Recently the Prime Minister confirmed that HS2 would go ahead, but a detailed reading of the Oakervee Review's recommendations shows there need to be improvements in HS2 Ltd's governance, contracting and cost control procedures. We take a look at these in more detail.

On 11 February Prime Minister Boris Johnson gave his long-awaited statement to Parliament on HS2 and released the Oakervee Review's report for publication. As widely leaked, the report recommended that HS2 be completed in its entirety, but that Phase 2a (Birmingham to Crewe) be combined with Phase 1 (London to Birmingham) and Phase 2b (the Y from Crewe to Manchester/Wigan in the west and Leeds/York in the east) be paused for a short time whilst a further review is carried out.

Oakervee Review

The Oakervee Review's Report (endorsed by all the panel members except Lord Berkeley, the Deputy Chair, who issued his own minority report in January) examined:

• the objectives behind a high speed rail link (increasing capacity, improving connectivity and supporting economic growth)
• the latest cost estimates
• the contracting process and the design standards and specifications
• the design and governance of the HS2 stations, Euston in particular
• the governance of the project as a whole and how the Government can control HS2 Ltd
• the economic benefit of HS2 and whether that has been accurately reflected in the business case.

The Government appears to have accepted the Report's conclusions and the Prime Minister's statement to Parliament sets out the next steps.  Some key themes to emerge are:

Governance of HS2 Ltd and the project as a whole

Boris Johnson has, since publication of the report, appointed Andrew Stephenson as HS2 Minister who will have the full-time job of overseeing the HS2 project with the benefit of a new Ministerial oversight group to take strategic decisions about it. This seems sensible, given that no one person can be accountable for a mega-project like HS2, which has already seen seven Transport Secretaries and  six HS2 Ltd Chairmen, with "almost certainly dozens more" (hopefully an exaggeration by Oakervee) over the next 20 years. 

Oakervee's suggestions include:

• Setting milestones to which HS2's management are held to account
• Additional non-executive directors appointed to the HS2 Ltd executive board by the DfT, HM Treasury and the Infrastructure and Projects Authority (IPA)
• A single point of accountability for systems integration: HS2 Ltd and the DfT need to ensure the lessons from Crossrail are understood and incorporated 
• As part of its decision around Notice to Proceed for Phase 1, the DfT should set out its plan for improving how it functions as a sponsor, client, funder and shareholder including how it will improve its internal expertise in a number of key areas
• HS2 Ltd should work closely with the new Shadow Operator and Network Rail, to make sure HS2 and the existing national rail network take each other's needs into account when making operational decisions – in other words, planning HS2 services with full consideration of services on the conventional rail network
• The overall governance of the HS2 project may need to be reframed in light of the Williams Review recommendations, including any new body/bodies that are established following that review – a representative from that body could be on HS2 Ltd's board.

The Government has responded by saying "There will be changes to the way HS2 is managed". 

Contracting and cost control

The Report is critical of the HS2 design process, noting that there has been considerable over-specification and 'gold-plating'. There is little scope to remedy this for Phase 1, but HS2 Ltd should "thoroughly examine what gold-plating of standards can be removed on Phase 2b to reduce costs, including alignment redesign if considered appropriate".

The Report also considers that HS2 Ltd's procurement and contracting approach has inflated prices on the Phase 1 Main Works Civils contracts and that, especially in the allocation of risk, this approach has, in hindsight, proved unsuccessful.

For future HS2 construction contracts, the Report advises considering revised procurement and contracting models, for example the approach used by Heathrow Airport and the revised contract adopted for the A14 project. These are similar to the HS2 Ltd Main Works Civils model. The Review recommends that HS2 Ltd rather than the contractors should carry and manage risk. HS2 Ltd could also procure some of the construction contractors' normal insurances for them on a project wide basis, achieving cost savings.

It also suggest that it may be worth HS2 Ltd developing the preliminary designs to a more advanced stage before going to the market, so that all the design risk does not rest with the contractor.

The message around costs seems to be that they have overrun, but that if the parties had worked together better, they might have had more of a handle on costs. There needs to be a consistent benchmarking procedure; and HS2 Ltd can learn from Network Rail (and vice versa) on cost estimating.

Stations

Instead of HS2 Ltd building all the new stations (which for Phase 1 are Euston, Old Oak Common, Birmingham Curzon Street and Birmingham Interchange), the Report suggests local authorities or combined authorities, in partnership with the private sector, could fund and develop them.  There are limited UK models for this but numerous international examples. A bespoke commercial model may need to be developed, building on the approaches used by London and Continental Railways on major development projects. It is vital that the HS2 stations are closely integrated with the existing transport network and if local government, in partnership with the private sector, take on HS2 Ltd's role in funding and developing stations, this should ensure such integration happens.

The Report briefly touches on value capture of land around Euston and Birmingham Curzon Street in particular and concludes that there needs to be further consideration around whether and how value created in land close to HS2 stations could be captured. This has long been an objective for those involved in transport hub led regeneration, and although mechanics such as planning gain have been used to some effect, it will be interesting to see whether the Government are now prepared to flex taxation powers and laws to achieve real change and impact in this area. 

The Report advises that the governance arrangements around stations needs to be streamlined as they currently often involve complex partnerships arrangements with the DfT, Network Rail, HS2 Ltd, local government and transport authorities, and private sector partners. The private sector has long been asking for a "single front door" in the public sector for each scheme and for greater certainty in relation to matters such as how long railway consents will take to procure.  Network Rail and DfT have made some progress in recent years, will this governance conclusion necessitate a fundamental shake up of decision making and more formalised partnerships/joint ventures?

The Report recommends that procurements for the development of HS2 stations are paused until these issues are sufficiently progressed.

The Report looked at Euston station in particular, which is effectively four sites in one space: the HS2 station, a redevelopment of the conventional station; regeneration above and around the station; and proposed plans for Crossrail 2.  The Report concludes that the existing design is not satisfactory, the management of the whole Euston project is muddled and the current governance arrangements need to be changed. There needs to be a single plan for the whole project and one single organisation to deliver it: "Given the complexity of the Euston project, this organisation should not be HS2 Ltd".

Economic benefits of HS2

On conventional economic modelling, as the cost of HS2 keeps increasing, the cost-benefit ratio of the project (i.e. whether it is good value for money) keeps coming down. But the Report believes that the economic case for HS2 does not fully align with the strategic case and does not capture the full view of the expected benefits of HS2. It is not just about better connections between places, it is about transforming the homes and jobs in those places. This is perhaps the crux of why the Report recommends HS2 should go ahead despite the escalating costs: if the benefits have been underestimated, it doesn't seem so expensive.

Next steps

Now that HS2 has got the go-ahead, this is what will happen in each stage of the project:

Phase 1

The High Speed Rail (London-West Midlands) Act 2017 sets out the detailed route design and the Main Works Civils contractors have been appointed. The Government now needs to issue a Notice to Proceed (NtP), authorising HS2 Ltd to finalise the contracts.  The Report however recommends that if HS2 Ltd cannot obtain acceptable Stage 2 prices, it may have to consider re-procuring some or all of these contracts.

The Report also recommends that HS2 Ltd and the DfT should seriously look at reducing the specifications of Phase 1 within the limits of the 2017 Act, including reducing the central planning assumption from 18 to 14 trains per hour. Boris Johnson said, "We will, in line with Oakervee’s recommendations, be interrogating the current costs to identify where savings can be made in phase 1 without the costs and delays that would be associated with a detailed redesign."  

The Report also recommends that the Government should also issue a revised funding envelope as it is clear that the existing funding available is not sufficient to meet the increased costs of the scheme.

Phase 2a

The Report recommends continuing with the High Speed Rail (West Midlands to Crewe) Bill but that the Government should consider merging the construction of Phase 2a with Phase 1. It seems that the Government agrees with this recommendation.

Phase 2b

This is where it becomes interesting. The cost of Phase 2b is almost as high as for Phase 1 but it is at a much earlier stage of planning, not yet hampered by the constraints of an Act as the hybrid bill has not yet been put before Parliament. A key theme of the Report is the need to see HS2 as an interconnected project, planned as part of the national rail network, not separate from it.  It recommends a further 6 month study, to be completed by summer 2020, to develop an integrated railway plan embracing Phase 2b alongside an integrated railway investment programme for the Midlands and the North of England – which will be known as High Speed North. This should look at how to quickly bring forward rail improvements for this area, as otherwise HS2 will not reach it until 2035-40. As Boris Johnson put it, "we are not asking whether phase 2B is not to be. That is not the question, Mr Speaker. The question is how we can bring a transport revolution to the north sooner."

On 21 February the Government published the terms of reference for High Speed North. The plan, informed by an assessment from the National Infrastructure Commission, will work to identify the most effective sequencing of HS2 Phase 2b, Northern Powerhouse Rail, Midlands Rail Hub and other proposed rail investments. It will also consider the recommended approach to sponsorship and delivery, including exploring options for new delivery vehicles for the new lines that may form part of HS2 and Northern Powerhouse Rail.

The plan will also have a focus on ensuring that lessons are learned from Phase 1 of HS2 to drive down costs. As one of the inputs to the plan, the Infrastructure and Projects Authority (IPA) will conduct a review of the lessons of HS2 Phases 1 and 2a and the effects of various factors, such as the planning and consents process and the procurement model and risk allocation, on the costs of delivery.  The IPA will use these lessons to make recommendations for infrastructure more generally.

Comment

In many ways recent announcements are hugely welcome in helping to end the uncertainty that threatened to stall investment and have reflected many of the views of stakeholders and the rail industry in campaigns over recent years. What is clear though is that the challenge has now been laid down to both the rail industry and the local authorities that have led the charge to call for HS2 and NPR, as well as central Government, to drive forward these projects in a new way, learning the lessons of the initial Phase and delivering on their full potential to transform our cities on budget.