Press Release - Progress on the Channel Tunnel Rail
Link
21 July 2005
The National Audit Office’s report finds that London &
Continental Railways (LCR) successfully completed the construction
of Section 1 of the Channel Tunnel Rail Link (CTRL) on time and at
a cost slightly below the target set in the 1998 restructuring.
Drawing on the reasons for this achievement, the NAO report
highlights lessons for other projects, including the importance
of:
- appropriate contractual provisions and incentives between the
client, the project manager and contractors;
- stability of designs and continuity of management personnel
before and during construction; and
- carefully working out the risk allowance, setting aside money
for that and releasing the money if associated costs do arise
rather than hoping to avoid them.
Section 2 is over 80 per cent complete in cost terms, and
it has to date met all its construction milestones in a programme
aimed at completing the new railway in the spring of 2007. LCR
expects that the final cost of Section 2 will exceed the target
cost by a few percentage points, allowing for railway-related
inflation.
Since the opening of Section 1, demand for Eurostar has grown
rapidly, but passenger revenues still remain well below forecasts.
In addition to a direct grant of just over £2 billion, the
Department for Transport expects to lend LCR about
£260 million to cover the shortfall between cash requirements
and income through to 2051, within a range between 0 and
£400 million. Despite worse than expected revenue forecasts,
the expected loan is not much more than the amount estimated in
1998 as LCR successfully secured savings through lowering the
interest costs on its debt. Following Railtrack Group’s departure
from the project, LCR was able cut the cost of capital from 8.9 per
cent to a more favourable interest rate of just above five per
cent.
In 2001, the Department conducted a new appraisal of the
uncommitted costs of Section 2 and the associated benefits. The
benefit/cost ratio, based on mid-range revenue forecasts for
Eurostar, was 1.4:1 (excluding regeneration and domestic transport
benefits). But actual revenues since 2001 have been below even the
lowest forecast and so, on the basis of the Department’s analysis,
the monetary value of the benefits (excluding regeneration and
domestic transport benefits) is less than half the expected
costs.
To learn lessons about forecasts for future infrastructure
projects, especially in relation to passenger numbers and revenues,
the NAO report says that the Department needs to determine and
review the economic benefits realised as a result of the project. A
key output should be guidance about how forecasts can be made as
realistic as possible, taking account of the difficulties of
forecasting for one-off projects like the CTRL.
There are now encouraging signs of regeneration in the Thames
Gateway and around the three international stations at St Pancras,
Stratford and Ebbsfleet. Part of the justification for public
sector involvement in the CTRL was that the project would stimulate
local regeneration in Government priority areas.
Sir John Bourn commented today:
"The CTRL is a major infrastructure project and that
Section 1 and so far Section 2 are largely on time and to cost is
impressive. But uncertainties remain. A shortfall in passenger
revenues below current expectations will increase the amount of
taxpayer support needed. The Department of Transport must continue
to monitor the exposure of the taxpayer and act to minimise the
risk."
Notes for Editors
- In February 1996, the Department for Transport awarded a
contract to London & Continental Railways Limited (LCR) to
build the CTRL between London and the Channel Tunnel and run the UK
arm of the Eurostar international train service (Eurostar). LCR
proposed to fund the construction of the CTRL from private finance
raised on the back of future revenue from Eurostar and from
Government grants. By the end of 1997, actual Eurostar revenues
indicated that LCR’s forecasts were overly optimistic. LCR had to
abandon its private finance plan and approached the Department for
additional Government grants. The Department seriously considered
abandoning the project. The Government wanted the Link built,
however, and after reviewing the options, the Department came
to the view that the best way forward was a restructuring of
the deal with LCR. In June 1998, the Deputy Prime Minister
announced that although grants for the project would not be
increased, the Government had agreed to guarantee most of the
private sector funding. It also agreed to lend public money
directly to LCR if it ran out of cash. Construction was split into
two Sections and Railtrack Group joined the project to manage and
eventually purchase Section 1, with an option to do the same for
Section 2. However, Railtrack Group did not take up its option to
build Section 2 and then withdrew altogether from the project in
2002, following the entry of its subsidiary, Railtrack plc, into
railway administration. With Government support, LCR bought out
Railtrack’s interest in Section 1 and is now taking forward Section
2 itself.
- Press notices and reports are available from the date of
publication on the NAO website, which is at
www.nao.org.uk. Hard copies can be obtained from
The Stationery Office on 0845 702 3474.
- The Comptroller and Auditor General, Sir John Bourn, is the
head of the National Audit Office which employs some 800 staff. He
and the NAO are totally independent of Government. He certifies the
accounts of all Government departments and a wide range of other
public sector bodies; and he has statutory authority to report to
Parliament on the economy, efficiency and effectiveness with which
departments and other bodies have used their resources.
Press Notice 49/05
All enquiries to Mark Strathdene,
NAO Press Office:Tel: 020 7798 7183
Mobile: 07748 181693