HS2 threatens by stealth to gobble up all available cash for rail

Whatever else it is, HS2 is a marvel of the lobbyist’s art. Even as cost estimates climb to unimagined heights, the cry is heard that the high-speed railway must be built in full anyway. As recently as last summer, ministers vowed that £55.7bn was the “only” budget. Now we’re up to a possible £106bn, according to the FT’s report on the official review, and still the chorus from HS2’s fan club remains the same.

The British Chambers of Commerce, a chief cheerleader, was at it again on Monday. “While there can be no blank cheque, cutting the project back would put development and investment plans across the country at risk,” said director general Adam Marshall.

That analysis would be more useful if the BCC defined “a blank cheque”. Most of us would regard £106bn, for a project that was originally priced at £34bn, as proof that HS2’s costs are out of control.

The “whatever it takes” mantra suits the contractors, who warn dramatically that HS2 should proceed because there are no “shovel ready” alternatives. There is, of course, some truth in that notion. Northern Powerhouse Rail (NPR), which would upgrade east-west links between Liverpool, Manchester, Leeds, Sheffield, Newcastle and Hull, is currently more of an idea than a scheme with planning consents.

But is NPR a better idea than HS2? Would it deliver more benefits to more people at a lower cost? And what proportion of HS2’s undeniable capacity improvements could be gained by easing bottlenecks on the current network?

We are now, surely, at the point where those questions matter. Lord Berkeley, the dissenting member of the official Oakervee panel, was right to ask them because the “shovel ready” pitch is really a counsel of despair.

But, the lobbyists implore, HS2 and NPR work best in combination since some of the tracks would be shared, so we must have both. Ideally, maybe. But in the real world, budgets are finite. If a choice has to be made – and looks increasingly as if it must be – the local claims of the north and the Midlands should have priority. That means NPR first, even with a delay. It is where pressure on the system is greatest.

The worst outcome would be one in which HS2, by stealth, gobbles up most of the money available for rail. Now that £100bn-plus is in sight, that danger feels real. Political breezes suggest a re-think of the scope of HS2 is finally underway. Let us hope so; it is long overdue.

Intu, the debt-laden shopping centre group, wants to raise a large sum of money via a share issue to repair its horrible balance sheet. It has not said exactly how much, but at least £1bn is on the cards. There are only two problems. First, is the plan feasible? Second, even if the funds could be secured, would it be enough?

The practical problem is that Intu, owner of Manchester’s Trafford Centre and Lakeside in Essex, is worth only £310m. Raising more than three times your stock market capitalisation is a stretch and a half in normal circumstances and the backdrop here is a crisis in retail-land and falling property valuations. Still, If John Whittaker’s Peel Holdings, owner of a 27% stake, leads by example, others might follow.

But £1bn still looks insufficient if the aim is to get Intu’s loan-to-value ratio – 57% at the last count – permanently below 50%. RBC’s analysts estimate that a £1bn equity injection would briefly deliver 49% but the next re-valuation of the centres (downwards, obviously) would return the figure to 54%. The process feels like an unrewarding exercise in chasing your own tail.

In the world after Neil Woodford, everybody now understands that holding illiquid stocks in a fund with a daily dealing facility does not work. A rush for the exits can be deadly. Why are such stupid structures tolerated, though? Here’s an answer from Terry Smith of Fundsmith, who has a fair claim to being the UK’s top retail fund manager these days: blame the investment platforms.

“It is now the case that no one can expect to effectively market an open-ended fund on any of the major investment platforms which retail investors and wealth managers use to manage their investments unless it is a daily-dealing fund,” Smith writes in its latest annual letter to investors.

That sounds correct and serious. Investment platforms, motivated by self-interest or laziness, have encouraged dumb models. It is another item for regulators to add to their Woodford postmortem.