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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
Shutterstock/VI Photos
The 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