Examination of Witnesses (Questions 20-39)
DEPARTMENT FOR
TRANSPORT AND
LONDON AND
CONTINENTAL RAILWAYS
28 NOVEMBER 2005
Q20 Kitty Ussher: Once the link is complete
it will be easier to travel, for example, from my constituency
in Burnley, in the north-west all the way through to the Continent.
Was there any assessment of wider economic benefits to the UK
as a whole?
Mr Rowlands: Not to the wider
economic benefits. That is what we will need to look at when we
go back on this project when it is complete and finally assess
what the out-turn costs were and what the benefits are.
Q21 Kitty Ussher: Obviously I support
any kind of decision that is good for jobs, but do you agree with
me that it is unusual for major government projects to look at
the wider jobs impact, and that there are other areas of government
procurement in defence and the NHS where that is not normally
looked at?
Mr Rowlands: If you had asked
me that question in 2001 I would have probably said "yes"
but it is not the case in 2005. My Department particularly is
moving to assess transport projects on a wider basis than the
traditional, may I say, rather narrow transport cost-benefit approach.
We now require all projects for example to undertake an economic
impact report—and again the NAO Report touches on that.
We are doing one, for example for Crossrail which looks at unemployment
and employment consequences for major transport infrastructure.
We are broadening the basis on which we look at projects now.
Q22 Kitty Ussher: Does that mean
you are developing a new methodology to be able to quantify economic
benefits of large projects like this?
Mr Rowlands: The guidance on economic
impact I think we posted on our website and it runs to about 24
pages, so, yes, there is an emerging methodology for this.
Kitty Ussher: Chairman, I look forward
therefore to improved train links to my own constituency as a
result of this assessment.
Q23 Greg Clark: Sir John, in cash
terms the total support for the rail link comes to about £5
billion. Do you believe that that represents value for money,
Sir John?
Sir John Bourn: My view essentially
is that the Government launched on this project on the basis the
private sector could do it. That was the original conception of
what "value for money" meant. Since then of course it
has become clear that it cannot be done on that basis, and the
taxpayer has been called upon to stand behind the project to an
increasing degree, in circumstances, as we know, with everything
Mr Rowlands has said, where there is still a degree of uncertainty;
and there is also uncertainty about the economic regeneration
benefits which underscored the original cost-benefit analysis.
So in terms of what the original conception of what value for
money was, this project does not meet that. That is not to say
of course that in their desire to keep, if I put it this way,
the show on the road, it has not been addressed with a lot of
care and thought, in the way that the report brings out. However,
in terms of what was originally intended, the value for money
has not been achieved.
Q24 Greg Clark: Mr Rowlands, in answer
to a question from the Chairman you pointed out that the expected
benefit-cost ratio is 0.7 excluding regeneration. Do I take it
that this will go down if, as indicated by Mr Holden, the passenger
forecasts for Eurostar go down?
Mr Rowlands: If nothing else were
to be included, you are right that that number would go down;
but, as you say, 0.7 does not include the regeneration benefits
and it does not include the benefits of domestic[2]—
Q25 Greg Clark: Sure, but the standard
practice, I understand, from the Treasury, is that one should
not include these benefits, which are difficult to quantify, so
from a position of only 0.7—
Mr Rowlands: I am sorry, Mr Clark,
my Department's position now is that we do intend to capture these
benefits.
Q26 Greg Clark: I am sorry, I missed
that, but the financial benefits go down from 0.72. Where would
you estimate it might be headed to—0.5?
Mr Rowlands: I think you are tempting
me into an answer I should not give you. We may have a clearer
idea when we get to the end of the year and we have done some
re- forecasting.
Q27 Greg Clark: Perhaps you can write
to the Committee and give us the percentage.
Mr Rowlands: I am very happy to
do that.[3]
Q28 Greg Clark: Mr Holden, LCR attributes,
on page 34, paragraph 3.27 of the report, the increase in cost
to the effect of railway-related inflation being greater than
assumed in 2001. Is that correct?
Mr Holden: Yes.
Q29 Greg Clark: What is railway-related
inflation at the moment?
Mr Holden: It is very difficult
to get a precise measure on it, but there are two factors we have
taken into consideration. One is the fact that indices as measured
by the ONS in the construction industry are running at about twice
the level we previously assumed, but specifically railway inflation,
following the events of Hatfield and the Railtrack administration—costs
increased enormously.
Q30 Greg Clark: I am asking how much.
What is it currently running at?
Mr Holden: In terms of impact
on the project we believe it is in excess of £300 million.
Q31 Greg Clark: No, but as a rate
of inflation your forecast was based, by implication, on a certain
rate of inflation, and it has been greater than that.
Mr Holden: It has doubled from
3% to over 6%.
Q32 Greg Clark: So the rate of inflation
is 6% rather than 3%.
Mr Holden: It is in excess of
6%.
Q33 Greg Clark: Why was that not
anticipated when the original assessment was made?
Mr Holden: It is very difficult
to anticipate inflation a great many years into the future. On
section 1 of the Channel Tunnel Rail Link, we actually over-estimated
the effects of inflation, and unfortunately in section 2 we have
under-estimated the rate of inflation. To forecast specific events,
as was the case which happened with Hatfield and the Railtrack
administration, is, I guess, impossible.
Q34 Greg Clark: What are you assuming
for the next five years the rate of railway inflation will be?
Mr Holden: We are assuming basically
a continuing level like we have seen in the last three or five
years of between 5% or 6%.
Q35 Greg Clark: Why should that continue
when Hatfield is receding into distant memory?
Mr Holden: I think we are being
very prudent at this point in time so that we do not have a recurrence
of the problem we are now talking about.
Q36 Greg Clark: Is that the reason
for inflation being higher? Can you explain why Hatfield has put
inflation up; rather than requiring more things to be done? Why
should the cost of doing those things be higher?
Mr Holden: There was a greater
demand for a limited amount of resource, and suppliers in the
industry took great advantage of that inequality of supply and
demand, as you would expect and ordinarily see in many aspects
of business.
Q37 Greg Clark: So there are more
public funds chasing a limited number of people who can carry
it out?
Mr Holden: This was both private
and public funds at the same time. We were, by the schedule of
CTRL, required to do certain works at a certain time, and therefore
we were of course at a very great disadvantage.
Q38 Greg Clark: Were the contractors
making more in profit? Presumably people were paying the same
rates of pay to the engineers and the people working on this;
or were they just taking more profit?
Mr Holden: I think the rate of
profit is the same generally, because profit is generally calculated
on what we call a de-escalated basis, ie, without the impact of
inflation.
Q39 Greg Clark: So where is all this
extra money going? In whose pockets is it ending up?
Mr Holden: In terms of additional
costs and in terms of additional wages for people and in terms
of additional cost of materials.
2 Note by witness: In my reply I inadvertently agreed
to a statement from Greg Clark that is not consistent with table
20 in the NAO Report. The 0.7 BCR in table 20 does include an
early assessment of regeneration and since then the guidance has
changed. Back
3
Note by witness: We will be able to provide the updated passenger
demand forecast and the updated ACL figures, as shown in answer
to question 79. We will not be in a position to provide a formal
update of the BCR at this stage, as the project will not be re-evaluated
until after Section 2 opens, as described in answer to question
83. But we will attempt to provide a broad indication of the likely
movement in the BCR. Back
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