High-Speed Rail – Stephen Ashcroft takes a sceptical look at the costs

(We’re delighted to have a guest article from Stephen Ashcroft of Brian Farrington Ltd, procurement advisers, trainers and risk management experts).

The track record (no pun intended) of major railway projects being delivered to budget is very poor. The UK Transport Secretary, Patrick McLoughlin, has disclosed that the cost of the HS2 railway line between London, the Midlands and the North has risen by a third to more than £40 billion. We confidently predict that the final project outturn actual cost will exceed £80 billion. We have considered the timescales – it “is intended” to link London to Birmingham by 2026, with branches to Manchester and Leeds, via Sheffield “planned” by 2032.

Why are we pessimistic about the ‘estimated cost’?  Reasons are advanced by the Department of Transport, for the additional cost as ‘significant changes to the line, including more tunnels to avoid disturbing the environment and those living near the line’. We offer ten risks for the Transport Secretary to urgently explore:

  •          Major contractor enters into administration
  •          Flawed specifications lead to excessive contractor claims
  •          Department of Transport fail to adequately contract manage
  •          Unanticipated security costs to cope with protestors
  •          External advice on cost and programme is flawed
  •          Signalling systems fail to work and have to be redesigned
  •          Strikes by contractor’s labour delay the project
  •          The contract details omit to cope with through life costs
  •          Consultants and legal fees far exceed the budget
  •          The rolling stock fails to meet safety standards.

The HS2 project is not short of reports. In January 2012 the DfT published “Economic Case for HS2: Updated appraisal of transport user benefits and wider economic benefits.” At page 32 it states that Davis Langdon, the HS2 cost and risk consultant, has “updated and extended the HS2 set of base rates for the capital construction costs.” It also states that “a further review has been undertaken of contractor overheads, design and client-related costs.”

It continues, “As a result of the recent DfT cost challenge process, a number of adjustments have been made to alter London to West Midlands estimate.” Were Davis Langdon paid for the work associated with the cost challenge process? Page 34 is a revelation! “The enhanced level of services, which have been included in the Y network, mean that we require more rolling stock to operate the network than we had previously estimated.” It continues, “As a result we estimate the costs of rolling stock for the full Y network would be just over £8 billion including risk and optimism bias.” What exactly do the last four words actually mean?

In March 2012 “A report to Government by HS2 Ltd - HS2 Cost and Risk Model Report”, was submitted to Government by HS2 Ltd (It was published in January 2013). At page 2 (Para 6) it states “Our current estimate for the full Y network is, therefore, estimated at between £30.9 billion and £36.0 billion, with a mean value of £33.4 billion.” You will be enlightened to learn that optimism bias is the tendency of project planners to be optimistic about the costs. Really? Could a different interpretation be advanced – don’t provide real figures otherwise the project will be dead in the water!

Patrick McLoughlin issued a statement “As a responsible Government, we must be prudent. This means allowing the right level of contingency and for that reason the Government has set an overall indicative amount for the project of £21.4 billion for phase one and £21.2 billion phase two, a total of £42.6 billion in 2011 prices which includes £14.4 billion of contingency.” If rolling stock is added to this figure the project cost is now circa £50 billion.

There is an enlightening report published in January 2012 by the California State Auditor into the “High-Speed Rail Authority Follow-Up.” Does this quote sound familiar? “The high-speed rail network (program) overall financial situation has become increasingly risky. The cost estimates for phase one increased to between $98.1 billion and $117.6 billion.”

In terms of procurement (our specialism) it states that “It has delegated significant control to its contractors and may not have the information necessary to make critical decisions about the program’s future.” Of equal concern is the age-old problem of managing contractors and subcontractors.

Will we get similar audit report comment s onHS2? We are confident it will! The Californian audit report states “The Authority continues to struggle to provide an appropriate level of oversight – it is significantly understaffed and has struggled to oversee its contractors and subcontractors, who outnumber its employees by about 25 to one.”

More evidence of a failure to manage large rail projects can be found in the New South Wales ‘Millennium Train’ contract. It was reported by the NSW Auditor that capital costs had risen by 24 per cent and total project costs by 17 per cent.

Procurement risks lie at the heart of every major project. The “HS2 Cost and Risk Model Report” suffers, with regard to procurement risks, from brevity. At Appendix D: Phase one programme level risks; there are two only procurement risk category facets. The first is “Inappropriate procurement structure selected/tender rates not achieved.” The second is “Continental construction rates achieved.” Whilst there is a consequence listed there is no integration strategy!

Then, at Appendix E: Phase two programme level risks. This has a completely different layout than Phase one. At Appendix E there is a risk description – “there is a risk/issue that ………….” There are only two procurement related risks/issues. The first is “cost escalation for general material price fluctuations.” This has a probability of 25% occurrence. We say dream on! The second risk/issue is “Inappropriate procurement strategy used. Tender rates exceed plan or contractor insolvency.” This has a probability of 10% occurrence. We say dream on!

Criticism of the HS2 project is largely unwelcome. The political arguments centre on economic benefits (the NAO are unconvinced) and jobs being generated. We are 100% sceptical about the ability of HS2 Ltd to effectively manage cost and risk. In conclusion, we say £80 billion minimum for the project, always assuming it isn’t cancelled.

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