Oral evidence: HS2 and Euston: recall, HC 67

Oral evidence, 16 November 2023.

Witnesses

Alan Over, Dr Nick Bisson, Sir Jon Thompson KCB and Dame Bernadette Kelly DCB.

Chair

Welcome to the Public Accounts Committee on Thursday 16 November 2023. We are here today to look again at the High Speed Two rail project. This was intended, of course, to build a high-speed, high-capacity railway between London, the West Midlands and the north of England. In October, the Prime Minister announced that phase 1 would continue, but that, beyond Birmingham, there would be no more HS2. We have been backwards and forwards with the Committee since then, pushing on some of the costs of this. We were pleased that the latest update to Parliament was late yesterday—we understand that that was just the normal timeframe, so no criticism of the Department for that—which lays out some of the issues. Just to be clear, that report is on 2019 prices, and you will be moving to reporting on 2023 prices in the next report.

Dame Bernadette Kelly

I cannot confirm that. That is subject to Treasury approval. Treasury’s general stance on these things is that you would reset at the time of a spending review. We are still in discussion with the Treasury and I would not want to give a commitment to the Committee that that will definitely happen.

Chair

Part of the reason why I raise it is because, when we, as a Committee, worked with the Department to get this reporting done in a way that was useful to Parliament and the public, rather than sometimes the way that officials want to report things, we were clear about the baseline being the same, so that we could make comparisons.

Dame Bernadette Kelly

Yes, indeed.

Chair

That is confusing people now when we talk about the cost overruns, but we are looking at 2019 prices and a future report might be at 2023 prices. What I would just flag is that, whichever way it goes, we need to have real clarity about what is a cost increase because we are working from a different baseline and what is a cost increase because costs have gone up.

Dame Bernadette Kelly

We strongly agree. It is absolutely imperative that we are able to distinguish between those two things. In an ideal world, we would like to see the price base uprated so that we are now restarting, as it were, in a way that is absolutely clear, as you say, about what is inflation uplift and what is a natural cost increase. We are working with the Treasury. We will always seek to provide as much clarity as we can to the Committee and to be very clear about the basis for the numbers that we are using as we use them.

Chair

Those are wise comments in front of the Comptroller and Auditor General. I do not know if he wanted to add anything here.

Gareth Davies

We will make sure that the accounts record the correct costs, and then the clarity on the baseline is there for the Committee.

Chair

We will be marking the homework.

Dame Bernadette Kelly

Yes, indeed.

Chair

Thank you for that. I would like to introduce our witnesses. We have Dame Bernadette Kelly, the Permanent Secretary at the Department for Transport. We have Sir Jon Thompson, currently the executive chair of High Speed Two, having been chair and taken over. We will touch on that in a moment. I also welcome Alan Over, the director general of the High Speed Rail Group and the senior responsible owner for High Speed Two at the Department for Transport. Dr Nick Bisson is the director of the integrated rail plan and the Northern Powerhouse Rail at the Department for Transport. Before we go into the subject of HS2, Ms Olney has a couple of quick questions.

Sarah Olney

Dame Bernadette, I just wondered what progress the Department of Transport has made on assessing the business case that Hammersmith and Fulham Council submitted for the repair of Hammersmith Bridge.

Dame Bernadette Kelly

The work is still ongoing. I was aware of your interest and that you were likely to ask this question. I cannot give you a date yet as to when that work is complete. I can assure you that it is ongoing. I do not really have any other further information to share with you at this point, but we will continue to keep you closely informed on all steps being taken on Hammersmith Bridge.

Sarah Olney

I am also very interested in the Pedicabs (London) Bill that was announced in the King’s Speech, because this could provide an excellent opportunity for local residents in Barnes to get across the bridge when it is reopened to cyclists. I wonder if you have any information that you can share about when that Bill will be coming before Parliament, and general progress.

Dame Bernadette Kelly

It is in this session. I want to check on the planned timing of introduction. I think that it is one of our Bills timed to start in the Lords, but I will double-check that again, if you would not mind allowing me to write on the timetable.

Sarah Olney

That would be wonderful. Thank you.

Dame Bernadette Kelly

That is, we hope, a positive step forward in terms of regulation of pedicabs and making them more useful across London, but I will come back to you on that precise point.

Sarah Olney

Thank you. I appreciate that.

Mr Francois

I offer my apologies to members of the Committee and to the witnesses. I am afraid that I have to leave shortly for the funeral of a really very good man called Andrew Lee. I apologise if I ask a question and then shoot and scoot. No disrespect is intended. I understand that yesterday, when the Transport Select Committee was taking evidence on this, you were told that the Secretary of State had agreed that things needed to change in terms of cost control and performance. He has already had two meetings, Sir Jon, with the HS2 board, and I understand that you particularly have been placing an emphasis on this. My colleagues will go into the costs in detail, but, to frame that and for context, could you tell us what you and the board are doing to try to keep costs under strict control?

Sir Jon Thompson

Yes, certainly. It is good to see you again. There are five things that I have already introduced. This is week 7 for me, so bear that in mind when you want to crawl back through something or other that I might not quite be on top of. I have introduced five things already. We have streamlined the executive governance to very much focus on what the costs and the deliverables are. We have improved the management information significantly. It is worth explaining that the management information used to run, as it were, horizontally across the organisation, talking about health and safety in the round, as opposed to saying, “I am building this asset. What is that going to cost?” We have turned the management information around. We have changed the accountabilities, so that we have bedded our commercial and finance teams into the delivery organisations. We have recruited two further finance directors in the centre—one for in-year management in order to keep within the spending limits, and the other on risk. We have changed the financial risk modelling so that what you do to manage that risk is much clearer, which is a multibillion-pound issue. Those five have already happened. There will be a new board sub-committee for finance and performance, which starts at the end of November. In January, we are introducing a post called the chief railway officer. Although that might sound slightly odd, one of the lessons to be learned from Crossrail is that you need to have a single controlling mind for the programme overall, rather than working through individual lines. You need to have someone who integrates the whole thing and thinks about the railway from in-service to now, and how you get there, both as quickly and as cheaply as possible. We are introducing a new post in that regard. There are also significant changes to governance and oversight, which are with the Department and are laid out in the parliamentary update yesterday.

Mr Francois

Assuming this is a frugal individual, they will be known as the thin controller. In all seriousness, have you yet identified who is going to chair your finance sub-committee? Will it be you or someone else?

Sir Jon Thompson

We are in a slightly difficult corporate governance situation, but, at the minute, it will be me. In the last six months, I have significantly strengthened the board. We have recruited the recently retired chief finance officer of Barclays Bank Europe. We have also recruited the former vice-president of IBM to look at railway systems. That is also a significant key risk and a lesson learned from Crossrail. We will shortly advertise for two further non-executive directors to strengthen oversight, with a particular focus on cost control.

Mr Francois

I know from your time in the MoD that you were always hot on the money, so it is reassuring to have you in this job. Perhaps you could keep us updated as a Committee when these posts are filled and who fills them. That would be helpful.

Chair

Sir Jon Thompson, you are currently the executive chair, so what are the plans on replacing you with a chief executive?

Sir Jon Thompson

Where we are at the moment is that a job description has been agreed, as well as a person specification. We hired a relevant head-hunter to do all the work. The only outstanding issue is the question of salary, which is currently with Ministers. My recommendation to Ministers is that we change the reward structure so that it is much more heavily incentivised towards meeting the schedule and delivering to the lowest possible cost. It will be a lower base than Mr Thurston, but there will be more opportunity to earn a higher salary if you meet all the necessary targets on schedule and cost. That is currently under consideration by Ministers. Once that is agreed, we will be ready to go, and I would think that that will probably be the first month of 2024.

Chair

So the chief executive and the chief railway officer, just to be clear, are different roles.

Sir Jon Thompson

They are, yes.

Chair

Can you just explain how that will work?

Sir Jon Thompson

The idea of a chief railway officer, as I said in answer to Mr Francois’ question, is that you need someone who can integrate all of the elements of it. It is not just about everything that we do.

Chair

We learned this in Crossrail. It is a bit surprising that it is just being learned here. They will do that and will report directly to the chief executive.

Sir Jon Thompson

That is correct.

Sir Geoffrey Clifton-Brown

Good afternoon, everybody. Ms Kelly, I am glad to see you here in person, which probably means that you are recovering.

Dame Bernadette Kelly

I am.

Sir Geoffrey Clifton-Brown

I am pleased about that. You have provided us with quite a lot of interesting information on costs, and I would like to just go into those in some detail, if I may. In particular, on 14 November, you kindly sent us a letter telling us that the lower estimate of the BCR had gone from 1.2 to 1.1. I assume that is very significant, because, if it were to go below 1, it would mean that you were spending more on the railway than you were getting back.

Dame Bernadette Kelly

I do not think that it is as significant as you suggest. As you know, in the letter that I sent you on 4 October, I set out a BCR range of 1.2 to 1.8. That is based on the decision to proceed from where we are now. It adopts Green Book methodology. It excludes some costs. Because we are comparing to factual and not continuing with phase 1, it takes account of the remediation cost as well. That results in a BCR that we calculated at that point at 1.2 to 1.8. Since then, my analysts, ever diligent, have been continuing to refine and assure the numbers, and they have spotted a small transposition error in the way in which we did that calculation, which means that the range is now 1.1 to 1.8, but it is the range that it is important. It is not a single, fixed-point BCR assessment. In part, that is because there are quite a number of variables in the key parameters that we plug in to get to that BCR, so there are quite a wide range of potential outturn costs. We took the range of £45 billion to £54 billion for phase 1. There is uncertainty about the future treatment of Euston costs for the purposes of the BCR calculation, because we are now seeking private funding and financing for that, but we have kept that in. There is also quite a bit of uncertainty around demand, so we have a wide range of demand scenarios. There is quite a bit of uncertainty in the various parameters as well, which is why we end up with a range now of 1.1 to 1.8. I do not think that, if that suddenly became 1, that would reverse my assessment that continuing with phase 1 at this stage represents the right thing to do in value for money terms.

Sir Geoffrey Clifton-Brown

Nevertheless, the thrust of my question is that, if it drops below 1, it means that your estimate is that the costs are going to be more than the potential benefits that the country gains. We are very close to that point, are we not?

Dame Bernadette Kelly

If the totality of the range does, but it does not at the moment. It is 1.1 to 1.8, so I would say that, if you look at it as a range, it is sitting above 1 at the moment. You would need to see quite a lot of worst-case scenarios—the highest cost, the lowest demand, the least positive outcome on Euston in BCR terms—in order to land at or lower than the bottom end of that range. I am not immediately concerned that the assessment is a risky one, if that is what you are suggesting. It is a fairly robust assessment and is sufficient to give me a significant degree of confidence that continuing at this point represents value for money.

Sir Geoffrey Clifton-Brown

Time will tell whether my assessment that it is a significantly risky assessment, or whether it is robust, in your words, turns out to be true. Nevertheless, for the here and now, can we just examine what it does or does not include?

Dame Bernadette Kelly

Yes, indeed.

Sir Geoffrey Clifton-Brown

It gives the benefit of remediation costs. The remediation costs are £11 billion. That is the cost. If you scrap the whole thing today, you would still have to pay £11 billion, and you are including that benefit in the figures.

Dame Bernadette Kelly

Yes. There are two material points here that make a significant impact to the overall range. One is the exclusion of sunk costs. That is entirely in line with Green Book methodology. The decision that Ministers are taking now is to continue or not to continue, and, therefore, we exclude sunk costs, which are very significant. At the time of my calculation, we used a figure of £23 billion. That figure is probably somewhat higher now. The second is the inclusion, as it were, of remediation costs if we were not to continue, which we have also included in that calculation. That is because, again, I am looking at this against a counterfactual, which is that you could either proceed with phase 1 or not. If Ministers chose not to proceed with phase 1, those remediation costs would be incurred, so that is why that is also reflected in the calculation of value for money. I did think quite hard about this, because I am incredibly conscious that there was going to be huge interest, not just in this Committee but more widely, in terms of this value for money assessment. I thought very hard about it and worked it through very thoroughly with my own analysts and financial experts, and also talked extensively to the Treasury officer of accounts and Treasury in thinking about how to approach this assessment. Those are the judgments that I reached. I take full responsibility for them, but they were carefully considered.

Sir Geoffrey Clifton-Brown

You are claiming the benefit of the remediation costs. You are taking out the sunk costs. These are all in 2019 figures.

Dame Bernadette Kelly

That is correct.

Sir Geoffrey Clifton-Brown

Let us have a caveat on all of that. All of these figures that we are talking about—the funding envelope, the costs of Euston, the remediation costs and the sunk costs—are all from 2019, so they are going to be hugely bigger by the time we get real 2023 figures.

Dame Bernadette Kelly

All of these numbers will be higher when put in 2023 values. Benefits will also be higher in 2023 values, so it does not necessarily follow that that would directly result in a reduction in value for money. One thing that I would say, also stated in my letter, is that, if you step back, as it were, and look at the totality of benefits and of costs as if you were starting on day 1 with phase 1, it would not achieve value for money.

Sir Geoffrey Clifton-Brown

I just want to get two more things and then I will have had my go on this, because this is all quite difficult stuff. The first is about sunk costs. We have a funding envelope of £45 billion to £54 billion in 2019 costs, of which you have already spent, table 1 tells us, £24.7 billion in sunk costs. That gives you a remaining cost, does it not, if it is at the lower end of that range, at £45 billion, of £20 billion to play with. If it is at the upper range, at £54 billion, it is £29 billion to play with to deliver the entire railway. Is that realistic?

Dame Bernadette Kelly

That is a separate question about the ranges, which you, no doubt, will wish to explore in this Committee as well. We have assessed a range of £45 billion to £54 billion, which, of course, is in excess of £9 billion above the previous funding envelope, so a very significant increase. The company and the work that the board has done has produced a range of £49 billion to £57 billion, and we can discuss both of those ranges and the reasons for the difference between them. Whichever one you take, you can do the calculation, Sir Geoffrey, that you have done and figure out what the funding to go is. It will be the difference between our spend to date and the upper end of the range. Equally, I should say that those ranges are both estimated. We have not agreed yet and will now need to do further work on the basis of the decisions that have been taken about phase 1 and further phases and to review what the cost of phase 1 will now be in the light of those changes.

Sir Geoffrey Clifton-Brown

We will get on to the ranges in a little while. Also included in these BCR costs are the costs of Euston. As I understand it, the original cost of Euston was £2.5 billion. We now know, with hindsight, that, even in 2019, those costs were unrealistic for what was expected to be delivered. Does that not pour some cold water on your whole BCR costs?

Dame Bernadette Kelly

I disagree, because, at the upper end of the range, we would not have put a £2.5 billion figure in for Euston. We would have put in a higher estimate. I cannot remember, I am afraid.

Alan Over

It is £3 billion to £4.5 billion.

Dame Bernadette Kelly

It is £3 billion to £4.5 billion, so we were plugging in a higher estimate, recognising that the estimates that we relied upon back in 2020 have proven not to be correct. It is also the case now that the Euston station requirement will be different and will be scaled back, because we are no longer building beyond Birmingham, which will create an opportunity to reduce the costs.

Chair

Thank you for now, Sir Geoffrey. We are going to probing these costs a lot. It has been quite sobering going back and looking at Public Accounts Committee reports where we were highlighting many of these concerns, so we will want to get into why we are uncovering some of these in detail only now.

Sarah Olney

In your answers to the deputy chair, you talked about the £11 billion of avoided remediation costs from continuing with phase 1 as opposed to scrapping phase 1. Part of the benefit of doing phase 1 is that you are avoiding those costs. Have I understood that correctly?

Dame Bernadette Kelly

You have understood that exactly correctly.

Sarah Olney

Can you give me an outline of what the other benefits of phase 1 are and what you have measured the value for money assessment against?

Dame Bernadette Kelly

From memory—excuse me if I do not get them all; my colleagues will help out—we have increased capacity that the new high-speed line will create on the network, so that is a very significant driver of benefits. We have reduced journey times and other transport benefits as a consequence of faster journeys. There are some environmental benefits included in the calculation. There are what we call level 2 wider economic benefits, so some of the investment and regen that you see around stations, which we will still see at Old Oak Common, Euston, Curzon Street and Interchange.

Sarah Olney

Can I just quickly interrupt you there? You mentioned Euston. Is the delivery of Euston station included as part of the benefits package?

Dame Bernadette Kelly

They are level 2 benefits. Part of the travel benefits of capacity, et cetera, and other journey benefits are driven by building the railway to Euston, so you derive benefit from building to Euston.

Sarah Olney

Given that there are tracks going into Euston, you have calculated the benefits separately from the expansion of Euston station.

Dame Bernadette Kelly

When we assess the benefits of the phase 1, we are assessing those benefits based on what we are building, which is a railway that goes between Euston and Birmingham Curzon Street. There are benefits from building the railway into Euston, and those are included in the calculation.

Sarah Olney

And then there is the station.

Dame Bernadette Kelly

I do not think that they are separate because we have a single phase 1 calculation, but we can disaggregate the additional benefits, as it were, that a journey into a central London location brings. They are incorporated in the overall BCR. The key benefits are increased capacity, journey times and other transport benefits, wider economic benefits up to level 2, and some environmental—

Alan Over

There is rail revenue.

Dame Bernadette Kelly

You are absolutely right, Alan, thank you. There is the assumed revenues from future services.

Sarah Olney

Am I right in thinking that a full business case just for phase 1 has not yet been completed? Is that correct?

Dame Bernadette Kelly

We have always had a full business case for phase 1 and we have updated it at various intervals. The last full update for phase 1 was the notice to proceed, I am assuming, back in spring of 2020. That was the last full business case and it is quite an exhaustive and exhausting appraisal for a project of this scale. My accounting officer assessment was an estimate based on the decision that Ministers were taking. What will now need to happen is that a full, revised business case will need to be produced, taking account of what we now know about costs, the changes to scope and what that means for the overall benefits of the scheme. That is a work that is already under way and that we will need to carry out over the next few months.

Sarah Olney

So the numbers that you were just quoting were from that initial business case for phase 1 from 2020, and you have not yet revised that phase 1 business case in the light of the decision to cancel phases 2 and 2a.

Dame Bernadette Kelly

My assessment does represent that, because one of the changes to the business case as a consequence of the decision that I took into account in my accounting officer assessment was the fact that not building 2a and 2b reduces the amount of additional capacity and also the possibility of faster journey times north of Birmingham. The short answer to your question is that, yes, I did take into account the decision to cancel phases 2a and 2b and HS2 East in producing my accounting officer assessment, because it results in a different benefits case.

Sarah Olney

I understand. Your accounting officer assessment has revised phase 1 in the light of the cancellation of 2a and 2b, but we do not yet have a fully revised business case for phase 1 in the light of the decision to cancel.

Dame Bernadette Kelly

That needs more detailed work to figure out costs.

Sarah Olney

That is completely understood.

Chair

How long did you have to deliver this accounting officer assessment before the announcement was made to cancel?

Dame Bernadette Kelly

We were working on this suite of decisions for Ministers for a number of weeks. I had time during that. I was clear from the start that this would require an accounting officer assessment, and I gave, it is fair to say, considerable time and attention to that assessment, working with my analysts, finance colleagues, Treasury colleagues and the Treasury officer of accounts. It was a matter of weeks, but I am confident that we did the work thoroughly.

Chair

How long will it take for the full business case?

Dame Bernadette Kelly

We are going to work through the consequences of all the scope changes and we have to do some work.

Chair

How long?

Dame Bernadette Kelly

I would say that we will be doing it in the first half of 2024.

Sarah Olney

When we are talking about delivering the benefits of phase 1, we do not yet have a full business case that incorporates the decision to scrap phases 2a and 2b and sets out what the revised benefits are going to be, other than your own accounting officer assessment.

Dame Bernadette Kelly

We now need to do further work on the benefits that can be delivered, very much with a view to maximising the benefits that are possible to be driven through phase 1. That is more detailed work that will need to take place and conclude, hopefully, in the first half of 2024.

Chair

Just to be clear, that will not include the business case for Euston station development itself. We will get on to Euston in detail.

Dame Bernadette Kelly

We will need to reflect upon how we treat Euston in that. As you say, we will get on to Euston. It is going to take some time and more than six months to deliver a detailed plan for Euston privately funded.

Chair

That is exactly my point.

Dame Bernadette Kelly

My guess is that that will be ongoing. We will reflect it as best we can in a revised business case.

Chair

There will be, basically, two business plans.

Dame Bernadette Kelly

There will need to be, I suspect, a later and different business plan for the totality of Euston.

Alan Over

Could I make two points briefly? We will have to be clear on our treatment of Euston for the purposes of the business case. When we come to work through the private financing parts of Euston, we will have to be transparent on which funds flow to the public sector and which funds flow to the private sector. The money needs to be found.

Chair

We will come to Euston in more detail later. I just wanted to check, because it seemed extraordinary if you could have a full business case, including Euston, in six months’ time.

Dame Bernadette Kelly

You are correct. It will take longer to do Euston.

Sarah Olney

You have mentioned the first half of 2024 for the full business case. There still seems to be some considerable uncertainty around costs. How are you going to be able to manage the project in the interim? If you are not yet absolutely clear on what the benefits are of phase 1 and how you are trying to deliver them, and there is still some uncertainty about costs, how can we be confident in your assessment of value for money?

Dame Bernadette Kelly

Managing the programme does involve managing the costs and being very clear on the costs of the revised scope of phase 1 now.

Sarah Olney

Can I just very quickly interrupt you there? If you are not entirely sure yet what the benefits are, how do you know that you are not going to incur costs that are not directly associated with benefits in the meantime?

Dame Bernadette Kelly

We have a pretty good high-level view of what the benefits of phase 1 are, based on the previous extensive business case.

Sarah Olney

I know that I keep interrupting and I am sorry, but the previous business case depends upon the delivery of phases 2a and 2b, so we do not yet have a really clear idea of how the benefits of phase 1 are going to have to be redrawn to reflect that decision.

Dame Bernadette Kelly

There is more work to do, undeniably, to get to that business case. That is why it is going to take a little longer. We are able to take a reasonably good high-level view of what the big change in benefits is, which is the lower level of train frequency. That is the fundamental change to phase 1 as a consequence of not continuing with phases 2a and 2b. That was accounted for in my accounting officer assessment. The work of the next six months is quite a significant reset of the programme, which means resetting the budget and being very clear about what the scope changes of the later phases mean for phase 1. There will be changes north of Birmingham, for example, which will be needed now to optimise benefits, and a whole host of other activities, which I am sure we will talk about. That is the work, as it were, of the next few months, and that will then drive the more detailed business case for phase 1. Going back to my accounting officer assessment, I was working on the best information available, taking account of quite a lot of ranges of uncertainty and producing a range that is prudent and realistic. I had better not commit myself now to what the final business case will look like, but it was a realistic and prudent assessment based on the information that we had.

Chair

You were talking about resetting the programme. We have a business case coming and then you have to reset the programme. Sir Jon Thompson has already put in place this new governance arrangement. When is all of this going to align? Is there going to be a gap in building phase 1 while all of this is happening?

Sir Jon Thompson

We will carry on with the instructions from Ministers. I have a settlement for the current financial year of just over £8 billion, and I also have a financial settlement for 2024-25. We will carry on with all of those areas where rescoping does not impact on the programme.

Chair

Can you just talk through what some of those things will be? What will we see happening?

Sir Jon Thompson

If you go to Colne Valley viaduct, which is the most significant viaduct that we are building, we just passed the 50% mark, and we would carry on building that viaduct, as well as all the cuttings and embankments. We now have approval from the Treasury to proceed to contract on Curzon Street station in Birmingham, so construction there would gear up. Interchange is slightly further back than that. All of the stations and infrastructure would continue as they currently are, in accordance with the schedule.

Chair

The big physical bits of groundwork will be continuing.

Sir Jon Thompson

Yes. We are currently out to tender for all of the railway systems. They began to come in this week, so we would expect to go on to contract for the railway systems—tracks, signals and so on—during the course of 2024. Then there is a point at which the civil engineering begins to reduce and the introduction of the systems begins to take place. That is probably in 2026-27 or beyond.

Sir Geoffrey Clifton-Brown

What is the final completion date now estimated to be for phase 1?

Sir Jon Thompson

Ministers have continued to commit to an opening date between 2029 and 2033. They are not being any more specific than that. I can assure you that we are well within that range at the moment.

Chair

I am just wondering how many of us will still be around by then.

Greg Smith

First, can I just put on the record my thanks for the opportunity to guest from the Transport Select Committee this morning?

Chair

Apologies. I should welcome you as a guest.

Greg Smith

Can I please return to greater clarity on some of the points that have been made on value for money of proceeding with phase 1 and the inevitable cost overruns? You have just said that the new full business case for phase 1 will not be published until, let us say, the middle of next year, by the time it is completed, and yet you are working on a BCR whose lower range, as Sir Geoffrey has said, is 1.1. That includes Euston being part of phase 1, which it may well not be if no private sector money is forthcoming. We could find ourselves, this time next year, with that BCR being below 1, could we not?

Dame Bernadette Kelly

I do not agree with your analysis. I have continued to keep the costs of Euston in this scheme, as well as the benefits. I am not going to try to anticipate now what the business case is going to be, but it is a range that starts at 1.1 and finishes at 1.8, and in which we have plugged, as I say, what I think are a realistic set of ranges on things like demand. It is highly unlikely that we would end up in that position. We would have to be at the highest cost point, the lowest demand scenario—and by the way, we will not have any more certainty on demand in the middle of 2024 than we do now—and the worst possible outcome on every parameter. What we will be doing is working extremely hard to drive better outcomes on all of those parameters—on costs, on benefits and on a privately funded Euston. You are asking me to speculate on something that I cannot answer, but I am confident that the assessment that I made was a realistic and prudent one, based on the information at the time. If the information changes, I will do a revised business case.

Greg Smith

Dame Bernadette, this is the point, is it not? There is a BCR that presumes that a development corporation will be set up and that private money will flow into it. That is no guarantee, is it? It is inconceivable by logic that, if or when that development corporation for Euston is set up and no money flows, the lower end of that BCR spectrum could possibly be still above 1.

Dame Bernadette Kelly

We retained the full costs of building Euston in the BCR in my letter of 4 October. We have not taken them out on the assumption of private funding. We have kept them in, precisely because we do not yet have certainty on the outcome, nor do we have certainty on exactly how, depending on the financing model, Euston costs and benefits should be treated in a business case. The point that I am making is that we have not assumed that saving.

Greg Smith

Ministers have been clear, and the Secretary of State was clear in the Transport Select Committee yesterday: no private money, no Euston. Therefore, just presuming the cost of Euston in the business plan and in your assessment is something of a nonsense, I would argue. Ministers have been clear that they are not going to sign off taxpayer funding for the construction of Euston. Therefore, it is private money or nothing.

Dame Bernadette Kelly

Keeping it in the calculation as a cost as well as a benefit is a relatively prudent assumption. If there were a different outcome on Euston in some time to come, we would have to reassess it. I could have taken it out on the basis that we have total confidence that we will get full private funding. I chose not to do so because I thought that, as an accounting officer, I should be being prudent here and not making very optimistic assumptions when we have not yet done the work. That said—and I am sure that the Secretary of State will have said this at the Select Committee as well—the Euston plan, which we will come on to, is a perfectly plausible one. There are many reasons to suppose that private funding or financing for a station is feasible, and that is what we will be working on. The implication of the question is that somehow I have treated the Euston costs in a way to produce a more favourable outcome. That is not the case. I consciously kept the costs in because I thought that it was important to have a realistic BCR at this stage.

Chair

To paraphrase, you kept them in because, until there is certainty as accounting officer, you need to make sure that you are not making an assumption about the future hopes for private investment.

Dame Bernadette Kelly

That is correct.

Dr Bisson

It is worth saying that there is a similar treatment on the benefits side, where we have taken a relatively prudent assumption on the number of trains that will run. In the optimisation work that will be done between now and the full business case, we want to see if we can improve on that.

Greg Smith

We are coming on to Euston later, so if I could ask on the business case again and the value for money for phase 1, we spoke earlier in the session about sunk costs and about estimates on remediation costs. Has there been an assessment of the total land take for phase 1, of what its current market value is and, therefore, were phase 1 to be cancelled, the receipts that the Department could ultimately bring in from the resale of that land?

Dame Bernadette Kelly

I will ask Mr Over to start on this. The remediation costs in this assessment are probably one of the less assured elements—I will be open about that—because it would be quite an unprecedented project to remediate on this scale. We have done high-level estimates, taking into account a whole number of things, such as the need to end contracts, the land and property, and then the making good of the land where construction has happened. It is quite a high-level number. It is relatively unassured. It will have taken account of the fact that there will be some recoverable cost to the public purse as a consequence of selling back land and property that has been brought for the purposes of constructing HS2.

Alan Over

That is right, Dame Bernadette. The assumption on the remediation costs is the gross costs of making safe, shutting down the programme and meeting our responsibilities, minus the modelled benefit of releasing the land, which offsets some of those costs.

Greg Smith

Is there an estimate of today’s market value of all of the land that has been taken that could be a receipt back to the Department and, ultimately, the Treasury?

Alan Over

We use a global estimate, given the extensive set of property that is owned on the resale value, but that is a coarse modelling assumption. It has not gone out and looked at each parcel of land and what the likely market value would be in today’s or future conditions. I think that that is fair, Sir Jon.

Sir Jon Thompson

Yes. I am not aware that we have done that piece of work or tried to give any advice on a more precise number.

Greg Smith

As a question to Dame Bernadette, would it not have been prudent for the Department to have understood the value of its land holding before making a decision on continuing with phase 1, given that that would have mitigated against various sunk costs?

Dame Bernadette Kelly

We have plugged in a reasonable modelled assumption. A detailed assessment of the sort that you describe would have taken many months to do so. What we will have done is, as I say, plug in a sensible modelled assumption of land value recovery into our analysis. Based on the work that we were doing and the timeframe in which we were taking decisions, that was a reasonable and sensible way to proceed. We have done the fundamental thing that you describe. What we have not done is a very detailed analysis to then compare it to current market values, but that would be months and months of work.

Chair

It would need enough surveyors to do it.

Dame Bernadette Kelly

It would be many surveyors. It is something that would create enormous uncertainty if done in advance of a decision as well, so it is quite a challenging thing to have done.

Sir Geoffrey Clifton-Brown

Could I just come in on that? I cannot find the relevant evidence just at the moment, but we have received evidence to say that your current cost of land acquisition for the whole of the railway is just over £200 million, whereas this particular person who is giving the evidence says that the current sale value is likely to be £100 million, so there is potentially a book loss there of £100 million, which goes to Mr Smith’s point.

Dame Bernadette Kelly

I do not recognise those numbers.

Sir Jon Thompson

I do not recognise those numbers at all.

Chair

We are trying to work from the NAO figures.

Sir Jon Thompson

I will try to give you the numbers. What has been spent on land and property on phase 1 is £3.6 billion. On phase 2a, it is £273 million; on 2b, it is £201 million. On the eastern leg to Leeds, it is £160 million. That is a total of £634 million on the phases that are now being scrapped, on top of the £3.6 billion for phase 1.

Sir Geoffrey Clifton-Brown

Just to clarify, this is evidence from the High Speed Rail Group. This is land and property that you have purchased between Birmingham and Crewe of £205 million, and he is estimating that the current value is £100 million, and so, on phase 2a, you face a loss of £100 million. Would you agree with that?

Sir Jon Thompson

No. At 31 October 2023, we had spent £273 million, which is a higher number than you have, and we have not currently calculated what the loss to the taxpayer might be, because you have to work through every single one of the 184 properties that you have purchased in order to put a value on them. I would not sign up to the idea that there is going to be a loss of £100 million.

Sir Geoffrey Clifton-Brown

We shall see.

Sir Jon Thompson

Yes, indeed.

Greg Smith

Can I now look at the cost overruns within phase 1? I apologise, but I will use examples from my own constituency to highlight some of the points that I would be grateful for particularly your assurances on, Sir Jon. It is still the case, even though we have passed the point at which HS2’s ability to acquire land under the Act has passed for phase 1, that there continue to be examples, such as Sheephouse Wood, where contractors and the company have come along and said, “Actually, we do need this bit of extra land. We do need more land parcels”, sometimes for unexpected utility diversions, sometimes for core construction. What handle do you now have on the point at which you and your contractors will be satisfied that you have now taken every land parcel that you could conceivably need for the construction of phase 1?

Sir Jon Thompson

We believe that we have more than 95% of the land that we will require. In direct answer to your question, the point at which the design has been completed on all of phase 1 and we have all of the necessary consents that we need from other public organisations, of which there are 8,278 to be obtained, we would get to the 100% certainty about what land is required. We believe that we are above 95% at the moment. I could bring that to life for you, if you wanted me to.

Greg Smith

Within that, there are many unexpected occurrences still happening as well. You are now on your second sinkhole in the Chilterns above where tunnelling is being constructed. Given that the initial assessments were that sinkholes would not happen, what contingency are you building into phase 1 budgeting for the now second, with potentially further to come, given that we have seen two that we were told would never happen, for mitigating against these occurrences that were unexpected?

Sir Jon Thompson

We did extensive geological work in the run-up to notice to proceed, and since more than 8,000 sinkholes were sunk, as it were. We cannot guarantee every single part of the route. We did not dig sink holes all the way along the entire route, so we have increased the amount of monitoring that is happening. Indeed, we discovered the sinkhole that you are referring to, which is relatively small, at approximately two metres by two metres by two metres. Nevertheless, to your point, it is still a sinkhole that can be attributed to the tunnel boring machine, so we have upped our monitoring. In terms of financial contingencies, I am not aware of a specific number, because it is in the detail somewhere. If you wanted a specific number, I would have to write you.

Greg Smith

Is that active work, given that this is an unexpected occurrence? The initial geological surveys were pretty clear that this was a highly unlikely scenario. Therefore, you will not have budgeted for remediation work or for the necessary things that you are going to have to do, not just to fix the land above but to prevent further sinkholes happening from the tunnelling process. Surely, it would be prudent to start work on contingency budgets. How much is that going to impact cost overruns for phase 1?

Sir Jon Thompson

Given that I have given the Department a range of £49 billion to £56.6 billion for phase 1 at 2019 prices, to a point that has been made, it seems to me that there is plenty of wriggle room between. Could we do a piece of specific work in relation to whether there should be a specific contingency in relation to sinkholes? We could do that, but I do not think that that would alter the overall conclusion from us of £49 billion to £56.6 billion.

Greg Smith

That is helpful, but your assessment is not accepted by the Department. We heard earlier that there is a variance between what the Department for Transport and what HS2 Limited believe the range should be. While I fully appreciate, from evidence given to the Transport Select Committee yesterday, that work to fully understand this is under way, we also have, which must play into that variance, the allegations that were published in the Sunday Times in October that suggested there had been—I am not suggesting this is under your watch, because, as you rightly said, Sir Jon, you are only seven weeks in—deliberate underplaying of costs within HS2 Limited as reported to the Department. Where are you internally, as HS2 Limited, and to you, Dame Bernadette, where is the Department, on fully understanding what went on there, the extent of it, and the guarantees that such underplaying of cost cannot happen again, not just in the future but from today?

Sir Jon Thompson

The Sunday Times article, frankly, is a disgrace. Let us be upfront about it. The allegations that were reported by Mr Thornton and Mr Bruce back in 2016 were reviewed by the National Audit Office in a report in 2018, and they did not find any major issues with those allegations. That has not stopped The Sunday Times from printing them again. We have a free media that are allowed to do what they like, but we completely refute those allegations. There is no evidence for the first two allegations. There is a current one from Mr Cresswell, who has also queried what is called estimating uncertainty. The Government Internal Audit Agency did a review of that and also did not make any recommendations to say that we had got that wrong. I can understand why, reading the popular media, you might think that that is an issue, but we completely refute that. It is poor journalism by The Sunday Times, frankly. Do you want me to go into the £49 billion to £56.6 billion?

Chair

Yes, please.

Sir Jon Thompson

Our perspective on this is that we started back in March of this year to update the estimated cost to complete, which is otherwise known as the estimated actual cost—the EAC. There have been almost 50 meetings since then. There have been hundreds of pages of analysis and thousands of person hours to produce an estimate. All of that was done transparently with the Department. Either the SRO himself or members of his team and/or KPMG as their representatives were in the room and went through all of that analysis. Indeed, I chaired some of those meetings, with Mr Over, so that the Department could fully scrutinise all of that. We have provided not just an update to the estimate but three other things that go with it. First, what are all the major assumptions that underpin the estimate? Secondly, what is the confidence level that you can give to the 17 elements of the programme that add up to the programme called HS2 phase 1? Thirdly, we have provided a timetable of events that sets out into the future when you will get better information so that you can hone down the estimate—for example, when there are tenders to be opened, when you complete 100% of the design and so on. We have not just said, “Here is what we believe”. We have all of the underpinning information, all of the assumptions, all of the confidence levels and a timetable for events to improvement. That requires a series of judgments and assumptions, which is why you end up with a range. For example, do you think that the programme can complete in the month that we are currently predicting? I did not give you that month in an answer to Sir Geoffrey’s question, but we have a month that we are trying to aim for in 2030. You have to make a judgment about whether we can meet that.

Chair

You said you had a range of 2029 to 2033, so you are aiming for 2030.

Sir Jon Thompson

I have narrowed it down for you. The current date is in 2030, so I have given that away. You have to make an assessment about whether you are going to be able to meet that schedule. If you do not, you end up with prolongation costs, which adds to the bill. That is why you end up with judgments and a range around the estimates. There are judgments and assumptions to be made there. There is also the question about risk. There is about £9 billion of financial risk. For example, what about tendering? What if productivity does not improve? What if efficiency does not deliver against the targets? Again, there is a range of risks in here too, and it is perfectly possible to take all of that information, of which there is a vast amount, and make a different judgment, which is what the Department did when it came up with its £45 billion to £54 billion, but I am happy to stick with my £49 billion to £56.6 billion.

Alan Over

I agree with everything that Sir Jon has said. We and the company have been working off the same data and been in the same meetings looking at it. It is because it is a matter of judgment about the extent to which future risks can be mitigated. In some areas around civils and around systems and delay costs, we have taken a view that there is more ability to mitigate those risks than HS2 Ltd has. That is a proportionate and professional discussion, and the overlap of the range is very significant. When we work through what is a no-regrets position, which is that we can all agree that we should be working for the lowest reasonable cost and working up the action plan to do so, there is a high degree of commonality between us in that ambition.

Chair

Over the timeline of the work that this Committee has done from 2013 and 2016, we have had you in a lot on this. We have danced around a bit, Sir Jon. You have your thin controller or your new chief exec coming in, and you have stepped up, but we have repeatedly raised issues about costs not being properly reported to Parliament, hence now reporting every six months. There were concerns about the “culture within HS2 Ltd of failing to provide full and accurate information to those responsible for holding it to account”. We are dancing around how we ever got here in the first place. Regardless of the Prime Minister’s decision in October, we still have a railway that is costing a lot more than it was ever supposed to. Quite simply, why is that?

Dame Bernadette Kelly

I am happy to give an assessment. On this question of the difference in ranges, it is right to emphasise that we are using the same information. There is a large area of overlap in our estimated ranges.

Chair

The business case will bottom this out.

Dame Bernadette Kelly

We will have to bottom it out anyway and will have to reach an agreed range in the next stage of work.

Chair

Given the change of scope, there are going to be some moving parts now, and so, at this point, I have a bit more sympathy for the difference in costs, because we will get this full business case. At that point, we want to be nailing it down, and we, with our sister Committee, will be wanting to keep a very great close eye on this. Going back, why are we in this position?

Dame Bernadette Kelly

Moving on to your question on costs, there are two ways in which you could approach this. One is about why this is a very expensive railway. There are a large number of quite historic and broad reasons associated with the way in which we build infrastructure in this country—the fact that we require the very highest environmental and other mitigations, and that we have a supply chain that is not as strong and productive as we would wish it to be. There are a lot of those generic reasons.

Chair

We understand those on this Committee.

Dame Bernadette Kelly

If we take that out, the point of your question is more about why we have seen an increase since 2020.

Chair

Yes, we have gone through the pain of pre-2020 before.

Dame Bernadette Kelly

Yes, indeed, so I will take it from there. Why are we now seeing ranges that exceed the funding envelope that we set in 2020? First, it is fair to say that external factors have not been particularly benign and could not have all been anticipated.

Chair

That is Covid and inflation.

Dame Bernadette Kelly

Covid, inflation, Ukraine and the supply chain are exogenous factors that have been challenging. Something that I am sure that Sir Jon can talk more to is that planning and consenting is a continuing challenge, which was anticipated, but perhaps the scale of some of the costs of mitigations that are required to deal with that was not. The third area, which is really important and needs to be the focus of both Sir Jon’s work and ours in the Department, is addressing the root causes of why we are seeing this very large increase in cost. We have already done some initial audit work to try to ensure that we fully understand this. Poor cost information and cost reporting from the supply chain has been a significant contributing factor. Financial and risk management broadly has not been as robust and as good as it needs to be. There are a number of areas—and I know that Sir Jon, and his analysis and assessment of the things that he is doing, confirms this and is focused on—around simply building the organisation, the capability, the processes and the leadership to drive a relentless focus on cost control. There are also practical steps in relation to the main works civils contracts in particular and containing costs there, which will be critical to ensuring that maybe the cost increases do not come in at the upper end of this scale. I do not think that we disagree on our analysis of what the things are that need to change and be improved, both within the company and within the Department’s oversight, in order to now manage these costs better going forward.

Sir Jon Thompson

I agree with all of that, but, to make it much more straightforward for you, the big difference between the Department’s spring estimate of £44.6 billion and now is about how the main works civils contracts manifest. 89% of the cost increase between then and now is down to those contracts. We have to be upfront with you. I think that the NAO went through these contracts in 2019, but the Government decision to let a cost-plus contract, where there are very few incentives or penalties around them, does not provide me with any real levers on those contractors to do better in relation to schedule and costs, because they receive a marginal reduction in their fee. If they spend 100% more than what was originally agreed, they get only a 1% reduction in their fee.

Chair

These are really important things that we need to be discussing. I know that you, the Treasury and the Department need to be looking at how big projects are still being set up with the wrong incentives.

Sir Jon Thompson

I would agree. To Bernadette’s point, I can attempt to see if we can reset that in some way, but we are where we are. The decisions were made for all the right reasons, I assume, back in 2019 to let these contracts on this basis, but the incentives and the penalties do not provide me with very much leverage to say, “Hang on a minute. You are 130% over the estimate. What is going on?”

Dame Bernadette Kelly

All I would add is that, if we come to the main works civils, which I strongly agree with Sir Jon are the principal driver of cost increase here, and if we go back to the contracting structure, there were reasons at the time. I know that the NAO did a report around 2020 that looked at this contracting structure. The contracts are large. That was intended to attract international construction firms into the task of building HS2. They were successful in doing that. We do have a large number of major international players—Ferrovial, Kier and Eiffage, et cetera—that are part of these joint ventures. The risk allocation partly reflected the scale of those projects. It was then adjusted somewhat when it became clear that the joint ventures were producing very conservative estimates, because they felt that they bore too much risk. That resulted in the commercial structure that we have now, which is one that the company proposed and the Government assured at various levels and approved. I recall that the NAO’s view at the time was that this did leave a lot of risk potentially sitting with HS2 Ltd and Government, and that that would need to be managed very tightly. In effect, we now have to acknowledge, given what we now see, that we need to do better on that tight management of those contracts.

Chair

That is stating the obvious, in some ways, but thank you for doing that.

Greg Smith

Sir Jon, you have had a clear steer from Ministers to deliver on the lower end of the range, and yet, by definition, with north of Handsacre cancelled, there will inevitably have to be some design change to phase 1. For example, do you still need the scale of the IMD at Steeple Claydon within the scope? While I appreciate that this work will not be completed, what is your current assessment of the scale of design change to phase 1 that is going to be required? Is it consistent that you can bear that design change and come in at the lower end of the range?

Sir Jon Thompson

The top three issues that we believe we have to work with the Department on are clearly the design, the scope and the delivery of Euston. We will give advice, but Mr Over is clearly the lead. Nevertheless, they need some input from us. I am happy to go through Handsacre, which is a junction on the west coast main line just short of Lichfield. Thirdly, is there any impact on the rolling stock contract? There are a series of subsidiaries such as the one that you discussed, but top of our list in terms of what will be within scope for us—we are assuming that Euston is now out of scope and with the Department, through the development corporation—is Handsacre. If you are not familiar with the junction, it is the part of the west coast main line that goes from six tracks to four and then to two. I am slowly learning the railway. It provides a choke point on the west coast main line. If you had built 2a—the route from Birmingham to Crewe on HS2—then HS2 trains would never have gone on the west coast main line at that point; they would have joined it north of Manchester. The idea now is about whether we can put the HS2 trains back on the west coast main line at Handsacre junction and, therefore, whether the junction is big enough. To be transparent about it, Mr Bisson, Mr Over and I are looking at that to work out whether it needs to be bigger and what that might mean in terms of land and cost and so on and so forth. There are many Network North changes that reduce the cost, but there may be some that increase the cost.

Dr Bisson

It is worth saying that that was acknowledged within the Network North work, because, effectively, the original intention at Handsacre was to be able to run the full train service on phase 1 straight on to the west coast. When the Government at the time accelerated phase 2a, a value engineering or efficiency opportunity was taken to reduce the scope of the works at Handsacre, and that is what we are currently working through. We may not go back to quite the original plan. There are some choices in that.

Chair

Basically, it is a U-turn or a reversal, almost.

Dr Bisson

It is a need to get back to the original level of benefit there.

Chair

There are many moving parts and complications to this.

Peter Grant

This leads quite nicely into where I want to start. I am interested in what happens on the west coast main line. Incidentally, Manchester and Leeds are not north, unless you are in London. For other parts of the UK, they are a long way south. Dame Bernadette, is the six-monthly report that has just been published written by the Secretary of State?

Dame Bernadette Kelly

Yes.

Alan Over

It is Mr Merriman.

Dame Bernadette Kelly

Sorry, it is the Rail Minister.

Peter Grant

It says, “No decisions have been made on the train service that will run when HS2 is operational”. Does that relate to the entire route from London to Birmingham and beyond?

Dame Bernadette Kelly

If I may, I am going to ask Mr Over to talk about this.

Alan Over

We develop an outline train service specification that sets out an assumed service. That allows us to do our infrastructure planning, but also to assess the benefits. Before we bring it into service, it is proper that we consult on it, and we will do that closer to the time of operating. We have a provisional set, but what the report is setting out here is that final decisions will need to take account of the economic conditions and the demand at the time.

Peter Grant

Does that relate to the whole length of the line?

Alan Over

Yes. There are some assumptions within that that are very certain—for example, that we will run at least three captive services between Birmingham and London on the dedicated infrastructure. What we need to work out now, following the Government’s decision, is how to optimise the services to the north-west beyond that, and that is why it brings in Handsacre and the infrastructure on the west coast main line. We really need to do that across HS2 and Network Rail, so that we optimise the whole corridor. That is one of the benefits of having the west coast partner that can advise us on the collective capacity between the two elements of the route.

Peter Grant

From what you are saying, are you in a position now to say what the capacity will be even on HS2 phase 1, once it is completed?

Dr Bisson

On the basis of the work that was done for the accounting officer assessment and, as I said earlier, the relatively prudent assumptions about what level of service you would run out of that, we can calculate an assumed capacity position on the west coast. I can go into that in a little more detail if you would like. As we have set out, that is not the final answer, because we will continue to look at how you optimise the benefits out of phase 1 and, indeed, what the optimal train service to run is, which will not land as a final decision until much closer to opening. If you want me to set out a bit more about the assumptions that we have at the moment, I am happy to do so.

Peter Grant

The Secretary of State told Parliament on 16 October that there will be an increase in capacity from 134,000 to 250,000 passengers per day. Are those figures speculative, optimistic or confirmed?

Dr Bisson

That is consistent with the work that we have at the moment, which, as I said earlier, is a relatively prudent view of the benefits that you would get out of phase 1. Our intent in the next tranche of work is, if anything, to improve on that.

Peter Grant

What assessment have you made of changes in capacity, first of all, from Birmingham to Manchester, and then from Manchester to Glasgow?

Dr Bisson

At this stage, we have looked more at the overall piece around services out of London. We are not assuming significant changes from Birmingham to Manchester or from Manchester to Glasgow. The piece around London, in our current assumptions, in line with what was planned for phase 2a, sees an increase from three to four trains to Manchester per hour. Otherwise, it largely sees the same number of paths used on the west coast south of Manchester, but there would be opportunities, depending on the infrastructure, to potentially run some of those at 400 metres to, for example, Crewe, and then split them, so that you have multiple destinations served out of a single HS2 path. That is some of the work that we will be looking at over the next months.

Chair

You mean longer trains.

Dr Bisson

You effectively run it as a double train to Crewe, for example, and then you can send each half to different final destinations.

Peter Grant

The six-monthly report also says that “passengers will be able to travel on HS2 trains through to Manchester, Liverpool and Scotland”. It might be HS2 trains, but they are not going to be going at HS2 speeds, are they? They are not going to be going any faster than the existing trains.

Dr Bisson

Clearly, between London and Handsacre, they are going to be going faster, and there is a significant journey time improvement associated with that. Beyond Handsacre, they are then on the west coast main line and running at that line speed.

Chair

They are not running at the Pendolino line speed.

Dr Bisson

That is also one of the areas of further work, because what you have at the moment is a set of speed limits that, as you are saying, Chair, are higher for tilting rolling stock like the Pendolinos. It is not the case that, in every circumstance, you need tilting rolling stock to run at that higher speed. In some places, you do and, in some places, you do not. The full finalisation of that is within the work of the next months and year, to say how far we can take this and what the best set of outputs that we can get are. On the basis of what we have at the moment, we are anticipating that London to Manchester, for example, would come down to an hour and 40 minutes compared to two hours and 12 minutes or thereabouts today.

Peter Grant

As far as people who are not obsessed with London and who may want to travel from Glasgow to Birmingham or Manchester are concerned, it seems to me from what you were saying just now that you do not know whether they will be able to make that journey as quickly as they do now. If they are on an HS2 train, there is still the distinct possibility that that HS2 train will be going slower.

Dr Bisson

From Glasgow to Manchester, we would not anticipate substituting existing rolling stock with HS2, if that makes sense, so we would not anticipate a change.

Chair

There is no change, basically.

Peter Grant

If somebody is travelling from Glasgow to Manchester on a London train, are they going to be going on an HS2 train?

Dr Bisson

If they were going from Glasgow to Manchester on a London train, they are changing at Preston or somewhere. They are not getting there direct. There is nothing that goes from Glasgow to Manchester to London.

Peter Grant

Dame Bernadette, I want to come back to the question of the costs for the completion of phase 1. The most up-to-date figure for sunk costs is £27 billion. Do I have that right?

Dame Bernadette Kelly

That is the cost to go in the latest parliamentary report.

Sir Jon Thompson

At the end of last year, we had spent £23 billion.

Chair

The accounting officer assessment had it at one level, but it has gone up since.

Dame Bernadette Kelly

It has.

Chair

But that is a more assured figure. It is not that it has gone up; it is that you have bottomed out the figure. Is that right?

Dame Bernadette Kelly

It is another six months of spend, so it would change all the time, just because the sunk costs are growing all the time.

Peter Grant

The estimated cost to completion of £45 billion to £54 billion include £27 billion that is already spent and we cannot do anything about. Is that correct?

Dame Bernadette Kelly

Yes, it would include the costs to date. I am just checking whether there is any reason why that would not be the case.

Alan Over

The estimate includes the sunk costs.

Peter Grant

That means that the level of uncertainty in the remaining costs, in percentage terms, is a lot bigger than it might first appear. If you take the £27 billion out of everything, it means that we think that we can do it for an additional £18 billion, but it might be an additional £27 billion. You will appreciate that what I am saying is that there is a degree of uncertainty. It is possible that the amount of money that you still need could be 50% higher than you are hoping.

Dame Bernadette Kelly

This is part of the reason why we have asked HS2 board to do this estimated at-completion cost exercise. One of the things that we and the board were able to observe was that we were not seeing a narrowing of range or uncertainty around outturn costs, which you would, to your point, expect to see in a programme once it is well-advanced like this. What that exercise has revealed is, as Sir Jon has explained, that there are still many areas of uncertainty, and significant areas where there are judgments and assumptions about risk rather than absolute certainties. There is still a wide range, and the task of the next piece of work that we are now doing to look at the business case, the revised scope and an agreed outturn range, will be to see whether we can narrow that. There is still uncertainty. We will have a range. We need to acknowledge that, but, as the programme progresses, we would hope to be seeing that range narrow.

Alan Over

Maybe Sir Jon and I could characterise how we expect that certainty to improve over the coming years. The first culminating point to reduce the risk and, therefore, narrow the range is to make further progress on the design and delivery of the civils, which is where the biggest risk lies, as we have set out. The second opportunity is when we get prices back from the market and contract them on the systems. There is still risk in the outturn against those contracted prices, but it will make sure that our estimates are backed off to the market.

Chair

When you say “estimates are backed off to the market”, can you just explain what you mean?

Alan Over

At the moment, the budgetary provision for systems is an estimate from the Government and HS2 Ltd.

Chair

You are going to test it.

Alan Over

We are testing it against the market. Hopefully, it will prove that we have made sensible estimates. If it does not, we still have to acknowledge that there is cost risk in them, as they are unlikely to be fixed-price contracts, so we will have to manage that. The more we progress through delivery of civils and then the challenging handover to systems, we can begin to retire that estimating uncertainty. We can also begin to retire prolongation risk, or the risk of things running on. That would be my characterisation of how the risk plays out, but Sir Jon may have a different view.

Sir Jon Thompson

I agree with all of that. The one complicating factor of this hearing is that you need to be careful about assuming that everything that is being said is at 2019 prices. I am spending money at 2023 prices, and then I have to deflate it back. To bring that to life for you, my current cash limit is a shade over £8 billion. That is £6.4 billion at 2019 prices. I do not want to say that we are having to report two sets of numbers, because that sounds like the wrong thing to say, but we are having to do it against two different cost bases.

Chair

This is why I said at the beginning that we need to be really clear on these numbers. It is both clear but also confusing if we do not get this right, so the re-reporting has to be done very effectively.

Sir Jon Thompson

I would just caution Mr Grant about mixing and matching different price bases. We ought to be clearer in future reporting about that, and you have that commitment.

Chair

We were clear at the beginning about what we need to try to achieve, and we will be watching it closely. We are an interlocutor with the taxpayer on this, so we need to be able to explain that we have challenged you and that we have the right figures.

Peter Grant

Just for absolutely clarity, is the range of £45 billion to £54 billion that we are talking about in 2019 prices?

Dame Bernadette Kelly

Yes.

Peter Grant

My understanding is that the current funding envelope that has been confirmed by the Treasury is £44.6 billion.

Dame Bernadette Kelly

That was a formerly agreed funding envelope, but the work that the Department has done and, more importantly, the detailed work that the company has done, has demonstrated that we are going to need to look at that again.

Peter Grant

So that is at 2019 prices as well.

Dame Bernadette Kelly

It is all at 2019 prices.

Peter Grant

If I can go back to what I did before and take off the £27 billion that has already been spent, you have a £17.6 billion confirmed funding envelope. Your lowest estimate of continuing costs at 2019 prices is £18 billion. Even before anything else happens, it seems to me that you are £400 million short. Does that mean that, even to be able to afford the lowest estimate of the phase 1 completion, you need to get more money from the Treasury at some point?

Alan Over

We are projecting to need more money than has currently been allocated, but that is pre the Stoke changes from Network North. We are going to have to work with the Treasury to get the single set of ranges between the company and the Department, and then to agree funding for that with the Treasury.

Peter Grant

Is it appropriate, then, to be saying that it is affordable, if what we are really saying is, “It is affordable as long as the Treasury gives us some more money”?

Dame Bernadette Kelly

Where are you getting the “affordable” from?

Peter Grant

I will ask the question in a different way, then, Permanent Secretary. At the moment, with the money that the Treasury has confirmed that you are allowed to spend on this project—

Dame Bernadette Kelly

The money that is allocated is a cash allocation, typically on a spending review period. Money that is allocated to the Department, and which we then allocate to HS2 Ltd, is a cash allocation per year. That is also at current prices, because, as Sir Jon has said, he is spending money today, not at 2019 prices. When we say “affordable”, what we are saying is that, based on our current financial allocations agreed in the spring Budget with the Treasury, the current spend of HS2 is affordable—i.e. we have agreed what the necessary funding allocation is to continue phase 1. We are talking about, as I say, the allocation of funds in a shorter-term period of time—typically, a spending review period—and the affordability of that. We have been very focused, in setting the spring Budget, on ensuring that the allocations that we have are sufficient to support the continued delivery of phase 1, and so, in that sense, it is affordable.

Peter Grant

Finally, I want to come around to Sir Jon Thompson. You took up office originally as interim chair in July 2021. Is that right?

Chair

And you are still here.

Sir Jon Thompson

I must be mad. I took up interim chair in early 2022 and formally became the chair in February 2023. I became executive chair right at the end of September.

Peter Grant

Does that mean that there was a period after the previous chair when you did not have an interim chair? I think that the previous chair left in 2021.

Sir Jon Thompson

There was a period of about five months when the Department for Transport’s lead non-executive director bravely stood in the gap.

Peter Grant

So you have somebody who served a very short term. You then have somebody who is there interim and who is eventually made permanent in February 2023. At the same time, the chief financial officer leaves at the end of August 2022. You had an interim chief financial officer appointed. They were not made permanent until May 2023. It seems to me that, over that period, there are a couple of very critical senior posts that are being filled by somebody temporary and interim, in both cases eventually made permanent. Does the fact that there were such changes contribute to the loss of cost control that we are now beginning to see evidence of? Not only were they such changes, but two such critical posts being filled by people who have clearly done a good job, because you have both been made permanent, but there is a difference.

Sir Jon Thompson

I will take that. The new CFO is rather good and has definitely brought some new disciplines. Alan can attest to that too. We have much better data.

Peter Grant

I am not talking about the quality of the individual. I am just talking about the fact that, for a significant period of time, you had two interims in very important posts.

Chair

It was not strong governance.

Sir Jon Thompson

The reason why I am saying what I am saying is because I do not think that it affects the quality of financial control. The wheels of Government grind very slowly on appointments, to be frank. If we are being honest about it, the Department was attempting to recruit a chair as well as a deputy chair and, in the end, did not manage to get a chair, and so, as deputy chair, I stood in. I already had a full-time job elsewhere in the public sector. Could you argue that I was not giving it enough attention? You might be able to argue that, but I was giving it the best that I could while I had a full-time job running the Financial Reporting Council.

Dame Bernadette Kelly

I would also just add that, as Jon has said, Ian King, our lead non-executive, who also sits on the HS2 board, did not formally take the role of chair, but he chaired the board meetings during the period between the previous chair’s departure and the appointment of Jon as interim chair.

Chair

With respect, chairing board meetings is all very well, and chairing a meeting in a room is one bit. The relationship between the chief executive and the chair is critical in these situations. Did they act in that role as well behind the scenes?

Dame Bernadette Kelly

Yes, absolutely, 100%. As I say, it was by agreement with Ian King that he did not formally take on the title of interim chair. At that time, we were running the process to appoint a permanent chair. As Jon rightly says, appointments processes in Government sometimes run more slowly than you would wish. If you looked at the activity that Ian was undertaking then and, indeed, during his entire period on the HS2 board, he was not only chairing the board meetings—

Chair

He was fully active as chair.

Dame Bernadette Kelly

He was fully active. He was certainly, I would imagine, talking to the chief executive on a very regular basis. He was definitely filling that role.

Chair

Mr Grant has highlighted the potential vacuum.

Dame Bernadette Kelly

I understand the question. That is why I wanted to make that clear.

Peter Grant

Moving forward to late summer and early autumn of this year, when it begins to become clear just how serious the cost overruns have been, it is an open secret that the Government are looking carefully at significantly changing or even cancelling parts of the project. The continuation of Euston was being seriously looked at. At that point, the chief executive goes. Was he asked to go or did he choose to go?

Sir Jon Thompson

You are conflating two different things. One of the things that has not come out, about which we need to be upfront, is that we had no involvement whatsoever in Network North. We were not party to that piece of policy change. You are making a point about this all going on and the chief executive resigning at the same time. You cannot put those two things together. We did not know what was happening—

Chair

Presumably there were conversations being had in No. 10 and with Ministers in the Department, and conversations being had in HS2, and they were not—

Sir Jon Thompson

You cannot conflate those two things together. After six and a half years, Mr Thurston decided that he wanted to resign and I have his resignation letter.

Peter Grant

I just have one final question, Mr Thompson. Earlier on, you said that the fact the Government decided to let a cost-plus contact meant you did not have the levers you might have needed to control costs. Would it be fair to say that, as soon as the contract was let on those terms, the situation that we have now became, if not inevitable, certainly much more likely than it would have been with another contract?

Sir Jon Thompson

No. There is an excellent NAO report that sets all of this out, which I heavily recommend that you read. It concludes with something along the lines of, “The Government recognise the significant risk they are taking on in the construct of these, and that risk needs to be well managed”. We have to say that there is a factor in here about the contract management of those contracts by the company as well as the form of the contracts themselves.

Chair

There will be a bigger inquiry into all of this, and we will pick up on a lot of that in more detail then.

Sarah Olney

Sir Jon, you mentioned not having previous sight of the decision to terminate phases 2a and 2b. I just wanted to ask a little bit more about that. Dame Bernardette, what analysis had the Department done of the decision to terminate before it was announced?

Dame Bernadette Kelly

Essentially, we were asked to start work late in August on options for the cancellation of parts of HS2 and on alternative transport investments. That request was made to the Department on behalf of the Prime Minister. We then worked very closely with No. 10 and the Treasury to produce analysis and advice on a whole range of options for HS2, which ranged from full continuation to full cancellation. We did all the options. We will come on, no doubt, to the alternative investments, but we did analysis on a range of alternative things that any money saved from HS2 could be spent on as well. The pace of work was very intense during that time. We were working on a basis of strict confidentiality. That was how Ministers and the Prime Minister wanted us to work, so that is how we worked. That did mean, to Sir Jon’s point, we did not consult the company on the detail. I should say that we have a huge body of analysis, evidence and information about HS2 held within the Department, as you can imagine.

Chair

Yes, we can imagine.

Dame Bernadette Kelly

I feel we were able to draw on that very thoroughly to provide good and considered advice for Ministers, but we were relying on the information we had within the Department.

Sarah Olney

For the record, Sir Jon, when did you find out that phases 2a and 2b were being cancelled?

Sir Jon Thompson

Dame Bernadette briefed me on the Tuesday evening on a need-to-know basis, and it was announced on the Wednesday lunchtime.

Chair

That is less than 24 hours.

Sarah Olney

That is less than 24 hours before it was made known to the public.

Sir Jon Thompson

Yes.

Sarah Olney

Dame Bernadette, in terms of the decision-making process, was that the right way to make the decision? Were the right people engaged at the right time?

Dame Bernadette Kelly

That was the process that Ministers wanted us to adopt and we were asked to adopt, so that was the process we did adopt, which was strict confidentiality and named officials only.

Sarah Olney

You did what you were asked.

Dame Bernadette Kelly

We were asked to do that. We considered at various points during that whether and how to engage Sir Jon. In the event, it was as he describes. I formally spoke to him about the decisions that Ministers were proposing to agree and announce.

Chair

Ministers were aware at that point that you were making that phone call.

Dame Bernadette Kelly

Yes, absolutely.

Sarah Olney

In terms of a full assessment of the economic impact of cancelling phases 2a and 2b, are you confident that you have a full understanding not just of the direct costs that are going to need to be met but also the wider economic impact of the cancellation?

Dame Bernadette Kelly

Again, I repeat the point that we do have exhaustive information within the Department. We have considered these questions at great length and depth in the past when taking the decisions to proceed. In a sense, we are now drawing on that evidence to consider what the impacts are. Some of it we certainly know and can measure, which is reflected in our formal BCRs. With projects such as HS2, we always talk about the wider economic benefits, the level 3 benefits, that we cannot measure. We were very much considering and ensuring that those were also taken into account as the decisions were taken. We had a lot of information to draw on. Clearly, if we had done a six-month external consultation, we would have sucked in more information, but we had a lot of information.

Sarah Olney

I understand that point, but, in terms of the information that was provided to the Prime Minister, he had the fullest possible understanding of the wider economic impact, the level 3 benefits, of cancelling phases 2a and 2b.

Dame Bernadette Kelly

We were very clear, and I was very clear as the accounting officer. Mr Over will also reinforce this. We felt it was very much our duty as officials to ensure that Ministers had thorough, robust and good advice. These are big decisions of very significant consequence. It was our duty and responsibility to ensure that Ministers had appropriate advice. We worked very hard to ensure that that was exactly what they received.

Sarah Olney

Can you give me perhaps a ballpark figure, if you have that available, of the estimated economic impact of cancelling phases 2a and 2b that you provided to the Prime Minister?

Alan Over

We can write to you on that, but the basis was the removal of the train paths and the benefits that each of those would deliver. Back at notice to proceed, we were planning to operate 17 trains per hour across the full Y. Those paths have progressively been reduced as the scope of the programme has been reduced. It is those paths that really deliver the economic benefits as well as the passenger benefits that we can quantify more easily in terms of the time savings or revenue. Moving from 17 to eight to 10 is the basis of the lost economic impact, which we find easier to calculate in relation to fares and level 2. The decision that the Government have set out in policy terms is that they want to move to more local transport benefits than the interregional ones that the programme was trying to address under the former scope.

Sarah Olney

There has been an assessment of the wider economic impact that you provided to the Prime Minister.

Dame Bernadette Kelly

Where we can quantify it, we do. That is then incorporated, as I explained earlier, in our BCR analysis. We are always conscious, particularly with these very large projects, that there are the harder-to-quantify level 3 benefits. We would refer to the loss of those benefits alongside the quantifiable benefits.

Chair

Just briefly on this, we all visited Crossrail and we remember the conversations about the gap in funding. It went ahead anyway. It was late, but now one in six rail journeys in England is on the Elizabeth line.

Dame Bernadette Kelly

Yes, it has been phenomenal.

Chair

Will you be learning those lessons about what your estimates were on the wider economic benefits and what has actually materialised? Are you doing any evaluation of that?

Dame Bernadette Kelly

Yes, we are. I am constantly challenging our analysts, particularly because we know it is very hard to quantify—

Chair

You are doing that evaluation. Do you know when it will be available?

Dame Bernadette Kelly

We have ongoing work looking at, exactly as you say, historic examples. We are looking at whether there are other ways for us to think about assessing the benefits of these transformational projects so we can more accurately assess what the benefits will be in the long term.

Chair

We look forward to seeing that.

Sarah Olney

When we did our visit to Euston earlier this year, from speaking to some of the people working on it, I was struck by the impact the project was having on the provision of apprenticeships, the skills being gathered that would be useful in the future and the fact that some of the small to medium-sized enterprises, particularly in the engineering sector, were going to be quite heavily reliant on contracts with HS2 for future years’ income. Will those kinds of impacts be included in your analysis of the decision to scrap 2a and 2b?

Dame Bernadette Kelly

Supply chain impacts were certainly one of the explicit considerations that was covered in advice to Ministers. We pick up the direct value of jobs and skills in our business case analysis. I would be very surprised if that were not the case. That would be a quantifiable benefit.

Sarah Olney

If you do not mind, it should also include the future value of the required skills to the future economy and future construction projects.

Dame Bernadette Kelly

Yes, agreed.

Sarah Olney

An awful lot of skills development will now not occur. That will have an impact on future construction because we will not have those domestic skills.

Dame Bernadette Kelly

I have two things to say in response to that. First, phase 1 is continuing. That is where the vast bulk of the 30,000 people—

Sarah Olney

We will be missing apprenticeship opportunities in the north, in particular.

Dame Bernadette Kelly

The £36 billion that is not now being spent on HS2 is being spent on other transport investments.

Sarah Olney

I was just going to come on to that, if I may. Once you have done the assessment of the economic value forgone, if you like, from scrapping HS2 2a and 2b, will you then do a comparison with Network North or whatever it is being called, the alternative investment being made?

Dame Bernadette Kelly

That is not our current plan. Network North, the alternative investments, is a large portfolio of all sorts of different transport investments from very large investments like Northern Powerhouse Rail to road maintenance and support for bus fares. There are very distinct and different projects and programmes within the totality of the £36 billion. It is not normally the case that we try to do aggregate VFMs. We do not do it in the Department. In fact, nowhere in Government would do aggregate VFMs for lots and lots of different policies and programmes. What we will be doing is assessing the VFM of each of the projects and programmes within Network North.

Sarah Olney

To interrupt you there, when the Prime Minister in his conference speech announced Network North as a new project, that is not how the Department will be approaching it.

Dame Bernadette Kelly

He announced a long list of alternative investments ranging from very specific projects like Northern Powerhouse Rail to uplifts in city regional sustainable transport funding and local integrated transport funding. We will assess those on their merits in the normal way rather than as a bundle.

Sarah Olney

Some of those will have business cases already. To what extent will some of those business cases be dependent on the delivery of 2a and 2b and will need to be reworked?

Dame Bernadette Kelly

There is an interdependency between 2b and Northern Powerhouse Rail. That is probably the principal direct interdependency, which Mr Bisson can say more about.

Dr Bisson

That was dealt with in the announcement, in the sense that enough funding was made available to continue the construction of Northern Powerhouse Rail as previously promised, albeit that the Government also said they would engage with local leaders on whether there were alternative choices to be made. That engagement is ongoing, I would say, right here, right now. To pull two other things out just briefly, as Dame Bernadette says, the Government’s intention is that the money that is reallocated out of HS2 should be reallocated within the same region of benefit. If X billion pounds was going to be spent in the north of England, X billion pounds is still being spent in the north of England, subject to agreement with Treasury, broadly to the same timescales but with the potential of bringing benefit earlier. If you think about it, in building HS2, we will not realise the benefit of the spend until 2040 or whatever the opening date for 2b becomes. If we are doing some of the smaller schemes, we will realise it earlier.

Sarah Olney

To conclude on this section, then, we do not yet have a fully worked-up estimate of the full economic impact of cancelling phase 2a and 2b and nor do we have—I take your point about them being lots of different projects rather than a single project—the opportunity to compare the cost of cancelling 2a and 2b with the benefits to be realised from all the other the projects that are going to get funding instead. There is really no way for this Committee at this time to properly scrutinise whether or not the cost or the impact of cancelling 2a and 2b is going to be mitigated by the projects that will get funding instead.

Dame Bernadette Kelly

I will say two things in response. First, I did think about this in my accounting officer’s assessment. In my letter, I described how the counterfactual that I considered to be the right counterfactual, which was not continuing—