The case of the High Speed 2(HS2)

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Source: Adam Smith Institute

URL: HYPERLINK “http://www.adamsmith.org/news/press-releases/high-speed-fail-%E2%80%93-there-is-no-case-for-hs2” http://www.adamsmith.org/news/press-releases/high-speed-fail-%E2%80%93-there-is-no-case-for-hs2

Economic Principles: opportunity costs, marginal benefits, limited resources, unlimited wants, capital, scarcity, efficiency, labour, production, economic problem, return on investments, and demand.

News Analysis Assignments

Introduction

The case of the High Speed 2(HS2) is a failed one because it does not make any economic sense. The benefits of the of the HS2 were over estimated, with the total costs incurred in the fundamentally flawed project being exorbitantly high as compared to the revenues that the project is supposed to generate. The huge costs of the project to the taxpayer will be exorbitant and will not be able to match the opportunity costs projections, especially if it is compared to London to the Channel Tunnel (HS1) and other international examples. The HS2 will not make enough money make a tangible return on investments; thus it will bring marginal benefits. The few tangible benefits that will be realized from the project will be so minimal to cover the operational and construction costs, and the most of the uptake projections were very optimistic.

The funding of the project came at a time when there were limited resources from the tax payers point of view during the period of austerity and increasing debt interest debt payments. Given that HS2 will be a state funded project, with seventeen billion pounds being spent on the first phase, and another fifty billion pounds to be used when the project expands to Scotland. There exist unlimited wants from the public by giving the government more pressure to construct more tunnels, and it costs much more per kilometre to build a railway tunnel through the environmentally sensitive regions of Chilterns, which will push the construction costs higher. This will exert the DfT’s budget under strain, implying that there is less capital to be invested anywhere else on the United Kingdom railway network. In the light, of the current inflation, a potential for going above the four billion pounds optimism premium that has been set aside for overspending will be too high.

The decision making process for the project must consider the if HS2 will make a profitable return, based on the number of passengers forecasted for previous rail projects in the United kingdom, such as London and Continental Railways (LCR). The projected number of passengers for EuroStar in 2004 was 21.4 million, which in reality, the number of passengers was one third of this figure. This will create an economic problem, since the figures do not add up for HS2, because HS1 costs amounted to 5.7 billion pounds and only raised 2.1 billion pounds when it was sold off. The passenger forecast did not consider the competition generated from classic train franchises and airlines, which pose passenger scarcity for the optimal demand of HS2 services.

The efficiency of HS2 in terms of environmental benefits are some of the strengths of the project, it has very little environmental case though, there are weak carbon emission reduction projections, and the actual environmental benefits can only be quantified after the completion of the project’s phase three in thirty years’ time. There is little rational to commit labour in the construction of the tunnel that will produce no significant benefits, if the government does not hit brakes on HS2, then this will mean wasteful spending on wildly unrealistic projects. Governments are known to be very poor in predicting the future. To spend £ 17 billion up to around £ 50 billion on a train network, which has less demand, would be obscene and wasteful during a time of austerity.

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