The justification for proceeding with Section 2 depends on wider benefits and uncalculated transport benefits

4.3 In 2001, prior to the commencement of the major construction works for Section 2, the Department appraised the benefits and costs relating solely to Section 2. The Department used its appraisal to support its decision to permit the construction of the section to proceed and to accept the LCR/Bechtel proposal for sharing Section 2 cost overruns.

4.4 The Department appraised two scenarios: (i) Eurostar serving both London Waterloo and St Pancras stations; or alternatively (ii) Eurostar serving St Pancras only following the closure of the Eurostar terminal at Waterloo.19 The Department used Booz Allen Hamilton Limited's 2001 Mid Case and 2001 Low Case passenger number projections in the assessment. It also estimated the monetary value of regeneration benefits associated with Section 2. Acknowledging comments in our previous report that such estimates would always be problematical, the Department produced sets of figures for the benefits with and without regeneration benefits. At the time, the Department's guidance still recommended that a monetary valuation of the impacts of regeneration of local economies should not be included in value for money assessments.20

4.5 Using the 2001 Mid Case passenger volume and revenue projections, the international transport benefits of Section 2 alone outweighed the costs, Figure 20 overleaf. This analysis was the basis of the Department's support in permitting construction of Section 2 to proceed. However, the Department estimated that costs would exceed benefits on the basis of the 2001 Low Case projections, even after including regeneration benefits.

4.6 Passenger volumes and revenues have subsequently dropped below the 2001 Low Case forecasts. The Department has not recalculated the cost/benefit ratio to determine the effect of lower revenues, but does not expect the impact to be as negative as the 2001 analysis projected. Lower benefits from lower patronage have been offset by the reduction in the additional public sector support through the access charge loan facility largely due to the reduction in LCR's cost of capital. In the Department's judgement, domestic transport benefits, which should emerge in 2009, the year when domestic train services are planned to start using the Link, will exceed the associated costs and improve the economics of the project further.

20	The Department's 2001 Value for Money Assessment of the case for going ahead with Section 2

		Mid case (£ million, 1997 present values in 1997 prices)		Low case (£ million, 1997 present values in 1997 prices)
		St Pancras & Waterloo open	St Pancras open only	St Pancras & Waterloo open	St Pancras open only
Benefits1
International transport benefits (capacity and journey time saving)		1,453	1,527	783	842
Domestic transport benefits		Not available	Not available	Not available	Not available
Regeneration benefits		475	475	450	450
Total estimated benefits (including regeneration benefits)		1,928	2,002	1,233	1,292
Estimated transport benefits only		1,453	1,527	783	842
Costs
Government grants2		(1,241)	(1,241)	(1,241)	(1,241)
Estimated additional public sector support (access charge loan)		(70)	(70)	(820)	(820)
Phase 2 of new London Underground ticket hall at Kings Cross (required for Section 2)		(97)	(97)	(97)	(97)
Thameslink 2000 works at St Pancras in the absence of Section 2 (i.e. cost saved by proceeding with Section 2)		194	194	194	194
Project wind-up costs (cancelled contracts, etc) saved by proceeding		43	43	43	43
Sale of Waterloo Eurostar terminal to the Strategic Rail Authority		0	70	0	70
Total costs		(1,171)	(1,101)	(1,921)	(,1851)
Benefit cost ratio (excluding regeneration benefits and without an allowance for domestic transport benefits)		1.24	1.39	0.41	0.45
Benefit cost ratio (including regeneration benefits but without an allowance for domestic transport benefits)		1.65	1.82	0.64	0.7
Source: Department for Transport Cost Benefit Appraisal of Section 2, 2001
NOTES 1 A full explanation of the methodology used to quantify passenger benefits in financial terms can be found in our previous report, The Channel Tunnel Rail Link, HC 302, Session 2000-2001. 2 The slight differences between the cost of Section 2 related Government grants reported here and in Figure 3 results from minor changes in the calculations of present values between 1998 and 2001. 3 The Mid case was based on Booz Allen Hamilton Limited's 2001 Mid case forecasts for passenger usage and revenues and the cost of Section 2 equalling the target cost. 4 The Low case was based on Booz Allen Hamilton Limited's 2001 Low case forecasts for passenger usage and revenues and the cost of Section 2 exceeding the target cost by £300 million.

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19 In November 2004, Eurostar Group announced that, following the opening of the refurbished St Pancras Station, Eurostar services into Waterloo would cease.

20 Since 2001 the Department has published detailed guidance on demonstrating the impact of a transport scheme on a Regeneration Area (http://www.dft.gov.uk/stellent/groups/dft_econappr/documents/page/dft_econappr_023708.hcsp). This guidance states that an Economic Impact Report must be prepared if regeneration benefits, in the form of increased employment in a Regeneration Area, are being claimed. The Department has also recently published advice (http://www.dft.gov.uk/stellent/groups/dft_about/documents/page/dft_about_033477.hcsp) on assigning a monetary value to these regeneration benefits to give an idea of the significance of regeneration benefits generated relative to cost. In future, the Department expects monetary valuation of regeneration benefits to be a routine part of transport appraisals.