UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 478-i

HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

PUBLIC ACCOUNTS COMMITTEE

HIGH SPEED 2

MONDAY 1 JULY 2013

PHILIP RUTNAM, DAVID PROUT and ALISON MUNRO

Evidence heard in Public

Questions 1 - 220

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Oral Evidence

Taken before the Public Accounts Committee

on Monday 1 July 2013

Members present:

Margaret Hodge (Chair)

Mr Richard Bacon

Guto Bebb

Jackie Doyle-Price

Chris Heaton-Harris

Meg Hillier

Mr Stewart Jackson

Fiona Mactaggart

Austin Mitchell

Ian Swales

Justin Tomlinson

Amyas Morse, Comptroller and Auditor General, Gabrielle Cohen, Assistant Auditor General, and Geraldine Barker, Director, National Audit Office, and Marius Gallaher, Alternate Treasury Officer of Accounts, were in attendance.

REPORT BY THE COMPTROLLER AND AUDITOR GENERAL

High Speed 2: A review of early programme preparation (HC 124)

Examination of Witnesses

Witnesses: Philip Rutnam, Permanent Secretary, Department for Transport, David Prout, Director General for HS2, Department for Transport, and Alison Munro, Chief Executive, HS2 Ltd, gave evidence.

Q1 Chair: Welcome. You are very far away from me, but let’s get going. We have many areas that we want to cover this afternoon, so, as per usual, I would be grateful for direct and short answers, as far as possible. That would help us all. My first question is to you, Mr Rutnam. Are the facts contained in the Report correct?

Philip Rutnam: Yes. I have been through the normal process with the Comptroller and Auditor General of confirming that the facts in the Report are accurate.

Q2 Chair: So why did the Minister say that he did not recognise the figures?

Philip Rutnam: I think there is one particular figure that the Minister was picking up on, which is the NAO’s estimate of what the supposed funding gap in the project would be over the coming years. It is the NAO’s estimate, and we recognise it and that it is accurate based on the assumptions that the NAO has made. It is not, however, the position that the Government are actually in, in relation to the project’s funding.

Q3 Chair: But the NAO’s estimate was based on your figures.

Geraldine Barker: Yes, it was.

Q4 Chair: So it was not based on figures that you dreamed up. Why would you not buy into that? It was an estimate, based on the figures that you provided to the NAO.

Philip Rutnam: We are not disagreeing that if you make the assumptions that the NAO makes-I think you are referring to figure 10 of the relevant text-on rolling forward the Department’s provision for capital spending in real terms and add in the profile of capital spending on HS2, you end up with that run of numbers. The Government, however, are not planning public spending on that basis.

Q5 Chair: Since last week. I do not understand what you are saying. You should have challenged what is different on the assumption of where the Government are planning their public spending on transport. What is wrong in the assumptions that are made in figure 10?

Philip Rutnam: Until last week, the Government did not have-

Q6 Chair: Oh, you are saying that you changed your mind last week.

Philip Rutnam: No. May I finish, please? Until last week, the Government did not have any public spending plans going beyond 2015-16. Therefore, while there could be a gap in affordability of this kind if you made certain assumptions, the Government did not accept that there was a gap, because there were no public spending plans going beyond 2015-15. Obviously, since last week, the position has moved again. In terms of the number the Minister may have been referring to, I think £3.3 billion was the particular one he had in mind. I can confirm that we went through the normal process with the Comptroller and Auditor General of reviewing the material in the Report for factual accuracy. We were content to confirm that it was factually accurate.

Q7 Chair: Sorry to quarrel with you, but I will on this one because, actually, what the Minister said predated the spending review last week, and he said that he did not recognise the figures used in the Report. We all accept that, given the spending review, there is now a 30% uplift in the amount of money available. We accept that, but it was not known at the time of the Report. The other thing is that the Secretary of State said that the analysis is out of date. What does that mean? Again, we used the analysis that you are using.

Philip Rutnam: Just to revert to the previous point, I think what the Minister said is that we do not recognise that there is a £3 billion deficit, or black hole, in the funding of the scheme, which indeed was the Government’s position, because the Government did not have any public spending plans going beyond 2015-16. So the Government did not accept that there was a funding gap in the project.

Q8 Chair: Had there not been an uplift in your capital programme in last week’s settlement, there would have been a funding gap of £3.3 billion, would there not? Had more money not been made available to you in last week’s CSR, you would have had a funding gap of £3.3 billion.

Philip Rutnam: If you make the assumptions that the NAO makes in its report by way of rolling forward the Department’s capital provision for those years and adding in capital spending on HS2, you end up with the arithmetic that is given there, but that does not mean there was a funding gap, because the Government did not have public spending plans going beyond 2016.

Q9 Mr Bacon: Correct me if I’m wrong, but it sounds to me as if you are saying, "There was no funding gap, because we did not have any funding at all." That is right, isn’t it? That is what you are saying.

Philip Rutnam: There was no funding gap because the Government had not yet set out its public spending plans beyond 2015-16.

Q10 Mr Bacon: On this bar chart, the pale blue bars represent the capital spending in each year. Which of those pale blue bars are correct, in your view, given the CSR that we have now had, and which are incorrect?

Philip Rutnam: Are you asking me which of those numbers-

Q11 Mr Bacon: This is on page 35. I am looking at figure 10, as you suggested we did. It says at the bottom "Source: Department for Transport" and it goes from 2013-14 up to 2024-25. There are 12 bars spread out over those years, and the pale blue one at the top is High Speed 2, yes?

Philip Rutnam: Yes.

Q12 Mr Bacon: Are those pale blue segments correct or incorrect? Or are some of them correct and some of them incorrect? If so, which?

Philip Rutnam: Okay. First of all, the Government has not set out capital spending plans going to 2024-25; it has set out capital spending plans for certain elements of the Department’s capital programme going to 2020-21. That is the first change between the chart and the position as set out last week.

Q13 Mr Bacon: So I should draw a line between 2020-21 and 2021-22, as you have no plans yet for everything to the right of that line, and for everything to the left of that line, you do?

Philip Rutnam: I think your question was "What are the differences between figure 10 and the plans set out last week?" The first difference is-

Q14 Mr Bacon: Yes, but subject to your answer, which was slightly different from my question but is helpful none the less, am I right in thinking that, if I draw a line on page 35 to the left of 2021-22, for everything to the right of the line-there are four bars to the right of the line-there are no plans yet for those years, but that there are plans for the years to the left of that line going up to 2020-21? Is that correct?

Philip Rutnam: I am trying to answer your question about the differences between figure 10 and the plans set out last week. The first difference is that there are no published plans beyond 2020-21. The second difference is that the Government has set out capital expenditure plans for certain elements of the Department’s capital programme, but not for every element.

Q15 Chair: For which element have they not set out plans?

Philip Rutnam: I think it is principally the other row here.

Mr Bacon: But we are really here to talk about High Speed 2.

Chair: The other row is tiny, for heaven’s sake!

Q16 Mr Bacon: We are really here to talk about High Speed 2, so it is the pale blue bar in which I am interested, Mr Rutnam. I want to know whether going up from now, 2013-14, until 2020-21, the pale blue element is correct or not.

Philip Rutnam: The third difference is that there are some differences in the profile, because we have been re-profiling elements of our spend, including the Highways Agency, for example. The Government’s plans for spending to 2021 include a significant increase.

Q17 Mr Bacon: That is pale green, the Highways Agency. Once again, I am not talking about the Highways Agency-I am not talking about the pale green; I am talking about the pale blue.

Philip Rutnam: Mr Bacon, I am trying to answer your first question, which was on the difference between figure 10 and the plans set out last week, and I can do that only if I am allowed to explain.

Mr Bacon: Okay, please finish. I am sorry.

Philip Rutnam: There are profiling differences. There are differences in relation to time scale, differences in relation to composition and differences in relation to profiling. Some elements grow significantly more than this.

In relation to your next question, which is what is the difference between the profile in that pale blue series-at the top-and the profile set out last week by the Chancellor, I am wary of giving you an off-the-top-of-the-head answer, to be honest. I wonder if David has anything to say on that. It is not massively different, but it may be different materially, none the less. David?

David Prout: If you look at figure 9, the light green and dark green elements there are equivalent to the light blue elements in figure 10-

Q18 Mr Bacon: You mean, as it were, all of it is HS2 on the left.

David Prout: Yes. For 2015-16, what you have here has been increased to £852 million; for ’16-17, it is £1.729 billion; for ’17-18, it is down marginally, to £1.693 billion; for ’18-19, it is up to £3.3 billion; for ’19-20, it is up to £4 billion-

Q19 Mr Bacon: £4 billion pounds exactly?

David Prout: Yes. And for ’20-21, it is £4.498 billion.

Q20 Chair: Can I take you back to something? You said, Mr Rutnam, that before last week not all the plans had been determined. When we pressed you on that, you said that the only bit of your plans that had not been determined was the "Other" category. Do you accept that the "Other" category is miniscule in relation to your total capital programme? I understand the re-profiling point you have just made.

Philip Rutnam: No, I am sorry. To clarify, until last week, we had no capital spending plans for the Department beyond 2015-16. Until Wednesday and Thursday of last week, we had capital spending to March 2015-sorry, we did not even have 2015-16.

Q21 Chair: You had no commitments? This is absurd. You must have had commitments from existing programmes going beyond-

Philip Rutnam: Of course.

Chair: Okay, that was what I was trying to get at.

Philip Rutnam: We have a tail of existing commitments, but in terms of a plan agreed with the Treasury, a plan in terms of the limit-

Q22 Chair: What are the existing commitments? Of course you have not signed off the capital expenditure, but where were your existing commitments before last week’s CSR?

Philip Rutnam: I am afraid that that is a question to which I would need to give a considered answer, because we have, as you might imagine in a Department of our kind, many capital programmes-

Q23 Chair: Give me a broad brush-you must have a vague idea. How much of your capital programme reflects existing commitments?

Philip Rutnam: It declines quite rapidly beyond March 2015, because road schemes do not typically last more than two or three years and nor do the local capital programmes-the local majors programmes last no more than two or three years-while in the tail of commitments other local capital programmes are not permitted. Of the principal committed projects, Crossrail is committed, but that is declining rapidly, as you can see from the orange block, so the principal committed item is the Government’s statement of funding available for the rail network-Network Rail-which runs to 2019, although I am afraid I do not have that figure in my head. I expect it is of the order of about £3 billion a year. So that is the principal committed item-the dark blue-although not necessarily in exactly that proportion. Otherwise, while we want to be able to plan long term, given that the Department has historically lived in a framework in which we are given public spending plans, including capital plans, only for three or at the most four years, we have had a pipeline that is capable of being switched off after two or three years, with the exception of rail, thanks to the legislative framework of 2006.

Q24 Austin Mitchell: None of this attenuates or excuses the harshness of the criticisms that are attributed by the media to the Department on the Report. Those criticisms were that the National Audit Office had made errors in calculations, that its analysis was out of date, that the findings of the Report were based on incomplete and misleading statistics and that it failed to take into account the wider benefits of the scheme. Those criticisms were all attributed to your Department. Were they wrong, or do you deny them now?

Philip Rutnam: The Department’s position on the Report has been clear. I made my position on the Report clear in letters to the Comptroller and Auditor General-

Q25 Austin Mitchell: Why were those statements issued then?

Philip Rutnam: In which I confirmed that, so far as the examination of the Report for accuracy of factual content was concerned, I was content. I also indicated that I was broadly content with the recommendations.

What I was not content with-the Comptroller and Auditor General knew this throughout-was the core conclusion, the central conclusion, in relation to value for money, which was that the project risked resting on weak foundations. I did not accept that, because I did not think that it reflected the very good progress that has been made on the programme in the last 18 months to two years, and I thought also that in the overall balance of things, it put too much weight on weaknesses in elements of the strategic outline business case as developed at the tail end of 2011, which underpinned decisions in January 2012. That conclusion I did not accept. I have to say that the Secretary of State’s statement when the Report came out was very much in line with the letters that I had sent to the Comptroller and Auditor General.

Q26 Chair: Do you want to come in on that, Amyas?

Amyas Morse: If I may. I am going to express myself in reasonably moderate terms-I think that’s better. But just to be plain-

Chair: Moderate but plain!

Amyas Morse: In the last stage of our discussion about the Report, the element of disagreement between us came down to a choice of phrasing as between describing the foundations for the business case as weak or saying that they could be stronger. I was not prepared to say they could be stronger, because I did not think that was a fair summary of our concerns, and I have to say, of course we took account-right up to the minute we published the report, we were looking at everything new that had been produced, but the problem was that nothing had progressed to the point that you could really change that view. The original decisions were made on the faulty information, and since then, yes, we recognise-this is a Report that looks on balance, and what we said on balance was that, despite the Department having more recently made considerable efforts to strengthen the business case, which we acknowledge in the Report, we felt that none of them as yet-as yet-fundamentally altered our view of the quality of the business case, and that was very clear.

I will just, if I may, for one second longer, say something about the assumptions we made. We did not describe it as a funding gap. What we said was: however, looking at all the Department’s spending plans, admittedly before the latest announcements-I’ll quote from our Report: "The Department’s spending plans are provisional after March 2015 when the current 2010 spending review period ends. The Department has prepared forecasts of what it expects its capital expenditure on High Speed 2 to be over the longer term". And those, with the other forecasts available to us at the time, are what we put into our figure. We did not say any more than, "This could lead to a funding gap," so that is what our Report says. I am just going to leave it at that. By the way, based on those figures, it could have led to a funding gap. Our concern about that was to draw attention to it. Now, of course, it has been overtaken by a huge increase in the budgetary envelope.

Q27 Chair: Okay, let’s take that. I take this first session as saying that you stand by the figures in the Report; your Ministers gave another view. That is the conclusion we come to on that. Can I delve into the costs a little more? Your original business case was from March 2010. Between 2010 and February 2011, your calculation of benefits reduced by £12 billion. Is that correct?

Philip Rutnam: In relation to reduction in benefits-

Chair: Your assessment of the potential benefits reduced by £12 billion.

Philip Rutnam: Yes.

Q28 Chair: Between February 2011 and January 2012, your costs increased by £1.8 billion, because you revisited forecasts on both revenues and operating costs. Is that correct?

Philip Rutnam: I think you are referring to figure 5, and we are content with the figures in figure 5.

Q29 Chair: Between January 2012 and August 2012, your costs went up by a further £0.3 billion and your benefits went down by a further £2 billion-£0.2 billion.

Philip Rutnam: £0.2 billion, yes.

Q30 Chair: So in three not-quite-annual assessments before there has been a spade in the ground, all the costs are moving in the wrong direction. Is that correct? Costs are going up; benefits are going down.

Philip Rutnam: I will ask David to say a bit more about this, but the costs of the project are dependent on the scope, and we have been doing-HS2 Ltd has been doing-

Q31 Chair: Is it true or not true that, over the period, the predicted costs have gone up and the predicted benefits have gone down?

Philip Rutnam: I am not disagreeing with the figures in figure 5. I am trying to provide some explanation of why costs have increased-in particular, most recently, the change in costs last week.

Q32 Chair: Okay. Let’s go to last week, when you increased the budget by about 30%.

Philip Rutnam: We did not actually have a budget for the project before. What we had in relation to phase 1-as indeed the NAO report recognises in paragraph 17 of the summary-in January 2012, in the business case, was an early estimate of the cost of constructing phase 1. That early estimate was based on a high-level, desk-based exercise. It is in the nature of these projects that as you advance, you will do more and more work-much more-on what the requirements of the project are, and as you do more work, you will uncover more things and refine your cost estimate. The change between the amount for phases 1 and 2 together-the figure of £32.7 billion, which was used in 2012-and the figure released last week reflects two things, principally: the first is much more detailed design work, and the second is, because we are now talking about funding rather than estimating costs, an increased provision for contingency.

Q33 Chair: I don’t understand the difference between funding and estimated costs. When you get an authorisation for a project, you put a number by it. I don’t know what the difference is. If you are sitting there as a Minister, you think, "This is what it is going to cost me." That is regardless of whether it is funding or a cost-I don’t understand the difference between the two.

Chris Heaton-Harris: And it’s not just the Minister. What were the figures you went out to public consultation on?

Philip Rutnam: Which consultation?

Chris Heaton-Harris: In 2012. The consultation last year.

Philip Rutnam: We said, as I recall, that there was a range of-

Alison Munro: The consultation was with the February 2011 figures-

Q34 Chris Heaton-Harris: What were the figures you were explaining to the public that they-the taxpayer-would be paying?

Alison Munro: At that point, as Mr Rutnam was explaining, the figures that we were presenting were a central estimate.

Q35 Chair: What were they?

Alison Munro: At that point, I think it was about £16.5 billion for phase 1. We actually presented it in a range, so those were the figures we were presenting.

Q36 Chris Heaton-Harris: Was it a fair consultation? You were selling something with a price tag that has just gone up by a huge amount. That does not strike me as a fair consultation for the British public and the British taxpayer.

Alison Munro: Throughout this process-as the NAO recognises, we were at a very early stage in February 2011, and we are still at a relatively early stage, and the NAO recognises that you expect to see movement in costs at an early stage in a project.

Q37 Chair: Why always up? Why not down?

Alison Munro: What we did, back in 2011, was make sure that we tested the effects on the benefit-cost ratio of various changes. So we have carried out sensitivity throughout the work, but you would expect the cost estimates to be refined as we go forward.

Q38 Mr Jackson: May I ask what a high-level, desktop review is? Going from 2011 to 2013, there is an uplift of 30%-it does not seem that high level to me. How can it be out by such a huge amount, in terms of the uplift this year? Are you satisfied with the robustness of the methodologies you used when you made those estimates in 2011, because they are very seriously out, in terms of today’s budget?

Alison Munro: As has already been explained, not all of the uplift is due to changes in the underlying cost estimate, but we had to reflect-our cost estimate reflected-the level of design that we were at at that time. What the desk study means is that we had a high-level route design, and essentially we costed that with unit rates, so, for example, we applied a unit cost per kilometre of tunnelling, because that was the information we had at the time. We applied, at that point, about 250 different unit rates. The further work that we have done since January 2012 has allowed us to develop a much more detailed design, so we now have a much more detailed cost estimate. Our current cost estimate is based on about 4,000 different unit rates and allowances, recognising the more detailed level of design that we are now at. So we do have a much more confident basis for our cost estimate at this time.

Q39 Chair: May I just draw to your attention the fact that when you gave us the £32 billion to £33 billion figure, you said it had regard to optimism bias?

Alison Munro: Yes, we have sought, throughout the project, to include allowances-

Q40 Chair: Well, it didn’t, did it, if you were 30% out?

Alison Munro: That was based on, as you tried to explain, an estimated central estimate, so there was a 50% probability that that would be exceeded.

Philip Rutnam: Exactly. Can we just expand on this? There are two major changes between the January 2012 figure and the June 2013 figure. The first is that decisions have been made to change the scope of the works in various ways. For example, instead of taking a surface route from Old Oak common to Northolt, we put the route in tunnel, because that is concluded to lead to a much better project with greatly reduced risk of disruption to the Central line and also to the north circular. That is one example of a major change in the scope of the works, for very good reasons, and there are a number of such changes. The second reason is that instead of, as at January 2012, providing a central estimate with a 50% probability attached for the cost of the works, we have chosen-as we are now moving into a point where decisions are being made about funding-to provide estimates with a 95% probability of not being exceeded. Those two reasons-the changes in scope account for £6 billion of the £10 billion, and the changes in approach to contingency, to put it all together on a much more conservative, cautious and prudent basis-because we are now making decisions about funding-is £4 billion or just over.

Amyas Morse: May I just check something to clarify? The increase of £10 billion applies to the whole route, including the Y route, doesn’t it? I do not imagine that your planning on the Y route is anything like as advanced as your planning on the short phase. Some of it is more accurate and specific, and some of it is not. Would that be a fair comment?

Philip Rutnam: That is correct.

David Prout: Also, we have a higher cash amount of contingency for phase 2. In phase 1 we are planning on £3.7 billion of contingency at P50 level for phase 2.

Q41 Mr Bacon: Sorry, what is a P50 level?

David Prout: It is a 50% level of confidence that you will come in on that budget. For phase 2, we have £6.5 billion.

Q42 Chair: May I just ask you how you got your £14.4 billion contingency? It is a heck of a contingency.

David Prout: Yes, on phase 1, you have a point estimate of £15.6 billion and a contingency of £5.7 billion.

Q43 Chair: No, I understand the arithmetic. I am asking you for the justification for a contingency at this stage of the development. You are telling us that you are very certain about phase 1, taking on board the point the Comptroller and Auditor General made about phase 2. On phase 1, what on earth do you need this massive contingency for? I tell you what this feels like to me. It feels a bit like the Olympics with its 50% contingency. You will spend way above the estimate and you will just say, "Well, we stayed within budget because we have this massive contingency. Some £14.4 billion is one heck of a lot of public money that is being set aside as a contingency in this project.

David Prout: Yes, but what the NAO Report argues in favour of is having a range of costs. What we effectively have now is a range of costs.

Q44 Chair: Why £14.4 billion? I understand the arithmetic and what is going where, but why so much?

David Prout: What we have said to HS2 Ltd is that its target price for completing phase 1 of the scheme is £17.16 billion. That is the bottom end of our range of figures. What then happens to that point estimate? The point estimate there is £15.6 billion, and we have given them a 10% contingency on that, taking it up to £17.16 billion.

Q45 Chris Heaton-Harris: Mr Prout, have you ever dealt with builders before? Giving someone a low range to aim for but knowing they have a massive contingency would mean, I suggest, that they will hit the top end of that contingency if nothing else.

Philip Rutnam: It depends on the incentivisation-

David Prout: Exactly. As the permanent secretary says, it depends on the incentivisation you put in place and also the controls you put in around releasing the contingency above the 10%.

Q46 Mr Jackson: May I ask whether that contingency includes compulsory purchase orders within it?

David Prout: Yes.

Q47 Mr Jackson: So how are you estimating the CPOs for the second phase? I mean, how can you possibly do that at this stage?

David Prout: HS2 Ltd does a bottom-up estimate of the amount of land that needs to be purchased and estimates the cost of purchasing that land. The increased cost of purchase is one of the things on phase 1 that has pushed the cost up a bit. Those lessons have been learnt on phase 2 and taken into account in the costings for phase 2.

Philip Rutnam: Could I go back and add something? You were asking how we had arrived at those figures for the contingency. The answer methodologically is that for phase 1 there is a very sophisticated-what is known as a quantified risk assessment, which looks at all sorts of variables in relation to the project and tests all sorts of assumptions about those and their impact cumulatively on the cost of the project. That is a very sophisticated QRA approach on which HS2 Ltd has been using some of the world’s leading engineering consultancies. That is for phase 1. For phase 2, which is at a much earlier stage of development, as the Comptroller and Auditor General said, an element of QRA has been used, plus an element of what you referred to earlier, Chair, as optimism bias. But phase 2 is at an earlier stage so there is inherently more risk.

Q48 Austin Mitchell: Isn’t a problem with the system the fact that all your estimates are so shaky and provisional that you have to allow a big contingency to cover it?

Philip Rutnam: It is important to stress that this project-phase 1 in particular-has now reached a markedly more mature stage. Instead of 2% of design work being complete, as at January 2012, I understand that around 10% is complete. So it is much more mature and an immense amount of effort-

Q49 Chair: Only 10% is complete?

Philip Rutnam: Yes, but uncertainty does not run linearly between 0% and 100%. It declines in a non-linear fashion. The expert advice I have had is that on the basis of immense amounts of work done in HS2 Ltd by their development partner, by the consultancies supporting them, this is a robust cost estimate for phase 1.

Q50 Mr Jackson: Can I ask a specific question? You have agreed with the Chair that costs are increasing essentially because of political issues around the need to build further infrastructure and the political sensibilities, which we understand, and at the other end there are flawed methodologies in your benefits, which you have corrected since they were first identified. On the second phase, have you factored in the risk that there will also be political sensibilities necessitating changes in scoping for the Y? In other words, there might be areas of special scientific or scenic interest. There might be national parks. There might be historic viaducts, bronze age sites or whatever that will mean you will again have to put aside significant contingency funds in the second phase. Is that factored in?

Philip Rutnam: I will ask David or Alison to speak to the approach to the contingency in phase 2, but just to clarify one point: it would not be fair to say that political decisions on the scope of works have increased costs. The decisions that have been made-for example, the decision to run a tunnel from Old Oak Common to Northolt or the decision to put a tunnel underneath the M6 on its approach into Birmingham at Bromford instead of having an at-grade, surface-level approach-are well founded decisions based on expert advice as to the right engineering solution in order to maximise the benefits of the project and avoid disruption.

Q51 Mr Jackson: Which weren’t identified at the outset?

Philip Rutnam: No, you’re right: they weren’t identified at the outset. A different view was taken on engineering feasibility. As more work was done, we found that it wasn’t going to be sensible or practical to run at grade from Old Oak Common to Northolt, for example.

Q52 Austin Mitchell: I have to say that nothing I have seen in the report or that you have said today has dissipated my impression that, here is a project that has been plucked out of the air so as not to be humiliated by the French in the way that President Mitterrand used to do, regarding our having nothing but slow trains in this country. The civil service and HS2 are then sent out to find justifications for this policy. That explains all the changes in costings, all the new factors that have been brought in, and all the dredging round for regional development and 200,000 new jobs around every station on the line. It looks like you are trying to justify a policy that was plucked, in principle, from the air.

Philip Rutnam: I must say I really don’t think that’s fair or accurate as an account of the policy. This is really about the future of the rail network in this country. Take a step back and look at what has happened to usage and demand for the rail network over the last 15 or 20 years. Usage has doubled. The volume of passengers and the number of trips made have doubled and growth continues. Growth has continued even during the recession. If you project forward, even on markedly more cautious assumptions than the experience of the last 15 years, you will find that our main lines will get increasingly full. The one that will get full first-indeed, it is just about full now in terms of train paths and, by the mid 2020s, it will also be full with passengers-is the West Coast Main Line, which is the single most important artery in our railway system.

Q53 Chair: Where is the evidence for that? I have searched high and low for the evidence. It is not in the Report. Everybody says that it isn’t published. Where is the evidence of future passenger demand?

Philip Rutnam: I think we could certainly do a better job in exposing the evidence.

Chair: Where is the evidence?

Philip Rutnam: There is the new lines study from Network Rail in 2009. There have been successive route utilisation studies by Network Rail, including the route utilisation study of 2011.

Q54 Chair: How far forward does that take us?

Philip Rutnam: The new lines study from 2009 looks at the gap between demand for rail services and capability on a whole series of main lines-essentially the five main routes from the west round to the north of London, going from Great Western Main Line right round to the East Coast Main Line. It says that the line that will experience the greatest gap between demand and capacity and the most acute problems is the West Coast Main Line. There is a very good reason-

Q55 Chair: If you go to figure 4 on page 21 of the Report and look at "Long-distance intercity", that is the evidence. At the moment, occupation is 76%. By 2026, it becomes 84%. By 2033, it is just over 100%. That is the evidence that you agreed with the NAO should go into the Report. You cannot sit there and tell us there’s evidence there’s going to be a lack of capacity when this is the only evidence you have.

Philip Rutnam: I am sorry, but I disagree. That is part of the evidence. I have just referred to a good deal of other evidence and to the strategic arguments around the future of the rail network and the way in which it will get increasingly congested.

Geraldine Barker: To clarify, figure 4 is the capacity on the main lines. What we are saying there is that it is the commuter services using the-

Q56 Chair: I understand that it is commuter services, but that is not what HS2 is about.

Philip Rutnam: I was expanding on things such as paragraph 2.5, for example.

HS2 is in part about the commuter services, because unless we deal with the capacity issue that we will face on our rail network, we will find that commuters won’t be able to get into London. They will be left standing at the stations on the southern half of the West Coast Main Line.

Chair: But there are other ways of dealing with them.

Q57 Mr Jackson: That is not the basis of this project. The strategic basis of this project is building up connectivity to support regional growth.

Philip Rutnam: No-

Mr Jackson: What you are doing is admitting there-perhaps it is a Freudian slip-that the experience of other countries, which is that economic activity is often sucked into the hub, will be repeated on HS2. Most of the work that Network Rail has been doing is remedial work to improve, for instance, local hubs on the East Coast Main Line. Surely the No. 1 priority is regional growth in the North and the Midlands. It is not about travel problems.

Philip Rutnam: We are doing other things in relation to regional growth in the North and the Midlands.

Can I take issue with the claim that the first strategic objective of this project is about connectivity? The first strategic objective is around capacity. If you look at paragraph 4 of the Report’s summary, the first objective there is about increasing "capacity to meet growing demand".

Q58 Mr Jackson: Then why have you not done a detailed comparative study to look at the top dozen or 20 discrete local infrastructure projects, which would much more quickly and cost-effectively, in value-for-money terms, assist regional economic growth, connectivity and connections to London, rather than this massive white elephant?

Philip Rutnam: A great deal of work has been done on alternatives. David, would you like to add to that?

David Prout: There are three major reports looking at alternatives. The 2010 Atkins report on London to Birmingham looked at road alternatives and five rail-based alternatives. The 2011 Atkins report looked at the wider network, including the Midlands Main Line and East Coast Main Line. It broke that down into what we call three rail packages.

In January 2012, Atkins and Network Rail responded to the representations made by objectors, such as the 51M group, with what they called their optimised alternatives study. Those modelled the capacity increases you could get from incremental improvements to the railway system and showed that you were unable, despite the fact that they would come to many billions of pounds, to meet the same requirements of the HS2 project.

Q59 Chair: I am going to go to Chris because you have already made your point. Let us be clear before we leave that, that the cost-benefit ratio on all those alternatives was better. Please answer that question. Was the cost-benefit on all those alternatives better?

David Prout: On some of the alternatives it was better in some cases.

Q60 Chair: And they all cost much less.

David Prout: And overall, they did not produce the same level of benefits as HS2.

Philip Rutnam: And they didn’t achieve the strategic objective.

Q61 Chair: But you can spend more, if you spend this much-as I understand it, it was 7% of the cost, but the cost-benefit ratio, which must be the key value-for-money indicator, was better on those than it is on this.

Austin Mitchell: And they come in quicker.

Chair: And they come in quicker, so it helps growth.

David Prout: But they did not meet the strategic objectives of HS2.

Q62 Chris Heaton-Harris: I have a number of questions on cost, but on this point, could you confirm which document you use? Do you use passenger demand forecasting handbook, version 4.1, or version 5, for your predictions of passenger demand?

Philip Rutnam: The passenger demand forecasting handbook 5 is the version that will be used for the revised updated business case that will be presented before the hybrid Bill is deposited this autumn.

Q63 Chris Heaton-Harris: Okay. So version 5 was written in August 2009. Is that correct?

Philip Rutnam: I am afraid I don’t know when it was first-the passenger demand forecasting handbook is an industry-led collaborative process. The Department makes a decision about which amendments to the PDFH should be taken on board in the Department’s methodology. It is not an automatic process of taking those questions on board. The Department’s methodology is called WebTAG-web-based transport appraisal guidance. I do know that the Department made a decision in August 2012 to take PDFH version 5 into its analytical approach, into its methodology. I’m afraid I don’t know when PDFH 5 started in the industry.

Amyas Morse: In 2009.

Q64 Chris Heaton-Harris: I’m pretty sure it was August 2009. The reason I’m asking is that for the West Coast Main Line franchising bid programme, you were quite happy to use the new version-version 5-but you persist until this day in using the old and very advantageous, to you, version of 4.1 for HS2, and I wonder why.

Philip Rutnam: To be clear, we are not persisting in using PDFH 4.1. Since August 2012, the Department has adopted PDFH version 5.

Q65 Chris Heaton-Harris: But so far, that is just two. You haven’t used version 5 at all yet.

Philip Rutnam: It is being used now in a very extensive body of work, which is updating the business case for submission this autumn. So it is being used. So far as I know, it is being used on other projects that have been taken forward before this autumn.

Q66 Chris Heaton-Harris: But it hasn’t been used on any of these costings or any of the value-for-money stuff you are working out now.

Philip Rutnam: It principally affects demand elasticities. It is being used. We presented a business case in 2012. We are revising that business case in a whole range of respects, of which the change to PDFH is just one. We will be presenting that revised business case this autumn, ahead of the submission of the hybrid Bill. As to the west coast franchise, I’m afraid I recall that there was quite a lot of confusion both within the Department and between the Department and bidders as to whether PDFH 4.1 or 5 was the model to use. I’m not sure that is an example of anything to be followed in any respect.

Q67 Chair: But they did use 5. The point is about whether there was confusion.

Philip Rutnam: I think 5 was used in some respects, but not consistently.

Chair: The West Coast Main Line franchise was an absolute disaster area, but according to the NAO, they used 5, didn’t they?

Geraldine Barker: Yes.

Q68 Chris Heaton-Harris: I was also listening to the statements coming out of the Department, as well as the Chair. Could you help the Committee with its figures by giving us the up-to-date numbers, as of last week’s announcement? How much is HS2 going to cost us, and why is that your estimate at this point in time?

David Prout: Do you want me to break it down?

Q69 Chris Heaton-Harris: The total would be great, but also with contingency.

Mr Bacon: Why don’t you give a global figure, then break it down into its component parts?

David Prout: The global figure for phase 1 and phase 2 together is £42.6 billion. In addition, there is £7.5 billion for rolling stock, which includes £1.7 billion of contingency. For phase 1, the total at P95 level of contingency is £21.4 billion, which includes £5.7 billion of contingency. For phase 2, the total is £21.2 billion, with £8.7 billion at P95 level of contingency.

Q70 Chair: Sorry, you said 10% contingency on phase 1-that is more than 10%.

David Prout: No, that is the target price for HS2 Ltd, so that is the bottom end of the scale.

Chair: I wish you guys were honest.

David Prout: We are honest.

Q71 Chair: The reality is that we could end up on £27 billion for phase 1.

David Prout: Not £27 billion, no. £21.4 billion.

Chair: £21.4 billion plus £5.7 billion.

David Prout: No, including £5.7 billion.

Q72 Mr Bacon: Including £5.7 billion, and at what level of probability?

David Prout: At P95.

Q73 Mr Bacon: Right, so it is £21.4 billion, including how much for contingency again?

David Prout: £5.7 billion.

Q74 Chair: So that is within the £21.4 billion.

David Prout: Yes. Doing it the other way round, it is £15.6 billion plus £5.7 billion, which equals £21.4 billion.

Chair: This smells like MOD territory to me.

Mr Bacon: It’s amazing. I would have thought that for £42 billion you would have got a few trains thrown in, but apparently not.

Chris Heaton-Harris: No, that is £7 billion on top.

Mr Bacon: So we are pushing £50 billion already. Everybody thinks it is going to be £70 billion, £80 billion or £100 billion by the time we have finished, don’t they? That would be par for the course, given your record.

Q75 Chris Heaton-Harris: I haven’t been able to find the information properly, but most high-speed railways across the world need subsidising post construction. What sort of subsidy level is the Department thinking of giving when things are running after construction?

David Prout: All our modelling shows that there will be quite a substantial operating surplus for HS2.

Q76 Chris Heaton-Harris: Okay, so it is going to be one of the very few high-speed rail projects in the world that runs at profit in surplus.

David Prout: Yes. Built into our BCR is the operating surplus.

Q77 Chair: Chris, may I just interrupt? I am just looking at phase 1. There is £21.4 billion, of which £5.7 billion is contingency.

David Prout: Correct.

Q78 Chair: So the contingency is 30%.

David Prout: Yes.

Q79 Chair: Why? You say that you are so far advanced that you know the costs. You have got a 30% contingency.

David Prout: The NAO itself argues in favour of having a range of figures.

Chair: I’m asking you why.

David Prout: We could give you a point estimate at £15.6 billion. That is the point estimate, build-up, bottom-up, as to what this would cost. But all major construction projects, at this early stage, operate on the basis of optimism bias in contingency. The NAO argues in favour of a funding stream being put in place at an early stage so that you can work with industry in order to develop the supply chain, given the certainty that it requires to bring costs down. We all know that we can bring costs down in this country if we work with the supply chain, so the NAO argues for a run of figures. We now have a run of figures, but we are at a very early stage-we are before the point at which we have introduced a hybrid Bill. We therefore need to have contingency built in.

Q80 Chair: I have to say that with 30% contingency, you cannot then argue that you are well advanced and clear on your costs. I am sorry, but those two statements just do not hang together. I can understand why you want a big contingency; it gives you greater flexibility. No doubt the public’s expectation will be that you will spend the lot. You cannot come before us this afternoon and argue that you are much more advanced on costs-that you have 95% certainty on what your costings are going to be-and then tell us that you need 30% contingency.

Philip Rutnam: We have 95% certainty within the £21.4 billion, which allows for the contingency.

Chair: Ah, that is such a complicated work-out.

Q81 Mr Bacon: Is it 95% certainty within the £21.2 billion that is phase 2 as well?

Philip Rutnam: Yes, but allowing for the fact that that is at an earlier stage. It is not as extensive a QRA process, which underpins that. There is more uncertainty around that. Critically, there are decisions still to be made about the route and station options, on which we are consulting.

Q82 Mr Bacon: How do you then say that it is a 95% probability when you have sort of just said that actually there is a lower probability?

Philip Rutnam: I am trying to display, perhaps in practical terms, that you can work on the basis of the information you have, and it comes out as a 95% probability. But we have to recognise that it is an earlier stage than phase 1.

Q83 Chair: What is the certainty about the £15.6 billion or £15.7 billion? What is the certainty there? You say that it is 95% if you add in 30% contingency. What is the certainty about the £15.6 billion or £15.7 billion?

David Prout: Sorry, the £15.6 billion?

Chair: Yes.

David Prout: That is the point estimate. That is the estimate in 2011 prices of what this would cost. But if you look at a P50 level of certainty-meaning that you are 50% sure of coming in on budget-you end up with the figure of £19.4 billion, and for P95, £21.4 billion. So it ratchets up-the higher the level of certainty, the higher the contingency.

Q84 Mr Bacon: My point was merely that if you add the two together-the £21.4 billion and the £21.2 billion-and you are saying that they both have a 95% degree of probability, then the £42.6 billion that you spoke about at the beginning, and I know that that includes contingency and does not include the rolling stock, in toto has a 95% probability of being correct. Yes?

Philip Rutnam: Yes.

Mr Bacon: But you are saying that some of that actually has other things around it, including decisions that have not been made, which means that we have recognise that some of that is at an earlier stage, which means that it is not really 95%.

David Prout: No, but that is why we have a higher level of contingency in phase 2 than we do in phase 1. In phase 2, we have £8.7 billion of contingency, and in phase 1 we have £5.7 billion.

Amyas Morse: In fairness, what we argue for in the Report is that, as the cost estimate becomes more mature, it is a good idea to have an indication of the funding stream in place; I am not critical of that. However, what is really important for the Committee to establish is that having a contingency on the existing cost base and on reasonable variation around it is one thing, but having the possibility of material scope creep-in other words, if it was some really material change, such as further tunnelling-is another. I take it that you would not regard that contingency as enough to absorb something of that sort. Is that right?

David Prout: The contingency would not include major changes in scope, for example, that the Select Committee might require. If the Select Committee requires an additional station, that is not included in the contingency. If it required 20 more miles of tunnelling, that is not included in the contingency. What we would expect to include in the contingency are the more minor adjustments in Select Committee to mitigate environmental impact.

Q85 Chris Heaton-Harris: Just a quick one to finish up on the subsidy question that I asked. I just wonder how you define surplus and what happens to that surplus when HS2 is running at surplus.

David Prout: The surplus is defined in terms of the revenue forecast against the operational cost of running the railway, including maintenance.

Q86 Chris Heaton-Harris: Okay, but what happens to that surplus? How does it manifest itself? Where does it go to? Does it go back into the Department?

David Prout: That is yet to be decided. It depends on the operating model that you put in place for the railway.

Q87 Chris Heaton-Harris: The sums you have given us add up to a lot per constituency-£75 million, and maybe a lot more than that-so it is actually quite of interest to everyone around this table, whether they are affected by HS2 or not. It is a big leap of faith-it is almost like "Field of Dreams" and Kevin Costner, "If you build it, they will come". I just wonder what other costs you have been thinking about. We are going to ship a lot of people between cities. Has there been an impact assessment on what HS2 will do to the London Underground, for example?

David Prout: A substantial amount of work has been done on what happens to passengers when they arrive at Old Oak Common and at Euston, and about the dispersal of those passengers. As for the actual number of passengers arriving on High Speed 2 in comparison with the total number of people being carried by London Underground Ltd, I am afraid that I do not have the figure in my head but it is extremely small-

Alison Munro: HS2 adds about 3% to Underground passengers at Euston. The key point at Euston is that there will be overcrowding without HS2. I think the predictions we had last year were that there would be 185% average passengers compared with capacity, and we would increase that to 191%. So we are adding to a problem that already exists but we are not the cause of the problem.

Philip Rutnam: A very important interchange between High Speed 2 and Crossrail is planned at Old Oak Common, which will provide a better way of dispersing passengers travelling into central London for many end-destinations than coming into Euston.

Q88 Chris Heaton-Harris: Can I just ask about time scales? Mr Bacon pointed out the graph in the Report. How will the moneys announced last week work with your time scales? I think that Mr Prout outlined how lots of money had been added to each column, so when can we expect to see the first spade in the ground?

David Prout: Our programme shows us starting work in 2016, 2017. As you know, there is a paving Bill before the House at the moment that will allow us to pay for certain works before the hybrid Bill has been passed. We would expect to see some works on Network Rail land in preparation for HS2 before then, including some purchase of property. But we will get under way in 2017 and our programme shows completion at the end of 2026.

Q89 Chair: How confident are you on that programme time line?

David Prout: We have sought assurance from High Speed 2 Limited and have received assurance in writing from the chairman-

Q90 Chair: Well, go on then, Miss Munro-are you confident you can stick to that time line?

Alison Munro: As David mentioned, our chairman has assured Philip that with the figures that will be spent on review-[Interruption.] This is based on advice he had from the executive-

Q91 Chair: Quite.

Alison Munro: With the spending review numbers and with the assumption that we get Royal Assent in 2015, we are confident that that funding and the construction programme that we envisage at this time will allow us to open the railway in 2026.

Philip Rutnam: Can I just add that it is very important to understand that the assumption is in there that we will get Royal Assent in March 2015?

Q92 Chair: Yes-which is mad. I was around when the first channel tunnel rail link was planned; in fact, it went through my constituency and probably through Jackie’s as well. I think that the hybrid Bill was three years late, and this time around you are dealing with every aggrieved person in Hampstead and right through every constituency. You are absolutely joking that you will get Royal Assent by 2015. It is a complete madness. Don’t you understand that? It is just unrealistic.

Philip Rutnam: I will ask Alison to say a bit more about what is being done to prepare the way for the hybrid Bill in a moment. I think that it is definitely a challenging timetable. It is clearly a matter for-

Q93 Chair: Do you honestly believe you will keep to the timetable? Do you honestly believe it?

Philip Rutnam: It is clearly a matter for both Houses of Parliament and the Select Committee as to how long the hybrid Bill takes. May I offer one observation? You mentioned the channel tunnel rail link. I recall the decision being made to proceed with the channel tunnel rail link in March 1993.

Q94 Chair: It could be; I cannot remember.

Philip Rutnam: There was then a period of time to prepare the hybrid Bill, and then a period of time for that Bill to go through Parliament. The Channel Tunnel Rail Link Act gained Royal Assent in 1996. We made a decision to proceed with phase 1 of HS2 in January 2012. Against that backdrop, achieving Royal Assent by March 2015 does not sound wholly unrealistic, but it depends on how Parliament deals with the Bill that the Government present.

Q95 Fiona Mactaggart: When will the Government present the Bill?

Philip Rutnam: The Government aims to present the Bill by the end of the year.

Q96 Fiona Mactaggart: Are you confident that you are on track to get the Bill out by the end of the year?

Philip Rutnam: An immense amount of work is under way to prepare the hybrid Bill. It is a huge undertaking-

Fiona Mactaggart: That did not sound like yes.

Philip Rutnam: And we are confident that that timetable can be achieved. It is a very challenging timetable, but we are confident that it can be achieved. Alison, do you want to add to that?

Q97Chair: Will you take responsibility if it isn’t, Mr Rutnam?

Philip Rutnam: A range of factors will determine whether the hybrid Bill gets into the House before the end of the year. Of course, I will take responsibility, with Alison and David, who is the SRO, for factors that are within our control that determine whether that is achieved, but there are other factors that are not within our control.

Alison Munro: One of the things that gives us confidence is what we have achieved to date since the Secretary of State’s go ahead in January 2012. We have done a vast amount of work. In terms of our development partners and our consultants, we have leading expertise from around the world. We set ourselves a target of delivering our draft environmental statement in the spring of this year, and we did it according to the target timetable. We are on course in what we have done. The work we presented in the draft environmental statement gives a really good indication of the amount of work we have done and shows that we are well on the way.

Q98 Mr Bacon: On that point, Ms Munro, you mentioned your consultants, but which consultants helped you with the calculation referred to in paragraph 2.13? It turned out to be wrong, so two thirds of the £12 billion reduction was due to errors in the way passenger demand was modelled. Which consultants made that mistake?

Alison Munro: This was the modelling error in 2010.

Q99 Mr Bacon: I am looking at the modelling error: "Between March 2010 and February 2011, benefits reduced by £12 billion."-the first bullet point of paragraph 2.13. Which consultants were involved in that miscalculation?

Alison Munro: The consultants were Atkins, who were then the consultants undertaking modelling on our behalf.

Q100 Mr Bacon: Mr Rutnam earlier referred to the study in 2010-"London to Birmingham: five rail-based options for study". That was undertaken by Atkins, yes?

David Prout: Correct.

Q101 Mr Bacon: Is that the same thing that we are referring to in this paragraph?

David Prout: It is not the same piece of work. It is the same firm.

Q102 Mr Bacon: So it is a different piece of work. Mr Rutnam, you said earlier that passenger forecasting was an industry-led process.

Philip Rutnam: The passenger-demand forecasting-

Mr Bacon: That passenger forecasting was an industry-led process.

Philip Rutnam: As I understand the PDFH process, yes. We participate as well.

Q103 Mr Bacon: Right. When you say "industry-led", to whom are you referring?

Philip Rutnam: I am afraid that I would have to come back to you on the details of the way in which the PDFH process is run.

Q104 Mr Bacon: Really?

Philip Rutnam: Yes. I think that there is a committee-a group of industry professionals who oversee the development of the PDFH methodology.

Q105 Mr Bacon: Let’s just deconstruct that for a second: you would have to come back to me on who it is that is leading the process of developing passenger forecasts.

Alison Munro: It includes, for example: Network Rail; the regulator, I believe; train operating companies-

Q106 Mr Bacon: You "believe"? I would hope that these things were pinned down, so we knew where we were getting our passenger forecasts from, because it is not as if we have not been here before. The millennium dome, you may remember, revolved around certain forecasts of visitor numbers. It was visitor numbers that went horribly wrong for the Navan centre in Northern Ireland. Passenger numbers have a habit of being wrong, so I would like to know, if it is an industry-led process, who it is that is doing it.

Philip Rutnam: I do not think there is any difficulty in coming back to you, Mr Bacon.

Q107 Mr Bacon: I am surprised that you do not know now, because this is central.

Philip Rutnam: I can tell you that, as I understand it, there is an industry committee that comprises the parties that Alison referred to-Network Rail and the train operating companies-and I also think it involves the Association of Train Operating Companies, which is the trade body that co-ordinates TOC activities, and the Department, which oversees the development of the PDFH methodology. It is a well established mechanism, a well established methodology and, by the way, it also has a good track record in terms of the relationship between forecasting and outcome.

Q108Chair: Really? East Coast Main Line?

Q109 Mr Bacon: Not according to the bullet point here in 2.13, it doesn’t. The apparent benefits reduced by £12 billion and two thirds of that reduction "was due to errors in the way passenger demand was modelled."

Philip Rutnam: That was a different matter altogether. That was to do with an error in one of the complex models operated by Atkins for this purpose, which involved an element of double-counting, to do with interchanges, I think. It is a completely separate matter from PDFH.

Q110 Chair: I just want to get on the record, Mr Rutnam, your fantastic ability to forecast. We had it wrong in front of this Committee on the East Coast Main Line, which led to a bankruptcy that the Government had to jump in on. We had it wrong on HS1, which again required a massive subsidy from the taxpayer.

Philip Rutnam: I am not sure that that is specifically to do with PDFH, I have to say.

Q111 Chair: It was the model used to predict passenger numbers, and those predictions were completely wrong.

Philip Rutnam: Yes, but as I recall, there was overbidding by a franchisee taking on the franchise.

Q112 Chair: No, it was a wrong assessment of the number of people who would use HS1.

Philip Rutnam: In HS1, as we discussed last year, I completely accept that the assessment did not allow sufficiently for the potential behavioural response to the creation of HS1.

Q113 Chair: That forecast about passenger numbers was wrong.

Alison Munro: There were two different things here. There is the PDFH 5, which produces the underlying growth in passenger demand, and then there is the modelling that we use with those forecasts to identify how many people might use High Speed 2. The error was found in how we applied those forecasts and working out how many people would use High Speed 2, because at that time, we had to develop a new part of the model.

Q114 Mr Bacon: As we have established through Mr Heaton-Harris, PDFH 5 has not even been used in HS2 so far.

Alison Munro: It was the earlier version.

Q115 Mr Bacon: The one that gave you more favourable-looking numbers.

Alison Munro: We have always used the version that is used in the Department’s guidance.

Q116 Mr Bacon: The point that I was really trying to get to was this. The industry has an interest in this project going ahead, doesn’t it? If the project goes ahead, the industry gets to build rolling stock, it gets to build track, it gets to employ lots of people and the Government pays it lots of money. The industry has an interest in this project going ahead, doesn’t it?

Philip Rutnam: The industry is generally supportive of it. I have to say that I think the commercial interests of the parties in the industry are by no means clear in relation to the project, not least because it is a long way off. The industry is supportive.

Q117 Mr Bacon: A depressingly small amount is clear, including the strategic case and the benefits case, but let us just leave that for a minute. What I am really getting at is: you say this process of forecasting passenger numbers is industry-led. You are, essentially, handing the process of forecasting how successful this will be to the people who will benefit from its being constructed, aren’t you?

Philip Rutnam: No, not at all. The industry is supportive, first of all, because it sees the strategic arguments that I was trying to outline earlier. We have seen huge growth in rail demand and rail passenger volumes, and the network will not cope if that growth, or anything like it, continues in the future. The industry recognises that capacity is central to the strategic case for this project. That is the first point.

Q118 Mr Bacon: Mr Rutnam, we did discuss this last time, when you were here to talk about HS1. Of course they would, because they are not broadband providers; they are train operators and they are constructors of railway track. They like trains, and they want more of them. Their interest is that this goes ahead, and you are handing to them the leadership of the process by which you establish passenger forecast.

You have not put in here any of the counterfactuals, which I tried to discuss with you last time, and after about eight or nine times of asking finally got from you the admission that you had not asked yourself what would happen if you spent £32 billion, for example, on broadband-let alone Mr Jackson’s question about what would be the potential effects, economic and other, of spending this money on a whole series of discrete projects that would produce quicker returns and higher benefit-cost ratios. You haven’t done that, have you? So, really, you have not done that work, you have not done the counterfactuals or the opportunity costs, and you are handing the leadership of the forecasting of passenger numbers to a group of people who want this to happen.

Philip Rutnam: I completely reject that. I do not accept at all that the Department is simply handing over to the industry the methodology to be used in appraising this project. The Department makes decisions on the methodology to be used. It has a very well defined process-

Q119 Mr Bacon: You keep moving it.

Philip Rutnam: It has a very well defined process for deciding on its methodology. Its methodology is internationally respected and indeed in many ways it leads the standard around the world.

Q120 Mr Bacon: Mr Rutnam, if it were that well defined, it would not have suddenly produced an £8 billion hole quite recently because the calculations were so bad.

Philip Rutnam: That is not to do with the methodology. If you are talking about the error in 2010, that is to do with an error in the application of the methodology made by a consultant working for HS2 Ltd and identified by our own quality assurance.

Q121 Mr Bacon: Most of our taxpayer constituents will not really care about which £8 billion error you made; they are just distrustful of your ability to get this right, frankly. You did say that the process of forecasting passenger numbers is industry-led, didn’t you?

Philip Rutnam: I said that the process of developing the passenger demand forecasting handbook is industry-led, as I understand it.

We then make decisions on which elements of the passenger demand forecasting handbook should be incorporated into our own methodology.

Can I make a passing observation? If the industry was so concerned, in your analysis, to present the most favourable case possible for HS2, why has the PDFH been revised in the way it has?

Q122 Mr Bacon: The history of many of these projects is that the goalposts move repeatedly until the project gets to the point where it basically cannot be stopped. There is a lot of academic evidence to support that. If you want to look at the references, you can read the book I just wrote, which came out a week ago.

Philip Rutnam: In that case, I want to assure the Committee of our complete commitment to the best possible objective appraisal of the business case for the project.

Q123 Chris Heaton-Harris: I have one more brief question about the hybrid Bill. Figure 12 on page 39 talks about programme risks, and the Bill timetable figures quite highly in that. In there are some eye-catching things such as "managing opposition to the scheme, including obtaining access for land surveys" and "minimising the risk of legal challenge". Bearing in mind that we all know how Parliament works-well, actually, I haven’t got a clue how it works, but in the three years I have been here, I have seen things that were dead certs become not dead certs very quickly-can you provide a note of how your costs will change if the Bill is delayed by one or two years?

David Prout: Yes, we could do that.

Chris Heaton-Harris: It would be very helpful if you could.

Q124 Chair: Out of interest, isn’t that built into your contingency?

David Prout: The contingency is based on a spot price, not on a funding stream going out over a period of years, so it is a different question.

Q125 Chair: That adds to my scepticism. You will not get the hybrid Bill through in the time period that you have set yourself. It is overly ambitious. You have admitted that there are risks. If you do not, there will be cost implications which will take us beyond the £15.7 billion and the £5.7 billion contingency just for phase 1. That is what I understand you to be saying.

David Prout: Incidentally, it also has benefits in terms of the BCR, because demand is built up if there is a delay in completing the project.

Q126 Chair: We will come back to the BCR. You are saying that if there is any delay in the hybrid Bill, that will add to your costs, and it is not built into the £5.7 billion contingency in phase 1?

David Prout: No. What I am saying is that we will give you a note on what it will do.

Chair: Yes, but that is what you have actually given in evidence to us.

Q127 Guto Bebb: I do not want to repeat what has been asked already, but I want to return quickly to the issue of capacity. As an MP from north Wales, I know that one of the arguments in favour is that it will produce regional benefits, but looking at the report, the information given and the increasingly odd messages coming from the Department, it is increasingly clear that the Department is now saying that this is not an issue of providing a high-speed rail line; it is about capacity rather than speed. In an article in The Times recently, the Secretary of State said that he would rather call it High Capacity 2 than High Speed 2. From your Department’s point of view, is this about providing capacity on commuter routes into London or about joining up the country and providing a faster rail link into the North-West and other parts of the country?

Philip Rutnam: The way I see it, the argument starts with capacity. If I can take a step back, the West Coast Main Line is the single most important long-distance route for the country. It serves our biggest cities and carries a large amount of commuter traffic and more than a quarter of our rail freight. It is a very heavily used multi-use line.

The projections I talked about-looking at what will happen to our key rail routes as you go forward into the 2020s-show that the West Coast Main Line is the route that suffers a serious gap between demand and capability first and most acutely. You start the argument with capacity. You then look at a whole range of different things and different ways of alleviating the capacity constraint.

To cut a long, technical story short, what you find is that a new rail line is the most effective way of alleviating the serious capacity issues on the West Coast Main Line. It is an expensive solution, but it is by far the most effective. If you are going to build a new railway line, it makes abundant sense to build it as a high-speed rail line, not as a conventional rail line. The incremental cost is actually very modest and the extra benefits you get from building a high-speed line are large, so it makes eminent sense to build it as a high-speed line.

You then add into the argument: "If we are going to build a rail line, and a new high-speed line, how can we do this?" We are going to commit, as a country, very large resources to this. How can we do that in a way that will really maximise the benefits that this project can bring to the whole country-bring to the national economy and to regional economies? That is where you get into the objective around regeneration, regional growth, and so on.

That is the story: you start with capacity and you end up with a national project in scale that has the potential to transform connectivity as well as capacity and to spur regional growth.

Q128 Guto Bebb: But looking at the figures, is it not the case that the capacity issue is all to do with commuter services into London? Is it not possible to argue, therefore, given your cost-benefit analysis, which has fallen quite dramatically, that the only thing keeping that cost-benefit analysis looking positive is the fact that you are classifying so many of the passengers as business passengers who obviously are not going to be doing much work while they are on the train?

I would argue that the capacity issue is primarily commuter traffic, commuter passengers, and if you classify those passengers as commuters, the cost-benefit analysis would be affected. Is there some argument for saying that the argument for a high-speed rail link is more to do with getting your cost-benefit analysis accurate, rather than the actual benefits that will accrue to other parts of the country?

Philip Rutnam: No, I don’t think it is quite like that. Going to figure 4-I am afraid again I am going to refer to the rail industry here and the experience of the rail industry over many decades-the characteristics of the commuter market are different from the characteristics of the long-distance market. In the long-distance market, once you start to get loading on trains over 70% or 80%, you start to get people who are actually deterred from rail travel. So there is what is known as a loading penalty, because people will either be deterred from travelling at all or they will find another mode.

As you see, the figures for long distance inter-city loading rise to well over 100% by 2033, and would continue rising thereafter-except, actually, what would probably happen, even well before 2033, is that that traffic would start being priced off. People do not want to travel on an inter-city train that is absolutely jam-packed full. They prefer to travel on an inter-city train where there is a bit of room for bags and space. The preferences of passengers on inter-city travel are different from those of-well, probably everybody on a commuter train would also prefer that, but the extent to which they prefer it is different. So there is a capacity issue on long-distance travel. There is also a capacity issue in relation to freight. There would be no more room for freight traffic to grow.

Q129 Chair: What proportion of your passengers on HS2 will be first class? What proportion of seats?

David Prout: The split between business and leisure is 30% business, 70% leisure in the modelling we have done.

Q130 Chair: And what is it on the current one?

David Prout: I don’t have that information. Alison, if you-

Alison Munro: I don’t have that, but I imagine it will be broadly similar.

David Prout: I imagine it is the same. I imagine that is where the assumption comes from.

Q131 Chair: No, I am talking about the West Coast Main Line.

David Prout: Sorry, I don’t know, but I should think the assumption comes from current patterns of usage.

Chair: Okay.

Q132 Guto Bebb: You say the breakdown is 70/30 in terms of leisure. In terms of the benefits coming through, it is actually the other way round. The benefits come primarily from the business travellers you are building into the HS2 calculations. Is that not the case? In figure 6, it is pretty clear that the economic justification comes primarily from the business travellers.

David Prout: Yes. In the model, the value of leisure time is much lower than the value of business time.

Chair: We will come back to that, because it is a key point. Do you want to deal with it now, Ian?

Ian Swales: On the value of business travellers? If somebody else wants to come in on that, they can. I want to come back in on the regional issue.

Q133 Chair: It’s a key point, so I want to ask about it. When we last discussed this, we said to you that the basis on which you assess business travel-a business traveller’s worth, as opposed to a commuter’s worth-is totally out of date. That was one of our recommendations from our previous consideration of this Report. You appear to have gone away and done nothing about it, although I notice-let me see if I can find it-that you published an analysis in 2012 suggesting a downward revision of how you value business travel to 65% to 50% of current values. I also notice that in countries such as France and Germany business travel is valued at three or four times ordinary commuter time, whereas we value it much more. All those facts show that the more you value the business traveller, the more it looks as if your cost-benefit ratio is okay, but if you were to put a real value on business time that reflected more honestly the cost of the time spent on a train, your cost-benefit ratio would immediately look negative, wouldn’t it?

Philip Rutnam: Sorry, I thought that the Comptroller and Auditor General wanted to say something.

Amyas Morse: Yes. We are making reference to paragraph 2.20 on page 28 of the Report. That makes reference to the fact that the Department did some work in 2009 to update the old analysis, which was over 10 years old-I am, of course, using old information-to try to understand better what proportion of business travellers work on the train. As I understand it, the Department discontinued that research because it found it too complicated.

To be quite honest, we were a bit surprised that you have not thought it right to pursue that strand, because that is such a crucial assumption and it is hard to believe the assumption underlying the estimation basis at the moment, which is that business travellers do no work. It seems to me that that must inject optimism bias into the benefit estimate, wouldn’t you say? Whatever it is, it cannot be zero, so as an estimate, it does sound hard to understand.

Philip Rutnam: This is a complicated topic. We need to separate two things: there is the methodology, and then there is populating the methodology with numbers.

You said, Chair, that you thought we had done nothing since we discussed this issue last year. That is not correct; in fact, we have an extensive programme of research under way, which is referred to in paragraph 2.20. One element of that programme will be to review the numbers on the value that is put on business travellers’ time, which, as you know, date from a survey over a decade old. We are seeking to revise that and I expect that we will be able to provide new estimates as part of the sensitivity analysis around the new business case produced in the autumn. So we are updating the numbers the value of time, trying to take account of the most up-to-date information available.

You then go back to the methodology. There is a set of issues around the methodology here; it is quite complicated. We are widely criticised for "failing" to take account of the fact that business travellers work on the train. We do make a simplifying assumption in that, but actually we make a whole range of other simplifying assumptions in order to try to arrive at a value of business travellers’ time. For example, we assume that the value of business travellers’ time is the same everywhere across the country, which is another assumption that could be questioned. We also assume that the value of business travellers’ time saved is the same, whether it is a very small saving of one minute, or a saving of an hour; that is another simplifying assumption that could be questioned. We also do not make any allowance for the fact that, if you have shorter journeys, you have less fatigued business travellers who may not need to stay overnight, for example. There is a whole range of assumptions we make, which are necessarily simplifying.

What I can say is that we are looking at how we can improve our methodology in this area, but our methodology continues to be on a par with best practice in transport planning administrations around the world. You may think therefore that all transport planning administrations are equally at fault, but there is no other methodology out there that is better than the one that we are using.

Q134 Chair: You get a positive cost-benefit ratio because you put a very high value on business travellers’ time-that is the reason. If that were to come down, you would find that this project was not worth pursuing, on just a cost-benefit basis; you may want to do it for other reasons, but just on the cost-benefit analysis, would not be worth pursuing.

You have said to me that there are simplifications in how you assess business time. That is clear and obvious. I think the argument-the argument we had last time-is about why you value business travellers’ time so much more than commuters’. It is the relationship between the value of business travellers’ time and the value of commuters’ time that is wrong, and you have not done work on that; you have not built that in to the costs and benefits. You may be doing research-you can carry on doing research till the cows come home, and get it more and more sophisticated-but you have not used any more contemporary analysis than the one you did on a survey in 1999-2000, and I think that gives you the answer you want.

When you tell me about other countries, and say yours is seen as best, that is not true. I repeat what I said before. Other countries put a lesser value on business time, because they recognise that business people using their iPads and so on, work on trains. You yourself produced analysis-it may not have been completely 100% accurate; it may have had a lot of ifs and buts, but it is better than what you have got now-that suggested that you should revise downwards the worth of business travel to 65% to 50% of current values. If you did that-if you have regard to your research that you have done so far, and if you have regard to international best practice-you would bring that value down, and immediately what you would find is that this is not a value-for-money project based on cost-benefit analysis.

Philip Rutnam: Well, there is a number of things I would mention and point out in response to that. The first is that we are seeking to update the analysis compared to 1999-2001-the period referred to in paragraph 2.20. We are looking at more up-to-date evidence that we can use and take account of in the business case published this autumn, so it is not right to say that we have not done anything. That is one thing we have done. Secondly, we are trying to review and improve the methodology in this whole area, but I observe again, this is a very difficult topic. Of transport administrations around the world, none has found a better approach than ours.

By the way, I do not think it is plausible to say that we will end up with a value of time for people travelling on business that is simply the same as for those who are commuting, because people who are travelling on business are travelling in working time.

Chair: No one is suggesting that.

Philip Rutnam: I am sorry; I thought you were.

Q135 Chair: No one is suggesting that. I have to say to you, I think the best is the enemy of the good. You are basing it on a 1999-2000 bit of research. So far-we always get promises about the future-all your evaluations have not had regard to more up-to-date research. All I would say to you is it is a common-sense observation, Mr Rutnam, which you have got to build in.

When I was travelling on a train in 1999-2000, it probably was quite difficult for me to work. When I am travelling on a train today, it is an absolutely glorious, precious bit of time when I can get on with work. It is a complete change in how we lead our lives. Not to have regard to that simply to create an outcome that justifies a project that you are committed to for totally other reasons, is, we find-unanimously in this Committee, actually-not a good way for you as an accounting officer do business.

Philip Rutnam: If we are in the realm of common-sense observations, may I make two in response? First, it can indeed be a glorious time in which to work, but only if there is the space in which to do so. If the train is absolutely packed-

Q136 Chair: No, even if the train is packed. I have done it in the last two or three weeks, sitting in an ordinary carriage with people standing around me. I can use my iPad.

Philip Rutnam: Evidence suggests that business travellers value an environment in which they do not have-

Q137 Chair: They may value it, but they can work in any environment. That is what I am telling you. I do not think I am exceptional; I think I am just ordinary.

Philip Rutnam: The second observation, which is supported by quite a lot of empirical evidence, including studies of high-speed rail networks on the continent, and including observation of the way the aviation market works, is that business travellers are willing to pay quite a bit in order to save a lot of time. There are not that many business travellers who will travel from Glasgow to London on the train as opposed to the plane.

Q138 Chair: That is not the question; that is not relevant.

Philip Rutnam: It is relevant, because through all this methodological debate, what the economists are trying to capture is what business travellers would be willing to pay to travel and to save time. That is how it works for non-business travellers. It is easier there, because you do not have the problem of someone else-the employer-paying for the journey. The methodological problem with the business travellers is the travel and subsistence people, the HR department, or whoever sets the rules about what travel option you can go for.

Q139 Chair: I’m sorry, I am going to have one more go and then I shall go to Ian. That is not what we are after. If you have £50 billion to play around with and you distort the figures by the way in which you value business travellers’ time, you end up taking a decision to build a project. If you were looking at it in a different way, you would go down the route of what Mr Jackson says and look at other projects that would deliver growth much sooner, or you would do the broadband that Mr Heaton-Harris talked about.

Q140 Ian Swales: That is where I would like to come in. You are talking to 10 weekly business travellers at the other end of the table here, so it is something we know about.

I want to go back to the question of regional policy. Is it true that your Department has a policy of rebalancing economic growth, as stated in the Report on page 7? If so, what does that mean to you?

Philip Rutnam: I am going to ask David to comment on this, but may I, just for the record, reject the charge that we are somehow distorting the figures in the appraisal, which is a serious charge? I think you have received a note from our chief economist, which sets out the approach that he, chairing the joint analytical group, has taken to the methodology.

Chair: I’ll come back to this note.

Q141 Ian Swales: On rebalancing growth, your Department has a job to do that. How do you think this project will rebalance growth? I am thinking about regional growth.

David Prout: The coalition Government has a policy to rebalance the economy and so do we.

Chris Heaton-Harris: What a relief!

Chair: So do we.

Q142 Ian Swales: Are you aware of research from the continent that shows that high-speed rail systems tend to pull more activity to the capital city?

David Prout: There is research that shows two things. It shows that economies as a whole grow as a result of transport infrastructure investment, including high-speed rail investment. There is also good evidence to show that, in particular, intermediate cities between the capital and the end points benefit greatly from high-speed rail.

Q143 Ian Swales: I will come back to that in a moment. The research from the continent shows that the cities on the high-speed rail line lose economic activity to the capital, but they gain it from the regions around them-that is what the research actually shows. So as you are predicting, more and more people will be coming to this city, which itself has a capacity problem. Is that something you want to encourage?

David Prout: Coming into the city?

Q144 Ian Swales: This city has a capacity problem-schools, housing, everything. We are already talking about Crossrail north to south. There is a capacity problem in London. Do you want to encourage more or fewer people to come to London?

David Prout: We don’t think that the high-speed rail project will cause London itself to grow disproportionately compared with the rest of the country.

Mr Bacon: Well, you should get a different economist, then.

Q145 Ian Swales: I think we are sceptical about that. Let me put it this way. Look at the four biggest countries in Europe-the UK, Spain, France and Germany. Just look at the rail map: what strikes you very clearly is that we have a hub and spoke system around London and they don’t; they join up their cities, all around the country, with good rail lines. Why do we not have a policy to do that? That would really rebalance economic growth.

David Prout: There is a debate about what the impact of this kind of infrastructure investment would be, but it is absolutely clear that the cities of the North, to a city, are clamouring for HS2 to go ahead. Our estimates of job generation, which set out in our consultation document, and show a reasonably modest number of jobs created on the back of HS2. The work by Core Cities and by individual cities in the north of Britain shows a much greater increase in jobs on the back of HS2. Core Cities say that in the environs of the high-speed stations, 400,000 jobs will be generated, with up to 1 million jobs supported in the wider area by HS2.

Q146 Ian Swales: One reason why I am sceptical is that I am not sure how well some people based in London understand the region. If we take the East and West Coast Main Lines north of HS2, I can see that some intermediate stations will have high-speed compatible trains. If there was a conurbation the size of Liverpool or Sheffield-in other words, an area of 750,000 people-on one of those lines, would you expect there to be a station there?

David Prout: There will be a station at Meadowhall, and Liverpool will have two services an hour that will link up to HS2.

Q147 Ian Swales: But if there was another area of an equivalent size to Liverpool or Sheffield on the East or West Coast Main Line further north, would you expect it to have a station? Would you expect there to be a station marked on figure 1, if there was an area of 750,000 people sitting on the East or West Coast Main Line?

David Prout: Would we expect high-speed rail to be extended in due course to Newcastle?

Q148 Ian Swales: I am talking about the compatible services that are shown on figure 1. Would you expect them to stop at the major conurbations?

David Prout: Yes.

Q149 Ian Swales: Can I ask you-perhaps this is a question for Ms Munro-how much you know about the Tees valley and Darlington, where there are 750,000 people who use the East Coast Main Line, which passes through that area? It is a hive of industry and has the UK’s second biggest port, but you are saying that you are not going to include it on your network. Why would that be?

David Prout: HS2 services will stop at Darlington.

Q150 Ian Swales: Why is it not shown on this map?

David Prout: It is not on the map, but the modelling we have done shows HS2 services stopping at Darlington.

Q151 Ian Swales: It does not give us much confidence when we have a map prepared by HS2 Ltd that does not show Darlington.

David Prout: Apologies for that.

Q152 Ian Swales: Can you confirm that if you were drawing the map again today, you would put Darlington on it?

David Prout: Yes.

Ian Swales: Right, good.

Mr Bacon: Send us a new map, please.

Chair: There are several bids around the table.

Mr Bacon: Norwich!

Q153 Ian Swales: I am sure there will be others, but that is actually on the East Coast Main Line.

I understand why the northern cities might be clamouring for HS2-to get to London quickly. But they are also clamouring for a lot of other things. When I got on a train in Middlesbrough last week to go to Salford for a PAC hearing, it took half an hour longer on that train, with no changes, to get there than it takes me to get to London. If you look at figure 1 and see where I am talking about-roughly halfway up that orange line to Manchester-that took me half an hour longer. A few months before that, I went to Sellafield, which is directly opposite the Tees valley, and it took four hours. That included changes, but it was directly across that small distance in the north of England. One of the huge problems we have with the credibility of these proposals is that there are many ways of rebalancing our regional economies that do not involve making it easier to bring people to London, which is more and more crowded.

David Prout: HS2 should not be seen in isolation. Last week’s spending review announcement made tens of billions of pounds of funding available for transport infrastructure investment to 2020-21. I think £73 billion is available, of which £16 billion is earmarked for HS2.

Q154 Ian Swales: I understand that. There were some things around the northern hub and electrification, but it did not value a business man’s time travelling between Leeds and Manchester very highly. Those are two huge centres of commerce, where there is a vast amount of traffic with an awful rail line.

Philip Rutnam: May I comment? I should like to offer a little bit of hope. You mentioned the northern hub and there is also the planned electrification of the trans-Pennine route. Both of those will reduce journey times and increase capacity between the North-East and Liverpool/Manchester.

Q155 Ian Swales: It is still very, very slow.

Philip Rutnam: I would mention two other points. You talked about connectivity between regional cities, and of course one effect of this scheme will be greatly to improve connectivity between, for example, South Yorkshire and the West Midlands and between the North-West and the West Midlands. A big, big benefit.

Q156 Ian Swales: Only if you are on the spokes from London.

Philip Rutnam: Could I also mention the released capacity? With HS2 there will be a different service pattern. We won’t need to replicate the services on HS2 on the West Coast Main Line and East Coast Main Line, which should create new options to serve destinations which are off the route at present, such as Sunderland or Middlesbrough.

Q157 Mr Jackson: On the East Coast Main Line in the last 10 years, there has been a 43% increase in passenger numbers. While obviously we have welcomed the reconfiguration of King’s Cross station and some of the work that is envisaged over the next 10 years to relieve the blockages on the line, there is concern that if the capital is going disproportionately into a west coast line, inevitably the East Coast Main Line will suffer. When I asked the Minister a parliamentary question, there did not appear to be any proper scrutiny or analysis of the impact on the East Coast Main Line other than to say, "Well, when the second phase is built, it will be able to reconnect at Leeds." That is 20-odd years’ time, and there will be a 1,500-seat deficit in King’s Cross suburban services by 2031. How can you reassure us that you have done the appropriate work to ascertain the impact on other key infrastructure such as the East Coast Main Line?

Philip Rutnam: There are issues about the East Coast Main Line, you are quite right. They are not as acute as the issues about the West Coast Main Line, and of course phase 2 would help with the East Coast Main Line further. However, in the near term we have two other things in train which will also help on the East Coast Main Line. One is the Thameslink programme: Thameslink services will run on to the East Coast Main Line and will provide a significant increase in capacity for that commuter traffic into London, certainly as far north as Peterborough. Secondly, we are introducing the new intercity express programme, which will replace the existing high-speed trains on the East Coast Main Line-there are options for lengthening intercity express programme trains which don’t exist with, for example, the Pendolinos. So there are more options. There are issues with the East Coast Main Line, but they are not as acute as the West Coast Main Line issues and there are more things in train and more options for things that can be done on the East Coast Main Line.

Q158 Austin Mitchell: I am still not convinced that the reasons you give for saying it will encourage regional development, particularly in the North, which is what I am interested in, are not spurious. Why should we assume that a faster connection, such as half an hour less to get to London, will encourage development in Birmingham, and three quarters of an hour less will encourage development in Manchester or Leeds? Why should we assume that, when for the whole of the last century London, the great wen, has been sucking talent, has been sucking jobs, has been sucking people, has been sucking industries-it has even been sucking my kids-down to London? What is there in the high-speed train that will reverse that? Aren’t we just going to hear a big high-speed sucking sound amplified by HS2?

David Prout: If Birmingham is only 45 minutes from London rather than an hour and 15 minutes, there is less need for industry and offices to move to London. It provides greater accessibility for the people who are living and working in Birmingham to be used to perform functions which otherwise might be performed in London.

Q159 Austin Mitchell: This has not happened in Europe-

David Prout: And the BBC in Salford-the viability of that project will be massively enhanced.

Q160 Chair: The BBC is in Salford because a decision was taken to relocate it in Salford.

David Prout: Yes, but its viability and its ability to flourish will be increased and improved by High Speed 2.

Q161 Ian Swales: What the evidence shows is that companies in London find that they do not need to have branch offices. That is what actually happens: they shut down their Birmingham office, because they can get there and back in a day. That is the kind of thing that goes on in the real world-

Austin Mitchell: And that is what has happened in Europe.

Alison Munro: There is also evidence, though, of how high-speed rail can actually lead to development. You can look at what has happened around the Lyon Part-Dieu station. That has attracted, I think, about 800 enterprises. They have developed around the station and it is thought they have attracted about 40,000 employees to work in that area, so there is evidence. We would certainly accept that you need the right sort of policies to support that. You need to have the connectivity to make sure that people can get to the station and you need to put your stations in the right place. With the right policies in place, you can actually encourage regional growth-

Q162 Chair: I love this thing about having policies in place. The evidence that I looked at on the Paris study shows that overnight stays in the satellite areas went down with high-speed rail, and we got the announcement today that the French have completely annihilated their high-speed-rail programme. According to the papers this morning, the French have slashed it from €245 billion to €30 billion, on the basis that they cannot justify the cost. One, they saw a decline in people staying overnight in the satellite towns, and two, they seem to have seen the light rather sooner than us and realised that it is a waste of money.

Philip Rutnam: The French, of course, have already completed a very large and extensive network. I think they are curbing their plans for further expansion, but their network is many, many times the size of ours. I was just going to add to Alison’s evidence. I would also recommend a visit to Lille, whose resurgence has really been on the back of improved connectivity, and there are towns in Germany where this has been the case. It is often the intermediate towns and cities, as David said, that have flourished most.

Q163 Chair: I have to tell you I am old enough to remember the story about the city of Lille. The reason why the city of Lille has had some resurgence is that they built a station there. It had nothing to do with-they just put a station there. If you want your high-speed rail to work, you are going to have to minimise the stations. This was just the one place. It’s the same as Stratford. Stratford has worked because they put a station there. I just wish they had put it in Barking or maybe even in-

Philip Rutnam: There is still a very fine conventional, classic rail network station in Lille. It is the new station on the new line that has helped to transform it.

Q164 Chair: It was the station. It was the fact that things stopped at Lille and you had to change at Lille. Do you argue with the research on Paris that I have looked at, which says that there are fewer overnight stays in the satellite towns?

Alison Munro: I am not arguing with that conclusion, but I have certainly also seen studies of that line that show that there has been a development in, for example, consultancy businesses in Lyon. So a number of different things are going on here, but Lyon has certainly benefited from the high-speed line.

Q165 Mr Jackson: Why are the MPs in Coventry so opposed to High Speed 2? Is it not the case that they feel that they-their constituents’ businesses and their commuters-are going to be disproportionately affected by the fact that, even if your thesis is correct, the economic activity and regeneration will be in central Birmingham? Wolverhampton, Dudley, Walsall and Coventry will be left behind.

David Prout: The local authority in Coventry is now in favour of HS2, as is the local transport authority, Centro. The lesson that we have learned from looking at high-speed rail around the world is that the key thing is to plan for its arrival properly and to work with the local authorities to ensure that the right kind of development can take place on the back of the transport infrastructure investment. We are lucky because we have 10 years or 13 years before the first station opens, and we are already working with the four local authorities around Old Oak Common; with Solihull, up where the Birmingham interchange station will be; and with Birmingham city council itself, around Curzon Street. We have a new working group with Manchester to plan for the arrival in Manchester and we are talking about the same in Leeds. The key thing is to prepare well, get the transport infrastructure in place locally and increase the connectivity, and that will maximise the benefits that you get from the infrastructure investment.

Q166 Chair: Amyas, do you have a brief question before I bring Meg in?

Amyas Morse: Very quickly, this is on the evidence. We agree that if the summary of the discussion is that there is evidence that both things have been discussed-some redistribution of activity into the metropolitan centre and some stimulus-it is not clear what the balance is. There is definitely redistribution, but we are not clear what the net-net of all that is. I think our work has so far shown that the evidence that is available is not very convincing or particularly substantial in either direction so far. Is that a fair comment on where we are at the moment, and does it mean that, to be convinced either way on what the balance of advantage would be, a lot more evidence is required?

David Prout: We have been doing some evidence gathering over the past year. What that shows is what I have just said, which is that if you plan for it-

Amyas Morse: I am not denying that you have done some. I am just trying to ask whether you really feel that you can place confidence in that yet, or whether you need more substantial evidence to be able to talk about what the preponderant-not just the positive-effects might be.

David Prout: I think you can have confidence. If you plan well, you will benefit from the arrival of a High Speed 2 station.

Chair: I don’t know what evidence you have to demonstrate that.

Q167 Meg Hillier: I want to bring us a bit more local to London on some of the challenges. The Chair talked about the hope in relation to getting the planning permission through. I suggest that the area around Euston will be one of the bigger challenges because of the plans there. Can you start by telling me what the original estimated cost of the work was at Euston?

Philip Rutnam: What date?

Meg Hillier: When High Speed 2 was announced.

Philip Rutnam: In 2012-when we made the decision?

Alison Munro: I would have to check the figure, but I think it was around £1.2 billion. That is the figure in my mind.

Philip Rutnam: In two of our minds.

Q168 Meg Hillier: What is the estimated cost of the Euston proposals now?

Alison Munro: It has increased to about £1.6 billion.

Q169 Meg Hillier: It is about a £400 million increase. Am I right in saying that under the current proposals, there will be fewer benefits locally-so fewer flats, fewer jobs and less workspace at Euston-than there were under the previous proposals?

Alison Munro: Our original proposals involved demolishing the entirety of the existing Euston station and replacing it, and also digging out and lowering the platforms. That, we estimate, would cause a lot of destruction during construction, and also of course disruption to the local community. We also found that it was more expensive than our original estimate. We have, since then, looked at an alternative. The alternative we are now proposing does not demolish the Network Rail site; it leaves it at the same level. Apart from that, it delivers all the transport benefits that the original scheme provided. We are currently doing work to look at what the opportunities are in terms of oversight development and development around the station, and also to ensure that it aligns as closely as possible with Camden’s aspirations, which are set out in its opportunity area framework. We are still doing the work on the benefits, but we are confident that it can provide the majority of the benefits of the original scheme, and it causes less construction disruption.

Q170 Meg Hillier: Just to be clear, although there might be 10 or 20 jobs here or there that you cannot pin down, you are confident that the benefits that were outlined in 2012 will more or less be delivered?

Alison Munro: The majority of them. The transport benefits, yes, and the majority of the other benefits, but we are still doing the work to confirm that.

Q171 Meg Hillier: When you say the majority, do you mean nearer 60%, 70% or 80%?

Alison Munro: The wider benefits in terms of oversight development, development around the station and permeability through the station. It is difficult to put a percentage on that, but we are currently working on that to try to maximise the opportunities.

Q172 Meg Hillier: These jobs are 20 minutes away from some of my constituents-probably less than that if the wind is blowing in the right direction-because of our transport links. It is important to me to know how many jobs. Can you write to me about how many jobs, and not just to me, but to other London Members in that part of London? Obviously, Euston was going to be redeveloped anyway. There was a huge plan to do that. As colleagues who travel through it regularly will know, it is a very tired station. What is happening now is that there will effectively be this parallel development-your bit and the old Euston. But you say you are working with Camden.

Alison Munro: It will be developed as an integrated station, so we are working closely with both Network Rail and Transport for London. The new station will be delivered as a unified whole.

Q173 Meg Hillier: What you are proposing now seems like a simpler scheme, but it is going to cost £400 million more. Why is that? Who made the original estimate? Atkins?

Alison Munro: Our original estimate proved to understate particularly the effects of keeping the station open during construction.

Q174 Meg Hillier: Who made that estimate? Was it Atkins again?

Alison Munro: It was the consultants who were advising us. At the time, I think it was Arup that was advising us on the costs of Euston station. As we were able to do further work, we are able to understand better the implications of trying to keep an operating station during construction. That was one of the main reasons why the cost is now thought to be higher than originally.

Q175 Meg Hillier: That is a big jump. That is a lot of money that could do a lot of things in anyone’s constituency. What is the penalty for Arup or any consultant that makes such a big misjudgment? How to keep a station running while you are doing major work is quite an obvious thing to think about. They are an experienced engineering company, so I would have expected them to factor that in. You are saying they didn’t and the cost has gone up, even though the scheme is potentially simpler, so I am a bit lost as to what has gone wrong. Who took their eye off the ball at that point?

Alison Munro: It is similar to the point that we were making earlier about the cost estimate. We have been able to do much more work with it. We have done surveys and have looked in much more detail at how we would actually construct the station, which we were not able to do originally. As we have done that further work, we have been able to understand better the implications, which has revealed that it will be more difficult to keep the station open during construction. There are various other things that are also more complicated than we originally envisaged, which has led to the costs being higher than we envisaged.

Q176 Meg Hillier: I am still puzzled as to why some of that was not picked up before. There are other issues, because the underground is there as well and we have talked about the capacity issues. Transport for London’s budget is going to be under increasing pressure, Mr Rutnam, and yet all these commuters, who will definitely be coming in to London on High Speed 2, will be on an overcrowded tube system that, despite investment over the years, will still be overcrowded because London is growing. All this money is being spent on HS2; why has it been judged better to bring people into London to fill our already overcrowded tube system, rather than giving more money to Transport for London to invest better in our major national city’s infrastructure to cope with the increasing number of people living and working here?

Philip Rutnam: I will just reiterate some of the points we discussed earlier. First, it is important to understand that there is a very important interchange for London at Old Oak Common, where a large new station is to be constructed to serve Crossrail, HS2 and the Great Western Main Line.

Q177 Meg Hillier: So why are you spending so much money on Euston?

Philip Rutnam: Old Oak Common will provide a very good interchange for many people travelling into central London. Some will either start or end their journey at Euston. We estimate that the incremental impact on passenger volumes at Euston is quite small-2% or 3%-compared with the flows that would already be travelling through Euston.

Transport for London’s budget, as you mentioned, is under more pressure now than it was. However, that is principally in relation to the operating or resource budget. The capital budget for Transport for London has been protected in real terms. I am sure there will continue to be discussion around how passenger volumes at Euston can be absorbed.

Q178 Meg Hillier: This is not the place to have a to-do about Transport for London’s budget. I should say that I am a former member of the Transport for London board, but that was some time ago.

To go back to Old Oak Common, a whole new terminus is being built there on a brownfield site. My hunch is that it is easier to do that than redeveloping Euston, so why is Old Oak Common not being "bigged up" more? What would be the challenges of people finishing their journeys at Old Oak Common to come into central London, rather than at Euston? Can you talk us through the geography of that and what the challenges would be?

Alison Munro: We looked very carefully at where people want to go ultimately when they arrive in London, or when they are leaving London. That showed that the majority of people want to access central London. For most of them, it is more convenient to come into Euston and then change to wherever they are going, particularly if they are going in a north-south direction. Old Oak Common is very good at providing the east-west journeys. So the combination of those gives a very good offering to the passengers, wherever they are going in London, but if you only provided one or the other, you would not be providing such a good proposition for the passenger.

Q179 Meg Hillier: I am fascinated that there is only a 2% or 3% increase in passengers. It is a lot of money to pay for a very small percentage increase in passengers going through Euston.

Philip Rutnam: To be clear, the figures that we have quoted for expenditure at Euston are for the station for the HS2 services; they are not for changing the underground, although I think there would be some improvements, such as a link to Euston Square tube, which would be integrated into the underground complex. So the £1.6 billion is essentially for building the station that would serve HS2 services to Birmingham and the North.

Q180 Meg Hillier: Can I just go back to this issue about the cost increase? Arup provided the price. You seem to suggest that it did the best job it could at the time, but is there no penalty for consultants that so badly underestimate, because there is always an underestimation and there is never an overestimation in projects such as this? We see it repeatedly on this Committee, and this is public sector procurement being outsourced in effect-well, the advice on procurements is being outsourced to a private company, which seems to get off scot-free. If you were here, Mr Rutnam, having made that mistake yourself, we would be giving you a pretty rough time about making that misjudgement, but Arup is sitting behind you-well, Arup may not be sitting behind you but metaphorically it is behind you-and it gets away with making a miscalculation of that magnitude.

Alison Munro: Clearly, if a consultant has actually made a mistake, then we would expect it to face a penalty. In this case, it reflected the level of design that we were at when we made the 2012 estimates. So I think that in this case we did not consider a penalty was appropriate, but in other examples, if it was clearly the fault of the consultant, then we would expect there to be a penalty.

Philip Rutnam: None the less, like you I am surprised at the scale of the cost inflation on this item, and I would be happy to provide the Committee with a note just explaining why-on our best analysis-that increase occurred.

Meg Hillier: I would be very interested in seeing that note. Thank you.

Q181 Chris Heaton-Harris: On stations again, your Department’s publication of 28 January this year, "Developing a new high speed rail network", seemed to suggest something, and hopefully you can clarify this point. I only have one railway station in my constituency, so my constituents go to it; it is called Long Buckby. Very few people ever go there; it is a long line down into London. However, the publication seemed to suggest that the service between London and Northampton will have fewer trains post-HS2, and other stations that may have a reduced service on classic rail to London post-HS2 include Coventry-as we have discussed-as well as Birmingham International and Birmingham New Street, Stoke-on-Trent, Wilmslow, Stockport, Leicester, East Midlands Parkway, Nottingham, Chesterfield, Sheffield, Doncaster and Wakefield. Through services would no longer be able to run from London to Dundee, Aberdeen and Inverness. So, 17 stations are likely to have longer-time journeys to London on classic rail post-HS2, due to the extra stops and route changes. Is that correct?

Philip Rutnam: My understanding is that HS2 could actually bring very significant indirect benefits to Northampton. I don’t know about Long Buckby; I know it’s the stop beyond Northampton, but I think there could potentially be indirect benefits there, too. If you haven’t seen it, there is a very helpful briefing note by Network Rail specifically on the impact that HS2 could have on Northampton, which talks about the fact that at peak times trains are already overcrowded. There are typically 125 passengers for every seat in the peak hour, but with HS2 the capacity that could be freed up on the West Coast Main Line could allow up to six trains an hour to Euston instead of the four that there are at the moment, and up to a 10-minute reduction in average journey times. We would be very happy to send you the briefing note.

Q182 Mr Bacon: I’m sorry, did you say 125 passengers for every seat?

Philip Rutnam: If I did, then it was an inadvertent slip-my apologies. It is 125 passengers for every 100 seats. There are, on average, four trains an hour into Euston that serve Northampton, but already there are 125 passengers for every 100 seats-

Q183 Mr Bacon: That you get things wrong by a factor of 100 does not surprise us.

Philip Rutnam: My apologies.

Q184 Chris Heaton-Harris: But I thought the suggestion in this publication, "Developing a new high speed rail network"-I named all those stations. Will they have a worse rail service post-HS2, or will it be better?

Philip Rutnam: A lot of work needs to be done on how the capacity that will be released by building HS2 will be used.

Q185 Chris Heaton-Harris: But in the "Developing a new high speed rail network" document from your Department, which was published on 28 January, does it not rather suggest that all those places I named will have a worse service post-HS2 instead of a better one?

David Prout: For the purpose of estimating the costs and benefits of HS2, we have to put in place models that show what the services could be like on the classic network as well as on the HS2 network. The model that we have, which is only a model and is there specifically for the purpose of estimating costs and benefits, shows a reduction in the service to Northampton. However, as the Permanent Secretary says, Network Rail has also looked at the potential for released capacity to Northampton and shown that in the real world, rather than the modelling world, when you start looking at services to Northampton, there would be a very good case for having a better service.

Q186 Chris Heaton-Harris: Can I clarify that the model that we talked about-not the Network Rail study-also suggested that the stations I listed would have less service to London on classic rail post-HS2?

David Prout: The model suggests that quite a lot of places will have worse services and quite a lot of places will have better services.

Q187 Chair: Can I have some quick answers, because we are getting on? You claimed 100,000 new jobs-that is in your documents somewhere.

Philip Rutnam: I think that that was in the appraisal of sustainability in 2011.

Q188 Chair: Okay. Is that a net figure? Have you had regard to jobs lost because of relocations?

David Prout: Yes.

Alison Munro: It is net around the stations. It looks at the additional jobs that High Speed 2 would encourage around the stations. As the NAO recognises, it is very difficult to identify whether those jobs might have gone somewhere else otherwise. It does not attempt to do that. It is a very difficult thing to calculate.

Q189 Chair: Have you costed the disruption to business due to the years and years of works around Euston, for example?

Alison Munro: We have made certain assumptions-for example, in terms of disruption to the railway-and we have made assumptions about how much we would have to compensate people, but we have not made any specific calculations in terms of any other disruption. We are not proposing to.

Q190 Chair: Will you? There is a cost of disruption, which would be a helpful figure if someone is asking fairly, "Is this a good thing to do?" Are you prepared to do that?

Alison Munro: We would have to reflect another thing in that-we have done further work on this recently. We have developed a code of construction practice that sets out how we would seek to minimise effects during construction. It would need to reflect the development of that. Our aim would be to minimise the effects of disruption as far as possible.

Q191 Chair: Let me give a specific example. You are going to lose some platforms at Euston, aren’t you? There are currently 16-how many are we going to lose during the construction?

Alison Munro: I think that we will have 13. There is an allowance in the numbers for compensation during the construction period.

Q192 Chair: You are losing three, is that right? We thought it was four.

Alison Munro: I would have to check how many we will keep going during construction. Ultimately, we will have 13 platforms on the Network Rail side.

Chair: It’s a busy station. If there is going to be some disruption, there will be a cost to business at this very high level at which you value business time. You are reducing the number of platforms for a considerable number of years.

Q193 Mr Bacon: You could always alter the value of business time for different parts of the equation, so that disruption had a low value of business time. Do you see what I mean? You could make the numbers look better.

Alison Munro: We have used the standard methodology.

Q194 Chair: But you have not actually valued disruption.

Alison Munro: We have made an allowance for the disruption to other train services.

Q195 Chair: You haven’t added in the cost to business and commuters.

Philip Rutnam: We will have valued the disruption to the train operating companies, which will reflect the fact that they will lose revenue. That will certainly capture some, if not all, the impact on passengers.

Chair: Well, hardly.

Q196 Mr Bacon: Do you think you have the right skills? It was plain from the intercity west coast franchise competition debacle that there was a skill problem in the Department. To what extent has that now been corrected?

Philip Rutnam: Within the Department, or within HS2 Ltd?

Q197 Mr Bacon: With both-the overall public sector capacity. HS2 Ltd is owned by the Government, isn’t it?

Philip Rutnam: Of course, yes.

Q198 Mr Bacon: So for my purposes it is taxpayer-funded. I am really saying that, other than the consultants you buy in and for whom one expects you are paying an arm and a leg-one hopes that they are experts, although they seem capable of getting things wrong-as far as the people directly employed by the taxpayer are concerned, do you now have the right skills?

Philip Rutnam: My view is that we have the right skills within HS2 Ltd for this phase of the project. As the project moves forward-

Q199 Mr Bacon: For phase 1, you mean.

Philip Rutnam: I mean for the phase of the project that we are in, in terms of planning and preparation.

Q200 Mr Bacon: What do you call that phase?

David Prout: The design or the set-up phase.

Q201 Mr Bacon: The pre-phase 1 phase.

Philip Rutnam: As we move towards-

Q202 Mr Bacon: Mr Rutnam, I am not trying to be difficult, but I just want to understand. Phase 1, to my simple way of thinking, is the first phase, but you are talking about pre-phase 1, aren’t you?

Philip Rutnam: Yes, before we get into construction. When we get beyond the hybrid Bill and move towards thinking about how we are actually going to procure this thing, assuming that Parliament gives us the powers, there will certainly be significant additional skills needed in HS2 Ltd. We will be moving towards the delivery phase, which requires a different, expanded skill set compared with the design and pre-set-up phase that we are in now.

Q203 Chair: Figure 12 on resourcing talks about delays in staffing up posts. What is your vacancy level in HS2 at the moment?

Alison Munro: I do not have that number to hand, but we have-

Chair: I heard that it was 40%.

Alison Munro: I don’t think that is right.

Q204 Mr Bacon: How many people does HS2 Ltd employ at the moment?

Alison Munro: In the company as a whole, we have about 439. Some of those are people supplied by our development partners-I think 115 are supplied by our development partner, CH2M Hill-and we have a number of secondees from Network Rail and the Department for Transport. The remainder are either HS2 Ltd employees, or people employed on an interim or agency basis. Some of those are on that basis for good reason, in that we do not need them long term.

Q205 Chair: But you don’t know how many you should have at the moment? The Report says: "Delays in staffing up posts identified as urgent in the corporate plan may undermine the ability to meet priorities."

Alison Munro: I don’t think that that is talking about our current position.

Mr Bacon: Isn’t it?

Geraldine Barker: I think that figure 12 refers to the Department rather than to HS2 Ltd.

Philip Rutnam: Shall I come on to the Department? As I say, I think that HS2 Ltd has the right skills for the tasks that it has at the moment. We will need to develop the skills with Alison and her team as the task develops in the future. In the central Department, I, with David, have greatly expanded the resourcing devoted to HS2. We increased to a target complement of 90 or 100.

David Prout: Our target is 100, and we will have 80 by the end of July.

Q206 Chair: What have you got at the moment?

David Prout: Five new people started this morning, so I think we may now have 70.

Q207 Ian Swales: Have you considered locating them in a regional office?

David Prout: We certainly are thinking about the location of HS2 Ltd in later phases of the scheme.

Philip Rutnam: In relation to the central Departments, even within the very tight constraints on our resources, I have greatly increased the resourcing. We have also brought David in as senior responsible owner for the programme, and I have created three director posts underneath David in order to oversee the programme.

I would say that we continue to face a challenge in terms of making sure that we have the right mix of skills in the central Department-not just policy skills and expertise at legislation, but also the commercial expertise needed to oversee the programme. The good news is that we clearly recognise that and are active in addressing it, but I will not deny that it is a challenge.

Q208 Chair: In the same little sentence I am looking at it says: "There are key risks concerning legal resources, economists and major project expertise."

Philip Rutnam: It is particularly the major project expertise.

Q209 Chair: Can I just ask about the 9% cut you agreed to take in your central resources in 2015-16: will that impact on this?

Philip Rutnam: That is in relation to our total resource DEL budget, which includes all the current expenditure.

Chair: I understand that. Will it impact here?

Philip Rutnam: I have to say that the figure that matters in terms of figure 12, and indeed other things we have to do such as the Thameslink programme, is the administration costs limit. I am not expecting a comparable change to our administration costs limit.

Q210 Chair: So it will stay at 90?

Philip Rutnam: We are in the process of finalising it. You will be aware of the very significant additional investment in transport that the Chancellor announced last week. We have been very clear that in order to deliver that in an effective and efficient way, we need the resources that correspond to it.

Q211 Chris Heaton-Harris: I am just wondering what your consultancy costs to date have been.

Philip Rutnam: On this programme?

Chris Heaton-Harris: On this programme-on HS2.

Alison Munro: It depends on what sort of consultancy you look at. In terms of modelling, we have spent-

Q212 Chris Heaton-Harris: I have a figure of £233.5 million so far.

Alison Munro: That is our total expenditure. That is not all consultancy. For example, since we have been doing more advanced work on phase 1, which is where most of the consultancy spend has been, we have spent about £150 million on our professional services consultants, who are doing the design and environmental assessment for phase 1. In addition to that, we have our development partner. As I said, we have spent about £5.6 million to date on modelling, including more advanced assurance that we are now putting in place for modelling.

Q213 Chris Heaton-Harris: Obviously, this is a very early report into what you are doing, but just so we can keep a handle on consultancy costs, can you give us a note on the breakdown of what you have just said? Also, I am assuming, especially for phase 1, that you have a prediction of where consultancy goes in costs and roughly what time. Can we have a note on that? It is not to hold you against-well, actually, it probably is-but it is just to keep track of how much money is being spent on consultancy. This Government-like future Governments, I assume- are trying to nail down consultancy as hard as possible. I know you need to bring in skills, but equally, you are at arm’s length from the Government, and therefore, I just want to check that normal rules apply to arm’s-length bodies as well.

Alison Munro: Yes. I can assure you that we are applying all the normal controls.

Q214 Austin Mitchell: I am afraid that you have not dispelled my impression that the prospects of development you are holding out for the North from High Speed 2 are nothing but a con to make us poor northern peasants believe we shall get some crumbs off yet another project that will primarily benefit London.

I will put it this way: what is in it for Grimsby? Here we are, the Queen of the North, but we have no direct service to London because there are no slots available on the East Coast Line. We do not even have a connection to Doncaster now, because a spoil heap has spilled over the track and buckled it. The heavy goods traffic from Immingham, the country’s major heavy goods port, is breaking down the heavy goods transit, so a lot of it is having to go by rail. There seems to be no prospect for Grimsby now. All those problems are happening now, and we are asked to hold out for the prospect of a growing development from Leeds in 2034, well beyond the 15 years for which I expect to carry on representing Grimsby and fighting for development for that benighted town. What is in it for Grimsby?

Philip Rutnam: I cannot make any promises for Grimsby. What I can say is that the fact that there will be services on HS2 that no longer need to be on the East Coast Main Line and do not need to be replicated there means that capacity will be freed up, which should mean that it will be possible to start better serving destinations that presently are not served by the East Coast Main Line. We talked about Middlesbrough earlier, I mentioned Sunderland and you could mention Lincoln-

Q215 Austin Mitchell: Why can’t that be done now?

Philip Rutnam: Because the East Coast Main Line is essentially full, or very close to full, in terms of train paths. There is not the spare capacity to do that. But if we move services-some services from Leeds, for example-off the East Coast Main Line on to HS2, train operators will be able to start thinking about how they can serve markets like Lincoln or Hull, and possibly Grimsby, which are not that well served at the moment.

Q216 Jackie Doyle-Price: This is relevant to Austin’s point. If you look at the map, the eastern region here is really the powerhouse of the British economy. That is the biggest net contributor. One reason why you have a capacity problem is the amount of freight that you want to transport by rail. All our ports are along that eastern coast. This is not your fault-this is very much a political decision, rather than one designed to deliver the outcome, which is getting the best out of our capacity-but really, aren’t we missing a trick by not putting the investment where the economic activity is?

Philip Rutnam: We, or my predecessors with the experts at the time, did look at whether the East Coast Main Line or the West Coast Main Line should be the higher priority. The evidence pointed to the West Coast Main Line. Actually, a huge amount of freight goes on the West Coast Main Line-about a quarter of all freight-and a lot of that starts in Felixstowe or Immingham.

Q217 Jackie Doyle-Price: And some of it was starting in London gateway.

Philip Rutnam: Some of it does indeed start at Tilbury or London gateway. Building this route, which, bear in mind, will be-the other thing we did not bring out earlier-effectively a segregated route, dedicated to high-speed services, which is far more efficient in a railway operational sense than having a mixed-use railway, where you have slow freight trains having to be accommodated alongside inter-city expresses. So there will be significant gains in terms of freight capacity-

Q218 Jackie Doyle-Price: But only on the west coast.

Philip Rutnam: No, the gains will spill over on to the east coast, as well.

Q219 Chair: How much have you spent to date on all this?

Philip Rutnam: We are spending £370 million this year. I am afraid I do not have a figure-

Alison Munro: To date, High Speed Two Ltd has spent £234 million, until the end of the last financial year.

Q220 Chair: And that is HS2. It does not cut into your departmental cost, does it?

David Prout: Departmental costs are lower than HS2 by quite a large factor. We have a capital budget for property purchase and the admin budget was quite small.

Chair: Okay; thank you. This is the first. We are coming back to this, Mr Rutnam, and it will be as rigorous as it has been this afternoon. But thank you for answering our questions. We will see you again, probably in a year’s time on this one. We will see you before on other ones.

Prepared 2nd July 2013