The Department estimated that the economic and wider benefits would outweigh the subsidy, so support for the Link was economically justified

3.13  The Department undertook value for money assessments to determine whether the Link would deliver sufficient benefits to justify the level of public sector support involved. The main benefits included in the assessments accrue to international and domestic passengers and therefore depend on the number of passengers using the train services. LCR based its bid on the number of passengers expected to travel on Eurostar UK over the assessment period. During the original competition in 1996, the Department did not undertake an independent assessment of LCR's or other bidders' passenger forecasts. At the time, the Department considered that previous passenger forecasts prepared in conjunction with British Rail were consistent with LCR's projections and could be relied on. However, all the forecasts used were over-optimistic and the failure to achieve them contributed towards the near collapse of the original deal.

3.14  LCR revised its forecasts downward for the restructured deal in 1998. However, the Department employed transport consultants Booze-Allen & Hamilton to provide an independent review of the revised forecasts and to produce their own forecasts of Eurostar UK patronage and revenues, upon which the Department could base its value for money assessment.

3.15  Booze-Allen &Hamilton produced forecasts for two main scenarios. A Government Central Case, which was somewhat lower than LCR's Management Case, formed the basis of the value for money assessment and the main calculation of the level of public sector support. A Government Downside Case represented a more pessimistic scenario, which was used to test whether public support for the Link was still justified if fewer passengers than expected use Eurostar UK services.

3.16  Booze-Allen & Hamilton's forecasts were based on annual patronage levels. To consider what these forecasts meant in practical terms, we calculated the daily passenger figures implied by the Government Central Case forecasts along with the number of full trains required, assuming each train was either full or operating at Eurostar UK's target of 65 per cent of capacity. The Department told us that the average number of Eurostar trains a day in 1999 was 52, carrying an average of 350 passengers (45 per cent of capacity) giving a total patronage in 1999 of 6.6 million. This compared with a forecast for 1999 of 7.4 million passengers. The results for the years 2010, 2020 and 2030 are shown in Figure 18.

3.17  To meet the demand forecasts on which the restructured deal was based, an average of 69 capacity filled train journeys would need to run between London and Paris or Brussels every day for 363 days in 2020, equivalent to one full train every 12 minutes (106 train journeys a day at 65 per cent of capacity, or one train every 8 minutes). If Eurostar UK trains continue to run at 45 per cent of capacity, as in 1999, this would require 153 train journeys a day in 2020. This would be nearly three times the average daily number of train journeys in 1999 and would equate to one train every 5½ minutes.

3.18  The final Government Central Case estimate of May 1998 showed that the total public sector contribution to the project was £2,300 million, including the access charge loan facility and subsidies by the Office of Passenger Rail Franchising9, and the total benefits were "around £3,000 million". The Department also estimated that the deal meant the Department would avoid £300 million of net costs which it would incur if Eurostar UK reverted to public sector operation. The Department estimated the final net present value to be around £1,000 million, with a benefit cost ratio of 1.5:1. The full Government Central Case assessment is shown in Figure 19.

3.19  The Government Downside Case was also shown to be justified, but the Department recognised that this was very marginal with a benefit cost ratio of only 1.1:1. In addition to the main value for money assessments, the Department undertook Cost Benefit analyses of several alternative options to the Link, such as delaying the project for ten years, only building Section 1, and undertaking relatively minor capacity improvements to the existing network. These calculations were not prepared in as much detail as the main value for money assessment as the Department did not have as much cost information. The assessments indicated, however, that delaying the project by ten years and improving the capacity of the existing network provided less absolute benefits but more favourable benefit to cost ratios than the existing project, because of reduced or delayed costs.

3.20  The three main benefits included by the Department were international and domestic non-financial passenger benefits (international and domestic passenger benefits) and regeneration benefits. The Department believes that international and domestic passenger benefits arise through reduced journey times and increased rail capacity and that regeneration benefits arise from the impact of the Link in attracting jobs to the areas through which it will run, particularly in the Thames Gateway and near areas surrounding the three international stations at St. Pancras, Stratford and Ebbsfleet.

3.21  The government has a number of more conventional funding mechanisms, which are specifically designed to create jobs and regenerate priority areas, such as through  English  Partnerships  and  the  Single Regeneration Budget. For the value for money assessment, the Department estimated the amount the Government would need to spend using these more conventional means to create the same number of jobs as the Department estimated the Link would create. This "willingness to pay" figure formed the estimate of the Link's regeneration benefits. More detailed descriptions of these benefits are given in Appendix 7.

3.22 Other benefits were also estimated, such as environmental benefits arising from freight transfer from road to rail and road decongestion benefits as people opted to travel on Eurostar UK rather than flying or driving. We have not been able to confirm the reasonableness of these estimates as the Department was unable to locate detailed evidence supporting these calculations. The Department also calculated the net costs of Eurostar UK reversion saved by accepting the deal, including engineering work for the

Thameslink 2000 project and London Underground work, the repayment of Eurostar UK debt, and the costs avoided by delaying the project. An estimate of the potential Eurostar UK revenues the Government was foregoing by leaving the business in the private sector was also included as a cost of the deal. However, as with any appraisal many estimates are uncertain. For example, fewer benefits will accrue and the Government will forego less net revenues if fewer passengers use Eurostar UK than estimated, impacting adversely on the value for money case. Passenger figures to date have been lower than forecast and we discuss the impact on the value for money of the Link if this continues to be the case in paragraphs 3.36 to 3.40 below.

______________________________________________________________________________________

9 Now the Strategic Rail Authority