Crossrail project full of doubts with recession looming

Nearly a year ago, in what was intended to be a pre-election flourish, Gordon Brown announced the definitive go-ahead for the Crossrail scheme. It had been a long time in gestation, with various early versions of the project having been suggested even before the Second World War. But now at last, Brown said, the funding was in place and ‘the project will now at last definitely proceed’.

However, just as the election never happened, neither might Crossrail. In the intervening year, apart from the Parliamentary process, little has happened to give confidence that the government is firmly committed to the scheme. In particular, there is still a lack of clarity about the precise funding arrangements and doubts about whether the Treasury is happy to allow the scheme to proceed.

Just to add to the confusion, there has been, of course various ‘events’ putting the project in doubt, notably the credit crunch, which not puts in doubt both contributions from the government and the private sector. Then there is the collapse of Metronet, responsible under the Tube PPP for maintaining two thirds of the Underground lines, which has put added pressure on Transport for London’s finances. Indeed, the fact that Boris Johnson, a Tory, has taken over as mayor from Ken Livingstone adds further doubt. While Johnson says he is supportive of the scheme and did a joint press call with Ruth Kelly soon after the Bill received its Royal Assent, that support may waver if Alistair Darling tries to drive a bargain over the detail of the funding that places too much strain on TfL’s finances.

There are too concerns about project inflation, given the large amount of construction activity in the capital in the run up to the Olympics and the shortage of skilled labour although this has been partly alleviated by the credit crunch. There are, too, little straws in the wind that the project is in trouble, an edginess amongst its supporters like the shelving of a recent report that was supposed to be discussed by the City of London on the benefits of Crossrail because of the current sensitivity of the issue.

Nevertheless, on the face of it the scheme is proceeding smoothly. The Bill completed its lengthy Parliamentary process in the summer and, despite the large number of objectors, it went through largely unscathed. Crossrail involves the construction of a full size railway tunnel under London between Paddington and Liverpool Street, with trains then running on to Maidenhead in the West and Shenfield and Abbey Wood (after passing through Docklands) in the East. The scheme is designed to relieve congestion on both the national rail network and the London Underground system by providing a huge amount of extra capacity with up to 24 trains per hour at peak times. The cost, including the usual 30 per cent contingency figure, is now reckoned to be £16bn.

The scheme has a chequered history. In 1991, a previous version of the project was launched but fell during the Parliamentary process because of doubts over its funding and the Treasury’s opposition in the light of a recession.

So will history repeat itself with a recession looming just before the government irrevocably commits itself to the scheme? Gordon Brown certainly tried to allay any such doubts when, in giving the go ahead last October, he spoke about it in glowing terms saying that the building of the line would be of ‘enormous importance, not just for London but for the whole country’.

Moreover, this time, according to Irving Yass, transport policy adviser to the business organisation London First, the need for the scheme has been set out much more clearly: ‘In the 1990s version, Crossrail was presented mainly as a way of relieving congestion on the Central Line which is why it did not go through once there was the start of an economic downturn. Now, the whole rationale for the scheme is growth in London employment.’ It was, of course, the boom in the capital which prompted the revival of the scheme in 2000 broadly along the same route which the government had safeguarded. Yass points out that of the 900,000 new jobs expected to be created in London over the next 15 years, half will be in the central area covered by Crossrail, and therefore the capital will simply not be able to cope without the extra capacity it creates.

However, in the year since the announcement, no further details of how the scheme will be funded have emerged and the figures remain vague and unclear. In a heads of agreement published in conjunction with Brown’s statement, the Department for Transport confirmed its commitment to provide a grant of £5.1bn towards the cost and set out the other sources of funding: the main ones are £3.5bn through the raising of a special 2p in the pound on all businesses above £50,000 in London; £2.3bn, again to be securitised, from the access charges paid by the train operators; and then there are several bits and pieces such as land sales and Section 106 money from developers (though it is admitted that these will not amount to much).

It is not surprising that there has been a delay in firming up the original announcement because obtaining much of this money is fraught with obstacles. New legislation will be required for the extra contribution from the rate as the money has to be hypothecated, something which the Treasury has always adamantly resisted. Interestingly, in the heads of agreement, the Department has promised to cover this contribution if the law is not passed. Indeed, there is a considerable amount of ‘funny money’ in this total based on much securitisation of future income flows, and what sometimes looks like double counting. While the City of London has promised a contribution of £600m, partly from fundraising from major City businesses and partly from its own resources, the latter will be covered by extra grant from the Department.

The biggest uncertain amount is the £2.7m which is supposed to be raised by Transport for London by securitising (borrowing against future income) the extra fares income. However, Crossrail is not expected to generate any significant increase in travel, merely provide relief to existing services. Moreover, an original plan to impose a Crossrail supplement on people using its trains has now been ruled out as impractical and unworkable since many people would then stay on the existing, albeit overcrowded, services.

Nevertheless, TfL is happy about its ability to pay its £2.7 bn contribution, by, again, securitising part of its income. A TfL source said that there would be sufficient extra passengers attracted to the railway to ensure it could make that contribution. TfL says the income from Crossrail would be £500m, enough to securitise such a sum, but is unable to say how much of that is additional and how much would be displaced from other railways, both its own and suburban services. A spokesman said: ‘The capacity freed-up by Crossrail on the other lines would fill up quickly, according to our modelling.’

Strictly speaking TfL cannot use a specific part of its income – the revenue from Crossrail – for securitisation but, instead, will have to earmark some of its overall cash flow. Of course, that means there is a risk that should passenger forecasts not be met, Londoners as a whole will have to make up the shortfall. Moreover there appears to be another black hole as originally the fares were to be earmarked to pay for the upkeep of the new line, whose operation was supposed to be broadly revenue neutral, but if they are securitised to pay for the capital investment, TfL will have to foot the extra maintenance bill. TfL, too, will be saddled with the project risk which the Department has carefully ensured does not remain with central government, and therefore cost overruns will give the Mayor a major headache.

Politically, there are difficulties with some aspects of the funding, too. The non-domestic rate, for example, will be paid by businesses across London. As Stephen Glaister, until recently professor of transport economics at Imperial College, put it: ‘If you own a large business in Barnet, you may not be too pleased to be paying an extra 2p in the pound for a scheme your employees are unlikely to use.’ Secondly, the same aspect applies to the potential fares across the board. Bus users in outer London will be equally infuriated by having to pay more for a line they will not use. Moreover, there is the wider problem for the government of supporting this scheme when so many light rail projects have bitten the dust in its Northern heartlands and there are a number of Labour MPs who would quite happily see Crossrail go the same way

Another source of criticism of Crossrail and remaining doubt has been the choice of route. In the West, one terminus is Heathrow, but the main route does not go to Reading, which seems an obvious terminus but which, it has been argued, is already too crowded, although a new signalling system will be in operation by the time of the proposed completion of the project in 2017. At the other end, it goes to Shenfield, an Essex suburb whose service will actually deteriorate as a result of Crossrail and Abbey Wood, since the original extension to Ebbsfleet, on High Speed One, has been scrapped because of overcrowding. It leaves a rather odd railway going nowhere much in particular and highlighted by the publication of Superlink, an apparently more coherent scheme designed to make better use of the potential links afforded by the new tunnel by running trains to such towns as Milton Keynes, Cambridge, Basingstoke and Stansted, creating a sub regional railway. Michael Schabas, one of the promoters of Superlink, feels the issue is still live: ‘They could easily build part of the railway, leaving the powers to build the rest, and adapt it to make use of our suggestions.’

A further oddity in terms of station choice is that while there is to be a station at Whitechapel, a relatively quiet bit of the East End not that far from Liverpool Street, the original scheme left out a station at Woolwich, a busy suburban town centre. After a campaign by the local MP, Nick Raynsford, the Woolwich station has been reinstated with one of those strange fudges that leaves the situation uncertain. A local developer, Berkeley Homes, together with Greenwich Council will pay the extra £186m for the extra station box to be created and the fitting out will be undertaken later paid for largely by business contributions. According to Berkeley Homes, this is ‘a solution which will not add to the costs or impact on public finances’ as the housebuilder plans to develop 2,500 new homes and 25,000 square metres of office space near the site. However, given the collapse in house prices and project inflation, there are doubts whether this part of the scheme will still stack up economically once work on Crossrail starts in 2010.

The lack of clarity about financial information is well illustrated by Public Finance’s efforts to obtain details about the funding situation. A call to the Crossrail press office was responded to, a full 24 hours later, by the Department of Transport because, according to Crossrail, it is the promoters who are responsible for the project. The Department then said that no civil servant could talk about it because of commercial confidentiality. That was supposedly because contracts for the project management are currently being let out but there is no way that should preclude discussing Britain’s largest postwar rail project. Only Transport for London was willing to provide any detail

The truth is, that as Tony Travers, Director of the Greater London Group at the London School of Economics, put it, ‘if the government wanted to ensure the scheme is built, it could do so tomorrow, by simply saying it will provide or guarantee or the funding.’ Clearly it has not done so. That is partly because of trying to extract the best deal out of the private sector, but, some of the amounts it has extracted so far are derisory. For example, Canary Wharf’s contribution is to build the station on the Isle of Dogs but at, say, £200m, that is peanuts given that it will allow the amount of office space there to double. An analysis of the value of the station by the City of London suggests it is worth at least five times that amount to the owners of Canary Wharf.

In fact, if the government was absolutely certain about its commitment to the scheme, some earth digging would have already started taking place. According to the heads of agreement, Transport for London has £1.25bn prudential borrowing allocated for Crossrail works this year, but so far has not touched the money. If a definite go-ahead had been given and the schedule of starting the scheme by 2010 was being followed, works would already be carried out on moving utilities since this will take at least 18 months.

As each day passes, the possibility that Crossrail may remain on the drawing board for even longer grows. Politically, it would be impossible for the Treasury to kill off the project, but watch for delays beyond 2017, the current supposed completion date. However, according to one City supporter of the scheme, that could spell be its death knell: ‘If another delay is announced, the property owners will go berserk. You cannot continue to blight a chunk of the world’s most expensive real estate. There will be a legal challenge that could kill off the project’.

Another alternative is that the scheme will be scaled down. The Crossrail team has, secretly, produced a cheaper alternative which would accommodate Tube size trains instead of full overground gauge stock. This would be highly controversial, however, as they would not provide as much extra capacity, but it might be a fudge acceptable to the politicians who would argue that the tunnels could be enlarged later. One aspect that favours some kind of approval is that both political parties are now involved, given that the newly elected Tory Mayor strongly supports the scheme. All is to play over the next few weeks as further prevarication will only raise speculation that Crossrail is, again, to be kicked into touch.