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
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