Transparency data

High Speed 2 (HS2) Phase One: accounting officer assessments (March to December 2019)

Updated 30 July 2024

Introduction

Four accounting officer assessments of the HS2 Phase One scheme were completed at different stages of the project during 2019, which are summarised below:

• Assessment 1: Continuing investment in HS2 Phase One (March 2019). Advice was sent to and assessment completed by the DfT accounting officer.
• Assessment 2: Continuing investment in Phase One and additional approvals for spend on long-lead advanced critical works ahead of Notice-to-Proceed (NtP) (July 2019). Advice was sent to and assessment completed by both DfT and HS2 Ltd accounting officers.
• Assessment 3: Continuing investment in Phase One and additional approvals for spend on long-lead and advanced critical works ahead of NtP (under new administration) (August 2019). Advice was sent to and assessment completed by the DfT accounting officer.
• Assessment 4: Continuing investment in Phase One and additional investment authority to undertake further main works civils activity ahead of NtP (December 2019). Advice was sent to and assessment completed by the DfT accounting officer.

Background to the statements

Summaries of the accounting officer (AO) statements on HS2 Phase One (2019) were requested by the committee at the 4 March PAC hearing.

Please note that these summaries of the AO statements are being provided after the event, and as such, are not in standard form.

The DfT is happy to provide further summaries of any future HS2 AO assessments as required.

Assessment 1: Continuing investment in HS2 Phase One (8 March 2019)

Background

This AO assessment was undertaken following receipt of main work civil contracts (MWCC) Gateway 4 cost returns in October 2018, and emerging work on the new Baseline (BL7) (bottom-up estimates of the scheme’s cost and schedule).

HS2 Ltd had reported significant pressures on cost and schedule across Phase One. It was therefore appropriate at this stage of BL7 development to provide updated advice of the value for money and wider AO issues relating to the scheme.

Regularity

There is no uncertainty regarding whether there are sufficient powers to build and maintain the railway. There is legal authority to spend money on HS2 (High Speed Rail (London to West Midlands) Act and High Speed Rail (Preparation) Act.

Sufficient controls are in place to ensure that HS2 Ltd is exercising these powers with regularity.

In relation to Handsacre Junction, mitigation plans are in place to enable adaption of Phase One delivery plans should the HS2 Phase 2a Hybrid Bill not receive royal assent.

Propriety

The latest cost estimates were not sufficiently mature at this point, and any potential overspend was not certain to necessarily present a propriety issue. The HS2 Development Agreement and HS2 Ltd framework document provided comprehensive control frameworks.

Compliance continued to be monitored by the DfT and the National Audit Office. Corporate and individual conduct were subject to guidance and compliance reviews.

HS2 Ltd had continued to operate within its Spending Round 2015 (SR15) spending limits and in line with principles and controls set out in managing public money.

Value for money

Latest analysis indicated that the project, if affordability is maintained, remained in an acceptable value for money position. Measuring cost to go against the funding envelope produced a benefit: cost ratio (BCR) of 1.4 including wider economic impacts (WEIs).

Sensitivity tests demonstrated that the BCR is resilient to cost increases of up to £3 billion above the funding envelope and schedule overrun of three years (with 2029 delivery into service).

Additional DfT analysis suggested a neutral BCR of 1.0 would be achieved if the current scheme scope was delivered in 2029 for £6 billion over the funding envelope (when measured against the cost to go).

When no costs are deemed sunk, the project retained a BCR of 1.2 with WEIs (measured against the funding envelope). However, the enabling nature of the Phase One scheme means that the value for money positions for the ‘full Y’ HS2 scheme remains high (BCR 2.1 including WEIs) provided that the Phase 2a and 2b schemes could be delivered within their respective funding envelopes.

Feasibility

The extent of the observed BL7 cost pressure meant that the affordability of Phase One was uncertain and there was insufficient confidence that the developing nature of the mitigation activities would lead to an affordable position.

At this stage, it was not possible to confirm that the HS2 Phase One scheme was affordable within the SR15 funding allocation and feasible within its parameters.

Further work was needed before the project could be confirmed as infeasible.

Conclusion

DfT Permanent Secretary:

I note the AO advice and can confirm that it is an accurate reflection of my own assessment at this point in time. I recognise that the Phase One cost position will fluctuate until MWCC Gateway 5 outputs are finalised.

As such, my assessment can only be a snapshot. I therefore expect to undertake a further assessment of feasibility once this finalised information becomes available.

In view of the uncertain position on feasibility, and the expectation of a further assessment against this particular standard, I have asked to be provided with a detailed plan of the current activities that are being deployed to address the cost challenges currently observed on the Phase One scheme, so that I can in due course consider their potential effectiveness in addressing the issues that this assessment has identified.

Assessment 2: Continuing investment in Phase One and additional approvals for spend on long-lead ACW ahead of NtP (23 July 2019)

Background

This AO assessment was undertaken because updated cost information had been received from HS2 Ltd, the ‘diagnostic’ phase of BL7 cost iteration was at an end and its cost remediation exercise had been completed.

It was therefore appropriate to take stock of the cost and value for money positions before BL7 development entered the ‘treatment’ stage, i.e. the deployment of scope or proposals to further reduce cost or the project was re-set.

In addition, the DfT had been notified by HS2 Ltd in their letter dated 29 March that the company were in breach of the HS2 Development Agreement as the stated scope for Phase One was unaffordable within the SR15 funding envelope limits.

Additional approvals for £500m of spend on long-lead ACW ahead of NtP had been requested by HS2 Ltd. As such, the HS2 Ltd AO (CEO) also undertook an assessment, alongside the principal AO (the DfT Permanent Secretary).

Regularity

Similar advice was provided as per Assessment 1, dated 8 March 2019.

Propriety

HS2 Ltd continued to operate within its SR15 budget allocations for 2019 to 2020 and in line with the principles and controls set out in MPM. However, HS2 Ltd had now informed the DfT that it was operating in breach of the Development Agreement so there was a risk of nugatory spend if affordability concerns could not be addressed. As the scheme continued to be government policy and there were plans in place to address these concerns that could confirm a viable path to an affordable position, continued spend on HS2 Phase One ahead of NtP was deemed proper.

With regard to £500m additional spend on long-lead ACW ahead of NtP, in advance of a viable path to affordability being identified then cover for such an investment should be sought from HM Treasury (HMT) and the Secretary of State (SoS). This cover from HMT and SoS was subsequently obtained.

Value for money

The value-for-money case for the HS2 programme compared against alternative schemes remained compelling. For Phase One in isolation, measuring cost to go against the funding envelope produced a BCR of between 0.9 and 1.0 including WEIs; this is considered ‘poor’ value for money.

However, the enabling nature of the Phase One scheme means that the value for money position for the ‘Full Y’ HS2 scheme remained intact.

Despite this, the value for money category fell to ‘low’ (BCR of 1.3 including WEIs).

The assumptions that were used for this assessment were that Phase 2a could be delivered within its funding envelope and 2b could be delivered within BL1.0 costs with £2 billion efficiency overlay.

The DfT put plans in place to reduce costs which will have the potential to impact positively upon the BCR for both the Phase One and Full Y schemes. Either way, on the basis of the current scope, the strategic case for the railway remained intact.

Feasibility

HS2 Ltd confirmed a breach of the Development Agreement as the Phase One scheme was not feasible within the existing funding parameters. However, a suite of scope and other remediation options had been developed that, with government approval, could be deployed to address cost pressures and confirm a viable scheme.

Whilst long-term affordability remained uncertain there was valid risk that continued investment in the project, including for additional AWC investment, could turn out to be nugatory spend in the event of cancellation. However, as the project remained government policy, there was greater risk that decreasing spend on HS2 would lead to increased overall costs (estimated at between £350 million to £525 million) due to the additional cost of de-mobilising and re-mobilising suppliers.

Conclusion

DfT Permanent Secretary:

Phase One is currently not feasible within either its affordability envelope or its published schedule constraints. DfT ministers and HMT have been kept fully appraised of this position as it has emerged.

Delivering HS2 remains government policy until a decision otherwise and my expectation is that the forthcoming Spending Review, and/or a separate review process will need to confirm the parameters of, and a trajectory to, an affordable scheme and also re-set the schedule.

In view of ongoing BL7 development and plans in place to address affordability concerns, I consider that it is premature to seek a direction from ministers at this point in time.

The current spend by the Programme is affordable within the 2019 to 20 budget allocations. The BCR ratio for Phase One is between 0.9 and 1.0, which would be categorised as being in the DfT’s ‘poor’ value for money category. This is a snapshot in time reflecting the current cost, schedule and benefits position prior to decisions to mitigate the affordability challenge.

A refresh of this work will be undertaken before a final decision on whether to authorise NtP for the Phase One scheme is taken later in 2019.

I note that the BCR for Phase One has always been lower than for other elements of the project. The value for money position of the ‘full Y’ network is stronger, as is the value for money for the joint Phase One and Phase 2a position (particularly as the Phase 2a Bill approaches royal assent which is expected around the turn of the calendar year).

I have also considered whether it is appropriate to continue with expenditure on HS2, given the risk that it could become nugatory spend in the event that NtP is not authorised. The HS2 scheme is government policy until a decision otherwise and I therefore expect the Government to determine the parameters of, and trajectory to, an affordable scheme at the next Spending Review and/or as part of a review of the project to inform BL7 HMT has been fully sighted on HS2 Ltd’s expenditure and its Board’s proposals to commit to continued spend, advanced works and long lead items and have not sought to rescind HS2 Ltd’s delegations.

In relation to advanced works and long-lead items, I have assessed the immediate risks of nugatory spend against the long-term cost and value for money impacts of delaying investment. As there remain opportunities to curtail investment and recover some costs in the event that a future administration does not confirm a revised Phase One settlement, I am satisfied that continued investment is justified whilst plans to re-confirm a settlement are being progressed with HM Treasury.

The DfT is notifying HMT formally about the spending position in good time to allow officials to raise any concerns. On the basis of above, I am content for the work to proceed based on the above assessments. This is my assessment as at 23 July following confirmation on 17 July that the SoS supports this approach. I will seek to review this position in light of any steers from the new Prime Minister and SoS.

HS2 Ltd CEO:

I note the AO advice you have sent and can confirm that it is an accurate reflection of my own assessment at this point in time.

As indicated in the advice and consistent with HS2 Ltd’s own notification of a breach under the Development Agreement, I recognise that Phase One is unaffordable within the SR15 funding envelope based on the scope and requirements stated in the Development Agreement.

I also note the impact that the cost increases have had on the value for money assessment although I concur with your advice to me that the strategic case for the scheme remains compelling and indeed it is HS2 Ltd’s view that the current method of assessing the BCR understates the benefits and transformational projects such as HS2.

I note the position on feasibility as stated in the advice. I recognise the potential risk of nugatory investment and indeed discussed this matter with the HS2 Ltd Board when considering EWC and MWCC investment decisions.

However, I concur that whilst HS2 remains Government policy, there remains a greater risk that decreasing investment on HS2 now will lead to increased overall costs.

I therefore support the decision to invest in advanced works and long lead investments on the basis that the proposed arrangements include the ability to break contracts and/or recover future cost commitments and on the basis of the work that HS2 Ltd is doing to support the DfT to achieve a viable path to affordability which I note will require Government approvals in due course. I agree that the confirmation of this path should be presented to Parliament and the public as soon as practicable.

It is my expectation that further AO advice will be provided for consideration as part of the fiscal event and/or approvals process for the Phase one FBC and NtP. On the basis of the above assessments, I am content for the work to proceed.

Assessment 3: Continuing investment in Phase One and additional approvals for spend on long-lead ACW ahead of NtP (new administration) (7 August 2019)

Background

The previous assessment (Assessment 2) had taken place close to the end of an administration. A new SoS was appointed on 24 July 2019, so the DfT’s AO reviewed the advice again having discussed the key issues with the new SoS.

Having received confirmation that the government was to continue investment on the HS2 Programme, the AO provided an update to the assessment on 7 August.

Conclusion

DfT Permanent Secretary:

I have reviewed my conclusions of 23 July following the consideration of these issues by the new SoS. The SoS has confirmed he supports this approach on 2 August.

HM Treasury also confirmed on 6 August that they have no objections to these investments being taken forward on the basis that both HS2 Ltd’s AO and I have concluded that continued investment in the HS2 programme is in line with managing public money and that we continue to do everything to minimise unnecessary spend as far as is practical.

I can therefore confirm that my assessment remains unchanged.” Official - Sensitive 8

Assessment 4: Continuing investment in Phase One and additional investment authority to undertake further main works civils activity ahead of NtP (16 December 2019)

Background

HS2 Ltd had recently notified the DfT that its Board had requested authority to extend the first stage of main works civils activities and delay NtP by up to three months from December 2019.

It had also recommended additional investment authority to undertake £283 million of further main works civils activity ahead of NtP. In addition to this, a general election had been called for 12 December 2019, so the assessment took place during the ‘pre-election period’.

The incumbent administration’s policy on HS2 was a review of ‘whether’ and ‘how’ the programme should proceed via the independent Oakervee review.

Regularity

Similar advice was provided as per Assessment 1, 2 and 3.

Propriety

The scheme’s feasibility, risk of nugatory spend and delay to NtP raised propriety concerns in relation to authorising additional investment authority and contingency drawdown.

If HS2 was re-confirmed as government policy then ministers would be advised to proceed with the investments recommended.

The current administration’s policy was a review of ‘whether’ and ‘how’ the HS2 programme should proceed via the independent Oakervee review and it was the DfT’s view that there was a strong possibility that the review would recommend continued investment in HS2, while it was also both Labour and Liberal Democrat policy to continue with the scheme.

HS2 Ltd continued to operate within its SR15 budget allocations for 2019 to 2020 and 2020 to 2021, and in line with the principles and controls set out in MPM. However, HS2 Ltd’s current delegated authority to spend on mobilising MWCCs would be exhausted by the end of January 2020.

In advance of a viable path to affordability being identified and political intent being confirmed, cover for such an investment should be sought from the SoS and HMT. This cover from HMT and SoS was subsequently obtained. Value for money

HS2 Ltd’s Board concluded that if proposals for additional investment authority were not accepted there would be a 9 to 12-month delay to the BL7 delivery-into-service date and an increase in the net point estimate of up to £460 million.

Value for money analysis for this scenario had not formally been undertaken but it was deemed highly likely that pausing and subsequently remobilising the supply chain offered worse value for money.

Phase One is designated ‘low’ value for money by the DfT, with a BCR of 1 including WEIs. However, the enabling nature of the Phase One scheme means that it is an enabler to a series of national transport investments such as Phase 2a and 2b, Northern Powerhouse Rail and Midlands Connect. The ‘full Y’ network, which comprises all three phases of the scheme delivers ‘medium’ value for money with a BCR of 1.6.

The value for money analysis has been undertaken on the basis of Baseline 7 costs for Phase One and Chair’s stocktake cost estimates for Phase Two. Updated Phase 2b costs are due to be presented to BICC on 16 December.

Further work is underway on assessing the BCR for the ‘full Y’ network in December to take account of HS2 Ltd’s most recent cost estimates for Phase 2, due to be discussed at BICC on 16 December 2019.

The Chairman of HS2 Ltd had set out advice to government to fully account for the ‘transformational benefits’ of HS2 and modifications to the appraisal framework recommended by HS2 Ltd resulted in a BCR of 2.7 with WEI for the ‘Full Y’ network.

Feasibility

The scheme was not feasible given it remained unaffordable and there was a valid risk that continued investment could turn out to be nugatory in the event of cancellation. If HS2 was re-affirmed as government policy, there remained a greater risk that not committing to these investments would lead to additional overall costs.

In July 2019, the DfT’s sponsor team concluded that the scheme was not feasible on the basis that it remained unaffordable. The chairman of HS2 Ltd also set out in his stocktake that the Phase One programme was no longer affordable within the current budget. There had also been further increases in cost during the process of finalising BL7 although these had been partially offset by a reduction in the quantified risk exposure.

Whilst the long-term affordability of the Phase One scheme remained uncertain, there was valid risk that continued investment may be nugatory spend in the event of cancellation.

Increased commitment, such as the £283.3 million of additional investment authority to fund the extension of Stage 1, ACW and additional commitments, potentially increased the level of nugatory spend. However, if HS2 was reconfirmed as government policy, there remained a greater risk that not committing to these investments would lead to additional increased overall cost, estimated at up to £460 million, and an 8-month delay in addition to the cost increases and schedule delays already inherent in BL7.

Conclusion

DfT Permanent Secretary:

Phase One is currently not feasible within either its SR15 affordability envelope or its published schedule constraints, although the current spend by the Programme is affordable within the 2019 to 2020 and 2020 2021 budget allocations.

In October 2019, the HS2 Ltd Board approved the new Phase One Baseline which includes significant input from the supplier market. The development of the new Baseline revealed the full extent of the cost and schedule pressures across Phase One following bottom-up estimates and mitigation activities undertaken by HS2 Ltd.

DfT ministers and HMT have been kept fully appraised of this position as it has emerged. DfT and HS2 Ltd have now agreed a new funding and incentivisation regime to manage the programme going forwards, which includes a revised funding envelope of £40 billion.

This funding and incentivisation regime was discussed and endorsed at BICC as part of the indicative FBC for Phase One. The FBC has been subject to a project assessment review and an MPRG in November, although it still requires HMT approval to address the cost pressures and confirm a viable scheme.

This remains subject to the outcome of the Oakervee review and a decision by new ministers on whether they want to proceed with the Phase One programme.

The BCR ratio for Phase One is around 1.0 including WEIs. This is categorised as being in the Department’s ‘poor’ value for money category. A refresh of this work will be undertaken before a final decision on whether or not to authorise NtP for the Phase One scheme.

I note that the BCR for Phase One has always been lower than for other elements of the project. The value for money position of the ‘full Y’ network is stronger, as is the value for money for the joint Phase One and Phase 2a.

I also note that further work is now underway on updating the BCR to reflect emerging costs estimates across Phase 2. I have considered whether it is appropriate to continue with expenditure on the Phase One programme, given the risk that NtP is not authorised and specifically that HS2 Ltd Board’s recommendation to commit a further £283 million of investment results in nugatory expenditure.

To avoid this risk, new Ministers will be asked to confirm whether they want to proceed in principle with HS2. If HS2 is re-confirmed as government policy then Ministers would be advised to proceed with the investments recommended by the HS2 Ltd Board, on the basis that failing to commit to these will likely incur significant additional cost and schedule pressures.

On balance, I am content that making this commitment now protects future value for money should a decision be made to proceed with Phase One. I am satisfied that continued investment is justified whilst plans to re-confirm a settlement are being progressed with HM Treasury. The DfT is notifying HMT formally about the spending position in good time to allow officials to raise any concerns.

On the basis of the above, I am content for the work to proceed based on the above assessments.

April 2020