Opinion
Making a fast buck
It is still not clear exactly how the new high speed rail line, HS2, would be funded. anooj Oodit looks at the options
T
he controversy over the route of HS2 may have reached a temporary truce, but the debate over its cost is as vigorous as ever. Many of the question marks over its business case simply refuse to go away.
Estimates for its benefit to cost ratio have been revised down several times, with the latest projections for the first leg of the route looking particularly bleak. In April, it was widely reported that the BCR had fallen to just 1.2 to 1.
HS2 itself confirmed that it had cut its BCR estimate for the London to Birmingham phase by 0.2, and for the entire route by between 0.3 and 0.4.
But while arguments over these numbers have hogged the headlines, less attention has been paid to where the funding is going to come from. This is perhaps odd, because if you really want to assess the scheme’s value for money – you have to factor in the ‘cost’ of that money.
The coalition government has offered to underwrite the development costs of HS2 – projected to be around £800m. But with construction not due to begin until after the next government is elected in 2015, and the chancellor sticking to his mandate to tackle the deficit, the Treasury is unlikely to suddenly start writing cheques to pay directly for HS2. Expensive public projects, whether in infrastructure or social infrastructure, can be paid for in a variety of ways, but the levers available to government are interdependent and complex. The most obvious way to fund a public project on the scale of HS2 is to borrow the money from the private sector. The likely candidates to provide the vast sums needed are
pension funds – both UK and overseas. Their fund managers are above all looking for lower risk, long-term returns. In other words, exactly the sort of thing HS2 could provide. Many pension funds have reduced their exposure to the stock markets as the world economy weathers the current storm, and are looking for alternative places to park their cash. UK pension funds currently have capital of £1.5 trillion invested. In his last autumn statement, the chancellor said he wants them to invest £250bn in infrastructure projects. HS2 – and particularly the ‘spurs’ to Manchester and Leeds should be an appealing investment proposition for them.
In return for an investment in the construction cost of the project, the funds would be granted a share of the profits for an agreed period. Pension funds in Australia and Canada have long been major investors in infrastructure projects, both in their home markets and in the UK. A consortium of Canadian pension funds currently owns the railway link between London and the Channel Tunnel, and Chinese and Korean pension funds are also looking closely at the UK for potential investment opportunities.
However the model has not been so widely adopted by UK pension funds, in part because they tend to be smaller and don’t have the same sheer depth of liquidity.
The scale of the sums needed to develop HS2 is so great that it would almost certainly need a syndicate of pension funds to invest. Keeping a diverse group of investors happy would add an additional layer of complication, but need not be an
SEPTEMBER 2012 PAGE 49
Shutterstock/VI Photos
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