Sixty-Third Report - HS2 Euston

The Department and HM Treasury have not reached a clear understanding about how they would manage high levels of inflation on the HS2 programme, including accessing Government-held contingency. In the 2022 Autumn Statement, HM Treasury confirmed that departments needed to … Read more The Department and HM Treasury have not reached a clear understanding about how they would manage high levels of inflation on the HS2 programme, including accessing Government-held contingency. In the 2022 Autumn Statement, HM Treasury confirmed that departments needed to absorb the higher costs from inflation within existing cash budgets. In response the Department has paused some of its capital projects including Euston. However, the risk from high inflation will continue to be an issue on the HS2 programme. The Department continues to discuss the treatment of inflation for major projects with HM Treasury, but there is not yet an agreed way to deal with this to mitigate the risk of poor value for money decisions. In setting the budget for Phase One of the HS2 programme in 2020 the Department never established how the government-held contingency of £4.3 billion would be deployed. Given that some of this contingency could potentially have been used at Euston or on Phase One more widely to manage the higher spend from inflation, we are concerned that arrangements for the use of this contingency have not yet been determined. Recommendation 4a: The Department should agree with HM Treasury and report back to the Committee in six months on how they will manage the continued consequences of high inflation. (b) HM Treasury should set out to the Committee how it will work with all departments to manage the consequences of high inflation on major capital programmes. (c) The Department should also establish and set out to the Committee the requirements to access the government contingency on the HS2 Programme. Show less

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HS2 Ltd told us that there was pressure to drive the overall HS2 cost to what was deemed to be an affordable point. It viewed the £2.6 billion as a budget to work towards and undertook a lot of work … Read more HS2 Ltd told us that there was pressure to drive the overall HS2 cost to what was deemed to be an affordable point. It viewed the £2.6 billion as a budget to work towards and undertook a lot of work on affordability and efficiencies to try and reduce costs. It told us that it generated somewhere between £300 million and £500 million of efficiencies.20 Show less

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Later, more detailed estimates showed that the costs were likely to be significantly higher, with the 11-platform design forecast to cost as much as £4.4 billion in June 2020, and the revised 10-platform design estimated to cost £4.8 billion in … Read more Later, more detailed estimates showed that the costs were likely to be significantly higher, with the 11-platform design forecast to cost as much as £4.4 billion in June 2020, and the revised 10-platform design estimated to cost £4.8 billion in March 2023.21 The Department told us that it needs to try to work out what the right next step is, what the right options are to consider and how it gets to a better outcome.22 It intends to look at whether and where it may be appropriate to make some trade-offs in order to get to something that is more affordable, and acknowledged that it may have to take a substantial amount out of the £4.8 billion estimate to get to an affordable position.23 The costs and impacts of pausing construction Show less

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In March 2023, following an announcement by the Secretary of State for Transport, the Department paused new construction work on the HS2 Euston station for the next two years to reduce spend over that period and to give it time … Read more In March 2023, following an announcement by the Secretary of State for Transport, the Department paused new construction work on the HS2 Euston station for the next two years to reduce spend over that period and to give it time to develop an affordable and deliverable design.24 The Department and HS2 Ltd do not yet know the cost of pausing construction. When asked about how much that would be, both the Department and HS2 Ltd referred to the £2 billion spend to date at Euston and the surrounding area on preparing and enabling the site for construction as “no-regrets work” that it would expect to be relevant to any future design.25 The Department told us that it will not know what the pause at Euston will cost until it finds out how much of the first two designs it can use in its next attempt at getting an affordable design.26 The Department stressed that it hopes and expects that the costs associated with the pause will be offset by finding a more affordable design.27 However, as the NAO has reported, there will be more costs from its supply chain stopping and re-starting work, for example from demobilising and remobilising staff, contractual changes, and project and site management costs being incurred for a longer period.28 HS2 Ltd told us that it expects to spend more than £200 million at Euston to wind up the works and make the site secure.29 18 Qq 30, 32 19 Qq 28, 30–31 20 Qq 8, 57 21 Q 31; C&AG’s Report, para 8 22 Q 23 23 Qq 37, 45, 59 24 C&AG’s Report, page 4 25 Qq 23, 38 26 Qq 44–45 27 Q 38 28 C&AG’s Report, para 2.24 29 Q 39 12 HS2 Euston Show less

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We asked the Department if Ministers had looked at the impact on businesses when they made the decision to pause construction. The Department told us that the decisions Ministers were trying to make were about trying to protect the supply … Read more We asked the Department if Ministers had looked at the impact on businesses when they made the decision to pause construction. The Department told us that the decisions Ministers were trying to make were about trying to protect the supply chain as far as they could and that this was an important part of the advice that was being given to Ministers as they considered options.30 HS2 Ltd told us that it had been working with the Department to develop various funding scenarios and best options for the HS2 programme since November last year but, with the decisions now made, it needs to determine the full extent of the impact of the pause on the contractors and subcontractors working at the Euston site.31 It intends to work with its existing suppliers to redeploy as many resources as it can to other parts of the HS2 programme but it was unable to confirm what proportion of the supply chain that would cover.32 Show less

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We heard concerns from the London Borough of Camden and Drummond Street Traders, who already face many years of disruption, and impact of the pause in construction on local residents and businesses and be absolutely transparent when it is possible … Read more We heard concerns from the London Borough of Camden and Drummond Street Traders, who already face many years of disruption, and impact of the pause in construction on local residents and businesses and be absolutely transparent when it is possible to do so on what the revised timetable involves.35 We asked HS2 Ltd about the extended disruption and how it is engaging with the local community. It told us that it continues to have a lot of interaction with Camden residents and the local authority and that it is starting to explore how it can open up some areas for the local community to use. For example, converting the existing taxi rank into a temporary public space. HS2 Ltd acknowledged that it has a difficult job to put the project on ice for two years and told us that it wants to give local residents a chance to help influence what the interim solution looks like so that it is as palatable as possible for local people and businesses.36 30 Q 81 31 Qq 39–40, 42–43 32 Qq 78–80 33 Qq 93–95 34 Q 98 35 HS2006, HS2007 36 Qq 82–83, 86 HS2 Euston 13 2 Managing the wider HS2 programme Managing high inflation and contingency Show less

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One potential source of additional funding to help manage higher costs from inflation and also higher costs at Euston is the government-held £4.3 billion contingency. This was set by the Department in 2020 as part of the £44.6 billion budget … Read more One potential source of additional funding to help manage higher costs from inflation and also higher costs at Euston is the government-held £4.3 billion contingency. This was set by the Department in 2020 as part of the £44.6 billion budget for the whole of Phase One.42 The Department told us that it had no expectation on what this contingency would have been needed for when it was established. However, it is also unclear on what it could be used for, with the Department acknowledging that it had ‘never reached any formal view or agreement on what basis the contingency would be drawn down on’.43 Reporting to Parliament Show less

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In response to our May 2020 recommendation on the lack of transparency on the HS2 programme, the Department began providing six-monthly reports to Parliament on progress, including on costs.44 The Department published its first update in October 2020 and, on … Read more In response to our May 2020 recommendation on the lack of transparency on the HS2 programme, the Department began providing six-monthly reports to Parliament on progress, including on costs.44 The Department published its first update in October 2020 and, on Euston, reported that design work was indicating a ‘cost pressure’ or overspend 37 Q 34; C&AG’s Report, para 12 38 Committee of Public Accounts, Oral evidence, High Speed 2: 2022 Spring Update, HC 51,16 May 2022; Q92 39 Q 109; C&AG’s Report, paras 12, 2.21 40 Qq 34, 109; C&AG’s Report, para 13 41 Qq 34–35 42 Qq 9, 25; C&AG’s Report, paras 2.2 and 2.5 43 Q 9, 25 44 Committee of Public Accounts, High Speed 2: Spring 2020 update, Third Report of Session 2019–21, HC 84, 17 May 2020, para 1; Written statement to Parliament, HS2 6 monthly report to Parliament: October 2020, 13 October 2020 14 HS2 Euston against its budget. HS2 Ltd reported this to be ‘in the order of £0.4 billion’ and that further ongoing work might potentially identify further pressures. However, the Department also stated that work was underway to address these pressures.45 Show less

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The Department has continued to report that the cost pressure at Euston was £0.4 billion throughout its six-monthly updates, including in the October 2022 update, which was the latest at the time we took evidence.46 Since October 2021, with the … Read more The Department has continued to report that the cost pressure at Euston was £0.4 billion throughout its six-monthly updates, including in the October 2022 update, which was the latest at the time we took evidence.46 Since October 2021, with the Department’s decision to change the design of the station to a smaller and less complex 10 platform single-stage build, the Department has stated that it expected that the cost pressure would be reduced.47 The Department also reported throughout 2022 including its latest update to Parliament in October 2022 that, as part of ongoing design work, it would need to consider the appropriate level of contingency to manage risks during construction of the station.48 Show less

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However, HS2 Ltd’s latest cost estimate of £4.8 billion is significantly higher than previously reported, at £2.2 billion over the budget.49 The Department told us that it did not know of the £4.8 billion estimate until HS2 Ltd reported it … Read more However, HS2 Ltd’s latest cost estimate of £4.8 billion is significantly higher than previously reported, at £2.2 billion over the budget.49 The Department told us that it did not know of the £4.8 billion estimate until HS2 Ltd reported it to them during February and March 2023.50 Prior to that, the Department noted that HS2 Ltd had been reporting a cost estimate of £3.3 billion, within a range of £2.6 billion to £3.6 billion.51 It acknowledged that this cost pressure was ‘slightly greater’ than the £0.4 billion being reported to Parliament but that those figures had not been validated while work was still underway.52 As a result, the Department told us that it reported what was known and validated which, until February 2023, was a cost pressure of £400 million.53 HS2 Ltd acknowledged that the £2.6 billion budget was seen as a stretch target, and that it had been working towards trying to get back to its previous estimate of £3.3 billion.54 Show less

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HS2 Ltd explained that it had not expected to have an estimate of costs that it was confident in until the end of 2022 following work by the construction partner on a detailed, ‘bottom-up’ costing of the design.55 This followed … Read more HS2 Ltd explained that it had not expected to have an estimate of costs that it was confident in until the end of 2022 following work by the construction partner on a detailed, ‘bottom-up’ costing of the design.55 This followed the two-stage procurement process that HS2 Ltd told us it is employing on the HS2 programme, where the construction partner is first appointed based on capability and suitability and then works with HS2 Ltd to develop a design and agree a target price for construction.56 The Department confirmed that this is a standard approach for large construction projects where there is significant unknown risk and where more design work is required before a realistic target price can be agreed.57 45 Written statement to Parliament, HS2 6 monthly report to Parliament: October 2020, 13 October 2020 46 Committee of Public Accounts, High Speed 2: 2022 Spring Update, 16 May 2022, Q 48; Written statement to Parliament, HS2 6 monthly report to Parliament: October 2022, 27 October 2022 47 Committee of Public Accounts, High Speed 2: 2022 Spring Update, 16 May 2022, Q 48; Written statement to Parliament, HS2 6 monthly report to Parliament: October 2021, 20 October 2021 48 Committee of Public Accounts, High Speed 2: 2022 Spring Update, 16 May 2022, Q 48; Written statement to Parliament, HS2 6 monthly report to Parliament: March 2022, 16 March 2022; Written statement to Parliament, HS2 6 monthly report to Parliament: October 2022, 27 October 2022 49 C&AG’s Report, para 2.19 and Figure 7 50 Q 5 51 Ibid 52 Ibid 53 Ibid 54 Q 8, C&AG’s Report, Figure 7 55 Qq 6, 8 56 Q 10 57 Q 11 HS2 Euston 15 Show less

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Prior to our evidence session, the Department had published its latest six-monthly update to Parliament in October 2022. It did not publish an update six months later in March 2023. Following our evidence session on 24 April 2023, the Department … Read more Prior to our evidence session, the Department had published its latest six-monthly update to Parliament in October 2022. It did not publish an update six months later in March 2023. Following our evidence session on 24 April 2023, the Department published its next six-monthly update on the HS2 programme on 19 June 2023.58 Our sister committee, the Transport Committee, held a session with the Department two days later, where it asked why the update had been delayed. The Department explained that a large part of the delay was due to the local election purdah period and that it would seek to return to the original timetable for future updates. The Transport Committee was also concerned about the lack of new information that would be expected in the update, for example updated costs using a more recent price base and an updated benefit-cost ratio. The Department told the Committee that work was ongoing and, if that was not completed in time to report as part of the next six-monthly update, it committed to find other means to provide the Committee with an update on the costs and benefits.59 Learning lessons Show less

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We concluded in our 2021 progress update on Crossrail that the Department had still not demonstrated that it is embedding lessons learned into its major programmes.62 When we asked the Department again about learning lessons, the Department and HS2 Ltd … Read more We concluded in our 2021 progress update on Crossrail that the Department had still not demonstrated that it is embedding lessons learned into its major programmes.62 When we asked the Department again about learning lessons, the Department and HS2 Ltd told us that they are learning from Crossrail, such as around programme and system integration and that there is a clear audit trail demonstrating how lessons have been applied.63 The Department also believed that the earlier identification of problems at Euston compared to other rail programmes reflected how it is embedding learning into its projects.64 Show less

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The £2.6 billion budget set in 2020 proved to be completely unrealistic for what the Department wanted to deliver. In April 2020, as part of the overall Phase One budget of £44.6 billion set by the Department, HS2 Ltd set a £2.6 billion budget for Euston. This budget was below …

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The Department does not yet know the costs and impacts of pausing construction. Neither the Department nor HS2 Ltd know the likely costs of pausing construction work for the next two years. They had been developing funding scenarios for the HS2 programme since the 2022 Autumn Statement but, with the …

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The Department’s reports to Parliament on the HS2 Programme did not reflect the significant level of uncertainty in its estimated cost of Euston station. From October 2020 through to its six-monthly update in October 2022, the Department HS2 Euston 7 has reported to Parliament that the cost pressure at Euston …

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Why the existing report was late and contained so little information

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The Department has not yet learned lessons from managing major rail programmes. In previous examination of other rail programmes like Thameslink and the Great Western Railway modernisation we have reported very similar problems to the ones we are now seeing again with Euston. The Department and HS2 Ltd say that …

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We asked the Department to give us an indication of what a reduced design for Euston station might look like. The Department told us that it would need to examine two options before it could come to the right solution: the minimum station option that would support passenger services and …

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The Department told us that it wanted to look at all elements of the design to see where the opportunities are to deliver something that prioritises passenger benefits and wider benefits of the scheme, but also reduces costs.14 It plans to use the pause in construction to determine the minimum …

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In April 2020, as part of the overall Phase One budget of £44.6 billion set by the Department, HS2 Ltd planned to design and build the HS2 Euston station for £2.6 billion. This budget was lower than its £3 billion assessment of what the station would actually cost to build.16 …

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We asked HS2 Ltd whether it was receiving notifications from contractors of their intentions to make contractual claims due to the pause. HS2 Ltd told us that this was not the case and that it is in discussion with contractors about how it can slow down or defer works, and …

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The Department is having to manage significant inflationary cost pressures across its spending on major infrastructure projects, particularly from higher costs of construction materials.37 For example when we examined progress on the HS2 programme in May 2022, HS2 Ltd told us that it was seeing ‘30% to 40% swings in …

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The Department told us that, although budgets are now set, it continues to have discussions with HM Treasury about how it manages inflation on programmes like HS2 in order to deal with any issues that may arise later in the year. The Department also acknowledged the value for money implications …

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The Department’s failures around budgeting, cost estimation and integration on the Euston project are not new. We have reported on these as part of our examination of other major rail programmes over the years. For example, on the Thameslink Programme, this committee found in 2018 that Network Rail did not …

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In terms of what it has learned from Euston, the Department told us that there are lessons on cost estimation, the treatment of contingency and managing integration on large and complex stations. These are all issues we have seen before on other major programmes, including those overseen by the Department. …

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In comparison the Department and HS2 Ltd noted that other HS2 stations may be less complex or already more advanced in their progress than Euston, such as Curzon Street in Birmingham, where HS2 Ltd told us that the civil works is 40% complete. In the case of the more advanced …

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