Category: UK & Europe

Infrastructure spending is fraught with pitfalls. One of the most dangerous is lobbying by special interest groups who stand to profit from the project.

Dr Richard Wellings from the Institute of Economic Affairs recently completed a report on the UK’s £43 billion High Speed 2 rail project — close to £80 billion if fully costed — and comments:

It’s time the government abandoned its plans to proceed with HS2. The evidence is now overwhelming that this will be unbelievably costly to the taxpayer while delivering incredibly poor value for money.

It’s shameful that at a time of such financial difficulty for many families the government is caving in to lobbying from businesses, local councils and self-interested politicians more concerned with winning votes than governing in the national interest.

The conclusions in his report The High-Speed Gravy Train: Special Interests, Transport Policy and Government Spending are even more damning:

• The decision to build High Speed 2 is not justified by an analysis of the costs and benefits of the scheme. Even the government’s own figures suggest that HS2 represents poor value for money compared with alternative investments in transport infrastructure.
• Ministers appear to have disregarded the economic evidence and have chosen to proceed with the project for political reasons. An analysis of the incentives facing transport policymakers provides plausible explanations for their tendency to favour a low-return, high-risk project over high-return, low-risk alternatives.
• A group of powerful special interests appears to have had a disproportionate influence on the government’s decision to build HS2. The high-speed-rail lobby includes engineering firms likely to receive contracts to build the infrastructure and trains for HS2, as well as senior officials of the local authorities and transport bureaucracies that expect to benefit from the new line.
• An effective lobbying campaign in favour of HS2 was initiated and funded by concentrated interests expecting to make economic gains from the project. This effort appears to have been effective at marshalling support for the scheme among policymakers.
• ‘Vote buying’ incentives were also important in building political support for a high-speed line. The policy was initially adopted partly as a response to local opposition to Heathrow expansion.
• The main losers from HS2 – the taxpayers in every part of the UK who will be forced to fund it – are highly dispersed, and therefore have weak incentives to actively oppose it. By contrast, members of communities along the route, where losses are concentrated, have had very strong incentives to campaign. This pattern of activity has enabled the debate to be misleadingly framed in the media in terms of local objections versus national economic benefits.
• Policymakers have strong incentives to ‘buy off’ opposition along the route at the expense of taxpayers, for example by increasing the amount of tunnelling or diverting the line. The large scale of HS2, its high political salience and its potential electoral importance, increase the risk that budgets will be expanded.
• Local authorities, transport bureaucracies and business groups are already lobbying central government to fund new infrastructure along the route, with several schemes already identified. HS2 will trigger billions of pounds of additional expenditure on commercially loss-making, taxpayer-funded projects.
• Along with design changes to ‘buy off’ opposition and subsidised regeneration projects, these proposals threaten to push total spending far beyond the basic budget. £80 billion plus is a plausible estimate of the overall cost, if these extras and the trains are included.
• In addition to the direct costs, there will be even larger opportunity costs from the misallocation of transport investment. Institutional reform is needed to reduce the malign influence of rent-seeking special interests on transport policy. New infrastructure could then be provided on a more economically rational basis.

California is undertaking a similar scale high-speed rail project to connect Los Angeles and San Francisco. Elon Musk, founder of Tesla and SpaceX, has proposed an alternative Hyperloop solution that would transport travellers four times as fast at one-tenth of the cost. Debate still rages over whether the concept is viable, but the fact that alternatives were never adequately explored highlights the dangers inherent in allowing political control of infrastructure spending.

Unless adequate safeguards are in place to minimize political interference and adhere to market-related rates of return on investment, taxpayer funds are likely to be wasted on gigantic projects that are an ongoing burden on the fiscal budget.