Conclusions and recommendations |
1. In bidding for the project in 1996, LCR
forecast that passenger numbers using Eurostar would reach 21.4
million in 2004 but actual passenger numbers for 2004 were only
7.3 million. Where future
income from passengers is expected to provide a major element
of the revenue needed to repay the cost of constructing transport
infrastructure, it is crucial that realistic forecasts are prepared
from the start. Downside risks need to be given due weight, drawing
on both UK and international experience, in considering future
2. The economic case for the Link remains
marginal. On passenger traffic alone the Link is not justified,
so regeneration benefits are required to make the project value
for money. The Department's assessment
of regeneration benefits of the Link should be rigorous, and should
separate out clearly those attributable to other major infrastructure
projects close to the Link, including in due course the impact
of the 2012 Olympics.
3. The initial aim was to transfer a high
level of commercial risk to a private sector consortium, which
did not however have the financial strength or equity capital
to sustain that risk if things went wrong.
As risks materialised, the Department had to provide more and
more support, while trying to ensure that private sector disciplines
were maintained. In considering such major projects in future,
Departments need to satisfy themselves that there is reasonable
consistency between the degree of risk transfer and the extent
of investors' equity stake in the project.
4. The Department thought the Cost Overrun
Protection Programme, though expensive, was a way of maintaining
private sector disciplines without extra direct support from the
taxpayer. After Railtrack Group withdrew
from the project in 2001, the arrangements made by the Department
and LCR included placing layers of cost overrun risk with commercial
insurers, as well as the project managers. The value for money
of such complex arrangements is difficult to judge, and there
would have been less need for them if the private sector had,
from the outset, the necessary financial strength to carry the
risk allocated to it.
5. There remains uncertainty over the future
call on the taxpayer. Even though the
major construction risks have passed, under the terms of the restructured
deal the taxpayer remains exposed to the financial consequences
of Eurostar under-performing against forecast passenger volumes.
The Department should actively manage the size and timing of LCR's
call on the Access Charge Loan facility, so as not to weaken the
incentive for LCR and Eurostar to maximise passenger revenues.
Any future changes to the structure or ownership of LCR will need
to protect the interests of the taxpayer.
6. High levels of inflation on construction
projects which drove up the costs of Section 2 of the Link will
continue to be a problem for the South East.
There are a number of further major infrastructure projects planned,
for example, the Olympics, widening of the M25, Thameslink 2000
and the Thames Gateway, creating substantial additional demand
for limited resources. The Treasury and Office of Government Commerce,
together with public bodies planning major projects, should aim
to schedule the construction phases of such projects so as to
manage the risks to cost, time and quality from any unplanned
surge in demand.