HS2 & Heathrow: planners in a muddle (again)

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HS2 & Heathrow: planners in a muddle (again)
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Master Investor Magazine 60

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The cost-benefit analysis of HS2 is dubious – and Heathrow will become unviable without a third runway. Why does the UK have such a troubled record on infrastructure planning? Victor Hill is asking.

HS2: What could possibly go wrong?

I have long since taken the view that the most momentous cock-up of British planning history was the decision in the early 1960s to close 6,000 miles of our railway network because motorways were the future. In fact, I cannot write or read the name of Dr Beeching without a perceptible rise in my blood pressure. He was the uber-ninny economically and historically illiterate “expert” (how I loathe that word) of all time. And we have had quite a few of them in this country.

Thanks to that man, one of the most comprehensive rail networks in the world was almost totally emasculated with grotesque economic consequences. The post-Beeching network was entirely London-centric and as branch lines were axed so huge numbers of rural businesses became unviable. (If you want to travel from Oxford to Hull you now have to travel via London.) It also laid the foundations of the car-first transport system which is so inefficient and environmentally deleterious. Before Beeching, rural communities were connected; after Beeching, without a car, people became isolated. Beeching was the insouciant author of the North-South divide.

Since then, the history of British infrastructure projects has been, with a few rare exceptions, a litany of projects which come in late and over-budget and deliver less than they promised. Crossrail (aka the Queen Elizabeth Line) is currently at least 14 months late and is already £3 billion over budget. Apparently, British engineers are very good at tunnelling; it is the fit-out of the stations that has gone badly awry. Bond Street station (still a building site today) was supposed to cost £126 million but will finally cost over £400 million.

On 11 February Mr Johnson announced to the House of Commons that HS2 – the fast-train project that first saw light in the early Cameron-Osborne years – would go ahead. Many senior Tories think that this was the new government’s first mistake. This represents £106 billion (up from an original £56 billion – and Lord Berkeley[i] thinks it could exceed £230 billion[ii]) which could be spent much more productively elsewhere with far less environmental degradation. HS2 will shave 20 minutes off of the journey time between London and Birmingham and potentially 40 minutes off of the London-Leeds run. But the journey from Liverpool to Hull (via Manchester and Leeds, of course) will still be Hell-on-wheels. Certainly, Bob Seely MP thinks so.

Many Tories regard HS2 as a vanity project which will inflict environmental damage without compensating economic advantage. Its green credentials are mythical – it means replacing ancient oak trees with saplings. Lord Randall thinks that pile-driving is already contaminating aquifers. If this is about enriching the North, many northerners are sceptical. Even Mr Johnson’s éminence grise Mr Cummings is opposed. And the idea that people will give up their cars in favour of fast trains is nonsense as tickets will be exorbitantly expensive.

Unfortunately, it seems that the deep state had already determined that the project would go ahead. Even though HS1 (St. Pancras to the Channel Tunnel) has been of very little economic value to the people of Kent. The real gainers were the City fat cats who glide at 220 kilometres per hour towards Paris and Brussels while quaffing Champagne.

Could the Chinese build HS2 more cheaply?

According to a World Bank report published in 2014, China’s high-speed rail network has cost between $17 million and $21 million per kilometre, even though it has a huge number of large-scale viaducts and tunnels. In Europe that figure is between $25 and $39 million per kilometre; and in California, the only US state currently planning a high-speed line, it’s more like $56 million per kilometre[iii].

How do the Chinese do it? Firstly, labour costs are still much lower in China than in Europe or the USA. Second, in an authoritarian state like China, the cost of moving people out of the path of a new line is negligible (both in terms of compensation and legal costs). Third, the sheer scale of the enterprise – a joined-up plan to build up to 25,000 kilometres of new high-speed track over 15 or so years has engendered massive economies of scale. Fourth, the Chinese authorities have been able to standardise design – of embankments, tracks, viaducts, and signalling and communication systems – which eliminates duplication.

They have also standardised construction techniques. China has built thousands of railway viaducts to save precious farmland and, even though they are expensive to build, the cost was kept down by standardising the design and manufacture of bridge beams. Their span is standardised at either 24 or 32 metres and they are cast in temporary factories set up along the route.

China’s pre-eminence in tunnelling most impressed the World Bank. The Chinese system for tunnel construction resulted in a unit cost of $10-$15 million per kilometre, a fraction of what it costs New Zealand ($43 million), the US ($50 million), and Australia ($60 million). The system allowed China to tunnel fast at a rate of 5-10 metres per day.

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It’s not surprising that China is exporting its railway building expertise to Africa. Two years ago I witnessed for myself the construction of the new Mombasa-Nairobi-Kigali high-speed line in Kenya. This is being built largely by thousands of imported Chinese workers who live in “temporary” villages. (Apparently, Africans are not up to the task – or so their leaders have determined, having been (let us say) persuaded by the Chinese that it is in their best interest to look the other way.)

But could the Chinese do a better job of building HS2? On 14 February the China Railway Construction Corporation (SHA:601186) wrote a letter to HS2 CEO Mark Thornton suggesting that it could build HS2 in five years flat as against the 15 years currently envisaged – and at well under the current £106 billion price tag. That is a historical irony as 150 years ago it was the British trading company Jardine Matheson (SGX:J36) which built the first railway in China (from Shanghai to Wusong).

No doubt the Chinese could do a decent job. But the political implications would be alarming. Just as Huawei will be embedded in Britain’s 5G network and China Nuclear Corporation (SHA: 601985) is bank-rolling the new nuclear power plant at Hinkley Point C, so the China National Offshore Oil Corporation (HKG: 0883) controls two of the North Sea’s biggest oilfields. Not forgetting that Jingye Group (SHA:600768) is buying British Steel. A Chinese take-over of HS2 would only increase China’s unwelcome grip over British life. Would they import tens of thousands of Chinese labourers as they do in Africa?

In France the high-speed link from Paris to Rennes (Brittany) was first mooted in 2005, tendered in 2008, commenced construction in 2012 and opened in 2018. It cost €2.5 billion. The French would never have dreamed of asking for Chinese help.

The environmentalists fight back

On 03 March the populist ornithologist, Chris Packham, launched a legal challenge against HS2 claiming that it was “unlawful”. This came days after the Court of Appeal ruled that ministers had violated the sacred Paris Climate Accord (2016) when they approved the third runway at Heathrow.

Even HS2 Limited admits that the line will not be carbon neutral over its 120-year projected lifespan. The Woodland Trust claims that it will damage 693 wildlife sites and 108 ancient woodlands. And the decision to go ahead with HS2 was made with the proviso that the budget had to be subject to discipline. Many environmentalists fear that cost savings will be achieved at the expense of environmental mitigation such as noise barriers, animal habitats and green bridges for wildlife.

Heathrow contra mundum

Heathrow’s boss, John Holland-Kaye, says that without a third runway there can be no Global Britain. Heathrow is Britain’s biggest freight port, handling £106 billion of goods in 2017 – that’s more than Felixstowe and Southampton combined – and 40 percent of UK exports. As I have written here before, Heathrow is the only major airport hub in the world with just two runways operating at full capacity 24/7/365 – and this has been the case for nearly three decades.

Anyway, on 27 February the Court of Appeal ruled against the third runway on the ground that it was it would prevent the UK from reaching its target of going net carbon neutral by 2050.

Actually, that is highly questionable – which is why Mr Holland-Kaye will be taking the case to the Supreme Court. For a start, jet aircraft are getting much cleaner and quieter; for seconds, there will be short-haul electric aircraft in service soon. Moreover, the carbon footprint of an airport is as much to do with its transport links as with how many runways it has. And what is the carbon cost of hundreds of aircraft stacking over the Home Counties and British exports re-routed through Paris?

Whatever the passion of Mr Holland-Kaye’s case, the Johnson government has now abandoned him, saying that they will not appeal further. That reflects the fact that the Johnson inner circle (which includes the environmentalist Lord Goldsmith) was always anti-Heathrow. This change of tack opens the government to legal action from Heathrow itself which has already invested £520 million in the planning phase. Everybody knows that if international airlines cannot get new slots at Heathrow they will book them at Charles de Gaulle, Schiphol or Frankfurt.

There is the logistical argument that Heathrow is in the wrong place – it should never have been re-located from Croydon in the 1950s. London does have five satellite airports which could be extended. But that, curiously, is not government policy. They have let Flybe crash – thus decimating Southampton and Belfast airports. Is that a policy?

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China plans to build 216 new airports by 2035 and India plans to open 100 new airports in the next five years. No doubt their worships will contemplate the total futility of their ruling when they come to retire at the Best Exotic Marigold Hotel.

And if that ruling creates a precedent, the government’s £28 billion roads programme could also face legal challenges. As for the £20 billion Scotland-Ireland Bridge – forget it. Given the sinister Thunberg-Goldsmith alliance, allinfrastructure is off limits.

Why does Britain get it so wrong?

Torsten Bell, Chief Executive of the Resolution Foundation, thinks that there are three main reasons for Britain’s poor performance in the sphere of infrastructure. Firstly, the flow of investment is volatile, with big-ticket gestures announced one year and spending slashed the next: a case of feast and famine which weakens the engineering and construction base. Second there is a lack of transparency in the project-selection process. Third, more infrastructure decision-making is vested in the hands of the state than in other countries. In the US more than half of infrastructure spending is carried out by the private sector but here only one third. This is partly because of the complexity of the UK’s planning rules and partly because big business is not sufficiently incentivised to initiate new projects.

None of this will be easy to resolve quickly.

Marking his card

Like all Tories and all Brexiteers I have taken to giving our PM the benefit of the doubt. This is the man who cut the Gordian Knot of Brexit, won a stonking majority – and got us out. He transformed the political landscape.

But forgive me if I still have the same doubts about his judgment that I voiced during the bizarre Tory leadership race in the summer of last year. Since the election victory on 13 December, Mr Johnson’s government has made a series of dud decisions – of which giving Huawei our passwords so that they can hack us for evermore is one of the most egregious.

He was supposed to surround himself with the finest minds and skills. Instead, Downing Street is apparently teeming with geeks and weirdos who, inter alia, are planning the euthanasia of British farming, the hollowing out of the Army and the imposition of wealth taxes…There is no philosophical centre. I’m worried.

***

I wrote my piece on the Covid-19 pandemic (for so it is) last week as a dispassionate risk analyst reporting to the investment committee of a hedge fund (a role I undertook for years). Readers divided more-or-less evenly between those who thought I had summarised the available information effectively and those who thought I was mischievously engendering panic (as Ms Thunberg aims to do).

If anything, given what has happened over the past week, I think my assessment was overly optimistic. I have been plotting the mortality rate of the virus on a spreadsheet and it is actually rising. (It is 3.43 percent as I write on Thursday morning[iv]). Then we learnt that the virus is already mutating into more aggressive forms. That will make the search for a vaccine more difficult. There is no credible scenario in which this pandemic will subside before the final quarter of this year – and a period of partial global lockdown could continue much longer.

What is clear is that the bull market of ten years has finally run its course. On Monday, Wall Street rose; only to lose all its gains on Tuesday – despite a desperate interest rate cut by the Fed (followed by Australia and Canada). It bounced on Wednesday: though that was more to do with the evisceration of Mr Sanders on Super Tuesday.

In the light of hindsight we might conclude that the bull market was about to run out of steam anyway, given global macroeconomic factors and unrealistic valuations. But corona virus has been the proximate cause – the spark that lit the flame – and it has the potential yet to cause economic havoc; even though, statistically speaking, none of the readers of these pages will die. (Or so I pray.)

Whatever Mr Trump says, the party is over.


[i] See his Dissenting Report available at: https://theengineer.markallengroup.com/production/2020/01/Lord-Berkeley-HS2-Review-FINAL.pdf

[ii] See: https://www.theconstructionindex.co.uk/news/view/berkeley-publishes-his-dissenting-report-on-hs2-failings

[iii] See: http://www.globalconstructionreview.com/sectors/why-china-can-build-high-speed-rail34socheaply7365/

[iv] See: https://www.worldometers.info/coronavirus/

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