The economic justification for public sector support

16  The Link could not be developed without very active support from the Government at all stages. The Government is necessarily involved through rail regulation, and through the UK's international obligations, notably those relating to the Channel Tunnel. The Government is thereby obliged to provide sufficient infrastructure to allow for forecast demand for the Tunnel to be met, but there is no obligation to provide a high-speed rail link between London and the Tunnel, which is what the Link will be (paragraphs 3.2 to 3.6).

17  It was always envisaged that the Link would not be commercially viable without a substantial Government financial contribution. Not only is the Link one of the largest infrastructure projects in Europe, rendering it unlikely that passenger revenues could cover the enormous investment within a commercially acceptable time, but the Link competes directly with other modes of transport, such as airlines, limiting the fares which can be charged. From the start, the Department was clear that it could back the Link, provided that the estimated benefits could be expected to outweigh the financial contribution made to the project by the Government (paragraphs 3.7 to 3.12).

18  Throughout  the  negotiation  of  the  original  deal  and  the restructuring, the Department analysed the economic justification for making the financial contribution needed if the Link was to be built. The Department's calculations confirmed that the estimated economic benefits of the Link outweigh the required subsidy. The main economic benefits comprise reduced journey times for passengers and increased rail capacity, along with expected regeneration benefits arising from the Link attracting jobs to the areas through which it will run (paragraphs 3.13 to 3.22).

19  In renegotiating the original deal, the Department made several changes in its methodology for estimating the benefits the Link would generate. In the final assessment the Department excluded benefits to non-UK resident passengers but included an estimate of regeneration benefits amounting to £500 million. The result, in the Department's most likely estimate of future Eurostar UK patronage, showed total benefits of around £3,000 million for a total public sector contribution of some £2,000 million (paragraphs 3.24 to 3.26 and Figure 19).

20  It was a new step to include quantified regeneration benefits. Previouslyin cost-benefit analysis of transport projects, the Department considered that regeneration benefits would be too uncertain to be quantified in money terms, and to the extent that they could be quantified some of this would represent double counting of passenger benefits already included in the assessment. In this case, however, the Department decided that the methodology for calculating regeneration benefits was sufficiently robust to allow their inclusion in the analysis. The estimate was that the Government would be willing to pay £1,000 million through conventional regeneration funding to secure benefits equivalent to those likely to arise from the Link. This figure was then halved to take account of the double counting (paragraphs 3.27 to 3.29).

21 In the Department's view, the innovation of quantifying regeneration benefits in money terms as part of this type of analysis was successful. The Department intends to place more emphasis on quantified regeneration benefits in future projects and is undertaking research on guidance as to what form this quantification might take (paragraph 3.30).

22 There is room for debate too about the way passenger benefits were taken into account. At the time, the Department did not have explicit guidance for the appraisal of new heavy rail schemes to complement the guidance it had issued for light rail schemes (such as trams). The Department's figures were based on a calculation that the value of time savings to passengers would, on average, be higher than the fares being paid. This would imply that passengers would not be prepared to pay for the full benefits they would get from using the Link (paragraphs 3.31 to 3.34).

23 We examined the other key assumptions made in the Department's calculations. In our view, some of them are questionable. Substituting more reasonable assumptions, we have estimated that there would be a net benefit from the Link of under £500 million, and that if money estimates of regeneration benefits are excluded, in line with Departmental guidance, then the net benefits of the project would only be marginal. To the extent that Eurostar UK does not achieve the levels of usage assumed in the Department's most likely estimate of future Eurostar UK patronage, then the costs of on-going public subsidy for the project are likely to be increased and the quantified net benefits of the project are likely to be reduced still further. On the basis of recent Eurostar UK performance, which has been below this level, the Link represents poor value for money in terms of estimated economic benefits (paragraphs 3.35 to 3.40).

24 What this means is that the economic justification for Government support for the project rests heavily on wider policy benefits associated with the Link. The Government saw the project as one of national prestige. It will provide a high speed rail service to Europe. France and Belgium already have such high speed connections to the Channel Tunnel, and the Link is one of a number of high priority projects for the development of high speed rail routes across Europe. This has given the Link priority status in the Government's overall transport policy. Although such a consideration was not formally included in the Department's stated objectives, it was an important consideration in Ministerial announcements on the project (paragraph 3.23).