UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1938-i

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HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

PUBLIC ACCOUNTS COMMITTEE

SALE OF HIGH SPEED 1

WEDNESDAY 18 APRIL 2012

STEWART WALLIS

PHILIP RUTNAM, STEVE GOODING and MIKE FUHR

Evidence heard in Public

Questions 1 - 135

Oral Evidence

Taken before the Public Accounts Committee

on Wednesday 18 April 2012

Members present:

Margaret Hodge (Chair)

Mr Richard Bacon

Jackie Doyle-Price

Matthew Hancock

Chris Heaton-Harris

Meg Hillier

Mr Stewart Jackson

Austin Mitchell

Nick Smith

James Wharton

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

REPORT BY THE COMPTROLLER AND AUDITOR GENERAL

Department for Transport: The completion and sale of High Speed (HC 1834)

Examination of Witness

Witness: Stewart Wallis, Executive Director, New Economics Foundation, gave evidence.

Chair: Welcome, Mr Wallis.

Stewart Wallis: Thank you.

Q1 Chair: May I also welcome the delegation from the Lebanese Parliament who are sitting in today? I hope you learn something from our proceedings.

Mr Wallis, you are probably aware that this first session is to support the way in which we then interrogate accounting officers around the issue of HS1. The other thing to say is that I have read quite a lot of the stuff you have written around HS2. What we are interested in getting out of today is a real understanding of the channel tunnel rail link, so that it can then be used by the Department to inform the approach to HS2. That is the context. It is open to you as to where you think the key issues are arising out of the experience of HS1, which you think ought to inform the evaluation of whether to go forward with HS2 and, if to go forward, how.

Stewart Wallis: Thank you, Chair. I will certainly orientate my remarks to the lessons from High Speed 1. To say a little in a quick opening about our experience: I am the executive director of the New Economics Foundation, which is one of the larger UK think-tanks. We have a particular focus on a number of areas, such as measuring the right things, on sustainability, inequality, jobs and regeneration. Those types of areas are where we focus.

We have been doing independently funded research-and it is independently funded-on High Speed 2. That follows a range of bits of work we have been doing on the social, environmental and economic costs and benefits of a range of other projects and programmes-some in infrastructure, some in other areas such as alternatives to prison for women.

The thing I would like to stress at the beginning is that we genuinely-and I mean genuinely-do not have a position on whether HS2 is a good thing or not. Whenever one is critical in any way, there is a danger that you are put in the "no" camp. We are not. Our concern is value for money and the right appraisal of big projects that take a large sum of taxpayers’ money. That is the territory we come from. In a nutshell, there is a real danger if we do not learn the lessons from High Speed 1 that this Committee, or a successor to this Committee, in 15 to 20 years’ time, will be having some of the same conversations about High Speed 2. That is what we are so keen not to see happen again.

There are three key areas that are major lessons from High Speed 1. One is around passenger demand. The second is around how one values time, and particularly the time savings of business travellers. The third is around the wider economic benefits-the very-difficult-to-quantify benefits that range from regeneration to agglomeration and the technical term. It is really those three areas that I should like to concentrate my remarks on, although there are three other generic areas that might be worth commenting on to do with the costs, the sensitivity and the evaluation-or lack of evaluation-on High Speed 1.

Q2 Chair: I do not want to interrupt you because this is very helpful, but we are going to have a vote, probably in about 20 minutes, which gives you your time frame. We will want to ask you questions, so if you are concise-

Stewart Wallis: Would you like me to continue on those areas?

Q3 Chair: Very briefly cover the three and the three others, but do it very quickly.

Stewart Wallis: I will do it quickly and then we can get into questions.

The first is passenger demand. As this Committee will be aware, the initial passenger demand on High Speed 1 was overestimated by about 30%. One of the major factors that happened on High Speed 1 was that the demand for near tourism and near travel to near Europe-Paris and beyond-did not grow in the way that was predicted. That has quite major consequences on the financing model and others on High Speed 1. With High Speed 2, there is an equal issue around demand but it is a different issue. The main competitiveness of High Speed 2 will be from other rail and, as in High Speed 1, the major factor that will influence demand is the estimates of GDP growth.

As the Department themselves say in their April update, they are still using the Office for Budget Responsibility GDP forecasts of a year ago. When one revises them down, that will affect the project first of all. But the other thing that will have an effect on High Speed 2, and this is commented on in the Booz and Co commentary on High Speed 2, is what the Government does about other franchises and what other rail companies do about fair structures.

One of the other factors that happened in High Speed 1 was a greater than expected competitive reaction from ferry companies and others. So the demand factor is a very complex model, but fundamentally it comes down to what you think is going to happen to GDP and what you think will happen and be the competitive reaction from other forms of transport.

We think that there is a real danger at the minute that it is over-optimistic. You are relying from here to basically 2060 on GDP figures, year on year, of over 2%. Now we all know that has not been our historical experience. If you don’t get that then your benefit-cost ratios are going to drop to very unacceptable levels. The thing just to stress on that to the Committee is that the benefit-cost ratios already on High Speed 2 have dropped for the Birmingham connection-the first bit of it-down to 1.2 without the wider economic benefits and 1.5 with. The Y-the extra bit up to Leeds and Manchester-is not much higher. So already you are looking at the latest assessment from the Department for Transport with very low benefit-cost ratios. You put in those uncertainties around demand and GDP and you could easily be seeing a real problem. That is the first problem.

The second problem, which applied to HS1 as well, is the way the Department-this is widespread practice so it does not get picked up in the NAO report-values time and time saving. Basically, it works on the basis that you look particularly at business travellers and you do not count the time spent on a train as productive. So any time saved, because you have a faster journey, is then valued in at a particular figure. At the minute-the other factor here on High Speed 2-it is valued in at an average of £70,000 per person, which might apply to some business travellers, but is way above any wage rates of a large proportion of the travelling public and business people.

The real problem is whether it is the right analysis. We are going to do much stronger testing on High Speed 2 and go out to a statistically effective sample of business people to actually look at what they do value. Anecdotally, they say that they value reliability, the space in which to work and connectivity. They very much value-if one has the right working conditions and trains are going to arrive on time-the ability to work on the train. To count it as non-productive and to count the minutes saved in a linear way at £70,000 per business person is, we think, a serious overestimation of the real time savings.

The third major factor is the one that has bedevilled High Speed 1 as well, which is what value you put on wider economic benefits. To cut a long story short, various studies of high-speed rail in other countries show a very mixed picture around those wider benefits. They are difficult to quantify and we have sympathy with that, but when you look at what has happened in France, for example, Lille is quoted as benefiting from high-speed rail lines, but Paris has benefited even more, so the imbalance has not changed.

If you look at Spain, Madrid has benefited and there has been severe under-utilisation of the line. If you look at the benefits that are calculated for Manchester and Leeds, they are growing fast, anyway. Would they grow fast without High Speed 2? One needs to be careful about the whole way in which one looks at wider benefits. Even the job creation that is estimated on High Speed 2 is weighted to London-70% of the jobs that are estimated to be created, directly working on the railway, are in London, not in the north.

Q4 Nick Smith: Jobs directly related to the railway?

Stewart Wallis: Yes. Not just construction jobs, but jobs created as a result of building a new railway line. The point I am making is that it is very difficult-going by the evidence from other countries-to quantify the wider benefits. You really have to do it in the context of an industrial and a regional strategy. Some people say that Cardiff will suffer if we build High Speed 2. You need to ask whether you are creating net new benefits and taking from other areas. Are you rebalancing and what would happen, anyway? Those are the sorts of factors that one has to look at in regeneration benefits. Those are the three big things.

Q5 Meg Hillier: You talked about the modelling for growth, for use and for income. We have seen this before. Visitor numbers to the Dome magically increased every time the budget for the Dome went up. It is not uncommon, so I do not think Government are very good at it. Are there good examples in the private sector of modelling? Clearly, private sector companies are bidding for this type of project. They have done their modelling to work out whether it is worth their while. Or is there a good international model?

Stewart Wallis: On demand management, Disneyland got it dramatically wrong, so the private sector is not necessarily immune to this. It is incredibly difficult, but the critical thing is not to assume the best. There is an optimism bias that the Department has built into its figures, which is a good thing to do, but overall, relying on a GDP of 2% right out into the future strikes us as something that would be lovely, but it is probably not totally realistic. This is another point that I wanted to make along with the other three points. Sensitivity analyses have done one thing and another. Several things tend to happen at once. The way in which sensitivity analysis ought to be done on transport and other projects is to say what combination of different factors has to happen for this to be non-viable? I think that when you look back at the different benefit-cost ratios over the years, you will see, based on the current figures on High Speed 2, and arguably on High Speed 1 as well, that these are quite marginal projects. There may be other very good reasons to do it that do not come up in economic analysis, but I do not think that we should pretend that we have a way of assessing things scientifically when we do not and when the margins of uncertainty and risk are quite high.

Q6 Nick Smith: Mr Wallis, can you tell us a little more about what you think has happened to places such as Lille, which I understand was a former coal mining area? When I go past it on Eurostar it seems to have changed dramatically. I had understood that it had done quite well, but I do not know. Secondly, related to that, what do you think is happening to Kings Cross, which I have been watching over a long period of time and it now, at last, seems to be taking off as an old railway line site, although I know that it has a few years yet before it is finished?

Stewart Wallis: I do not think that I can comment in detail. All I can tell you is that the evidence from studies internationally is very mixed. Lille seems to be quoted as one of the examples that really has benefited-there is good evidence that it has. One of the things that is said, particularly about High Speed 2, is about rebalancing the economy. There is a real danger shown in other evidence that, yes, some areas might benefit and some might lose, but London might benefit even more than others. In the case of Lille, it has grown as a result of high speed rail, as far as one can tell from the evidence, but Paris has grown even more. That may still be a good result, but one has to be aware that it is not rebalancing the economy and that it may or may not achieve anything on the north-south divide.

Q7 Jackie Doyle-Price: It is not rebalancing, but it is still growing the economy.

Nick Smith: In a very poor area.

Stewart Wallis: I agree. The point I am making is that you have got to look at each case differently. Germany is different again. The evidence on Germany is that it has not had as big an effect. The evidence on Spain, ditto. The evidence on Lille is that there has been an effect. It is not that there are not benefits: there are. The issue is on where those benefits will arise. Will Manchester and Leeds do well in spite of it? Who might lose out? You have to be able to answer the thing in the round. That is in the context of each country’s geography, policy and so on. That is the main point. I do not think that one can-

Chair: I am going to move on quickly.

Q8 Jackie Doyle-Price: If you have economic growth when the country benefits-it is not about gainers and losers, although I accept that there will be a disproportionate benefit in London, but that will always be the case, because whenever you have growth London will grow faster than anywhere else-and if we can demonstrate that there will be a significant increase in economies such as Sheffield and Leeds, that growth means much more to them than the added growth in London. We need to look at in terms of a holistic vision as opposed to a bottom line.

Stewart Wallis: I agree totally. I was just making the point that one should not over-claim about rebalancing. The issue is that it is very difficult. At the minute, if you look at High Speed 1, you started off with the extra benefits of regeneration being about 16% of the total. Now, as the NAO report has pointed out, you need them to be more than 100% of the other benefits to make the thing work. The point I am making is that it can bring major benefits and we need to understand those better. That is why I say genuinely that we are not anti-High Speed 2, because even if one takes into account those other things of time and demand forecasts, which are likely to be negative against the case, you can really look at the regeneration benefits. The only way, however, to tell whether we are a Spain or a Germany, where there have not been massive benefits, or a France, where there may have been, is understanding the particular context of the country. I do not think that we have an argument that really sets that out yet.

Q9 Austin Mitchell: I think that a lot of the benefit for High Speed 1 must have come from the great chunk of land that they got round King’s Cross, which will be profitable to develop, but there is not any such massive donation that can be given to High Speed 2, is there? What proportion of the regenerative benefits came from the King’s Cross development?

Stewart Wallis: That is absolutely right, though they are not well quantified yet. But on High Speed 2, it would depend, among other things, on whether, for example, you have new stations within cities or outside. There are a number of factors like that that still need to be determined. Part of the difficulty is that for the "Y" part of the High Speed 2 line-in other words, the bit beyond Birmingham-the route is not fully clear yet. There are still some quite major details-do you have city centre stations, which might have that sort of effect, or do you have stations outside towns-that have got to be quantified, as has the issue of what the environmental costs are. The Department has done environmental costs on the first bit of the line, and it is good that it has factored them in, but it has not done that for the second part of the line. Given how those benefit-cost ratios are quite low already, we don’t know-

Q10 Chair: Having lived with King’s Cross for about 20 years, as Nick has done, King’s Cross has always got economic regeneration benefits, and it would have happened had you or had you not had the Channel tunnel rail link there. The real question I have for you is, how do you do a model? The thing that rather shocked me is that we invested in this in-I can’t remember when the decision was-’93 was the original decision?

Stewart Wallis: Yes.

Q11 Chair: Nobody has ever done an evaluation. It is absolutely shocking. Is it because it is too difficult to do?

Stewart Wallis: No. I do not think that it is too difficult to do, but I think that another key lesson-one of my second three-

Q12 Chair: How do you pull out that it is the railway?

Stewart Wallis: You need to plan an evaluation at the beginning, whereas on High Speed 1, we were in danger of not ever getting the answers to that. It is difficult, yes, but we really have to plan it now. If we are going ahead with it, we should plan an evaluation at this stage, not think about it-

Q13 Chair: Given what I have just said about King’s Cross, which is that regeneration and economic activity would have happened anyway, can you, in an economic evaluation, pull out the impact of the rail, or is that being over-optimistic?

Stewart Wallis: I cannot answer you on King’s Cross. It should be, but you could only do it if you have-this is a difficulty that we face, and this is a much wider question-a clear industrial strategy and regional plan, so you can then say what part is transport playing in that. If one is just looking at transport on its own, it is very difficult to tell what has happened because of transport and what would have happened anyway. That is the case of Leeds and Manchester. We might see very good growth figures in the future, but would those have happened anyway? That is the most difficult question to answer.

Q14 Matthew Hancock: This hearing is about High Speed 1 and learning the lessons from HS1. It is very important that we do not end up just pontificating about High Speed 2. I am very grateful that you have set out the benefits that you think have come from High Speed 1. In the report, the cost-benefit is about 1.8, when you take everything into account.

I wanted to question you about the assumption of 2% growth. You said that that has not happened, but I wonder over what time frame in the past we are taking that, because that is inconsistent.

Stewart Wallis: That is particularly on High Speed 2-

Amyas Morse: It is 1.8 in our report, Matt.

Q15 Matthew Hancock: Yes, but you said that that is not what has happened. I wonder whether you have any evidence for that at all.

Stewart Wallis: I am making a general point about the UK economy. If you are reliant, both for elements of your time saving and for your passenger demand figures, on the key driver of GDP, all I am saying is the record of the last 10 years has not been a year-on-year growth of 2%.

Q16 Matthew Hancock: What has it been?

Stewart Wallis: You can see that there has been a major down flow in GDP over the last few years.

Q17 Matthew Hancock: High-speed rail is supposed to be over a long period of time. So say, take it over 20, 30 or 40 years. What has been the GDP growth over that period?

Stewart Wallis: I cannot give you the figure out of my head, going backwards.

Q18 Matthew Hancock: It has been about 2%, hasn’t it, or 2.5%, on average?

Stewart Wallis: A bit less, I think. Obviously, if we take the last four years, they would have pushed it down quite seriously.

Q19 Matthew Hancock: Yes, but high-speed rail is not intended to last for four years during a financial crisis.

Stewart Wallis: I know. All I am saying is that it has not been a compound rate. Even on average, it probably has been a bit below 2%, but I am guessing there. I do not think I should quote a figure I cannot give you out of my head, the average from 1980 to 2010.

Q20 Matthew Hancock: The other question is about the wider impacts. You were talking about the positive impact on Lille, Paris and London of High Speed 1, but you went on to argue, it seemed, that because they are distributed in all three areas, they somehow do not count. I did not understand that. I have an old-fashioned view that improvement is improvement.

Stewart Wallis: Definitely, but the issue is-if I quote your question right-that the evidence from other countries on regeneration and wider economic benefits of high-speed rail is very equivocal: it is stronger in some countries than others. All I am saying is that one needs to try to get a judgment-and it is difficult-of what would have happened anyway if we did not have a high-speed rail line, and what might be happening in some regions compared with other parts of the country if one builds high-speed rail? In other words, you might get greater growth in some places and less in others. Is it net new growth or is it substitution? Obviously, your point is that it does matter if that growth is happening in a poorer place. That is very important, so I am not knocking it at all. It is about trying to understand what is really going on, and it is not simple. The evidence-that you think you can get x amount of benefit-is not clear.

Of course, the other question is: what might you have done otherwise? Would it be better to do much more on the inter-north-north links, for example, and the areas round Manchester to get much better local transport links? I cannot answer that. A problem on High Speed 2 that was not, really, on High Speed 1, is that there has been an inadequate real look at the alternatives. That is a different issue.

Q21 Matthew Hancock: I have one other question. I am interested in why you and NEF have done the work on this. Obviously, here is an expert witness. What is the background for why you have done the work?

Stewart Wallis: Certainly, that is a very good question. The reason is that we got funding for this from an organisation called the Hadley Trust, which was set up by a business person who has worked in computers all their life. It has supported NEF on a range of projects-and other people have, too-looking at what we call the social return on investment, looking at the social, environmental and economic costs and benefits of major projects. We have done all sorts of other things, from Sydney harbour, to working with John Lewis on opening stores, to runway 3. Having done work on Heathrow runway 3, there is a logic to our looking at a major transport project that is taking, potentially, £36 billion of public money to find out what we can learn from it.

It comes back to the fact that we are not coming from a position of campaigning on this; we are coming from a position of saying, "Is this value for money? What can we learn about how best to appraise projects in future?" [Interruption.]

Chair: Thank you so much. I am sorry to interrupt you because of a vote, but that is democracy at work. That was very clear and helpful, so thank you very much indeed.

Sitting suspended for Divisions in the House.

On resuming-

Examination of Witnesses

Witnesses: Philip Rutnam, Permanent Secretary, Department for Transport, Steve Gooding, Director General, Domestic Group, DFT, and Mike Fuhr, Director, DFT, gave evidence.

Q22 Chair: I start by welcoming you, Mr Rutnam, to your first appearance before this Committee as the Permanent Secretary at the DFT.

Philip Rutnam: Thank you.

Q23 Chair: No doubt, there will be lots of appearances, and we wish you well. I do understand that you have been there for only a week, but it says something about the accountability structure that you are going to have to account for everything since 1993-I do not know where you were then. Welcome, too, to the other two witnesses.

I will start by saying that I think this is a mixed-picture Report. I don’t know if you agree. There are some things that clearly, if you look back on the history of the project, went better than they did on the west-whatever it is called-

Philip Rutnam: The west coast main line.

Q24 Chair: Thank you for helping me on that. Things were clearly a zillion times better than on the west coast main line. I think our interest is to look at HS1 to see what lessons we can learn from it and, therefore, to try to assist you and the Government to ensure that we get proper value-for-money decisions as we move forward with another major project-with HS2. If you feel that a question is looking at the past to inform the future, that will be the bias of the questioning of you this afternoon, but accept that against the background that, for example, I think that the way in which the sale was handled was exemplary. There are other aspects that we would have been pleased to have seen.

The thing that hits you is the passenger forecasts that were done on HS1. As far as I can see, if you look at the present total travel between London, Paris and Brussels, it is still a third less than either the 1995 forecast-the LCR forecast-or your own departmental forecast in 1998. I do not know what you learn from that. Why do you think that that went so badly wrong, and what are you intending to do to make sure that you are better at forecasting passenger numbers as you move towards taking real decisions on HS2?

Philip Rutnam: Perhaps I could go back to your summary of the Report, because I think that that is a fair summary. There are some things that, in retrospect, were not quite right in relation to this project. I think the passenger forecasts, whether in 1995 or 1998, clearly overstated the level of demand compared with what we have seen. In some ways, there was also an excessive level of ambition in relation to the amount of risk that could be transferred to the private sector. On the other hand, once the decision to proceed with the project had been taken, many aspects of the way in which this Department handled the project were, to use your word, exemplary. The way in which the Department handled the successive restructurings, and the way in which the Department ultimately ended up with a very complex, major project that was built within the funding identified back in 1998 and within the time scale identified in 1998, is also a significant achievement.

Q25 Chair: We will come back to that.

Philip Rutnam: And the sale process, too.

Could I just pick up on the question of demand forecasts? I have already indicated that there are clearly lessons to be learned from the demand forecasts. The demand forecasts made in 1995 and 1998 need to be put into a bit of context. The challenge that the Department faced then, and that the private sector bidders for the concession and, indeed, the public sector operators of the railway, both British Rail and SNCF, all faced then, was forecasting what was a very novel form of travel: high-speed rail travel between three international capitals. Picking up on something that Stewart Wallis said in the previous session, I do not think that the forecast got the total size of the market wrong-I think that the total size of the market was about right-it was the share of the market that would be captured by high-speed rail going between those destinations, as opposed to, for example-

Q26 Chair: I shall have to stop you there, because I do not think that is right. My understanding is that Eurostar has got 80% of the market to Paris and Brussels. I do not know how ambitious it wants to be, but 80% seems to me to be probably pretty much the maximum share of the market, given the competition from air and sea. What was wrong was the total demand. It is not the share of the market; it is the total demand.

Philip Rutnam: Actually, the forecast back then assumed that people would be travelling much greater distances from destinations that are now served by regional airports that have direct flights to France and Belgium. It is that part of the market that has gone away from Eurostar. Also, as Stewart said, there was a stronger competitive response from the ferries in particular.

Q27 Chair: But 80% of the cross-channel market is what Eurostar currently has.

Philip Rutnam: Eurostar has about 10 million passengers a year to and from-

Q28 Chair: My understanding-maybe those around you can help you-is that it is about 80%.

Philip Rutnam: I think it is 80% of the market to Paris, rather than the cross-channel market completely.

Q29 Chair: Okay, 80% of the market to Paris. What was got wrong was the assessment. You may have an explanation why-cheap airlines, and so on-but you got it wrong. One is always wise after the event, but I cannot understand why in 1993, 1994, 1995 they did not think about cheap airlines, because they were beginning to emerge then.

Philip Rutnam: Having looked at it in the week that I have had, the key issue is that then they were forecasting a relatively novel mode of travel: high-sped rail across the channel. The size and share of the market that would be taken, with hindsight, was wrong. However, if you look at the forecasts made by the Department in 2004 and 2008 or, indeed, the forecast made for the domestic rail services running on High Speed 1, these have been very accurate. Figure 2 of the NAO report brings that out in relation to the international services. Both the 2004 forecast and the 2008 forecast compare to subsequent outturn very accurately. The same is true of the domestic services.

Q30 Chair: But if you got it so wrong and you were over-optimistic-the assumption behind how you are answering the question is that you were over-optimistic because you thought a lot of people would be attracted by the novel, high-speed way of getting from London to Paris or Brussels-how on earth do you then justify a prediction of demand for HS2 that is twice that of HS1?

What we are trying to tease out of you is your capability to make sensible predictions on passenger numbers for these very high investments. I cannot for the life of me get HS2. We have other lines to go on. HS2 is much less likely to have competition from cheap airlines-you might have a bit of competition from cheap airlines, but not so much-but there are existing lines that people can go on. Yet you are predicting and justifying your investment by a doubling of extra demand from what you predicted you would get out of HS1.

Philip Rutnam: I will ask Steve Gooding to comment on that in a moment, but just to make a point about the context, in relation to HS2, we are modelling a market that already exists. We have decades of data and experience of inter-urban travel in Britain. We also have decades of experience of steady growth in demand for that travel, so the context and market we are dealing with in relation to HS2 is quite different from the market we were dealing with in trying to forecast HS1. I point again to the forecasts-the three sets of forecasts-that we have made: 2004, 2008 and the domestic services on HS1. In all three cases, the forecasts we made and the subsequent out-turn have been very close.

Q31 Chair: I understand that Steve wants to come in, but you are accepting therefore that if you are trying to make forecasts over a 30, 40, 50 or, indeed, 60-year period, they are likely not to be right. If you are making a forecast on a much shorter term, you are far more likely to be accurate. Would you accept that?

Philip Rutnam: There are always risks in making any forecast.

Q32 Chair: Would you accept the statement that I made?

Philip Rutnam: Typically, when you look at forecasts, the level of risk expands the further you go into the future.

Q33 Chair: So your current assessments of the use of HS1 are more accurate because they are over a shorter time period.

Philip Rutnam: The point I was going to go on and make is that the way to address that risk is by testing the analysis of any project against a wide range of sensitivities and testing the robustness of the forecast. To be honest, we also address it by making assumptions that are prudent rather than aggressive. In relation to HS2, we have done all three of those things, as perhaps Steve could explain.

Q34 Chair: You are coming out with growth that is double that of your prediction on HS1. It is a very different set of circumstances.

Steve Gooding: There are two things that I would say particularly that the Department has learned from the High Speed 1 experience. One is that although, in its way, high-speed rail on land is novel and might therefore be thought to be more attractive, we have not put anything in assuming that. We have assumed that there are benefits from the speed at which it goes, but not from the novelty of the experience. As you were saying, people might have been expected to think that a high-speed connection to Paris was in itself exciting and that that would be a good thing.

The other thing is, as Philip was saying, we sought to put a very wide range of possibilities around the central numbers. So, again, harking back to what Mr Wallis said earlier, obviously we are going to start off with the figures that the Office for Budget Responsibility gives us for GDP growth. But then we put some different assumptions into our modelling to ask ourselves, "What if that does not happen? What if growth does not go on in perpetuity but stops at a point in time? What if it is not quite the rate that the OBR is expecting?" That gives us a range. As Philip said, the challenge for us is ultimately that the further out we go, the wider that range is. We then have to think, "What’s the probability of where we might end up within that range and what would we do?" That is what we have sought to do with the High Speed 2 calculations.

Q35 Chair: I hear that. It looks to me as if your High Speed 2 rail calculations change annually as well. In 2010, you expected demand to double by 2033; in 2011, you expected demand to double by 2043; and in 2012, we are back and you are expecting demand to double by I think 2038.

Chris Heaton-Harris: 2037.

Chair: 2037. All of this leaves us with very little confidence in the Department’s capability, built on the record of what it did on HS1, of predicting properly the crucial factor of passenger demand when you take such a massive investment decision. Why have we had those three changes? You have been so brilliant, yet we have got them changing so radically in the three years.

Steve Gooding: Among the factors that have caused those changes is the fact that we start with a different base year each time. Over that period of time, we have had a significant recasting of the forecast of GDP growth between 2010 and 2011.

Q36 Chair: My understanding is that you are using the old OBR figures anyway, not the OBR figures since the second downturn last year. Have you recalibrated it again on the latest OBR figures?

Steve Gooding: We have not recalibrated from the March figures yet; that will be part of the recalibration that the Secretary of State said we would do, which we will publish in the summer.

Q37 Chair: If you get these sorts of changes-a 10-year change in expected demand doubling, from 2010 to 2011. I am trying to think what was happening in that year, apart from a general election; I cannot think. The economy at that point was gradually getting better, and it was in 2011 that we had the big downturn.

Philip Rutnam: Can I try to explain and put in a little bit of context here? Typically in these models, what matters is: the base year, which you start from; the latest data you have about the world as it is; and then what assumption you make about the trend rate of growth in demand for the product. In this case, for high-speed rail, we had been assuming that growth in demand would be, on average, about 2.5% a year for each year until demand essentially doubles, and then we have assumed, prudently, that we cannot just go on adding demand in perpetuity. We have assumed 2.5% a year until it doubles. That compares to an historical experience, since the mid-1990s, of demand for that product growing at more than 4% a year, or in the previous decade, notwithstanding the recession, growing at about 5% a year. In terms of the central assumption about what the rate of growth in demand is going to be, we have sought to take the best assumption, but also a relatively prudent assumption.

Chris Heaton-Harris: Going up a decade in one year-it does seem like guesswork though, doesn’t it?

Chair: Well, quite.

Q38 Chris Heaton-Harris: The Chairman is asking what parameters massively changed. In 2010, you decided that demand was going to be dramatically less for HS2, based on this. Then you decided in 2011 that there would be quite a bit more demand a bit later.

Philip Rutnam: I do not know quite which document you are referring to.

Chris Heaton-Harris: I am citing the figures the Chairman has.

Philip Rutnam: The key drivers of the model, as I understand it, are: what the base level of demand is, so you start with the latest historical data; and what the trend rate of growth is. There is then an assumption in the model, which is also put in for reasons of prudence, that you do not just continue to assume that demand will grow for the whole century or for the next two centuries, but put an assumption in the model that demand will stop growing when it reaches double the level.

Q39Chris Heaton-Harris: But these are the economic cases for HS2 that your Department published. In 2010, it said that it expected demand to double by 2033, and in 2011, it was a decade later. The question that the Chairman and I would very much like to hear an answer to is, why the massive difference in just a year? The following year, you produced another set of figures and it has gone backwards six years. It looks a bit like you are picking figures out of the air.

Philip Rutnam: I assure you that we are absolutely not picking figures out of the air. I think that probably the best thing to do will be to send you a note, if we may, on that, because I am afraid that in the space of a week, I have not been able to pick up exactly that point. It will be driven out of the model by the latest historical data around the base year and then the trend rate of growth, and then this assumption about demand-you do not keep growing demand after it doubles.

Q40 Nick Smith: Mr Rutnam, you have said that three times, and we get it, but given the large difference, what factors changed so much?

Chair: Perhaps there is someone around who can help you. We do not expect you to know a week in, but we do expect either Mike Fuhr or Steve to tell us-or you have brought the wrong people to give evidence.

Nick Smith: What has changed so much?

Amyas Morse: It is very sensitive to the base year, isn’t it?

Steve Gooding: It is. There are significant sensitivities to the year from which we are calculating, so that year changed. There was a significant central re-forecasting of GDP growth between 2010 and 2011, and that has a knock-on effect on some of the other elasticities in the model.

Q41 Nick Smith: So it is the GDP growth change which has markedly affected your estimate.

Steve Gooding: Well, those two together, and from the base-year point that the Comptroller reminds me of, there is also the extent of growth up to the point of the base year. So there had been more growth than many forecast in the period up to our base years, which were, successively, ’09 and ’10 and ’11.

Q42 Chair: This is all learning from HS1. Let’s take another aspect of this, because we are getting lost on this. I don’t think that GDP growth went up and down to that extent in the base years, but we’ll check that, perhaps through the NAO, before we write our Report.

Let me take another issue. One of the things that went wrong with HS1 was that you assumed that people would switch to go on to the high-speed rail and they would not use the traditional-or "classic"; I am picking up the lingo in this world-trains, but would use the high-speed rail network. Yet people operate on the basis of price-surprise, surprise-and the tickets are 20% higher and they chose not to switch. In fact, you can read endless articles about people who have been really fed up because it takes them much longer to get to work now than it did before the channel tunnel rail link was in. We know that. We know from HS1 that one reason why your passenger numbers were wrong was that your assumption about switching was wrong.

We then look at HSR2, and in your evidence you’re assuming 65% will switch from classic to the high-speed railway. How on earth-on what basis-do you make that assumption, when, presumably, the price differential will still be there?

Steve Gooding: We haven’t actually put a premium price into the modelling for the high-speed rail service.

Q43 Chair: Well, that’s wrong. That’s crazy. If you haven’t assumed a premium price and you know it’ll cost more, that is bonkers.

Steve Gooding: I don’t think we do know, at this stage, that it will cost more. We haven’t applied the sophisticated pricing model to High Speed 2 that you might do if you’re an operator bidding to operate it in 2024. What we’ve done, I think, is take the more prudent assumption that there is a pricing model for the railway at the moment and that those prices-

Q44 Chair: Don’t tell me you haven’t-have you got an assumption on the price that people will pay?

Steve Gooding: We have an assumption on the price.

Q45 Chair: Is that higher or lower than for the classic trains?

Steve Gooding: We’re not assuming that it’s higher than the classic rate.

Q46 Meg Hillier: Can I just get this straight? If I wanted to go to Birmingham on the train and the Chairman wanted to go as well, we would pay the same price for her to go at a snail’s pace and for me to go faster?

Steve Gooding: On the grounds that, in our modelling, we thought it was more prudent to assume that we weren’t charging a premium for the high-speed route than for the classic route. Remember that how services-

Q47 Meg Hillier: So why would anyone travel slowly?

Steve Gooding: I do not think people will choose to travel slowly to go to Leeds or Manchester. I think they will choose the classic line to go to the intermediate stations. I think they’ll choose the faster service to go on a longer distance trip.

Q48 Meg Hillier: Then it’s fairly easy to model, isn’t it? So what you are doing is taking the total passenger numbers now and you will be working out who gets off at what stations, which is easy to calculate from season ticket sales, no doubt, as a good indicator of that, compared with the people who go directly to one of the major cities.

Steve Gooding: We can undoubtedly build in a sense of a higher price-a premium-for getting the time saved and the higher-speed service from the high-speed line. There would then, as I think the Chair is getting at, be a trade-off between the willingness to pay the higher price and the volume of traffic that the line is to carry.

Q49 Chair: Your modelling is really quite shocking. It seems to me that you are biasing the modelling assumptions, because you’re putting in a modelling assumption that there will not be a premium price, to demonstrate your additional passenger numbers, then you say, "Actually, there might be a premium price, because people will want to get there faster". You’ve got to build that assumption about there being a premium price into your modelling of passenger numbers, because that’s what went wrong, going back to what we hear about. That’s one of the things that went so badly wrong with HS1.

Philip Rutnam: I really don’t think it was one of the things that went wrong with HS1, if I may say so. In relation to-

Q50 Chair: The Report says it is.

Philip Rutnam: Let me take the domestic services, for example, which do operate at a premium price, between 20% and 35%-the domestic services on HS1. The model-the forecast-which was made of those domestic services was very much in line with the out-turn, and some 8 million passengers a year are using those services because they find them better than any alternative. So I think the experience in HS1 shows to me that, the 1998 forecast aside, actually, the forecasting record was pretty good.

Q51 Chair: That’s why we are reducing the number of trains, are we? There are supposed to be 29 trains a day. The current timetable has 24, reducing to 22 in May.

Philip Rutnam: Sorry, which trains?

Q52 Chair: Using HS1. Passenger trains. Demand is so great that the operators have decided to reduce the trains to 22 in May.

Philip Rutnam: Those figures are certainly new to me.

Q53 Chair: The assumption was 29. The current timetable shows 24. I think that Chris has the same briefing as I have, and we are down to 22.

Philip Rutnam: I am afraid that those figures are new to me. The data that I have show, for example, that in the year to March, just last month, passenger revenue on the domestic services was growing at an annualised rate of 25% a year-a very rapid growth.

Q54 Chair: Do any of you know how many trains there are?

Philip Rutnam: There are eight services per hour in the peak hour on the domestic services.

Q55 Chair: How many trains?

Philip Rutnam: Eight trains in each peak hour on the domestic lines; four trains in the off-peak hours. From memory, there are 18 international services a day.

Q56 Chair: How many were planned originally, and how many will be around in May in the new financial year?

Philip Rutnam: I am not aware of any changes to the timetable in May although obviously, if there are, we will confirm it. In terms of how many services were planned-

Chair: I’ve got it on trains.

Amyas Morse: We are not convinced. We gather that the evidence was put forward, but we did check the timetable. We don’t think that there has been a change in timetabling.

Chair: In May.

Amyas Morse: We haven’t found that change.

Chair: Amyas, did you want to come in something else?

Q57 Amyas Morse: To go back to High Speed 1, Mr Rutnam, of course I accept that it was novel and there were different things, but it is pretty clear to us and probably to you from your remarks that there was optimism bias in the way that it was done originally-I am setting aside the later projections. I understand from what you say that you will be very much exercised in doing your projections on High Speed 2 that that optimism bias will not be present in those projections. Would that be a fair way of summarising it?

Philip Rutnam: Yes. That is a fair way. I would say that, again with hindsight, there should have been more attention to sensitivities and to the real level of risk around passenger forecasts for HS1 back in the mid to late 1990s. The question is about lessons learned. That is an issue of which we have well and truly learned the lessons. In our published appraisal of HS2, a great deal of attention is given to risk both on the cost side and on the demand side, and a great deal of work has been done in terms of both quantified risk analysis and examining specific sensitivities.

Of course, more can always be done, but the question of risk that exists in major projects like these is one that the Department has absolutely recognised, and it must be central to the way in which it handles them.

Q58 Chair: In your own thing, you talk about a rough doubling of long-distance demand of 2008 levels. That is what you believe. I am gobsmacked by that.

Steve Gooding: As Philip has said, we have seen significantly higher annual rates of growth in the long-distance market over the past 10, 15 and 20 years. We have set in a lower rate, and then we have sought to cap it. Some of the consultees to the exercise that we ran last year think that was cautious on our part. I accept that others thought it was-

Q59 Chair: As I understand it, if you look at ORR and its work during the past decade, the greater growth comes in regional traffic.

Steve Gooding: No, the ORR figures that I have still show a significant growth in the long-distance traffic.

Q60 Chair: But the greater growth is in regional traffic.

Steve Gooding: There has been significant growth in all of our markets.

Q61 Chair: But the greater growth is regional. When you are making capital investment decisions and you want to deal with congestion, the greater growth is in regional traffic.

Philip Rutnam: The greatest growth may have been in regional traffic but, while we are assuming 2.5% a year growth in the markets that are relevant to HS2, the historical average going back to the mid-1990s was something like 4% a year. Of course, there are risks with these projects. There is also significantly the risk that we are underestimating trend, that traffic will double more quickly than we have projected. In that case, in the absence of this investment, the existing services on the classic network will become that much more crowded, that much more quickly, and that much more unsatisfactory.

Q62 Chair: I will have just one more go and then I will go to Chris, Austin and Meg.

My final thing is, what assumption have you made, for example, about changing working practices, through things such as video-conferencing? Have you built that in?

Steve Gooding: We have not built that in as an explicit assumption in the modelling done so far. We have had quite a bit of debate about that, including exchange with the previous witness this afternoon, about how best to do that. The modelling we have done takes, as everyone has said, a simplifying assumption about the value of business time savings, but in turn it does not count an assumption about the crowding benefit; that is, the benefit that the business traveller has from being able to sit down and make some use of their productive time. What we have got is limited evidence so far from the studies that have been done about quite how productive that time is. It is definitely something we need to look further at.

Chair: We will come back to the productiveness of time, but this is whether it impacts on passenger numbers. Business travellers may travel less if they can video-conference. That is pretty common sense. I do it and I think most of us know that in businesses there is less traffic and more alternative ways of having a meeting. Chris.

Q63 Chris Heaton-Harris: May I ask a couple of questions about lessons learned from HS1? The first is on cost and the second on regeneration. I cannot quite work out in my mind-and I cannot put it all down to land costs-why to build a mile of high-speed line in France costs four times less than in the UK. Could you comment on that?

Lessons were learned from HS1 about costs in the construction. How are you ensuring that the lessons learned from trying to keep costs down for the taxpayer then feed through into the HS2 project? If you match like with like and take out inflation, I am told there is a 30% to 38% increase in the costs of this stuff. How are you keeping costs down and why does it cost so much to build high-speed rail in the UK?

Philip Rutnam: First, it is important to seek to compare like with like in this discussion. So, the claim that it costs four times more to build High Speed 1 compared with high-speed lines in France does not take account of the fact that part of High Speed 1 was the very substantial reconstruction of St Pancras station. There was also a much higher volume of urban works, tunnelling from London to Barking, and much greater complexity in the project as a result of those additional works than anything faced by high-speed lines examined in France.

You have to compare like with like. If you look at the Infrastructure UK cost study, it also compares the construction of the first section of High Speed 1 from the channel tunnel up to Fawkham in Kent, and it identified a gap there of around 24%. I think that is probably a better comparison than a four-times difference. That 24% is still very substantial. The factors that seem to come out of that are higher land acquisition costs-the value of land in south-east England being higher than in France-greater environmental mitigation; and other additional regulatory costs.

Then you get into the question of whether the construction supply chain itself is as efficient in the UK as it is in France. I think there are some interesting questions we could look at in terms of supply chain integration, how we work with the supply chain to ensure that it is as efficient as possible. The Infrastructure UK study talks about the importance of very clear signalling from the client side-that is, from the Government-about future demand, so that the supply chain can gear up to provide it. It talks about the importance of a really strong expert client function on the Government side. Again, I think there are lessons we can learn, but it is a lesson not about a four- times difference but a lesson about 24%.

In relation to the High Speed 2 project, of course that is at a much earlier phase. What we have done there has been to try to take a sound, risk-based approach to estimating the construction costs of the project. That includes taking point construction cost estimates from HS2 Ltd, working across each of the different cost categories, but then doing a proper risk analysis on top of that to look at the risks involved-there are well-established techniques for that quantified risk analysis-and then applying what is effectively a premium for optimism bias on top of that.

When you add all those elements together, which from my discussions in the Department are clearly benchmarked against global best practice for dealing with major projects, you end up with something like a 66% increment to the simple cost estimate in order to arrive at what we think is a really robust figure for the project, which absolutely should not be exceeded. Going back to the point about lessons learned, this is an area where the Department, conscious of its role on major projects, has absolutely put a great deal of effort into trying to make sure we are right up there with best practice in dealing with the costs of major projects.

Q64 Chair: The Major Projects Board, or whatever they call themselves, in the Cabinet Office, have they vetted your-

Steve Gooding: Yes, we have been through the gateway process with the Major Projects Authority.

Q65 Chair: And what have you got? Red? Amber? Green?

Steve Gooding: Amber red, but for a variety of reasons. We share the honour with a number of other projects. This is not going to be an easy project, and I will not pretend that it is. The point I wanted to pick up that you were asking about also plays to the lessons learned. I am pleased to say that we have actually got someone from IUK on our programme board for this. Key to making sure that we manage the costs is when we get beyond the current planning stage into the contracting stage, it is in the management of the works, so there are the elements that Philip has said that might make the situation different-

Q66 Chair: Amber red is not good enough.

Steve Gooding: Amber red is not something we aspire to stay in; it is something we aspire to get ourselves out of.

Q67 Chris Heaton-Harris: Can I ask about regeneration? Part 3 of the NAO Report talks a great deal about regeneration, but lots of that regeneration is actually taking place at intermediate stops on High Speed 1. As there are no intermediate stops on High Speed 2, is that a lesson un-learned?

Philip Rutnam: Can I say something about regeneration? On High Speed 1, the principal regeneration, which I think was discussed in the NAO Report, is at King’s Cross, which we were hearing about earlier, and at Stratford. There is also Ebbsfleet. Developments at Ebbsfleet are still at an earlier stage, but at King’s Cross and Stratford very significant regeneration activity is clearly under way.

In relation to HS2, we have not sought yet to put a value on the regeneration impact of HS2. The figures that have been cited for the benefit-cost ratio for HS2 do not include a value for impacts on regional rebalancing or the regeneration of specific sites. This again goes to the fact that we are seeking to take, throughout this process, a prudent approach to both costs and benefits, and we do not yet have a sufficiently robust evidence base to be able to put a value on the regeneration benefits. There will be, I am confident, significant regeneration benefits. There are plans for major redevelopments at Old Oak Common in the west of London. There are plans already being developed in Birmingham for what will happen around Curzon Street and around Birmingham Interchange. There will also be things happening at Euston, but we have not yet sought to put a quantifiable value on that.

Q68 Chris Heaton-Harris: I can just about remember the excitement at Ashford in Kent and the number of very cross people there were around there when the plans for HS1 were first mooted. I can then remember the campaign when HS1 was essentially to move away from stopping at Ashford in Kent, because the regeneration that had happened-by accident, not by design-had been so dramatic, and property prices in the surrounding area had gone up. If you go back to Victorian times, travel down South West Trains line now and the reason why Surbiton exists, and is the size it is, is because the people of Kingston did not want that horrible nasty train to come so it bent round to Surbiton, which is a bit of a boom town for commuters now. So there are benefits from having stops on train lines into London, and yet this is just Birmingham to London. Another mooted idea was to have spurs, which you decided was not good enough. Surely the lesson learnt is that if you want buy people in and build on regeneration and help with employment and many other factors, then there should be slightly more stops. Why have you gone away from that?

Philip Rutnam: Steve might add to this, but the subject of intermediate stations raises some complex issues, because essentially the more intermediate stations you have, the greater the delay, because the train has to stop and start again, or the greater the complexity in the service pattern. There are some big trade-offs there. While it is true that, apart from Old Oak Common, I do not think that any intermediate stops are planned on HS2 between London and the Birmingham interchange, there will be very significant benefits on the west coast main line through the capacity that is freed up on that for additional services. So the intermediate destinations, such as Milton Keynes and so on, will be able to have very significant benefits through changed and enhanced services.

Q69 Austin Mitchell: There must be, in terms of construction costs, a benefit from the greater amount of work and the continuity of work in Europe in the sense that, as with the urban trams, they can move on from one construction project to another and keep a continuity of work and supply and everything. That must have been an enormous financial benefit to European construction.

Philip Rutnam: I think that is absolutely right. In fact, one of the things that we are conscious of in relation to HS2 is how Crossrail coming to an end in 2017 should free up some of the construction resources to work on HS2, so it is absolutely a point.

Q70 Austin Mitchell: We have moved too jerkily.

I just have to observe, in respect of what the Chairman was asking about premium pricing, that I am prepared to pay a premium to get to Birmingham more slowly or indeed not at all. However, you mentioned, in terms of the estimates of use, that there had been an increase in traffic from regional airports and, presumably, budget airports. Does that account for the whole of your over-estimate as compared with actual use?

Philip Rutnam: In the HS1 forecasts?

Austin Mitchell: Yes.

Philip Rutnam: In the analysis that I have seen, it was the arrival of the low-cost airlines and the dramatic impact that they had-although not necessarily on the market from Heathrow, Gatwick, Stansted, and London City airport-on the wider market for travel from England, in particular, to France and Belgium. That was, if you like, a disruptive event, which was not anticipated.

Q71 Austin Mitchell: Did it fill the whole of the gap?

Philip Rutnam: It filled most of the gap. The other factor, which I think I also mentioned, was the competitive response of the ferries. The ferry companies brought in more aggressive pricing. Some routes disappeared, but there was more aggressive pricing on those that remained, so there was a competitive response.

Q72 Chair: Would you accept that those things should have been predicted?

Philip Rutnam: We can all learn things, and I am determined that we do learn things from the projects that the Department has been responsible for in the past. Could those things have been predicted? It is difficult to think back to the mid-1990s now, but I do not think that it was impossible to predict them.

Q73 Austin Mitchell: In terms of that, you must be a very happy Department-perhaps there is something in the water-because you always over-estimate. Everything is over-estimated, such as passenger usage. You over-estimated the fact that the guarantees would not be called on. You accepted the gross over-estimates of the increased use of the east coast main line by National Express, which proved to be totally wrong, and you are accepting over-estimates of the GDP growth for High Speed 2.

Philip Rutnam: I do not think that I have accepted anything like that on GDP growth for High Speed 2

Q74 Austin Mitchell: But you are a happy lot, are you not? I wonder whether the Department’s and Ministers’-although you can only speak for the Department-penchant for "les grand projets" actually colours your estimating process of how much these "grand projets" are going to be used by people.

Philip Rutnam: I do not accept that the Department always over-estimates. I do accept that forecasting and estimating is a very difficult thing to do, which is one reason why we need to recognise that risk is inherent in it and we need to allow for risk in projects. We need to look at the risks and look at the sensitivity analysis. I can give one other example, which is in my mind, where we clearly did not over-forecast. If you go back to the forecasts that were being made of rail traffic back in the mid to late 1990s, they did not foresee the boom, essentially, in rail traffic-the very heavy growth in demand for rail traffic that has happened since then. There may be cases that go the other way but that is one where I think, if anything, we underestimated.

Q75 Austin Mitchell: But you are more inclined to as a Department. You are more generous than St Martin-in-the-Fields, splashing out letters of comfort and guarantees. You did the same on Metronet as you have done on HS1.

Philip Rutnam: I cannot speak to the Metronet case. I am afraid I don’t know anything about it, but what I would say is that-

Q76 Austin Mitchell: But letters of comfort were issued that were over-optimistic.

Philip Rutnam: From what I have seen of the Department, the task of forecasting costs and benefits-and indeed, risks and the external uncertainties around projects-is taken very seriously indeed. We seek, as we have done with HS2, to take the very best data available, benchmark it against leading academics and other authoritative sources, and take the best view we can. This does not mean that 10 or 15 years later, we will be right, because forecasting is inherently an uncertain business, but it is also a necessary business if we are to plan for the future.

Q77 Austin Mitchell: You guaranteed Network Rail’s £25 billion. You have a lot of mis-estimates hanging around your neck, haven’t you?

Chair: What I was going to say to you is that I have absolutely no doubt about your intent. The problem we have as a Committee is that we have looked at three issues out of your Department before you arrived. There was the M25 road-widening, where the cost estimates were all over the ruddy place. There was East Coast rail, which we looked at-and what was the third? This is the third, so we have looked at three where the failure to provide anywhere like realistic estimates has led to poor value for money. So, you have to accept a bit of our scepticism. I really welcome the fact that you want to get it better, but it shows caution is hugely important here, given what we have had to deal with.

Q78 Austin Mitchell: Just one other question. I am a devoted user of the east coast main line. Are you in effect saying to me that I will have to put up with less than adequate service and conditions, when they could be improved and you could have more frequent, longer, and better trains? Am I going to have to tolerate the existing situation because all the money is going to HS2?

Philip Rutnam: No, absolutely not. I think the Government have been clear that they are not going to cut their funding for the core rail network, just in order to fund-

Q79 Austin Mitchell: They are not funding it enough. They need to increase it.

Philip Rutnam: There are always debates to be had about funding.

Q80 Mr Jackson: Can I jump in now? Forgive me, gentleman, I wasn’t here earlier. I was detained elsewhere, but to take Mr Mitchell’s point, if you go back to High Speed 1, is there not an issue about opportunity cost here? Although you have talked about the regeneration potential for central London and to a certain extent, Ashford, you have not talked about, for instance, the regeneration potential for Medway and Thanet. There is only a certain amount of capital available to be spent by Government and the private sector. Thanet remains one of the poorest parts of the south-east of England, and Medway struggles with lots of social deprivation in many areas. So, Mr Mitchell makes the very important point that when you have limited resources, it is reasonable for people to say that if you are spending it on, essentially, a super-west coast line, you will be taking money away from the east coast. That is what worries some of us who are rather High Speed 2-sceptic.

Philip Rutnam: I can understand the concern. All I will say is that one of the fundamental principles of the way in which Government go about appraising projects-it absolutely runs right through the Green Book-is that we need to recognise opportunity costs. We need to recognise that resources used for one purpose cannot be used for another, which is one reason why they have a significant value. The concept of opportunity cost is something that absolutely lies at the heart of the way in which we have appraised HS2.

I would comment, in passing, on east Kent, that it has of course had significant benefits from HS1. I understand that something like two thirds of the travellers from places like Deal and Sandwich now use HS1 services, so there are significant benefits. I know that there remains a big regeneration challenge in Thanet.

Q81 Mr Jackson: Yes, but the context is that you are making a value judgment between High Speed 2 and £36,000 million of public money for discrete local transport infrastructure and projects. That is the key issue. So opportunity cost is not just between east coast and High Speed 2. It is between all the other local infrastructure: bus, cycle, train, guided bus, for instance, across the country. That is the key issue which perhaps you gentlemen need to consider.

Chair: Do you hear that? Nick is coming in on the same point.

Nick Smith: It is not the same point but related. I was pleased to hear from Mr Wallis that Lille, a deprived former coal-mining district-

Chris Heaton-Harris: Seen through the window.

Nick Smith-which I am dying to visit, benefited greatly from HS1. I get that. We would love to see electrification of the valley lines, particularly Ebbw Vale to Cardiff, if anybody is listening. That would help my district hugely. I want to return to the point that Mr Wallis was making which is that sometimes this regeneration could have taken place already. King’s Cross, central London, large railway lands: do you know what? I think it would have happened anyway. The obvious example is that Paddington basin, just down the road, has gone through the roof and been regenerated and been a success and that has been done more quickly because it has not had to deal with having a whole bunch of infrastructure dropped into either. I am really interested in the added value of transport infrastructure and whether you can measure that in the central London locations and therefore whether the money would be better spent elsewhere where you could make a bigger difference.

Philip Rutnam: You are absolutely right. It is a difficult thing to measure. It is one of the things we will be looking at in the evaluation of HS1 that will be done. Take the example of King’s Cross: it is an interesting case where the added value of the rail investment is very significant in relation to the whole regeneration plan. I know there were ideas around. Norman Foster had plans for King’s Cross going way back, although even that was connected to the hole in the ground that was going to carry international rail services at that time.

What the rail project has done is, first of all, change the access to the railway lands, which were previously locked up by rail lines going right the way round them, opening up the access to create many more opportunities for regeneration. Secondly, it has involved the regeneration and transformation of St Pancras, which is now obviously a fantastic destination, and lately the transformation of King’s Cross. A "regeneration only" option, without transport investment, would not have involved that. The work needs to be done in the evaluation, but I think we will find that in that case, the rail and transport investment has been absolutely critical to unlocking regeneration value, which is very, very significant.

Q82 Chair: Mr Rutnam, you are making an assertion, and so is Nick. One of the shockers in the HS1, which I hope you will accept, is that I cannot understand why an evaluation framework was not put in place as early as 1993-94.

Philip Rutnam: I will come to that if I may, but on King’s Cross, it is not an assertion; it is quite demonstrable that the rail investment unlocked the land physically. In relation to the evaluation, I understand the concern, and I want to make two points. First, there are very good reasons why it has not been possible to do an evaluation until now. Indeed, it remains not possible. It is to do with the fact that these very large projects bring about such significant changes in travel patterns and in regeneration that you need to allow time for those changes in travel patterns to work through.

Q83 Chair: Hang on. You did not hear my question. When you embark on a major project of this sort, you put in an evaluation framework. As the project proceeds, clearly the things that you assess change and evolve. Here we are in 2012, and you still have not got an evaluation being undertaken of a project that started in 1993; that is just not acceptable.

Philip Rutnam: I would agree that the preparations for evaluation need to start at the start of the project. In my previous existence in BIS, we spent a lot of time in programmes we were working on-such as apprenticeships, for example-doing exactly that. The point I am seeking to make was just to explain why an evaluation has not yet been done.

Q84 Chair: It will change.

Philip Rutnam: I think an evaluation needs to be done. When you have such big changes in service patterns, you need to allow some time for people to adjust the way in which they travel and the way in which they live.

Q85 Chair: Mr Rutnam, you are just not getting it. Of course things change, but you could have done an evaluation of all sorts. You could have evaluated, for example, why you got the passenger numbers wrong. You could have evaluated why you had to change your target costs. You could have evaluated why, actually, they could not raise the private finance. All those things, if you had evaluated them early, could have much better informed what you are doing on HS2. It is not an evaluation of the whole thing-of course that takes time.

Amyas Morse: I have to say I do agree. Mr Rutnam, in many ways our Report is very clear that a lot of good things happened on High Speed 1. We have tried to be very clear about that, but we were not persuaded by the idea that you could only begin an evaluation once all the results were in, which has a tendency to result in the retrofitting of the evaluation methodology. We think you would have gained a lot by building evaluation in from the beginning, and I suspect that at some level you do, too. Our reason for emphasising that so much is that, going forward, I suspect the Committee would ask that question from the very beginning of any project. They would want to know about the evaluation method. The point is that we know all the results will not be in, but if you make predictions about trend-line developments that you would expect to see and they are not happening in the way you expect, that allows you to adjust in course, rather than just continuing.

Given that the reversionary liability on these projects always lies with the Government, as I am sure you realise, we think it is very important to be aware of these things earlier. I am only taking a moment to say this because it is one of the few points, apart from the passenger numbers, where we were critical of the Department. Therefore, I think it is worth while making sure that it does not get lost in the discussion.

Philip Rutnam: It is very helpful to have this feedback and, of course, I paid a great deal of attention to the Report. If it is any reassurance to the Committee, I have already talked to the chief economist of the Department about how we make sure that, as a Department, we get to a place where we are very clearly best in class in achieving best practice in relation to evaluation across the range of things that we do. From what I have seen, I think there is lots that is already like that; the guidance we produce is excellent, and we will be developing plans to ensure that that is implemented, including from the very start of projects, as you have identified.

Chair: Thank you.

Q86 Meg Hillier: Picking up on the evaluation, with High Speed 2 looming, it seems to me that you need to build up evaluation earlier. Will you be doing that for High Speed 2?

Philip Rutnam: Yes.

Q87 Meg Hillier: You have talked about managing risk, and I recognise that it is not a simple science, but do you look at the private sector? There are some things, such as the issue with the ferries and aggressive pricing, that if you were in the private sector and your business was transport, you know you would have to face. I used to work for the cross-channel ferries, and there was always a fear about the options when the channel tunnel was being developed, and about the flights and so on. There is a very acute awareness in the cross-channel industry of the challenges. It seems to me that surely, when the Department did the modelling, that should have been built in. I am interested to learn that it was not. What will you do with High Speed 2 to make sure that some of the issues that colleagues have raised about options that might arise for people elsewhere are taken into account?

Steve Gooding: Some of the problems that we have had and to which you have alluded, such as the east coast main line, have been instances where our colleagues in the bidding world have got their assumptions wrong, too. The key thing for us is that there is a breadth of opinion out there to be had on what we should be looking out for and what the future might hold. We need to be drawing that out of the potential operators of train services, the competitors and the academic world. That is why we have had a panel of academics involved in the work so far. That is why what might happen-both on the development of high-speed services and with regard to the implications for the classic lines, as we call them-has been part of the debate we have already started to have with the bidders for the west coast main line. I can give you the assurance that we are seeking to draw experience on that from the widest range we can.

Q88 Meg Hillier: You talk about academics and civil servants, no doubt very good civil servants-I am checking your biographies to see how many of you have worked in the private sector-but do you bring in expertise from people who have worked in the private sector and who have done this?

Steve Gooding: Yes, our DG of major projects worked in the private sector and the rail sector before he worked in the public sector.

Q89 Meg Hillier: So you are confident that these questions are being asked, even if the answers are difficult?

Steve Gooding: I am confident that the questions are being asked. They are part of the ongoing dialogue that we have with, for example, the rail industry, represented in the Association of Train Operating Companies, or the owner groups. We not only talk about the individual competitions that they are bidding in, but try to stand back and have a wider debate with them about the nature of transport demands and the patterns coming through.

Q90 Meg Hillier: The Report talks about the number of different potential benefits from this. What were the top objectives of High Speed 1? Perhaps you could state that for us, because there are many things that you talk about measuring, in terms of achievement.

Philip Rutnam: Two objectives really stand out. One is the said transport benefits: improvements to journey times and reliability, and crowd improvements to services and so on, on the high-speed line, with knock-on effects to the classic network. The second is regeneration. Regeneration was an absolutely core objective from the outset; if you remember, the Government of the day decided to route it through East London. Regeneration-the impact on Stratford, King’s Cross and other locations-was a key benefit. Mike, you were more heavily involved; do you want to say anything about objectives?

Mike Fuhr: Those were exactly the ones. The debate at the time was whether there should be a northerly route, a southerly route or what was then the Channel tunnel rail link. The decision to route through South-East London was taken very deliberately, so that there would be access from King’s Cross St Pancras to Stratford. The growth of Stratford city, which at the moment is interrupted by the Olympics, if you like, can be expected to resume rapidly once the sites have returned from Olympic use. That is our evidence of the extent to which regeneration was a key objective. The transport benefits, although the initial forecasts were over-optimistic, are there none the less; the NAO itself valued them at something in the order of £7 billion.

Q91 Meg Hillier: As the Chair acknowledged at the beginning, there were certainly very good things about how HS1 was managed. You have picked up on our concern with evaluation. That is because we see other big projects coming in and we spend rather a lot of time dealing with big-budget projects that do not have proper evaluation or management along the way.

Talking about regeneration, we have not got real time to go into the issues around whether you mean job growth or social regeneration, so let us park that for a moment. If you look at the passenger demand figures, however, we know that when fares go up-for the shorter commuter routes certainly, and others, although I am not an expert; colleagues from Peterborough and other places might be better placed to comment-people will make the calculation about the cost of their travel versus the cost of their housing. Taking away the costs of moving house, it would now be cheaper for some people-certainly on the shorter commuter routes-to live in central London and pay the extra mortgage costs, rather than to pay some of the increased travel costs. These are difficult things to model but, nevertheless, this is real behaviour right now. Peterborough is 48 minutes from King’s Cross, which means that I, living in Hackney, am about 58 minutes or, allowing for transfers, just over an hour from Peterborough, which is not bad given that it takes me half an hour to get into Westminster in the morning. That means that there are a lot of people who are maybe making those judgments on the longer commuter distances, so have you factored that into your calculations? Can you, indeed? Maybe it is asking the impossible.

Steve Gooding: We try to factor that in. I have to say, it is an imperfect science. We try to work off the Office for National Statistics forecasts for population, which include not only the total population but where the population is. You are absolutely right that with something like high-speed rail significantly reducing journey times, I suspect that some people will be thinking that the trip to Birmingham is a perfectly reasonable commuting trip; they will be doing the trade-off between the cost of an annual season ticket, the sort of lifestyle that they want to live, and the sort of house that they want to live in. We do try to capture that. It is another area where I am sure we could be doing better.

Q92 Meg Hillier: I have a supplementary question on time saving, which the Report talks about being over-calculated. Certainly, working time on a train that is going at a steady pace and is not so wobbly that you cannot write or read is a valuable thing. Do you think that you have got that wrong? Are you going to be looking at that for High Speed 1, because that is quite a big factor? If you have got trains going faster, but people who were using that time to work are not able to use it-they will have a faster journey, but there will be pay-offs-that sort of feeds into what colleagues were saying about investment in other infrastructure. I speak as someone who lives right on the East London line, which was a great initiative and has made a huge difference to my constituency. We are looking forward to-I put my bid in, as others have-the Hackney-Chelsea line, which is the next thing we are looking forward to you delivering. [Interruption.] I think Hackney is definitely the most important. Can we just answer that question about time saving? As I said, there are pay-offs here for people.

Steve Gooding: There are three aspects to the time saving that we try to capture, which is basically the leisure market, the commuter market and trips in the course of business. It has been observed-Mr Wallis, among others, has observed this-that we make a simplifying assumption at the moment that for trips in the course of business, we value the entirety of the saving as a productive benefit, and we tried to match that to the average cost to businesses of employing the people making the trips.

Q93 Meg Hillier: You count the £70,000 a year as an average cost to businesses?

Steve Gooding: It is the cost to the business, so it is not a salary cost.

Q94 Meg Hillier: Well, take a salary at a third of costs. That is still quite a generous salary for my constituents.

Steve Gooding: That is the number that we got from the survey work that we have done.

Q95 Chair: When did you do that survey work?

Steve Gooding: The survey work was done in 2002-03.

Q96 Chair: Should you not update it? It seems a potty figure to all of us. You are in the top decile of earnings.

Meg Hillier: Maybe only the top decile of earners travel on those.

Philip Rutnam: It is not earnings; it is to do with the productive time. If a firm paid all the value that it created from people to its employees, it would not have anything left for investment, profits and so on. It is to do with the productivity, not with salaries.

Q97 Meg Hillier: So someone who is a production line worker not doing anything while they are on the train is costing the company more than someone like me, who might be sitting there writing a report. Actually, I am not losing productivity.

Steve Gooding: If I come to the core question you are asking-do we think we need to do more on this-the answer is yes. The thing that makes this difficult is that there is imperfect knowledge out there. Some studies have been done about quite how productive that time really is, and what time it is eating into. I suspect that I am like many people here: I work on the train in the morning as I come to work. Whose time is that I am saving? I do not think the civil service is paying me for it. The time on the train is not, by and large, being as productively used as the purpose for which the trip is being made. We do want to try to get into that; that is one of the discussions that we started with Mr Wallis, and we will take it up with the academic world. We will try to get better at that.

Q98 Meg Hillier: And you will have that in place? High Speed 2 is coming along the line.

Steve Gooding: We seek to develop the way we approach this. All the time, we are looking to get better at it. We are always going to be having to make some simplifying assumptions there. The key thing-again, this is something that Philip said earlier on-is that in making an assumption, we need to test that with a range of things: "Maybe we got that wrong. Maybe we are over-optimistic. Maybe we are pessimistic. Where do we think the range leads us?"

Philip Rutnam: I also observe that as technology has changed in the last 15 to 20 years-people have Blackberries, iPads and so on-it has become easier, in a sense, to use your time on public transport productively. That has not dented the growth in demand-this is the period in which we have had rapid growth in demand for public transport. There are some other complex issues. If one of the other major benefits of High Speed 2 is reducing crowding, compared to not having High Speed 2, at the moment, we do not suppose that reducing crowding makes it possible to be any more productive on trains, but if you think about a world in which all the trains coming into Euston are absolutely packed full and standing room only, you are not going to be able to do much work on them. It is quite a complex issue, and we need to look at it in the round.

Q99 Jackie Doyle-Price: I have always worried about silo culture in Whitehall. Obviously, you are the Department for Transport, and your core role is to deliver an effective transport system. Yet overlaid on this project has been this objective of regeneration, which, if we are all honest about it, is not a core responsibility of yours. It is other Departments, really, that have a role in making that happen. To what extent do you engage with other Departments on a project such as this? If it is really going to be effective and transformational, which we all want it to be-ultimately, you are going to think about it very much from a transport perspective-you will need that additional input. Are there any lessons learned with regard to this project that you will take forward with HS2?

Philip Rutnam: First, as someone who is new to the Department, I think it is really important that we seek to think about transport in the round, in terms of all the impacts that it has on the economy, society and the environment. That is a difficult thing to do, and it is sometimes much easier to measure some types of impact, such as journey time savings, than other types of impact, such as regeneration, wider effects on the economy and the ability of firms to connect with each other more effectively. There is inevitably a tendency to focus on things one can measure, but it is really important that, as a Department, we can give the weight that is due to things that cannot necessarily be measured, or cannot be measured so precisely, but are none the less really important for the long-term future of the economy. I really do think we have tried to do that in HS2. I have already observed that, for HS1, regeneration was an absolutely central objective.

Q100 Jackie Doyle-Price: It was, and I agree that, in terms of the stuff that is your core responsibility, the Report actually comes out very well and you have done very well, but the regeneration angle is slightly weaker. My constituency is Thurrock. During this period, the Government were spending a lot of time and attention on the Thames Gateway to try to regenerate the whole economy of East London and South Essex through to Kent. HS1 runs 40 feet from my back door, but there is no benefit to my borough or to South Essex from this infrastructure.

It just strikes me that there have been missed opportunities here, and we risk having them again with HS2. You start off with this great vision about what you are trying to achieve with this great transport project. It rolls out to the public, and the public debate tends to be about what is bad about it. We now have a debate about HS2, which is all about the impact on the environment and less about the economic impact in the north, which is actually the main objective. That is really what I am trying to get at: how can we actually do more to link back to the vision when we are evaluating this, rather than, through consultation, just keep ticking off the interests of various groups?

Philip Rutnam: I don’t think there is a perfect answer, but one thing I would say is that it is really important that we do not see the business case for a project such as HS2 just in terms of a very narrowly defined benefit-cost ratio, which will be able to include only things that can be quantified; it has to be seen in a wider setting, in terms of things that cannot necessarily be quantified, and are related to a broader sense of strategy for, as you say, the economy and the role the transport system can play in that. I think that is a challenge for us.

Steve Gooding: I just wanted to add that, looking at the business case-as you say, that is the sort of vision for the scheme-one of the things that we have absolutely sought to learn from a variety of projects around the world on development of High Speed 2 is the importance of working with the local authorities along the line of route. In addition to trying to make connections-we will now have even better connections with the Department for Business, Innovation and Skills and the Department for Communities and Local Government-it is very important that we do not sit in Marsham Street in London and think that we know what the best pattern of development is for Birmingham, Old Oak Common or, indeed, points north. That is why the company has sought to make very good connections with local authorities along the line of route.

Q101 Jackie Doyle-Price: That is great from a consultation perspective, but not so great in terms of leadership. As you are taking everyone with you, it is easy to lose sight of the overall programme. Coming back to HS1, obviously Ebbsfleet is key to this. Making a good case as to just what this investment has done for Ebbsfleet would be a great selling point for HS2. What are you doing to monitor that and to capture what impact that has had in terms of regeneration?

Philip Rutnam: As I understand it, at Ebbsfleet the relevant property holder is, I think, Land Securities, which is a private sector business. We do not control them, and their plans are a matter for them. I know that there has, as yet, been relatively little development at Ebbsfleet. I understand that they consider that it is still a site with very significant long-term potential, and I believe that they are talking to the local authority about some of the planning issues that they face in order to help unlock that potential.

Q102 Chair: Mr Rutnam, we have to draw you back again, because that is the whole point: a proper evaluation would have been important. We put a lot of money in. I do not know how much money went into building the Ebbsfleet station-

Jackie Doyle-Price: It should have been in Purfleet, but there we are.

Chair: It should have been in Barking, actually, but never mind-or Hackney; we will go round the table. A lot of money went into creating it and, crucially to our discussion around evaluation, it would have been really important to have looked at why nothing has happened to date, whether you should put other incentives into the system and whether there was something wrong with the partnership that you developed. On all those issues, we have not got answers, which are hugely important for informing HS2. Would you at least accept that?

Philip Rutnam: I understand that the main issues there are really planning issues.

Q103 Chair: But you haven’t evaluated it, have you? You don’t know.

Philip Rutnam: In the Department, we know. I take the point about evaluation. It is about understanding the impact of the public money we have used, compared with not using the public money in that way. Ebbsfleet will be something we will look at alongside King’s Cross and Stratford. It is a more difficult case. In King’s Cross and Stratford we have been a principal party involved through LCR, where we have direct equity interests in it.

Q104 Jackie Doyle-Price: Can I turn to that question now then? To whom should we be talking to about the impact at Ebbsfleet? Again, it comes back to what is in your control to deliver here, and there is a bigger agenda here. Where do you require the help to get that message out about what it is doing from Ebbsfleet? Is it elsewhere in Government?

Philip Rutnam: As I understand the issues at Ebbsfleet, it is principally a planning matter between Land Securities and Kent county council. I would say that representations about getting on with unlocking the value at Ebbsfleet to the benefit of society would best be addressed to those parties. Rest assured, as a Department we are interested in it for various reasons and we will do what we can to help those issues along, but they are principally issues for the private sector developer and the local planning authority.

Q105 Meg Hillier: Can I just come in on this? One of the issues with High Speed 1 is that there was a lot of land available to package into the deal. I have seen the East London line come to my constituency not with a lot of land. We have seen property prices, rents and so on increase. It has made the area have a feel and a buzz about it, but it is quite expensive for a lot of the local people. With High Speed 2, there will not be any chunks of land available, will there?

Steve Gooding: There is quite a bit of land being unlocked at Old Oak Common. There is quite a lot of potential, although it is obviously quite contentious with Camden about what could be done at Euston. I think most of us think that something rather better than the current Euston station could be built.

Q106 Meg Hillier: But that is not land that the Department or the Government own is it? It is land that belongs to Network Rail.

Steve Gooding: Network Rail owns the land at Euston.

Q107 Meg Hillier: Network Rail, which we are not allowed to FOI and we cannot find any information about. So any boosts that we get from Network Rail, which is effectively taxpayer funded, we do not see.

Steve Gooding: I have talked to David Higgins, who was recently appointed transparency director at Network Rail, so the Committee might want to speak to him.

Chair: Let me bring in Nick.

Q108 Nick Smith: Like everyone else, I think that in the round this has been a good project-on time, on budget, fantastic engineering. There are a lot of good things about this project, and that has to be said. In a lot of respects, it is better than many projects that have come before us in the past couple of years that I have been on this Committee. I am still not convinced, although I think Mr Rutnam has been going in the right direction with his responses in the past 10 or 15 minutes, that the Department has a good handle on the economic benefits, the regeneration effects, of transport infrastructure improvements in different places. More work on that would be valuable for the country as a whole and would make a real difference in analysing not just capacity numbers and not just a cost-benefit analysis of the different projects that you are working on, but the wider benefits of infrastructure investment in places such as south Wales, which badly, badly need it.

Philip Rutnam: Thank you for that. I am sure things can always be improved. One can always do better. Dealing with HS2, which is the case I have managed to look at-well, HS1 and HS2 are the cases I have managed to look at so far. On HS1, we have had a very clear strategy in relation to King’s Cross and Stratford, and very effective participation in various quite complex arrangements, and significant regeneration benefits are flowing. Ebbsfleet is more difficult because it is private sector-led, as we have discussed. HS2 is really at an earlier stage. I think we have got a good handle and Steve was starting to run through the opportunities, but these things are actually going to be pretty complicated to bring them off. I think at Old Oak Common the land ownership is fragmented, so, to bring about the best outcome, you are into one of those situations where it is probably going to require a level of co-ordination and planning between different parties-public sector, private sector. I think we understand those issues in principle. I think HS2 Ltd will understand them in a lot more detail. What we have not done yet is try to say, "Well, this is going to be worth so much to society and we will put that value in our benefit-cost ratio."

Steve Gooding: I take absolutely the core point that you are making. There is value in us as the Department for Transport understanding and broadcasting a clearer sense, if we can get to it, of the value that the transport investment brings. That is in our interest, and it is in the wider interest. It may cheer you to know we are actively on the case with the Welsh Assembly Government on the values of electrification.

Chair: Okay, we have another 15 minutes before the next vote. Stuart, Chris, Richard and Austin, and then I will sweep up.

Q109 Mr Jackson: Can I bring out some of the points Jackie Doyle-Price alluded to? Some of the answers that you have given are a bit concerning. It is not as if we are just closing the chapter on High Speed 1; we are also opening the chapter on High Speed 2.

It seems to me that you have not fully scrutinised the regeneration possibilities’ opportunity costs. You mentioned Ebbsfleet. For my sins, I was the Opposition regeneration spokesman in the last Parliament. When I went to Ebbsfleet, four years ago, a fight was going on between Medway, Swale, Kent county council, British Land and Land Securities. You only have to look at a massive project like Dubai Ports in south Essex, which has gone on for years and years. In fact, Lord Mandelson had to fly to Dubai personally to try to sort it out. It seems strange to me that you have already said today that you do not have a methodology for regeneration for High Speed 2. At the moment, you have not built that in. It seems to me that if you are not modelling regeneration, you do not actually have many quick wins.

It is not carbon-neutral, because you do not fly to Heathrow to go to Birmingham; you take the train. You have compulsory purchase orders. You have seven to nine years to get Euston right, and Frank Dobson will tell you a lot about that. You have displacement activity and opportunity costs even in the midlands, around places like Coventry. You have got the same thing for the east coast main line, as Mr Mitchell and I have said. And, of course, some people would say that you have got some exceedingly dodgy figures on people working on the trains and what that is actually saving the taxpayer. If you add to that the anecdotal evidence from, say, the Dutch model, that you will actually suck economic activity into the capital rather than dissipating it out to Birmingham, what have you got left?

Philip Rutnam: Can I answer that in relation to regeneration? We do have a methodology. We know how to value these things. What we do not yet know, I believe, is enough about the scheme at Old Oak Common and on the east side of Birmingham to say whether this kind of development will be commercial or retail, what number of people it will involve and what else might happen if the rail project does not happen-how much it is worth to society. That is the issue.

To be honest, compared with rail engineering-a huge amount has been done on the rail engineering. How do you build the rail line at the lowest cost and the best environmental impact between London and Birmingham or Lichfield? The regeneration side of it is just less far advanced. It will get there, and I absolutely recognise, as you are saying, that we need to be thoroughly on top of it, because it is a big part of the benefit that this project could bring.

Q110 Mr Jackson: I did not even mention people chaining themselves to the infrastructure in the Chilterns, which will be another issue in terms of environmental impact. It worries me. Unless you can demonstrate absolutely conclusively what this will bring to the national economy over this massive time scale, when the business case is apparently quite weak, I think you will stay on red.

Philip Rutnam: Just to be clear, we do not think the business case is weak-that is probably another discussion-but we will be doing all that we can to try to assess the best regeneration options and what influence Government and HS2 Ltd can have on those regeneration options, to create the greatest possible value from this project. It is strongly in our interest to create the greatest possible value from the project. It is just at an earlier stage. Did you want to add anything to that, Steve?

Q111 Chair: No, I have got three more people, and we are quite tight. I was going to clean up at the end on that one. So the benefit-cost ratio of HS2 matters to you?

Philip Rutnam: Of course it does.

Q112Chair: Accepting that there are some things that are difficult to quantify.

Philip Rutnam: Of course it matters to us, but it is part of the wider picture of the business case.

Q113Chair: It is the key determining issue?

Philip Rutnam: No. The Department has a very clear methodology, in which it says that the business case for a project has got to rest on a number of different pillars, of which the benefit-cost ratio is a key input into one, but not the only one.

Q114 Chair: At what point does the benefit-cost ratio demonstrate that it is poor value for money? What sort of ratio are you looking at? What are you looking for?

Philip Rutnam: We have a very sophisticated methodology in the Department for looking at benefit-cost ratios. We give projects different sorts of labels. We say that if a project has a benefit-cost ratio of under 1, it is likely to be poor value for money. 1 to 1:5 is low.

Q115 Chair: So are you looking for above 1:5?

Philip Rutnam: The benefit-cost ratio is only one element in the value for money judgment.

Q116 Chair: I accept that. Are you looking above 1:5?

Philip Rutnam: Obviously, we want the benefit-cost ratio to be as high as possible, consistent with doing a very robust, impartial analysis of the project.

Q117 Chair: I just want a yes or no answer, then I will get everybody else in. Yes, you are going to look at the OBR’s most recent growth projections in determining that?

Steve Gooding: Yes.

Q118 Chair: Okay. On value of time, which is an issue that everybody criticises, are you changing the assumption that the value of time for a long journey should be £54 an hour, whereas the value of time for a commuter journey should be £7 an hour?

Philip Rutnam: We have said we will continue to seek to improve the methodology.

Q119 Chair: Do you accept that there is something wrong with that?

Philip Rutnam: I accept that things can always be improved, but nobody in the world, to my knowledge, has come up with a better methodology. The methodology that we have used is one, as we have said, that we have tested with the leading academics in the field.

Q120 Chair: Do you accept that if you retain that, it gives a heavy weighting to work-time travel? £54 per hour if you are on a long journey and £7 if you are on a commuter journey.

Philip Rutnam: Savings in the time of business travellers are part of the business case, but they are only a part of the business case.

Q121 Chair: Do you accept that it gives a large weighting to that?

Philip Rutnam: Obviously, the higher the figure, the greater the weighting, but it is only part of the business case. As I was trying to explain earlier, if you suppose that working time spent on trains is used productively, you need to consider what impact on productivity comes from the greatly reduced crowding compared with not investing in the project. We have tested that in the sensitivity analysis.

Q122 Chair: Okay, but if you accept that it is heavy weighting, which I think you have-I understand that it is not the only factor you have taken into account-you also then further accept that it could prejudice your decisions in favour of investment in long-distance rail infrastructure rather than in the regional infrastructure that a lot of us have been arguing about.

Philip Rutnam: Absolutely not. We try to maintain our methodology.

Q123 Chair: You must do. If your methodology gives you £54 an hour for a long journey, which you have confidence in, as opposed to £7 for the short journey-the commuter journey-that must have an impact. That weighting must favour long journeys.

Philip Rutnam: Any methodology necessarily involves making assumptions. Our task is to make sure that those assumptions, given the complexity of this, are the best approximation that we can evidence in relation to reality now and in future. We will seek to maintain our methodology to be the best possible. That is what we have done so far.

Q124 Chair: I hear that, but I hope you accept that the weighting has an impact. It was rather surprising when I looked at this in detail, but you assume that all the journeys on HS1 benefit the UK economy, whereas presumably half the people travelling to and from Paris and Brussels will be benefiting the French economy, the Dutch economy, et al.

Philip Rutnam: The approach that we have taken to international travel, which is only part of half of the travel on HS1, absolutely accords with guidance from the Treasury in relation to the Green Book on how to value-

Q125 Chair: Are you happy with it, Mr Rutnam? Do you think it is fair? Are you trying to do a real, proper benefit-cost analysis? All these assumptions shove you in one direction.

Philip Rutnam: No, I do not think that is fair. Interestingly, on this question of international travel, I came across another version of it when I was at Ofcom dealing with the regulation of mobile services. In the case of non-UK residents coming to the UK and using their mobile phones here, the question was do we care if they face excessive charges? The answer was yes, of course we care. We do not want to extract value from that.

Q126 Chair: It is a different issue.

Philip Rutnam: Underlying it is the same issue. We want to have the optimal use of resources in the UK-the optimal use of goods and services that are created. To be honest, I do not think that policing whether they go to people with UK addresses or non-UK addresses is very sensible.

Q127 Mr Bacon: On that point, I was talking to Ofcom the other day about mobile telephony and of course we all want the optimal use of resources, but, at the end of day, what constitutes the optimal use becomes slightly political. I will be very happy if mobile telephone operators make slightly smaller profits, consistently and for ever, if they are regulated into requiring 100% coverage, so that very rural constituencies like mine can operate. It would have a huge economic impact and I would go around looking for a model until I found one that showed the economic impact that I wanted, because it would benefit my constituents. I can understand, because all of the things that our previous witness Mr Wallis was talking about-about costs and sensitivity in analysis and value in time-the way that you are talking about refining your model and making it more sophisticated. That all makes sense rationally. Do you know, however, what Franklin’s gambit is?

Philip Rutnam: No, that is new to me.

Q128 Mr Bacon: I recommend that you watch-it is on its website-the Policy Exchange lecture that Professor John Kay gave the other day. He quoted Benjamin Franklin, who said: "So convenient a thing it is to be a reasonable creature, since it enables one to find or make a reason for every thing one has a mind to do." It seems to me that, at the end of the day, that is how it works: you decide what you are going to do and then you find reasons for it. I am not saying that that is wrong, but that is how it works. This Committee went to the United States a few years ago and met an academic called David Luberoff, who has written a very good book called "Mega-Projects", not to be confused with a book by Bent Flyvbjerg’s book of the same name. Essentially, there is quite a lot of evidence that proponents of projects go round getting the technical analyses that they want until they say the right thing. If they do not, the technicians are sent back to produce other numbers until they produce the right ones. We have seen that many times in PFI.

You mentioned yourself that the benefit-cost analysis is only one of the contributors. When you have several important components-you called them key pillars-no matter how much you refine the methodology, who decides whether you put a 29% weighting or a 76% weighting or a 54% weighting on benefit cost ratios rather than something else? Ultimately that decision has to be plucked out of the air, does it not? We are not asking you whether this is all a complete waste of time, because it plainly is not. You have to reach for some sort of rational methodology somehow, but at the end of the day, aren’t you sculpting with clouds?

Philip Rutnam: No, I do not accept that. I do accept that there are real limitations on how far you can go in forecasting, which we talked about earlier, and in projecting the impact that a project like this will have. There are real limitations. It is really important to go through the exercise of making the best possible analysis on the basis of the evidence that is available, but we know, I can tell you, that in 20 or 30 years’ time, looking back at this project, the estimates we have made now are very unlikely to be exactly right. They may be, but it is in the nature of forecasts that you are dealing with uncertainty. I agree with you that with projects on this scale, involving this level of uncertainty, making some strategic judgments about the case for the project compared with not doing the project are critically important, alongside doing the modelling, the quantified analysis, the quantitative risk assessment and so on-critically important.

May I add one word on that? We have talked a great deal today about doing HS2. If we do not do it and there is anything like the demand that I have been talking about in relation to long-term projections for rail travel-the projected population increase of 10 million over the next 25 years, the fact that, God willing, our incomes will continue to rise by something like 50% in real terms over that period-all those things will drive demand for rail travel. As the Secretary of State said, unless we make strategic decisions now to cope with that situation, we will find, in 10 or 25 years’ time, that it is too late.

Chair: Hang on, I am just going to bring Chris in.

Q129 Mr Bacon: Can I finish? I hear what you say. It may be that the guess would be wrong, and it turns out that you actually had something that was more valuable. Professor Kay gave an example of the Victoria line whose useful life has ended, according to the economic model, but it is probably more valuable now than it ever was-[Interruption.]

The Division bell has made me forget my question. The counterfactual that you surely need is not simply cost of the HS2 or HS1 versus not doing it, but versus the cost of an alternative. For example, what would be the effect of spending £32,000 million on broadband, on travel packs? If you don’t look at something like that, how do you end up with anything that is remotely useful?

Philip Rutnam: The Government, of course, do have a broadband programme.

Q130 Mr Bacon: Yes, £510 million. And they are spending 64 times more on rail on one project than on the entire broadband.

Philip Rutnam: There are tens of billions of private sector investment, of course.

Q131 Mr Bacon: This is true. It doesn’t help the last 2%, which it might represent in a very rural area. If you had a completely wired-up, fibred-up country, the impact of that on travel would probably be absolutely ginormous.

Philip Rutnam: It is an interesting question.

Q132 Mr Bacon: It is, but are you asking it? Are you asking it or are you leaving it to me to ask it? If it were such an interesting question, are you asking it?

Philip Rutnam: I have seen nothing in relation to communications technology that suggests that it has actually at the moment been dampening demand for rail travel.

Q133 Chair: He is asking, "Are you asking about it?"

Mr Bacon: Are you asking that question? Google didn’t existing in 1998. The fact that you "have not seen any evidence" is a lovely phrase. I know that the Government use it all the time: "There is no evidence". But are you asking that counterfactual question? If not, why not?

Philip Rutnam: We try to ask as many challenging questions as we can.

Q134 Mr Bacon: Is that one of them? What would happen if you spent £32 billion on broadband?

Philip Rutnam: Not that precise question, no.

Q135 Chris Heaton-Harris: In the last couple of reports, your Department has been very poor at predicting consultancy costs. I know that a lot of consultancy costs are involved in this project. I wonder if you can just drop us a note saying what you have spent so far on consultancy, and what your predictions are, so we can just match you to that.

Philip Rutnam: The Department as a whole or on HS2?

Chris Heaton-Harris: On HS2, sorry.

Philip Rutnam: Right. I know that we have a budget of around £300 million this year for progressing the project. There is a great deal of work to be done.

Chair: I think that we will stop there. Nick is the only one who I haven’t brought in. Thanks very much. We are going to vote in the Division. Given that you have been in the job for a week, congratulations! That was a really good evidence session.

Philip Rutnam: Thank you.

Prepared 20th April 2012