Q11 Chairman: So if we look at the early part of this Report at paragraph 6, which you will find on page 1, the NAO states there that the economic case for the link remains marginal. Do you agree with that?
Mr Rowlands: I agree in the sense that, as we speak, the regeneration benefits are beginning to go in place. They will start to build out Stratford city in 2006 and King's Cross in 2007. I do not think any of us, with hand on heart, can say that that is exactly the regeneration benefits, but they are there. They are still marginal but I think they will be less marginal as time passes.
Q12 Chairman: In relation to the cost overrun protection programme you can find on page 32, paragraph 3.21, the Report states that both the Department and the Treasury felt the Department was in a weak position when negotiating the Cost Overrun Protection Programme and that it was expensive. The obvious question is: why did you go ahead with it?
Mr Rowlands: We looked at the alternatives. There was a Railtrack alternative, which the Report well sets out, that was even more expensive. You see that in table 17 on page 31. We looked at whether the Department in effect should take all the risk on cost overrun. As the Report sets out, at the mid- case forecast that would have been, in NPV terms, perhaps £40 million cheaper, so essentially we had to look and say: "To save £40 million in net present value we take all of the construction risk: is this a sensible thing to do when we cannot manage those risks?" The conclusion we came to was that it was better to go with what we genuinely did think was an expensive proposition, but it was the best proposition we had in front of us.
Q13 Chairman: Do you want to comment on that, Mr Holden?
Mr Holden: I have nothing to add to what Mr Rowlands says. We believe we put to the Department a proposal which met their objectives.
Q14 Chairman: The product is going to cost us £5 billion. Is that broadly right?
Mr Rowlands: In finite term prices I should think more like about £5.8 billion.
Q15 Chairman: Would it have been cheaper just to have done it as a government project?
Mr Rowlands: It depends whether you believe the Government would have been able to control the costs, the timetable and the scope. The last thing we did, if I am allowed to say so, was the Jubilee Line extension, which came out 21 months late and £1.4 billion over budget. At least against that yardstick, this project is performing a great deal better.
Chairman: We have the Auditor General of Bulgaria, Professor Valeriy Dimitrov, with us. Welcome.
Q16 Kitty Ussher: I wanted to probe the wider potential benefits of this scheme. Can you look at the second phase. Why was it decided that that should go ahead, in terms of policy-makers in your Department?
Mr Rowlands: Remember that this project, when it was restructured in 1998, was broken into two parts, section 1 and section 2. At that stage, albeit that it was difficult to properly capture the employment and regeneration benefits, it was decided to go ahead with the project. When it was reconstructed in 2001, and particularly going ahead with section 2, when that was reappraised the case was still there in cost-benefit terms.
Q17 Kitty Ussher: Can you explain that a bit more? The case was still there in cost-benefit terms. Do you mean in terms of recouping your investment purely on passenger numbers, or on wider considerations?
Mr Rowlands: At the time, as I recollect, even the international transport benefits were sufficient to justify the case on the basis of the mid-range forecast. It did not stand up at the lower end. Remember, this project was originally conceived not simply for its transport benefits but for its regeneration benefits as well. Although it was difficult at that stage properly to quantify it, I think in my earlier answer I set out some of the consequences that are beginning to flow and will flow. When we looked at it back in 2001, it was a combination both of a transport benefit but also of the then more clearly emerging regeneration benefits.
Q18 Kitty Ussher: So that we can be completely clear, the mid-range forecast showed that it was probably a good idea to go ahead purely on the passenger benefits and the transport benefits although there were clearly some risks at the lower end.
Mr Rowlands: That is right, yes.
Q19 Kitty Ussher: But you presumed that there would also be wider positive benefits from economic generation of jobs, but those were not quantified and no analysis was done. Is that correct?
Mr Rowlands: Yes, I think that is right, and I think the Report says that this route began life back in 1991 when the then government rejected BR's so-called southerly approach because it did nothing for the regeneration of east London; and that is why this route was chosen. That is why you see, for example, the station at Stratford, to drive redevelopment there.1
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.
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1 Note by witness: To amplify the answer I gave in response to question 19, an attempt was made in 2001 to quantify the benefits from regeneration area jobs and this is the source of the £475/£450 million figures given in table 20 of the NAO's Report. The NAO favour excluding this estimate from the BCR as Departmental guidance at the time recommended not monetising these benefits. The Department now requires Economic Impact Report (EIR) guidance to be followed. It is not clear what level of benefit would be identified by following the EIR approach.