Press Notice No. 38 of Session 2005-06, dated 4 May 2006
THIRTY-EIGHTH REPORT: CHANNEL TUNNEL RAIL LINK (HC 727)
Mr Edward Leigh MP, Chairman of the Committee of Public Accounts, said today:
"The Channel Tunnel Rail Link is undoubtedly a magnificent project and a boost to our national prestige but the economic justification for it remains marginal. The Link has been bedevilled from the outset by inaccurate forecasting of the number of passengers likely to use Eurostar and the amount of revenue this would generate. Estimates of passenger numbers have been progressively reduced as the project proceeded. It is essential with such projects that, from the start, estimates are realistic and provided by advisers who are clear-eyed about risks to revenue.
"No one really knows how much money taxpayers will be required to cough up in future. The restructuring of the deal agreed by the Department for Transport still leaves the public purse sharply exposed to Eurostar's failing to meet passenger forecasts. The Department has tried but continually failed to ensure that the private sector shoulder a high enough level of commercial risk. In providing financial guarantees for the project, the Department must not weaken the private sector's incentives to maximise the number of passengers.
"What this project also demonstrates is that a high demand for building resources leads to high levels of inflation on construction projects. There are dangers in the sheer number of major infrastructure projects planned for the South East: including the Olympics, M25 widening, Thameslink 2000 and the Thames Gateway. It is essential that the Treasury and other government departments manage the risk of making such demands of the construction industry that prices of large scale building projects, including the Link, are driven up even further."
Mr Leigh was speaking as the Committee published its 38th Report of this Session which examined the progress of the Channel Tunnel Rail Link project. It looked in particular at the forecasting of future Eurostar passenger numbers and revenues; the decision to go ahead with the construction of Section 2 of the Link; and the continuing exposure of the taxpayer to the risks inherent in this project.
In 1996, the Department for Transport (the Department) awarded a contract to London & Continental Railways Limited (LCR), a private sector consortium, to build the Channel Tunnel Rail Link (the Link), a high speed railway linking St Pancras Station, London, to the Channel Tunnel, and to run the British arm of the Eurostar international train service (Eurostar UK).
Construction of the Link was to have been funded partly by government grants and by LCR borrowing money, secured on future revenue from Eurostar UK. By the end of 1997, Eurostar UK revenues were well below LCR's forecasts. Consequently, LCR abandoned its plans to borrow money and approached the Department for an increase in the government grants.
In 1998, the Department and LCR agreed to restructure the deal. Construction of the Link was split into two sections and Railtrack Group joined the project taking management control of construction and agreeing to purchase Section 1 once it was complete. Although direct government grants were not increased, the Department agreed to guarantee most of the money LCR would borrow to fund construction. The Department also agreed to lend money directly to LCR if it, as forecast, ran out of cash several years after completion of the Link (the Access Charge loan).
Even though the economic justification of the project remained marginal, the Department decided to allow LCR to go ahead with the construction of Section 2. Railtrack Group subsequently withdrew from the project following Railtrack plc's entry into administration. The deal was restructured for a second time with LCR backed by the Department, Bechtel and a group of insurers sharing construction risk for Section 2. LCR paid Bechtel and the insurers £87 million to bear £315 million of the first £600 million of any cost construction overrun.
Section 1 of the Link was completed in 2003 on schedule and within budget. Revenues from Eurostar UK have increased but remain below forecasts and it is likely that the Department will have to lend more than the currently estimated £260 million to LCR to cover future cash shortfalls. The Department and LCR expect that Section 2 will open in 2007, but that costs will exceed budget, mainly due to higher than expected construction inflation and changes to the works.
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