Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 20-39)


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

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2006
Prepared 4 May 2006