Examination of Witnesses (Questions 1-19)
DEPARTMENT FOR
TRANSPORT AND
LONDON AND
CONTINENTAL RAILWAYS
28 NOVEMBER 2005
Q1 Chairman: Good afternoon and welcome
to the Committee of Public Accounts, where today we are looking
at the Comptroller and Auditor General's Report on Progress on
the Channel Tunnel, which examines progress made in the Channel
Tunnel Rail Link since the last PAC Report on this in March 2002.
We welcome back to David Rowlands, the Department's Permanent
Secretary, Mr Michael Fuhr, who is the Director of Major Projects,
and Rob Holden who is the Executive Chairman of London and Continental
Railways. You are all very welcome. Can I start by asking you,
Mr Rowlands, to look at figure 11 on page 27. You will see there
that the latest Eurostar revenue forecasts are even below the
low case ones for 2001. Is that right?
Mr Rowlands: Yes.
Q2 Chairman: What is the likelihood
then, Mr Rowlands, that they will be revised down again?
Mr Rowlands: We are looking at
the moment at the revenue forecasts to re-forecast when LCR may
need to access the access loan charge arrangements. I think it
is too soon to say that they will be revised down again. We will
have a clearer view at the end of the year.
Q3 Chairman: You do not know. Mr
Holden, can you add anything to that?
Mr Holden: The revenue forecasts
are continually being revised. I think you need to look at this
project though, in terms of more than the revenue forecasts; it
is a combination of issues. Together with other things that have
happened since these forecasts were last produced—and the
Committee reviewed the situation in 2001—a number of things
have happened which have—
Q4 Chairman: You are not answering
the question. What is the likelihood of these forecasts being
revised down again?
Mr Holden: I think the likelihood
is that they would be revised downwards and then reviewed again.
Q5 Chairman: The likelihood is that
they will be revised downwards. Thank you, that is fine. Mr Rowlands,
can you now please look at page 15 paragraphs 2.5 and 2.7 and
please explain to the Committee why the Government, or rather
the taxpayer, has underwritten every single pound of debt in this
project?
Mr Rowlands: Because financially
it was the most efficient way to structure a project that was
in the private sector. What we ensured was that we did not underwrite
all of the risk associated with the project; much of that remains
with both insurers and with Bechtel, as you have seen from the
NAO's Report.
Q6 Chairman The taxpayers are over
a barrel over this, are we not?
Mr Rowlands: No, we are not over
a barrel.
Q7 Chairman: Can you explain why
not then?
Mr Rowlands: In the event that
this project significantly overruns in terms of cost, for example
a 20% cost overrun, the insurance market is out to the tune of
£215 million, and Bechtel is out to the tune of £100
million, as is well set out in the Report.
Q8 Chairman: Let us pursue these
factors further. Can we look at the access loan charge, which
is dealt with on page 34, paragraph 3.29. Can you explain to the
Committee, Mr Rowlands, how much of the access charge loan will
be repaid; or is it going to be just another subsidy from the
taxpayer?
Mr Rowlands: As the Report says,
the LCR expectation is that they will repay all the amounts they
draw down under the access charge loan arrangements.
Q9 Chairman: Can you now please look
at figure 20 on page 38? This is an important matter; it is the
value for money assessment of the case for going ahead with section
2. Obviously, the economics of the project depend heavily on assumptions
about regeneration benefits—do you accept that?
Mr Rowlands: Yes.
Q10 Chairman: So can we be confident
about the numbers in this figure?
Mr Rowlands: If you look at the
extreme right-hand side down the bottom, 0.7, that is the calculated
benefit cost ratio for the low case, that is the case which includes
a £300 million overrun on the original target construction
costs. It is 0.7, but that does not include any benefits from
domestic services. We believe that once those are included that
that will take it above one. We will be looking again at this
once the project is complete, but bear in mind that at Stratford,
Ebbsfleet, King's Cross and indeed at Eastern Quarry, you have
about 100,000 jobs tied to the arrival of this project. From memory,
there are 18,000 homes and a lot of retail developments. It is
fair to say that though this project depends in part upon its
regeneration benefits, not just its transport benefits, those
benefits are materialising, as the report sets out.
Q11 Chairman: So if we look at the
early part of this Report at paragraph 6, which you will find
on page 1, the NAO states there that the economic case for the
link remains marginal. Do you agree with that?
Mr Rowlands: I agree in the sense
that, as we speak, the regeneration benefits are beginning to
go in place. They will start to build out Stratford city in 2006
and King's Cross in 2007. I do not think any of us, with hand
on heart, can say that that is exactly the regeneration benefits,
but they are there. They are still marginal but I think they will
be less marginal as time passes.
Q12 Chairman: In relation to the
cost overrun protection programme you can find on page 32, paragraph
3.21, the Report states that both the Department and the Treasury
felt the Department was in a weak position when negotiating the
Cost Overrun Protection Programme and that it was expensive. The
obvious question is: why did you go ahead with it?
Mr Rowlands: We looked at the
alternatives. There was a Railtrack alternative, which the Report
well sets out, that was even more expensive. You see that in table
17 on page 31. We looked at whether the Department in effect should
take all the risk on cost overrun. As the Report sets out, at
the mid-case forecast that would have been, in NPV terms, perhaps
£40 million cheaper, so essentially we had to look and say:
"To save £40 million in net present value we take all
of the construction risk: is this a sensible thing to do when
we cannot manage those risks?" The conclusion we came to
was that it was better to go with what we genuinely did think
was an expensive proposition, but it was the best proposition
we had in front of us.
Q13 Chairman: Do you want to comment
on that, Mr Holden?
Mr Holden: I have nothing to add
to what Mr Rowlands says. We believe we put to the Department
a proposal which met their objectives.
Q14 Chairman: The product is going
to cost us £5 billion. Is that broadly right?
Mr Rowlands: In finite term prices
I should think more like about £5.8 billion.
Q15 Chairman: Would it have been
cheaper just to have done it as a government project?
Mr Rowlands: It depends whether
you believe the Government would have been able to control the
costs, the timetable and the scope. The last thing we did, if
I am allowed to say so, was the Jubilee Line extension, which
came out 21 months late and £1.4 billion over budget. At
least against that yardstick, this project is performing a great
deal better.
Chairman: We have the Auditor General
of Bulgaria, Professor Valeriy Dimitrov, with us. Welcome.
Q16 Kitty Ussher: I wanted to probe
the wider potential benefits of this scheme. Can you look at the
second phase. Why was it decided that that should go ahead, in
terms of policy-makers in your Department?
Mr Rowlands: Remember that this
project, when it was restructured in 1998, was broken into two
parts, section 1 and section 2. At that stage, albeit that it
was difficult to properly capture the employment and regeneration
benefits, it was decided to go ahead with the project. When it
was reconstructed in 2001, and particularly going ahead with section
2, when that was reappraised the case was still there in cost-benefit
terms.
Q17 Kitty Ussher: Can you explain
that a bit more? The case was still there in cost-benefit terms.
Do you mean in terms of recouping your investment purely on passenger
numbers, or on wider considerations?
Mr Rowlands: At the time, as I
recollect, even the international transport benefits were sufficient
to justify the case on the basis of the mid-range forecast. It
did not stand up at the lower end. Remember, this project was
originally conceived not simply for its transport benefits but
for its regeneration benefits as well. Although it was difficult
at that stage properly to quantify it, I think in my earlier answer
I set out some of the consequences that are beginning to flow
and will flow. When we looked at it back in 2001, it was a combination
both of a transport benefit but also of the then more clearly
emerging regeneration benefits.
Q18 Kitty Ussher: So that we can
be completely clear, the mid-range forecast showed that it was
probably a good idea to go ahead purely on the passenger benefits
and the transport benefits although there were clearly some risks
at the lower end.
Mr Rowlands: That is right, yes.
Q19 Kitty Ussher: But you presumed
that there would also be wider positive benefits from economic
generation of jobs, but those were not quantified and no analysis
was done. Is that correct?
Mr Rowlands: Yes, I think that
is right, and I think the Report says that this route began life
back in 1991 when the then government rejected BR's so-called
southerly approach because it did nothing for the regeneration
of east London; and that is why this route was chosen. That is
why you see, for example, the station at Stratford, to drive redevelopment
there.[1]
1 Note by witness: To amplify the answer I gave in
response to question 19, an attempt was made in 2001 to quantify
the benefits from regeneration area jobs and this is the source
of the £475/£450 million figures given in table 20 of
the NAO's Report. The NAO favour excluding this estimate from
the BCR as Departmental guidance at the time recommended not monetising
these benefits. The Department now requires Economic Impact Report
(EIR) guidance to be followed. It is not clear what level of benefit
would be identified by following the EIR approach. Back
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