includes the £16bn Crossrail scheme for London and the Southeast. This will connect central London, the City, Canary Wharf, the West End and Heathrow Airport to areas east and west of the capital, and will include a new tunnel linking Paddington with Liverpool Street. Already under way in the capital are the extension of the East London Line to better link north and south London and the £6bn Thameslink upgrade.
Schemes elsewhere include the electrification of the Great Western lines and the Liverpool to Manchester route; a major refurbishment of Reading and Birmingham stations; Network Rail’s five-year £8bn enhancement programme, which involves improving capacity on major routes; and the speeding up of services between Glasgow and Edinburgh. In addition, there is a massive public-private partnership investment scheme on the London Underground and the continued subsidies to the franchised train operators. Now, of course, there will be also be the investment in high-speed rail.
Not everything has gone according to plan. Last month, Transport Secretary Lord Adonis abandoned the Intercity Express Project to replace the ageing high-speed 125 model with new supertrains, including one that could run on both electric and diesel power. The scheme was scrapped, partly because winning bidder Agility Trains – a consortium comprising Hitachi and John Laing – was having difficulty finding funding for the project, and partly because plans to electrify the Great Western line meant the specification had to be changed.
Adonis has appointed the former head of the Audit Commission, Sir Andrew Foster, to examine whether a revamped project would be feasible – but he will not report until after the general election.
Yet, surprisingly, this could be the exception in the railway investment programme, as much of the £40bn-plus programme is safeguarded or committed for the next Parliament. This is remarkable given that the rail industry has suffered in the recession and the growth in passenger numbers is slowing, which could make a hole in the budget of several hundred million pounds. One train operator, National Express East Coast, has thrown in the towel and been replaced by a government-run company, Directly Operated Railways, for two years.
More operators were expected to fail but since several own more than one franchise, they do not want to risk losing all their contracts by abandoning a loss-making one, and are therefore willing to match losses on one with profits on another.
Moreover, under the contracts agreed with the government, losses are mitigated once passenger numbers fall 3% below expectation, which means that taxpayers take most of the hit. Both Adonis and the Conservatives support the idea of longer franchises. They might try to negotiate longer deals in return for stopping loss mitigation, which has meant the government takes the revenue risk on the franchises, which privatisation was meant to end. The guaranteed payments against losses have left a hole in the government’s rail budget, which was expected to lead to a cut in investment.
Industry observers believed the project most at risk was Crossrail, which has already been through a whole cycle of stop-go since it was scuppered by the previous recession in the early 1990s. The scheme also appears overpriced at £16bn for a tunnel under London and a variety of improvements and extensions at both ends. However, it is the first major new rail tunnel under the capital for a century and is expected to increase rail capacity in central London by 10%.
Transport for London has also found itself out of pocket following last week’s decision by independent arbiter Chris Bolt, who rules on disputes in the public-private partnership between infrastructure companies and London Underground. Bolt priced the next 7.5-year period of the PPP at £500m more than TfL had budgeted for. However, while this does put further strain on the organisation’s finances, it is unlikely to jeopardise the Crossrail project because its funding is coming from various sources, including a special business rate to be levied by the London mayor, £5bn from the government and £2.3bn securitised from future access charges.
This mix of funding was originally seen as a risk but insiders now believe it is a benefit. As one says: ‘If the Treasury tries to cut the project, they will actually save very little of their money, so they might as well continue.’ Indeed, project managers are hoping to get £2.5bn worth of contracts away before the election, pretty much guaranteeing that the project reaches the point of no return. While that will guarantee the construction of the central tunnel, it would still be possible to cut some of the improvements envisaged for the ‘throats’ of Paddington and Liverpool Street, which are needed to accommodate Crossrail, with the result that the line would not continue beyond those stations.
The East London Line is virtually complete, and expected to open later this year. The Thameslink project is also under way and is therefore highly unlikely to be cut entirely. It is seen as an essential part of boosting rail capacity in the capital, especially as it is the only major national rail line to go through central London. The recent problems with the current operator, First Capital Connect, which has led to hundreds of cancelled trains and passenger fury, demonstrates the strain on this line, again making any attempt to cut the scheme unlikely. However, there is speculation that the number of trains per hour will be cut from 24 to 20 because of the lower growth in passenger numbers. An order for 1,100 new coaches has also been deferred from summer to autumn.
That highlights an area where cutbacks are likely: rolling stock. While new trains are universally popular, attract new passengers and are cheaper and greener to run, the life of coaches can be easily extended. More than two years ago, the government announced that it would provide an extra 1,300 carriages for the railways, excluding Thameslink and the now doomed Intercity Express Project, but has failed to produce a coherent plan showing where and when these trains would be introduced. The publication of the plan has now been postponed until after the election and clearly this could be ripe for cuts.
Shadow transport secretary Theresa Villiers suggests that this is an area of uncertainty: ‘We are waiting for the government’s delayed Rolling Stock Plan.Until we see the components in that plan, it is difficult to say what we might do.’
Most rail investment is channelled through Network Rail, which spends more than £5bn annually on maintaining and renewing the network, in addition to its £8bn enhancement programme. It is required by the regulator to cut maintenance costs by a fifth between April 2009 and March 2014, and has announced it is cutting its 30,000 staff by 5%. The unions have threatened industrial action over Easter, putting extra pressure on the company.
However, while Network Rail has said it will be a tall order to make the cuts, its budget is essentially safe because it has been agreed by the government, which provides most of the funding, and the regulator.
If a new government were to try to cut back on its budget, it would have to launch a regulatory review based on a new Statement of Funds Available. This would be a cumbersome process and, since much of the funding is for schemes that are spread over the five-year regulatory period, potential savings would be limited. Hence, thanks to the Byzantine financing structure created by the Railways Act 2005, Network Rail’s budget is protected by and large. Spending after 2014, however, has no such protection since that will require a new Statement, and is hardly likely to be generous given the prevailing financial situation.
That is where the high-speed rail scheme enters the equation. During the next Parliament, up to 2015, expenditure on this project will be minimal as it will be in the preparatory stage. The big bucks will start to be spent after that. Yet, Adonis has confidently announced that it is quite feasible to build a £30bn line linking London with Birmingham and then with spurs to both Manchester and Leeds, with most of the money coming from taxpayers. He argues that a high-speed line is essential to provide the extra capacity needed on the rail network.
Adonis tells Public Finance: ‘Trying to increase capacity on the existing network would be just as expensive as building a high-speed line, and therefore it is by far the best option.’
He argues that it is inevitable that demand for transport will continue growing and he wants rail to absorb that increase. As part of his announcement on high-speed rail, he ruled out any new motorway construction. Although this was unlikely anyway, it emphasises how central rail is to Labour’s transport plans.
There are, however, dissenters who believe that a high-speed line is an expensive way of providing extra capacity. Professor Stephen Glaister, the transport economist and now head of the RAC Foundation, says that the drive to build a high-speed line is based on ‘little more than blind faith’. He argues that, in environmental terms, other projects would save more carbon per pound spent.
But Glaister is battling against the prevailing wind, with all three major parties backing a high-speed rail line, despite the economic circumstances.
Indeed, the Tories were the first to announce support for the idea and have set out detailed plans involving a strange L-shaped line that would go from London to Birmingham, Manchester and then Leeds. They estimate the cost at £20bn, part of which could be funded by the private sector.
As for the other projects, the Tories have refused to give unequivocal support. Villiers has warned that all the major projects would be re-examined. While she supports the principle of investing in rail, she says: ‘The real issue is affordability, and I cannot give a guarantee that any scheme would go ahead under a Conservative government until we have applied the value-for-money test. The government sounds committed to these plans, but the question will be whether it will be able to come through on its promises.’
She sounds particularly unenthusiastic about the electrification scheme for the Great Western. This project is supposed to be funded by extra money in Network Rail’s budget but could be scrapped quite easily, though there would then be knock-on effects on rolling stock acquisition.
However, as the analysis of the various schemes shows, an incoming government would have little wriggle room. Moreover, cutting back on the programme would be deeply unpopular and result in severe overcrowding on the railways. So it looks as if rail investment will survive the recession relatively unscathed – thanks to the efforts of a very pro-rail transport secretary, who has shifted investment from roads to rail, and the structure of the privatised industry, which makes cuts difficult to effect without the huge expense of breaking long-term contracts.
History, for once, is not repeating itself.
Christian Wolmar’s latest book, Blood, iron and gold, how the railways transformed the world, is published by Atlantic Books
18 March 2010
Last week’s high-speed rail white paper confirmed that – despite the recession – the government’s £40bn programme is being given the green light. Christian Wolmar reports
The government’s announcement last week of an ambitious high-speed rail link between London, the Midlands and the North seems, on the face of it, to come at a strange time. In the bad old days of boom and bust, cutting investment in transport infrastructure, especially big railway schemes, was a hardy perennial of Budgets. With the Treasury unwilling to distinguish between revenue and investment expenditure, carefully prepared projects that had been on the stocks for years, if not decades, were summarily scrapped, consigning much hard work and millions of pounds of planning to the dustbin.
Today, the juxtaposition of record levels of investment in the railways with the worst recession in a generation would suggest that transport was as ripe for cuts as ever. Unlike health and education, it is not a sacrosanct area.
Yet, even before the latest announcement, the government’s rail programme read like a trainspotter’s dream. It includes the £16bn Crossrail scheme for London and the Southeast. This will connect central London, the City, Canary Wharf, the West End and Heathrow Airport to areas east and west of the capital, and will include a new tunnel linking Paddington with Liverpool Street. Already under way in the capital are the extension of the East London Line to better link north and south London and the £6bn Thameslink upgrade.
Schemes elsewhere include the electrification of the Great Western lines and the Liverpool to Manchester route; a major refurbishment of Reading and Birmingham stations; Network Rail’s five-year £8bn enhancement programme, which involves improving capacity on major routes; and the speeding up of services between Glasgow and Edinburgh. In addition, there is a massive public-private partnership investment scheme on the London Underground and the continued subsidies to the franchised train operators. Now, of course, there will be also be the investment in high-speed rail.
Not everything has gone according to plan. Last month, Transport Secretary Lord Adonis abandoned the Intercity Express Project to replace the ageing high-speed 125 model with new supertrains, including one that could run on both electric and diesel power. The scheme was scrapped, partly because winning bidder Agility Trains – a consortium comprising Hitachi and John Laing – was having difficulty finding funding for the project, and partly because plans to electrify the Great Western line meant the specification had to be changed.
Adonis has appointed the former head of the Audit Commission, Sir Andrew Foster, to examine whether a revamped project would be feasible – but he will not report until after the general election.
Yet, surprisingly, this could be the exception in the railway investment programme, as much of the £40bn-plus programme is safeguarded or committed for the next Parliament. This is remarkable given that the rail industry has suffered in the recession and the growth in passenger numbers is slowing, which could make a hole in the budget of several hundred million pounds. One train operator, National Express East Coast, has thrown in the towel and been replaced by a government-run company, Directly Operated Railways, for two years.
More operators were expected to fail but since several own more than one franchise, they do not want to risk losing all their contracts by abandoning a loss-making one, and are therefore willing to match losses on one with profits on another.
Moreover, under the contracts agreed with the government, losses are mitigated once passenger numbers fall 3% below expectation, which means that taxpayers take most of the hit. Both Adonis and the Conservatives support the idea of longer franchises. They might try to negotiate longer deals in return for stopping loss mitigation, which has meant the government takes the revenue risk on the franchises, which privatisation was meant to end. The guaranteed payments against losses have left a hole in the government’s rail budget, which was expected to lead to a cut in investment.
Industry observers believed the project most at risk was Crossrail, which has already been through a whole cycle of stop-go since it was scuppered by the previous recession in the early 1990s. The scheme also appears overpriced at £16bn for a tunnel under London and a variety of improvements and extensions at both ends. However, it is the first major new rail tunnel under the capital for a century and is expected to increase rail capacity in central London by 10%.
Transport for London has also found itself out of pocket following last week’s decision by independent arbiter Chris Bolt, who rules on disputes in the public-private partnership between infrastructure companies and London Underground. Bolt priced the next 7.5-year period of the PPP at £500m more than TfL had budgeted for. However, while this does put further strain on the organisation’s finances, it is unlikely to jeopardise the Crossrail project because its funding is coming from various sources, including a special business rate to be levied by the London mayor, £5bn from the government and £2.3bn securitised from future access charges.
This mix of funding was originally seen as a risk but insiders now believe it is a benefit. As one says: ‘If the Treasury tries to cut the project, they will actually save very little of their money, so they might as well continue.’ Indeed, project managers are hoping to get £2.5bn worth of contracts away before the election, pretty much guaranteeing that the project reaches the point of no return. While that will guarantee the construction of the central tunnel, it would still be possible to cut some of the improvements envisaged for the ‘throats’ of Paddington and Liverpool Street, which are needed to accommodate Crossrail, with the result that the line would not continue beyond those stations.
The East London Line is virtually complete, and expected to open later this year. The Thameslink project is also under way and is therefore highly unlikely to be cut entirely. It is seen as an essential part of boosting rail capacity in the capital, especially as it is the only major national rail line to go through central London. The recent problems with the current operator, First Capital Connect, which has led to hundreds of cancelled trains and passenger fury, demonstrates the strain on this line, again making any attempt to cut the scheme unlikely. However, there is speculation that the number of trains per hour will be cut from 24 to 20 because of the lower growth in passenger numbers. An order for 1,100 new coaches has also been deferred from summer to autumn.
That highlights an area where cutbacks are likely: rolling stock. While new trains are universally popular, attract new passengers and are cheaper and greener to run, the life of coaches can be easily extended. More than two years ago, the government announced that it would provide an extra 1,300 carriages for the railways, excluding Thameslink and the now doomed Intercity Express Project, but has failed to produce a coherent plan showing where and when these trains would be introduced. The publication of the plan has now been postponed until after the election and clearly this could be ripe for cuts.
Shadow transport secretary Theresa Villiers suggests that this is an area of uncertainty: ‘We are waiting for the government’s delayed Rolling Stock Plan.Until we see the components in that plan, it is difficult to say what we might do.’
Most rail investment is channelled through Network Rail, which spends more than £5bn annually on maintaining and renewing the network, in addition to its £8bn enhancement programme. It is required by the regulator to cut maintenance costs by a fifth between April 2009 and March 2014, and has announced it is cutting its 30,000 staff by 5%. The unions have threatened industrial action over Easter, putting extra pressure on the company.
However, while Network Rail has said it will be a tall order to make the cuts, its budget is essentially safe because it has been agreed by the government, which provides most of the funding, and the regulator.
If a new government were to try to cut back on its budget, it would have to launch a regulatory review based on a new Statement of Funds Available. This would be a cumbersome process and, since much of the funding is for schemes that are spread over the five-year regulatory period, potential savings would be limited. Hence, thanks to the Byzantine financing structure created by the Railways Act 2005, Network Rail’s budget is protected by and large. Spending after 2014, however, has no such protection since that will require a new Statement, and is hardly likely to be generous given the prevailing financial situation.
That is where the high-speed rail scheme enters the equation. During the next Parliament, up to 2015, expenditure on this project will be minimal as it will be in the preparatory stage. The big bucks will start to be spent after that. Yet, Adonis has confidently announced that it is quite feasible to build a £30bn line linking London with Birmingham and then with spurs to both Manchester and Leeds, with most of the money coming from taxpayers. He argues that a high-speed line is essential to provide the extra capacity needed on the rail network.
Adonis tells Public Finance: ‘Trying to increase capacity on the existing network would be just as expensive as building a high-speed line, and therefore it is by far the best option.’
He argues that it is inevitable that demand for transport will continue growing and he wants rail to absorb that increase. As part of his announcement on high-speed rail, he ruled out any new motorway construction. Although this was unlikely anyway, it emphasises how central rail is to Labour’s transport plans.
There are, however, dissenters who believe that a high-speed line is an expensive way of providing extra capacity. Professor Stephen Glaister, the transport economist and now head of the RAC Foundation, says that the drive to build a high-speed line is based on ‘little more than blind faith’. He argues that, in environmental terms, other projects would save more carbon per pound spent.
But Glaister is battling against the prevailing wind, with all three major parties backing a high-speed rail line, despite the economic circumstances.
Indeed, the Tories were the first to announce support for the idea and have set out detailed plans involving a strange L-shaped line that would go from London to Birmingham, Manchester and then Leeds. They estimate the cost at £20bn, part of which could be funded by the private sector.
As for the other projects, the Tories have refused to give unequivocal support. Villiers has warned that all the major projects would be re-examined. While she supports the principle of investing in rail, she says: ‘The real issue is affordability, and I cannot give a guarantee that any scheme would go ahead under a Conservative government until we have applied the value-for-money test. The government sounds committed to these plans, but the question will be whether it will be able to come through on its promises.’
She sounds particularly unenthusiastic about the electrification scheme for the Great Western. This project is supposed to be funded by extra money in Network Rail’s budget but could be scrapped quite easily, though there would then be knock-on effects on rolling stock acquisition.
However, as the analysis of the various schemes shows, an incoming government would have little wriggle room. Moreover, cutting back on the programme would be deeply unpopular and result in severe overcrowding on the railways. So it looks as if rail investment will survive the recession relatively unscathed – thanks to the efforts of a very pro-rail transport secretary, who has shifted investment from roads to rail, and the structure of the privatised industry, which makes cuts difficult to effect without the huge expense of breaking long-term contracts.
History, for once, is not repeating itself.
Christian Wolmar’s latest book, Blood, iron and gold, how the railways transformed the world, is published by Atlantic Books
