Select Committee on Public Accounts Thirty-Eighth Report

1  Forecasting of passenger traffic

1. The original deal envisaged that LCR would draw on revenue from Eurostar to service the private debt raised and to provide a return for its shareholders. LCR's business plan therefore depended on whether revenue from passengers using the Eurostar service would meet or exceed forecasts made by the company. If passenger revenues fell below expectations, the Department might have to lend more money to LCR to keep it afloat.[1]

2. Estimates of passenger numbers have been progressively reduced. In bidding for the deal in 1996, LCR forecast that passenger numbers would reach 21.4 million by 2004 but actual numbers reached only 7. 3 million (Figure 1). In 2004, passenger numbers and revenues were revised downwards and the central case numbers are now below the 1998 and 2001 low case forecasts. The Department does not, however, expect the impact on the cost/benefit analysis to be as negative as it might have been because the effect of lower patronage has been offset by a reduction in LCR's cost of capital and a reduction in market interest rates.[2]
Figure 1: Estimates of passenger numbers have been progressively reduced

Source: C&AG's Reports (HC 302 of Session 2000-01, Figure 6 and HC 77 of Session 2005-06, Figure 8)

3. Over optimistic forecasts of Eurostar's passenger numbers and revenues were produced when the project was first planned by British Rail and SNCF. Inaccurate forecasts were also produced ahead of the restructuring of the project in 1998 and, in 2001 and 2004, by the Department's advisers, Booz Allen Hamilton Ltd. The Department is nevertheless employing Booz Allen Hamilton Ltd again to forecast passenger traffic. The Department was unable to say whether a competition had been held to see if anyone else could have made more realistic forecasts. Nevertheless, the Department said it was satisfied that Booz Allen Hamilton Ltd had done the best professional job it could do at particular points in time.[3]

4. The Department is currently preparing a new forecast of when LCR may need to draw on the access loan charge arrangements, as it is likely that Eurostar revenues will be revised downwards. Although past forecasts have accurately reflected the increase in revenues following the opening of Section 1 of the Link, what were not taken into account were potential downside risks such as the events of September 2001 and the outbreak of foot and mouth in 2002. The Department and LCR consider that passenger numbers have not yet recovered from those events. The London bombings of 2005 added to this list of one off shocks to passenger trends.[4]

5. A further reason for the lower than expected passenger revenues is the success of the low-cost airlines in competing with Eurostar on price, and their much larger range of destinations. These events illustrate the difficulty of accurately forecasting revenues on novel major projects. The Link is moreover the only high speed railway in the country and the first new railway line for a hundred years, so there is no recent national experience with which to compare it.[5]

6. The Department told us that it has now learned from all this experience, and that the next time it considered undertaking a major transport project, it would factor more severe downside assumptions into its business case analysis.[6]

1   22nd Report from the Committee of Public Accounts, The Channel Tunnel Rail Link (HC 630, Session 2001-02) para 2 Back

2   C&AG's Report, para 15 Back

3   Qq 88-90, 92 Back

4   Qq 2, 4, 52-53 Back

5   Qq 47-49 Back

6   Q 49 Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2006
Prepared 4 May 2006