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High Speed 2: Cost escalation is not the problem – it’s the symptom of a deeper problem

Cost escalation with High Speed 2 (HS2), the UK’s first railway network to be built in more than 100 years, is eye-popping. But it is a mistake to believe that cost escalation is the problem that we need to tackle, say Nuno Gil, Professor of New Infrastructure Development, and Ian Reeves CBE, Visiting Professor at Alliance Manchester Business School.

Cost escalation is not the problem. Cost escalation is merely one symptom of a much deeper problem – our failure to measure the societal and environmental gains that large infrastructure projects can produce. But let’s try to understand how we got into this conundrum.

Back in 2009, HS2 Ltd, the arms-length government body charged with delivering the new railway, was launched to great fanfare with the aim of improving connectivity and capacity in the national network. Since then, its business case has evolved dramatically as key stakeholder groups started to make legitimate claims on the HS2 budget, arguing the project needed to allow for much greater creation of social welfare – and rightly so. After all, we live in an advanced liberal democracy and the railway scheme not only uses substantive taxpayers’ money in an age of austerity, but also asks for legal powers to force land sales, compromising the sacrosanct principle of property rights.

Local authorities along the route, for example, demanded that their voices should be heard. Manchester is a case in point. The original plan for a very basic HS2 station in nearby Salford evolved into a grandiose city centre station, one which was to be fully integrated with the existing station in Piccadilly following mounting local pressure, more than doubling the cost forecast. As well as this, local stakeholders demanded to lengthen the tunnel into the city centre station to avoid disruption to local communities and a second station was also to be added to the route at Manchester airport.

Thus, the purpose of projects like HS2 has to go beyond the economic case. In a democracy, a government can’t just impose its vision after consultation. The same is true for private investors. Rather, projects need to gain consent through consensus-oriented negotiations. Today, HS2 is no longer a railway building project, it’s an economic development programme. That is what its highest-priority stakeholders have consented to. So be it. And yet, wider levels of society also demand accountability and predictability in cost from the onset and rightly so too. But how can we square the circle?

Codifying Immeasurable Social Gains

As major projects face demands for a much deeper level of stakeholder enfranchisement, is it inevitable that costs will get out of control? Yet, if we stick to the current tools we have to measure value. Today, major projects like HS2 are only approved after initially demonstrating that they are “value for money”. But while we know how to codify, count, and verify economic benefits, there are many social and environmental benefits that go beyond the law, or exist in grey areas, that key stakeholders demand projects to realise (as well as disbenefits to mitigate) - yet we can’t properly quantify them.

So, we can forecast the number of passengers who will use HS2 and its impact on their productivity, as well as some expanded economic benefits, such as the impact on property prices. But we can’t measure many potential benefits such as improvements to quality of life; creation of local jobs; technological spill overs; and changes to health and safety practices. Neither can we measure the value of mitigating environmental disbenefits such as carbon emissions; threats to biodiversity; landscape impact; and noise pollution. Put simply, we do not know how to measure the social and environmental value that major projects are expected to create by playing the role of moral actor.

And so the game starts. Project sponsors have no alternative but to exclude upfront the costs of realising social gains that go beyond the law to make the project “bankable”. And then, consultants are brought on board to mitigate the “stakeholder risks” and keep the project on target. To no avail, of course, as HS2 and many others show. Unless costs slip, the highest-priority stakeholders will not consent to the project. Like the local authorities on the HS2 route.

To make matters worse, as costs escalate, society starts to question the ‘character’ of the project. As the trust deficit widens, extra layers of scrutiny and control are added, depriving managers of decision-making autonomy and hurting productivity. Further, because the benefit to cost ratio doesn’t acknowledge the additional social and environmental benefits, the value for money appears to worsen. This causes wider support for a project to decline, just like we are now seeing, with politicians under pressure to scale down HS2, slashing elements essential to realise its full economic value. So, major projects get trapped in a vicious circle of incomplete budgets, cost escalation, mistrust, and value destruction.

Economic value cannot be the currency

What we need are new metrics to inform decisions on capital investments; as of now, the benefit to cost ratio just isn’t a realistic measure of all the value that can potentially be created. We need much better metrics to quantify the economic, social and environmental benefits that society will demand, including gains in social welfare, inclusion, equality, job creation, technological spill overs, resilience, redundancy, safety, and biodiversity.

Better metrics will support greater efficiency as projects won’t have to play a game upfront to look bankable whilst knowing they will have to be fully redesigned along the way, just as HS2 has been. Instead the costs and benefits of realising social gains can be codified earlier, and projects can enfranchise the highest-priority stakeholders earlier and negotiate quicker a purpose to which society consents. By getting the value distribution right at the start, there will be less disruption during execution, less need to engage in endless cycles of rework and of negotiations with non-user beneficiaries. And crucially there will also be a better basis to not only agree who gets what, but also to who pays what.

Researchers and policymakers around the world are working on this. Just recently, the G20 has produced new guidance to measure the positive effect of new infrastructure in developing countries on tackling gender inequality. Progress on measuring the benefits of investment in decarbonising capital projects is also happening. And advances have also been made on the value of negotiating community-benefit agreements or public sponsorship funds to realize social gains.

What we saw tackling the Covid-19 pandemic suggests we are at a tipping point of a major paradigm shift as to the values that we cherish as a society. As such, old ways of measuring the value of large-scale projects need to die so the game can stop. After all, science advances funeral by funeral. So should project appraisal policy advance too.

Blog posts give the views of the author, and are not necessarily those of Alliance Manchester Business School and The University of Manchester.

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