NATIONAL AUDIT OFFICE REPORTBY THE COMPTROLLERAND AUDITORGENERAL LondonDocklands DevelopmentCorporation: The LimehouseLink ORDEREDBY THE HOUSEOF COMMONS TO BE PRINTED 12 JUNE 1995 LONDON:HMSO HC 466 Session 1994-95 Published 16 June 1995 f 6.95 NET London Do&lands Development Corporation: The Limehouse Link This report has been prepared under Section 6 of the National Audit Act 1983 for presentation to the House of Commons in accordance with Section 9 of the Act. John Bourn National Audit Office Comptroller and Auditor General 7 June 1995 The Comptroller and Auditor General is the head of the National Audit Office employing some 750 staff. He, and the NAO, are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources. London Do&lands Development Corporation: The Liiehouse Link Contents Page Summary and conclusions 1 1. Background 6 2. Appraisal of the Limehouse Link project 20 3. Management of the construction of the Limehouse Lii 33 Appendices 1. Limehouse Link! Key dates 49 2. Organisations consulted by the National Audit Office 53 London Docklands Development Corporation: The Limehouse Link Summary and conclusions Background 1 The London Do&lands Development Corporation, established In 1981, is an executive non-departmental public body sponsored by the Department of the Environment. The Corporation has a statutory remit to secure the regeneration of its area. In May 1993 the Corporation opened the Limehouse Link, the longest cut and cover tunnel ln Britain. It links the City of London to the Isle of Dogs, including the Canary Wharf development, and provides access to the Royal Docks. The tunnel, which is 1.8 kilometres long, cost 2293.3 million to construct. The Corporation also incurred additional expenditure on acquiring the land; rehousing local residents; and providing grants to the local authority for social, economic and connnunity projects. Of the total additional expenditure of f155.3 million, the Corporation attributed E66.1 million as directly related to the Link and the remaining E89.2 million, comprising some rehousing expenditure and the grants, to the delivery of wider regeneration objectives. Need for the road 2 In the 1970s the former Greater London Council and the London Borough of Tower Hamlets reviewed the need for road improvements to support Docklands development, including improvements in the Limehouse area, but in 1981 the Council decided not to pursue their Dockhands Northern Relief Road. Development forecasts produced by the Corporation in the mid 1980s indicated that road improvements were urgently needed to make Dockhands more accessible and therefore more attractive to potential investors, businesses and the local population. In 1987, the Department and the Corporation stated their intent to the former Olympia and York Limited, the developers of the Canary Wharf area, to provide a range of infrastructure improvements as part of the wider Dockland highways strategy. These improvements included a cut and cover tunnel road providing access to Canary Wharf from the west, subject to the necessary resources being available (paragraphs 1.6,1.8, 1.12 and 2.8). Options for the road 3 In March 1986 the Corporation’s consultants completed an initial feasibility study in six weeks which investigated a range of options for a new western access road to the Isle of Dogs (three surface routes and two tunnels), drawing on the earlier work by the Greater London Council. This study did not fully identify the Corporation’s 1 London Docklands Development Corporation: The Limehouse Link requirement. A further option, based on one of the options identified in the March 1986 study, was subsequently developed in discussions between the Corporation and interested parties. This further option was a cut and cover tunnel witb a serpentine alignment. It became known as the Limehouse Link (paragraphs 1.9 - 1.10 and 2.3-2.4). 4 In June 1986 the Corporation’s Board gave approval to develop the Limehouse Link option. The serpentine cut and cover tunnel offered an early completion date and involved the loss of less productive land and less demolition of property than the other options. It also allowed land above the tunnel with development value to be retained and offered environmental and community benefits. The indicative costing of the Limehouse Link option was E51 million at 1986 prices. The consideration of the options was developed further in the consultants’ update to their feasibility study in November 1986. The Limehouse Link remained the preferred option and the tunnel was then designed and the specification worked up. In August 1988, the project was submitted to the Department of the Environment for approval to go to tender with an estimated cost of ~2141.5mlllion. This increase was principally because of changes to the requirement, developments in the design and speciiication, inclusion of project management and professional fees, and provision for inflation (paragraphs 1.11, 1.17 and 2.4-2.7). 5 The Corporation identified the costs and benefits of the various options in the economic appraisal supporting its August 1988 submission of the scheme for Departmental approval. By this thne the Corporation had reached an agreement in principle with the London Borough of Tower Hamlets, known as the Accord, which secured its co-operation with the Corporation’s road schemes and wider regeneration programme. The appraisal showed that, after accounting for assumed increases in land values to reflect the regenerationbenefits of thescheme, atl theoption8 badnegative economic returns. Department of Transport road schemes are normally expected to have a positive benefit to cost ratio, but there is no accepted methodology for appraising the contribution made by road schemes to inner city regeneration. The Corporation and the Department of the Environment believed that the cost was justified by wider regeneration benefits which could not readily be quantified. The Corporation did not undertake a comprehensive sensitivity analysis of their appraisal to changes in all the various costs and benefits (paragraphs 1.15-1.17 and 2.10-2.12). 6 The serpentine cut and cover tunnel option was chosen because the economic appraisal showed it had the lowest discounted net cost of 291 million. The appraisal showed its high construction and maintenance costs were partly offset by gains in land values and 2 London Docklands Development Corporation: The Lhnehouse Link benefits to through trafRc, and this option offered the earliest completion date. The Corporation considered that delaying the construction of the Link would adversely affect the momentum of Docklands regeneration, including placing at risk the development of Canary Wharf by Olympia and York. In October 1988 the Department of the Environment and Treasury gave approval to the construction of the Link on the basis of the economic appraisal, which enabled the Corporation to proceed to tender (paragraphs 1.17 and 2.11-2.181. Construction 7 The Corporation adopted a suitable contract strategy which contract achieved a reasonable balance of risk between the contractor and the Corporation, given the project’s technical complexity. The design was frozen in September 1988 as at this point in time it was considered to be sufhcient for tender purposes. The construction contract was awarded In September 1989 to the lowest appraised bidder who had offered an earlier completion date, at a price of E171.1 million. At this stage the Corporation estimated the fmal construction project cost at ~2227.6million. Thereafter there were modifications to the tunnel design, which were made after the contractor was on site (paragraphs 1.20, 3.2, 3.11). Project management 8 When problems developed on the contract, the Corporation’s and reporting resources for overseeing it needed reinforcing. The project was behind schedule and the estimated final project cost had risen from Z227.6 million to S284 million when additional m-house and consultant resources were bought in from December 1990. From this point on the Corporation managed the project so that two sections of the Link were completed ahead of the original planned date, and the third on time. Variations to the construction contract were agreed in March 1991 and again in June 1992. The March 1991 variation agreement, which involved significant financial obligations, was approved by the hiiiastructure Project Review Group and discussed by the Board, but this approval was not formally recorded by the Board until July 1991 (paragraphs 3.24-3.35 and 3.38). Outturn costs and 9 The Corporation opened the Lbnehouse Link on 17 May 1993. benefits Completion of the Link in just over seven years from commissioning of the feasibility study compares favourably to the average of 15 years for new road schemes completed in 1992-93 elsewhere In the United Kingdom. The outturn cost of constructing the Link was 2293.3 million. This compared with the pre-tender estimate in August 1988, including contingencies and provision for inilation, of 2141.5 million (an increase of 107 per cent); and with the post-tcndcr cstimatc of E227.6 mihion (an increase of 29 per cent). In the Corporation’s view the increased cost of the Link must be seen 3 London Do&Lands Development Corporation: The Limehouse Link in the context of the project’s special engineering requirements, environmental constraints, and against the background of the national and local economic climate over the period of the project (paragraphs 1.20-1.21, 2.21, and 3.9). 10 The Corporation acquired the land and property to construct the Link, and rehoused 556 local authority households which were on the line of the Link or in the vicinity of the Do&land highways.