CAA review finds Heathrow ‘wasted’ money and was “inefficient” as costs of 2 tunnel refurb projects costs spiral
The CAA’s economic performance review concludes that Heathrow has “wasted” money on two ongoing tunnel refurbishment schemes and acted inefficiently. The cost overrun of both schemes combined is estimated at £212.4M, although the CAA suggests that those costs could be inflated further by the time work is completed. Costs on the cargo tunnel job between Terminal 4 and the Central Terminal Area have soared by £152M, from its approved £44.9M budget to the current final cost of £197M, the report reveals. The cost of upgrading the main vehicular tunnel to Terminals 1, 2 & 3 has risen by £60.3M from an approved budget of £86M to £146.3M. On the cargo tunnel, the CAA states that “there is clear evidence that the actions of HAL may have directly contributed to wasted spending or lost benefits”. The delays have lead to a loss of benefits to consumers. Heathrow could have been more efficient in managing its work contractors. The CAA will now assess whether to remove costs associated with the tunnel refurbishments from HAL’s Regulated Asset Base (RAB) – which effectively means HAL would have to pay for cost overruns, rather than charging airlines.
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Heathrow ‘wasted’ money as tunnel refurb costs spiral
24 SEP, 2020
BY ROB HORGAN (New Civil Engineer)
Heathrow Airport Ltd (HAL) has “wasted” money on two ongoing tunnel refurbishment schemes, the aviation regulator – the CAA – has ruled.
A Civil Aviation Authority (CAA) economic performance review concludes that HAL acted “inefficiently” on refurbishments of a cargo tunnel and road tunnel servicing its terminals.
The cost overrun of both schemes combined is estimated at £212.4M, although the CAA suggests that those costs could be inflated further by the time work is completed.
Conclusions made in the CAA’s September 2020, Economic regulation of Heathrow paper draw on independent analysis by Arcadis and Institute for Fiscal Studies.
The paper can be seen at:
Costs on the cargo tunnel job between Terminal 4 and the Central Terminal Area have soared by £152M, from its approved £44.9M budget to the current final cost of £197M, the report reveals.
Meanwhile, the cost of upgrading the main vehicular tunnel to Terminals 1, 2 & 3 has risen by £60.3M from an approved budget of £86M to £146.3M.
On the cargo tunnel, the CAA states that “there is clear evidence that the actions of HAL may have directly contributed to wasted spending or lost benefits”.
It adds: “The Cargo Tunnel project faced significant cost overruns of around 400% against the original budget and is now forecast to be completed during H7 [the next funding period starting in 2022].
“We consider that this has led to a loss of benefits to consumers because of late delivery […] We also consider that if the risk of cost increases had been better assessed at the beginning of the project, more efficient contractual terms (in terms of risk allocation) may have been obtained by HAL through its procurement process.”
Design work for the project has been undertaken by WSP, with Mace providing contractor input and Brydon Wood onboard to provide offsite and DFMA expertise.
Earlier this month, HAL infrastructure & programme management office director Darren Colderwood told NCE how procurement for the scheme has moved towards the Project 13 model. https://www.newcivilengineer.com/innovative-thinking/project-13-principles-help-heathrow-airport-save-time-and-cost-17-09-2020/
On the main vehicular tunnel upgrade, being carried out by BAM Nuttall in conjunction with M&E specialist VVB Engineering, the CAA report states that “Arcadis concluded that the project had been delivered efficiently to date, and HAL had, by and large, acted reasonably in trying to mitigate the contractor’s poor performance”.
It adds: “Arcadis found several examples of poor performance by HAL’s contractor on this project, including continuing discovery of defects within works already completed.”
However, the CAA concludes that HAL is ultimately responsible for its contractors’ performance.
“HAL is responsible for any inefficient management or delivery of projects by its contractors that increases cost or results in loss of benefit,” it states.
“So, this poor performance leading to delays and cost increases appears to indicate inefficiency.”
The CAA will now assess whether to remove costs associated with the tunnel refurbishments from HAL’s Regulated Asset Base (RAB) – which effectively means HAL would have to pay for cost overruns, rather than charging airlines.
The decision will be taken following a further consultation round and once work is completed on both projects.
HAL has repeatedly been accused of spending inefficiently by rival bidders to expand the airport. Last week Heathrow West chief executive Carlton Brown slammed HAL’s £500M sunk expansion costs as “shocking”. https://www.newcivilengineer.com/latest/heathrow-expansion-rivals-sunk-costs-are-a-tenth-of-hals-shocking-500m-bill-15-09-2020/
Meanwhile, Heathrow Hub founder Jock Lowe told NCE that his proposal to extend the runway is the only “oven ready” expansion proposal left for Heathrow. https://www.newcivilengineer.com/latest/heathrow-expansion-rival-claims-extending-runway-is-only-oven-ready-proposal-left-23-09-2020/
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The CAA paper says:
18. We will use what we learn in this review in setting our future policy for the
incentives and other arrangements relating to capex by HAL, including the capex
governance framework for H7. In particular, it will be important to take account of
the experience of this review in designing a stronger, more consistent and
targeted incentive regime, consistent with the approach set out in our August
2020 working paper.
19. We currently envisage that there will be at least one additional round of
engagement with stakeholders needed to quantify and present any potential
disallowances due to inefficiency. We will also consider if there is a case for
carrying out further reviews of the efficiency of HAL’s capex project for projects
delivered in the period 2019-2021. For example, if the IFS (or other stakeholders)
identify potential inefficiencies with a project (or projects) delivered during this
period.
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See earlier – 2018:
How Heathrow is happy to pay way over the odds, to increase its RAB, allowing more revenue
The City Editor of the Financial Times, Jonathan Ford, has written about how the reasons for Heathrow’s anticipated costs for its possible 3rd runway. The cost of £17 billion, or now £15 billion are exceptional. But Jonathan explains how Heathrow’s investors seem happy to spend so much. It is because of the curious incentives that operate in the topsy-turvy world of utility financing. As with most ventures that have monopolistic aspects, Heathrow is not subject to ordinary restraints on capital expenditure. The principal check is the willingness of the airport’s regulator, the Civil Aviation Authority, to sign off on the mechanism by which these costs can be recovered from captive airline customers through passenger charges. Heathrow often pays far above the going rate for building, new technology etc, because this adds to the airport’s regulated asset base (RAB) on which it gets an allowed return, and thus permits it predictably to expand its own revenues. Since taking over BAA in 2006, Ferrovial has been extremely active, tripling Heathrow’s RAB to £15bn. It is a system that has allowed the airport’s owners to finance these expansions with vanishingly little equity capital. Heathrow is encouraged to fund everything with debt by a regulatory system that allows it to keep the gains from financial engineering. Heathrow’s owners hope to shrug off the risks of completion, but transfer them on to customers.
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and
Sunday Times commentary on Heathrow: the cash machine with an airport attached
The Sunday Times reports that under a complex (perverse) incentive system, Heathrow is encouraged to spend as much as it can on developing the site. Heathrow’s investors earn returns based on the size of its “regulatory asset base” (RAB), under a formula set by the CAA. So the more the airport spends, the more its owners can earn. It gives an example of £74,000 to cut down 3 trees, which is at least 20 times the normal price. These costs of developing the airport are recouped through passenger charges, and also set off against UK tax. The Sunday Times questions the efficiency, governance and transparency of the management of Heathrow. It says the airport is demanding an insurance policy against the risk that the project goes wrong, and wants the CAA to ensure it will be compensated by airlines and passengers if there are unanticipated difficulties (eg. construction delays, or lower than anticipated passenger numbers or revenue). Scrutiny of Heathrow’s spending has been inadequate, there is no audit of the RAB, to show how the figure of £15.8bn for the expansion project is calculated, and Heathrow has not provided a detailed cost breakdown for the runway plans.
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