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CTRL cost overrun risk hits Bechtel after 9/11

News

CHANNEL TUNNEL RAIL Link shareholder Bechtel shouldered cost overrun risk worth up to £42M for three years - from 2001 until last year - according to a government report published last week.

It had to take on the risk because insurers refused to underwrite it, says the report, published by spending watchdog the National Audit Offi ce (NAO).

Bechtel offered to take on the risk because, in 2001, Railtrack pulled out of an agreement to buy Section One of the project and ditched the option of buying Section Two. Had Railtrack stuck with the agreement, it would have retained cost overrun risk.

US contractor Bechtel holds a 22.4% stake in CTRL concession company London & Continental Railways (LCR). It is also a shareholder in CTRL project manager Rail Link Engineering.

Railtrack had originally agreed to the Section One deal and the Section Two option under the rescue plan brokered by deputy prime minister John Prescott in 1998.

But after the Hatfield rail crash in early 2000 it sought to minimise its exposure to construction risk on Section Two as its financial problems mounted.

At the same time, Bechtel and LCR proposed an alternative deal under which they would take on more cost overrun risk.

'The Department for Transport (DfT) chose to proceed with the LCR/Bechtel proposal on the basis that it contained performance incentives (the sharing of savings and the risk of sharing cost overruns) that did not exist under the option in which the Department carried the construction risk, ' says the NAO report.

Under the deal, insurers were expected to take on £215M worth of cost overrun risk, with Bechtel carrying - or seeking underwriters for - any shortfall. In the end insurers took on £173M of risk.

Bechtel had expected to get insurance companies to underwrite the remaining £42M, but this hope was dashed after the 11 September attacks on New York in 2001.

As a result, the US fi rm was left carrying the risk until the end of last year when insurers fi nally agreed to underwrite it.

he report adds that construction of the second phase of the CTRL is running over budget, but that the first phase of the line came in below target cost despite significant and unexpected obstacles.

The report says that the DfT and CTRL operator LCR blame unexpectedly rapid rail industry cost infl ation for much of the cost increase.

'Once infl ion is removed, LCR expects the cost of Section Two to be within a few percentage points of the target, ' says the report.

Section One of the line was finished on time and under target cost, despite exceptionally heavy rain during earthworks and unforeseen skill shortages.

The heavy rain produced cost increases of £80M, some of which were insured and some of which were paid by LCR's client, operator Union Railways.

Higher rail costs were associated with huge demands on resources from Railtrack's West Coast Main Line upgrade and following the Hatfield crash.

INFOPLUS To access the full report to go www. nceplus. co. uk

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