Merryn's Blog

HS2 cost estimates have overrun. Who'd have thought it?

The government's initial cost estimate for HS2 has already been blown out of the water. No surprises there then, says Merryn Somerset Webb.

Back in 2012, we had a quick look at the estimated costs and benefits of HS2. Most of the numbers coming from the government appeared to be close to nonsense (finger in the air guesses about the economic benefits to businesses of clustering together more, and so on), and the Institute of Economic Affairs (IEA) had noted that the analysis done up until then on the finances of the project looked to be "pushed to the limit of what is academically rigorous."

The truth is that the majority of big government projects overrun their cost estimates by ludicrously large amounts (witness the Olympics), and very often destroy more value than they eventually create. You can read my editor's letter on the matter hereand a later blog here. But the key point is that 90% of big infrastructure projects have cost overruns, and in the case of rail, that overrun is around 45% of the original budget.

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The numbers we looked at in 2012 suggested that if HS2 overran by the same amount, it would "generate a loss of 79p for every £1 spent on it." You won't be pleased to hear, then, that this is now pretty much a best case scenario.

In 2012, the total cost estimates came in at around £33bn. By early this year, they were up to £34.5bn. In June, we got the latest official estimate in at £42.6bn (in 2011 prices). We now find that, according to the FT, the internal Treasury opinion is that the final cost will be more like £73bn (2013 prices), while independent estimates from the IEA put it at £80bn. Even if you take the lower figure (and adjust it back for inflation), we are already into a 100%-ish cost overrun from 2012. Oh dear.

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