Louise Haigh, like many transport secretaries before her, wants to know what the hell has gone wrong at HS2, why the costs jump every time the numbers are added up, and whether anything can be done to get a financial grip on the project. “I have seen up close the scale of failure in project delivery – and it’s dire,” she says.
Nobody would argue with that assessment. The latest estimate for the first stage of the project is a colossal £60bn to £65bn in today’s money, and it’s odds-on that a few more billion will come at the next count. So it is reasonable for a new government, especially one contemplating reinstating the section to Crewe, albeit in slimmed-down form, to want to know what happened. Yet another independent review of HS2 – this one by James Stewart, former chair of infrastructure at KPMG – is justified.
But the intriguing part in Haigh’s announcement was her separate review into the “incentives” of contractors, which, we’re told, “could lead to some contracts being renegotiated or amended”. That’s getting to the nub of the matter because the most significant chunk of HS2’s cost over-runs relates to the decision, circa 2018, to award cost-plus contracts – where the contractor is paid a percentage of the total value of the work, whatever that value ends up being – on the line from Old Oak Common to Birmingham Curzon Street. The alternative would have been fixed-price contracts, or ones with heavier penalties for cost over-runs.
Here’s what Sir Jon Thompson, executive chair of HS2 Ltd for the past 18 months, told MPs in January. Before his time, he said, the government and the company “decided to let cost-plus contracts, where 99% of the financial risk is with the government and only 1% is with the contractor, which is extraordinary”. He went on: “If you are basically going to say, ‘You’ll get a fee of 10% irrespective of how much it costs,’ you are almost incentivising somebody to go over the budget, because they will now get 9% of a much larger number.” Well, quite.
Why were such one-sided contracts ever written? Well, at the start of 2018, Carillion, a giant of the contracting sector, had gone bust and ministers feared big companies wouldn’t bid for HS2 work if they were on the hook for a normal level of cost over-runs. Put another way, the contractors had an opportunity to run rings around naive ministers and their arm’s-length body, and they seized it.
The size of these contracts, a report from the Institute of Civil Engineers (ICE) said in September, meant there was “an imbalance of power” between contractors and HS2 Ltd. Cost-plus contracts “can work if a project is planned and delivered well”, argued ICE, but the multi-billion versions at HS2 were awarded at speed and with “limited design maturity”, causing “a cascade effect on costs”.
The full tale of HS2’s financial horrors is more complicated obviously, and Thompson in January did not shy away from HS2’s own failings in budgeting and cost control. To this list one can add government fiddling and the original sin of making the line ultra high-speed if the problem was one of capacity.
But the question of “what can be improved?” comes down, in large part, to Haigh’s and HS2 Ltd’s ability to rewrite contracts. It will probably be impossible to recoup a penny for work already completed. This is about injecting penalties into work still to be done, so will mostly affect the BBV (Balfour Beatty Vinci) and EKFB (Eiffage, Kier, Ferrovial and BAM Nuttall) consortiums, where work is less advanced.
Thompson, in January, was reluctant to promise that renegotiation could achieve anything. “If you are going to let cost-plus contracts and you can’t change the basic fundamentals of those contractual arrangements, there are still incentives for the contractors to spend more money,” he said frankly.
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Haigh, then, will have to cajole and bully in an attempt to persuade these companies to go against their narrow shareholders’ interests. That is a tough gig. But is, unfortunately, how the success or failure of this latest attempt to unpick the HS2 debacle should be measured.