A Window Into Crossrail From the National Audit Office

As a public project with Department for Transport ownership (albeit in this case jointly with TfL), Crossrail is subject to a number of elements of public project governance. One of the most interesting of these is regular reports, during the implementation phase, by the National Audit Office (NAO).

These reports are intended to provide some insight as to whether the project is being run effectively and as to whether costs are being controlled by the DfT. Indeed my colleague Pedantic probably described these reports best whilst looking at the last NAO report on Thameslink last year:

[The report] has the feel of a half-term report on the subject of Thameslink and the progress or otherwise being made by the pupil, young master DfT. As a half term report it will not count towards his final end of term assessment, but raises issues and weaknesses as well as the good points. Master DfT would be wise to address the issues which are raising concern if he wants a good report at the end of term.

It is to Crossrail, not Thameslink, that the NAO have now turned their critical eye and it is probably fair to say that, broadly speaking, this first report contains no real surprises. Were this truly a school report it is tempting to think that the verdict would be “B+ Good but can do better.” Overall, the conclusions are that Crossrail is on time, on budget and well governed.

That is not to say, however, that the report (which you can read in full here) doesn’t contain some suggestions and warnings. It also contains some interesting comments on financing – most notably in the level of contribution that the DfT are now expecting to receive from Heathrow Airport towards the project. Although this doesn’t affect the overall funding package it will be surprising if this is not the element (indeed perhaps the only element) that receives whatever coverage of the report appears in the mainstream media over the coming week – coverage of TfL’s concrete calamity allowing.

For those for whom the thought of a Friday reading Civil Service documents – no matter how well written – is an unpleasant one, we have extracted the key points from the NAO report below.

The Reading question

That Crossrail might be extended to Reading is a question that has remained the elephant in the room since practically the beginning of the project. The NAO report rather succinctly sums up some of the reasons why this question continues to be asked:

The Crossrail route currently terminates in the west at Maidenhead; the sponsors are considering whether it should run to Reading. The Department expects that this change would result in a slight reduction in the construction costs of the Crossrail programme, largely because some works at Slough and Maidenhead would no longer be required. The cost of electrifying the Great Western Main Line and of redeveloping Reading station is being paid for as a separate project. In addition to the relative costs and benefits of each option under consideration, the Department will need to consider the impact on the programme schedule

This is not a subject that we will look to cover here in detail, for the “Reading Question” deserves (and will shortly receive) a fuller write up of its own. As can be seen, however, the report confirms what has largely been an open secret – that extending to Reading remains, even at this point in the project, something under active consideration for TfL, the DfT and Network Rail.

Getting things going

Although Crossrail’s gestation period was a long one (the 1974 London Rail Study being generally regarded as the point where it all began), since the passing of the 2008 Crossrail Act the project has continued at a brisk pace. This is all the more impressive in a world where infrastructure projects can occasionally become as much about hitting “key milestones” as about delivering the work that those milestones represent. This is something that has not gone un-noticed by the NAO who suggest one reason why Crossrail has avoided the kind of milestone bloat that has occasionally infected other large-scale projects during their planning stages:

Either sponsor could withdraw from the programme and the programme could be cancelled up until the final review point, which concluded in April 2011. We believe that this stopped the review points from becoming a formality and meant that real progress had to be made.

Whilst there are no doubt a number of reasons for the rapidity of Crossrail’s advance – including a clear and overwhelming desire on the part of TfL to strike whilst the financial and political iron was hot – the NAO’s suggestion that the combination of two project owners, both with the ability to walk away, proved beneficial is certainly an interesting one.

Getting the governance right

According to the report, getting up and running was not the only time that the status of Crossrail as a joint project has proven beneficial. It also suggests that the presence of TfL – an organisation less prone to the significant senior management (and obviously political) turnover at the top that afflicts the DfT – has acted as a stabilising influence on the project at a senior level:

As with other Department for Transport programmes, the Department’s senior representatives overseeing the programme have changed frequently, reflecting the number of programmes that the Department is sponsoring and a scarcity of staff with the right skills and experience. The impact of this has been lessened, however, because a small number of departmental staff have worked in rotation on the Joint Sponsor Board. In addition, there has been continuity in Transport for London staff on the programme, and Crossrail Limited’s senior team has a strong track record.

If this is truly the case then it is something that is well worth bearing in mind for future large-scale infrastructure projects, both in London and beyond. Experiences with Thameslink and, increasingly, with HS2 would suggest that change continues to be a disruptive influence from a DfT perspective – one of which they are, in fairness, aware.

Show me the money

Something the NAO report does rather nicely is highlight where the money for Crossrail is actually coming from, and how well it is doing at meeting its financial targets.

crossrailfunding

Funding Crossrail. Note the expected Heathrow funding contribution in the DfT column.

Here again the news is largely positive – especially given the general tendency (or at least the expectation) that “mega-projects” such as Crossrail will overrun. In line with industry best-practice, Crossrail uses a probability-based approach 
to forecast final cost, and monitor risk. Using this approach, project costs are currently forecast to be at or below £14.51 billion, with a 95 per cent probability. That would bring Crossrail in under the available funding for infrastructure of £14.8 billion, something that in these more financially restrictive times bears bolding and bodes well for the chances of future potential infrastructure projects within the capital.

It is not, however, all entirely good news – at least for the DfT, who appear to have failed to extract as much of a contribution as hoped from Heathrow Airport Ltd (HAL).

Airport Tax

Heathrow’s potential contribution to the Crossrail project has always been a contentious one. The airport operator had originally argued that it should make no contribution at all. At first glance, this may seem a relatively indefensible position given that Crossrail will run to Heathrow. Other companies and institutions across London, it could be argued, were being asked to contribute far more (proportionally speaking) for far less in the way of direct benefit.

Look deeper, however, and Heathrow’s argument was not without merit. The clues to why can be found in the airport services that Crossrail will absorb – Heathrow Express. In recent years Heathrow have invested considerably in both this service and the infrastructure and corresponding future-proofing that it required – the vast majority of which Crossrail itself will take over and benefit from. Heathrow thus argued that a further contribution to the project was unfair as they had already contributed indirectly, a claim that wasn’t entirely false.

Nonetheless, in 2008 the DfT indicated that it expected Heathrow to contribute £230m to the Crossrail project, a figure it argued was based on the further economic benefits that Crossrail would bring to Heathrow. This contribution was subject to the approval of the Civil Aviation Authority (CAA), Heathrow Airport’s regulator but, as the report explains, this proved to be a considerable over-estimation of what both HAL was prepared to pay and what the CAA would sanction:

HAL later determined that, with Heathrow operating at or near to capacity, Crossrail would bring no net benefit to the airport, but made a provisional allowance of £100 million in its final business plan. In summer 2013 the Department made a counterproposal of £137 million. In January 2014 the CAA determined that HAL should contribute £70 million.

This, then, appears to be the ultimate outcome. The DfT initially hoped for a £230m contribution from Heathrow, but this has proved to be decidedly optimistic. HAL’s final contribution will instead be £160m short of that.

Getting complex with accounting

In a time when every transport penny counts, this would appear at first glance to be a major problem and no doubt questions will be asked – Where will the money to make up that shortfall be found? Will the “tax-payer” be left to foot the bill?

The truth, however, is that this is less of a problem for Crossrail than it might seem. A clue as to why this is the case can be found in the NAO report’s description of the issue (bolding ours):

The Department currently expects that one-third of the private sector funding it negotiated for Crossrail infrastructure will not actually be received (Figure 9 overleaf). The Department negotiated agreements worth a total of £480 million, although it is not clear how the expected City of London Corporation contribution was calculated. These contributions are now likely to total £320 million, 67 per cent of the Department’s expectation. This leaves a potential shortfall of £160 million which the Department will need to meet, from funds it had already set aside for the purpose.

Building large infrastructure projects over a number of years (fourteen of them in Crossrail’s case) is always a risk and forecasting their final cost is an even riskier business. It is for this reason that Crossrail, like all projects of its size, included a considerable financial contingency – money beyond the “best guess” cost to ensure that should expenses increase – for whatever reason – that there was a reasonable chance that the project would not be significantly disrupted.

For the funding agency concerned this extra allocation is considered part of the budget – more importantly it is treated as money already spent once the project is committed, regardless of whether it is ultimately used or not. It is this that ensures that Crossrail will not be left with a financial shortfall as a result of the Heathrow decision, but also this that ensures that the DfT must not now find an additional £160m from somewhere else. For the DfT had already allocated £5.2bn to the project – enough to cover its direct contribution (£4.8bn) and the contributions from both Heathrow and the City of London. The reduction in the Heathrow contribution simply means that the Department (or rather the Treasury) will now ultimately receive less money back in the end. Disappointing, certainly, but as the opportunity to redistribute that money had never been planned for, nothing else (directly at least) will suffer as a result.

Maintaining the savings

One thing the change to the Heathrow contribution does highlight, however, is just how important it remains for Crossrail to stay on top of its project costs. Contingency is there for a reason, but its use should be avoided unless absolutely necessary and overrunning it completely is a bad thing indeed.

As was indicated above, and as the graph below rather nicely demonstrates, this is an area where so far Crossrail has performed rather well. Even taking the Heathrow shortfall into account its final costs are trending well below the £14.8bn total.

crossrailcosttrend

Crossrail’s forecast final costs

The NAO report rightly highlights, however, that Crossrail cannot afford to rest on its laurels. Generally speaking the cost of work carried out remains higher than its initially estimated cost, something that the NAO have indicated Crossrail need to bring under control.

actualcostcrossrail

The NAO’s estimated CPI for Crossrail

Meeting the Deadline

Finally, the NAO report highlights that Crossrail needs to remain vigilant about delivering both milestones and the overall project on time. Broadly speaking it believes that so far Crossrail has largely succeeded in doing so.

crossrailmilestones

Crossrail’s milestones

The report highlights, however, that initially tunnelling was delayed (although it is worth noting that it has progressed at a considerable pace since, with almost two thirds of Crossrail’s tunnels now complete). It also highlights that Crossrail is still failing to meet some of its targets, although it is improving.

crossrailprogresstargets

Crossrail’s progress against targets

Overall though Crossrail’s confidence in meeting the December 2018 target for the opening of the Central section remain high.

crossrailconfidence

Crossrail’s confidence in delivering on time

Future Challenges

The NAO do suggest though that a number of potential risks are worth watching – in particular the procurement of the rolling stock (which was delayed due to fallout from the Thameslink rolling stock tender) and finding the operator to take on the concession:

Crossrail will not be fully operational for another six years. Risks remain in a number of areas. For example:

awarding the contract to manufacture the trains, by April 2014. Failure to do so could result in delays to services starting and a reduction in benefits. This process has suffered delays as a result of the decision to change the method of funding, but the sponsors are focused on achieving this date;

operational planning is crucial to Crossrail’s success. Crossrail Limited’s plans for integrating the programme are well advanced relative to other rail projects we have recently reviewed, and there is a clear assurance process in place. A director of operations reporting to the chief executive was in place from 2006 to 2008 during the early development of Crossrail plans and operations staff have been in place throughout the programme. Crossrail Limited recruited the current operations director in early 2013, increasing the focus on this critical area in advance of the appointment of the operator; and

aligning Crossrail with other rail services – including Great Western, Anglian and South Eastern services. This work is led by the Joint Sponsor Team, working closely with the Department’s Crossrail and franchising teams.

Overall, however, Crossrail and (in particular the DfT) will likely be broadly happy with the report. Where it matters, it seems the NAO believe that Crossrail is solidly on target. What TfL and the DfT need to do now is focus on making sure the next report says the same.

Written by John Bull