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Hertfordshire LEP Board paper Title: Croxley Rail Link – re-allocation of funding Author: Joan Hancox, Growth and Infrastructure Manager Date: 22 April 2015

1. Purpose

1.1 To provide the Board with further details of Croxley Rail Link including cost analysis, funding package, economic impacts and Transport for London’s commitments following the Board’s provisional approval to re-allocate £37.35m of funding on 22 January 2015.

1.2 To ask the Board to agree re-allocation of Growth Deal funding of £37.35m from the

A10/M11, A1(M) and M1/M25 packages to Croxley Rail Link. 1.3 To seek delegated authority for the Executive Director to agree the terms of the agreement

with Hertfordshire County Council on the transfer of funding for Croxley Rail Link and those between HCC and TfL.

1.4 To seek delegated authority for the Executive Director, in discussion with the LEP Chairman,

to agree changes in the composition of funding for Croxley Rail Link from LEP funding sources providing there is no change to the total amount of funding provided to Growth Deal or Growing Places projects.

2. Summary

2.1 Following the January Board meeting the Board wished for further details on costs/funding, economic benefits and Transport for London’s commitment to Croxley Rail Link.

Costs/funding

2.2 The offer from Transport for London is to deliver Croxley Rail Link for £284.4m which they

consider has a 50% probability of increasing. They will take the risk and meet any cost overruns but will also benefit from any cost savings which they are able to achieve. The £284.4m cost is derived from a due diligence exercise they undertook in January 2015 and includes significant sums for risk in line with their project practices for projects at this stage.

2.3 A funding package, which includes additional funding from the Department for Transport

(DfT), funding from Transport for London (TfL) and additional funding from Hertfordshire County Council and Watford Borough Council as well as the LEP Growth Deal and provisional reallocation has been put together but requires final sign off by the LEP Board, as set out below.

Agenda Item No.

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Funding Contributor April 2015 (£m)

DfT 109.82

HCC + WBC 40.23

LEP Growth Deal 1 50.5

LEP additional (provisional)

37.35

TfL 16

TfL (borrowing) 30.5

TOTAL 284.4

2.4 If the additional allocation by the LEP Board is agreed, the project will be fully funded with

no recourse for further funds to come from Hertfordshire.

Economic benefits 2.5 A 65 page report by Nathaniel Lichfield & Partners (nlp) sets out the wider economic

benefits of Croxley Rail Link. In summary, the project would unlock an additional £796.4m of capital investment in adjoining sites, lead to the creation of an additional 9,400 jobs and a £8.3bn boost to GVA in the sub-region (parts of Hertfordshire and Buckinghamshire) by 2031 as shown in Appendix 1. These are considerable economic benefits and demonstrate that the investment being considered by the LEP would have a significant impact on the sub-region and contribute towards the LEP achieving the goals in terms of job growth for our Growth Deal (15,000 jobs) and GVA increase set out in the SEP (£3bn uplift in GVA).

2.6 The Department for Transport has also carried out a thorough value for money appraisal

focusing mainly on the transport benefits but also considering the wider economic benefits. This gave the project an overall value for money assessment as low. The appraisal was subject to scrutiny by the DfT’s Chief Economist and signed off by the Permanent Secretary and the Treasury.

2.7 The reason for the discrepancy between the nlp study and the DfT assessment is that the

DfT are still developing their regeneration assessment tools and have yet to issue guidance on this matter. DfT have discounted a higher proportion of the wider economic benefits than included in the nlp study, as they were looking at the national benefits, rather than sub-regional and used only a 5 year timescale to capture the benefits, whereas the nlp study considers these up to 2031. However, as Hertfordshire LEP’s remit is to facilitate the growth of the Hertfordshire economy it is considered that the Board should give more weight to the nlp study findings than DfT. In this case the overall value for money assessment would be likely to move to medium or high.

Transport for London Commitment

2.8 TfL have been directed by the Mayor of London to undertake the project and to provide a

financial commitment. DfT have imposed conditions on TfL covering the contents of the

scheme, operation and setting a target of commencing operation in 2019. TfL will provide

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£46.5m of the funding. The scheme will form part of London Underground Limited’s overall

investment programme and will be under the remit of TfL’s Independent Investment

Advisory Group which provides independent assurance and expert advice to the Mayor. TfL

will take on all cost risk above £284.4m.

2.9 Overall the main conditions set out by the LEP Board have been addressed and final

approval of the re-allocation of £37.35m from the M1/M25, A1(M) and A10/M11 transport

packages are sought.

3. Background

Why Croxley Rail Link is the LEP’s top infrastructure priority 3.1 Croxley Rail Link remains the LEP’s top infrastructure priority for Hertfordshire due to its

direct physical linkage to regeneration of brownfield sites and employment areas along its route and its contribution to Watford’s economic growth and prosperity. The direct link between transport investment and economic regeneration makes this project unique nationally. Landowners and investors are lined up to redevelop, regenerate and refurbish employment, retail and leisure facilities due to Croxley Rail Link being heralded for a considerable period. The pace and scale of growth would represent a step-change in south-west Hertfordshire i.e. at a faster rate of investment than has been seen over the previous 10 years. The calculated additional investment if Croxley Rail Link is to proceed is calculated at over £700m, providing over 9,000 jobs and contributing over £8bn to the economy.

3.2 The main areas which will see additional investment directly as a result of Croxley Rail Link

are:

Croxley Business Park and Watford Business Park

Western Gateway/Ascot Road adjoining the new Cassiobridge Station

Watford Health Campus site

Watford Town Centre

Watford Junction – Special Policy Area

3.3 Croxley Business Park is a modern business park which has been acquired by Threadneedle and has been undergoing a phased modernisation to bring the buildings up to Grade A standard. They have a planned investment programme which would see substantial redevelopment of part of the site if Croxley Rail Link goes ahead.

3.4 Watford Business Park is a mixed older employment area in need to substantial investment

to provide modern employment stock. The LEP has agreed to provide Growing Places funding for a study on how to approach this task as well as an initial phase of site assembly. Whilst the Business Park is under the freehold ownership of Watford Borough Council it requires extensive site assembly to prepare sites for redevelopment. The type of employment uses which will be attracted to the park and the viability of such redevelopments will be depend on Croxley Rail Link proceeding.

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3.5 Sites close to the proposed new station are in the ownership of a property company. If Croxley Rail Link goes ahead it is likely that the site would be developed for office headquarters.

3.6 The Health Campus is a unique development on a 65 brownfield hectare site due to provide

a range of employment, housing and health facilities. A new station will improve the accessibility of the site as well as the existing hospital which employs 1,700 people.

3.7 Watford Town Centre – a £100m investment in Charter Place is planned to provide new

cinema, leisure and retail facilities and help to retain Watford as the key sub-regional shopping destination.

3.8 Watford Junction – longer term plans exist for the redevelopment of land with potential to

provide 1,500 – 1,800 homes and 500,000sq ft of commercial floorspace. This scheme is at the earliest stage of development.

3.9 A key concern about the quality and range of employment space in the County would start

to be addressed by these development proposals. 3.10 As well as these regeneration benefits the transport benefits include improving the

connectivity of Watford with other locations in south-west Hertfordshire and north London, providing greater choice of journeys to and from central Watford and reduce congestion by providing new public transport links to key employment areas. Watford’s economic growth is constrained by existing traffic congestion, particularly at peak times and Croxley Rail Link provides additional transport capacity in an area where road capacity improvements would have minimal affect.

Previous Board decisions and assurance requirements 3.10 The LEP was allocated £50.5m from its Growth Deal 1 for Croxley Rail Link as its priority

infrastructure project for Hertfordshire due to the considered economic and regeneration benefits of the scheme. On 22nd January 2015 the LEP Board considered allocating additional funding from the A1(M) and M1/M25 transport packages £37.35m) to Croxley Rail Link due to increasing overall cost of the project and funding gap. At that meeting the LEP Board conditionally approved the re-allocation of the funding and requested a further report to set out

- The funding package elements, planned expenditure (including indicating where

costs have changed) and whether there is scope to reduce the costs

- The economic benefit case, including the lost benefits from the transport schemes

not going ahead

- The current position with LUL’s commitment

3.11 A number of possible conditions for the funding had been outlined in the report which the Board agreed should be attached to any funding agreement. In addition it was agreed that an assessment would be carried out on “who benefits” and “who could pay what” but that this would be done later in the year.

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3.12 A further update was provided to the Board meeting in March where the Board re-iterated

their concerns about the value for money aspects of the project. 3.13 In terms of our Assurance Framework, Croxley Rail Link falls within the category of “Major

transport schemes” and has been overseen by DfT as part of their “tail-schemes” approval arrangements. Our Assurance Framework acknowledges and does not seek to duplicate arrangements for the preparation, scrutiny and appraisal of business cases to meet the requirements of the majority project funder, which for Croxley is DfT (£180.52m). In this case the DfT’s considerations of the Croxley Rail Link business case have included the transport funding that would be allocated through the Growth Deal to Hertfordshire LEP as well as the major scheme funding they would make available to TfL. There is an element of funding from DCLG (£17.15m) for the M1/M25 and A1(M) transport packages which has not been included within the DfT’s assessment.

3.14 Our Assurance Framework sets out that in all cases the LEP will consider whether:

There is a clear rationale for the interventions linked with the strategic objectives

identified in the Strategic Economic Plan

The proposal has clearly defined inputs, activities, outputs and anticipated

outcomes, which are additional, ensuring that factors such as displacement and

deadweight have been taken into account where appropriate

The benefits exceed the cost of intervention

Deliverability and risks have been appropriately considered and if there are likely to

be clear mitigations for them

3.15 Each of these issues have been thoroughly considered by DfT as set out later in the report and led to the scheme’s approval by DfT and the Treasury.

3.16 The Programme Management Committee (PMC) has been established to provide advice to

the LEP Board on the independent appraisals of projects. However, in this case, it has not been possible to fit in a meeting of the PMC prior to the Board meeting due to the timescales involved and Board members are asked to note this deviation from the process stated in our Assurance Framework. HCC, as our Accountable Body, has also been informed of this.

4. Current position

Funding package elements

4.1 Since January LEP Board meeting the funding package has changed with increasing

contributions from the Department for Transport (DfT), increasing capital from Hertfordshire County Council and Watford Borough Council, as well as financial commitment from Transport for London (TfL). The LEP is the last organisation contributing to the scheme to make a decision on the project and its funding represents the final piece of the required funding to enable the project to go ahead, as TfL have made a commitment to take the risk

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for all cost increases over £285m. The funding package and how this has changed over time is set out overleaf:

* includes £1.125m of local private sector contributions

** note there was a funding gap in January 2015

4.2 As can be seen, the contribution from HCC and WBC increased by £8.225m since January. DfT have increased their funding commitment by £33.58m. The borrowing, based on projected revenue income from fares, has been transferred from HCC to TfL. TfL have now committed £16m making a total commitment of £46.5m (with the £30.5m borrowing).

4.3 As part of the increased funding for Croxley Rail Link, DfT released £24m of the LEP’s Growth

Deal funding in 14/15. A further £4m for Croxley Rail Link has also been released as part of the 15/16 payment. The £24m has been released in revenue form which gives the LEP flexibility in swapping with its GPF capital funding to provide greater flexibility over its use of funding in the future. This will allow the LEP to decide whether to provide capital or revenue GPF grants or loans rather than be restricted to predominantly capital based projects.

Scheme costs

4.4 The current cost estimate is based on the “due diligence” work that was undertaken by AECOM for TfL, which looked at the cost estimates produced for HCC. Despite a robust response by HCC on these the TfL position has not shifted on the project costs. Their current estimate of £284.4m is a P50 estimate, which they define as a cost which has a 50% chance of being higher or lower as well as an implementation programme which has a 50% chance of being longer (or shorter).

4.5 There have been discussions with TfL regarding reducing this figure but to no avail, although

TfL are now contributing financially to the project. TfL would have preferred to take on the

Funding Contributor

July 2014 (£m)

January 2015 (£m)

April 2015 (£m)

DfT 76.24 76.24 109.82

HCC 16.00 21.33 27.555

HCC (borrowing)

26.0 30.5 0

WBC 2.595 7.595 9.595*

LEP Growth Deal 1

50.5 50.5 50.5

LEP additional (provisional)

0 37.35 37.35

TfL 0 0 16

TfL (borrowing)

0 0 30.5

Other 3.08 3.08 3.08

TOTAL 174.415 226.595** 284.4

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project at their P90 costing of £298.77 where the probability of cost overrun was 10% and has a later delivery timescale of May 2019.

4.6 The offer from TfL is to take on the delivery of the Croxley Rail Link for the price of £284.4m.

They will take the risk of any cost overruns but will also keep any savings if the project is delivered for less than this amount. There may be scope to reduce the costs but those cost savings would be retained by TfL.

4.7 Apart from the significant risk element increasing, other contributory elements to cost

pressures have included: - Significant programme delays resulting from the CRL scheme design being both

delayed and changed by disruption to LUL’s much larger signalling upgrade

programme

- Inflationary pressures on cost arising from programme delays

- Requirements from the rail industry to refurbish and enhance existing assets over

and above that required to accommodate CRL alone

- Delay and disruption in the delivery of the design programme

The economic business case

4.8 HCC and WBC commissioned Nathaniel Litchfield and Partners (nlp) to carry out an extensive

assessment of the wider economic benefits of Croxley Rail Link and the work was completed with the assistance of landowners of Croxley Business Park and land near the proposed stations, as well as the Health Campus developers (Kier), the owners of the Watford town centre shopping centre and developers with land interests around Watford Junction. The study looked at three scenarios, a) CRL goes ahead as planned, b) CRL goes ahead delayed by a few years and c) CRL does not go ahead. For the purpose of this report we will focus on the first scenario and the additional benefits when compared with Croxley Rail Link not going ahead.

4.9 The study found that the additional economic impacts (i.e. the economic impacts over and

above what would happen if Croxley Rail Link did not proceed to be:

more than £796m of capital investment,

9,700 construction jobs

9,400 direct and indirect permanent jobs

More than £8bn of direct and indirect economic output (measured by GVA)

4.10 In terms of value for money, if the project cost is compared with the additional capital

investment then the leverage would be 2.8, which would represent high value for money (according to the DfT categorisation of Benefit Cost Ratios1). When we compare the above impacts against expected outputs for Croxley Rail Link which we included with our SEP – these were 6,000 jobs, 6,500 homes and leverage of £117m.

1 Benefit Cost Ratio is a methodology for quantifying the costs and benefits of a scheme

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4.11 DfT carried out their own assessment of the value for money (vfm) case and produced a BCR of 0.9. They added in some £20m of wider economic benefits which produced a verdict of a low vfm. However, due to the restrictions on DfT methodology they were looking at the additionality (the difference the scheme would make) on a national basis rather than looking at the sub—regional or local economic benefits. Whilst the nlp figures have discounted some of the additional benefits of Croxley Rail Link due to local or sub-regional displacement, DfT has discounted a higher percentage in line with national government’s assessment methodology. In addition, the DfT only looked at the short term benefits (over 5 years) rather than nlp which forecast benefits through to 2031. However, DfT accepted that the wider economic benefits could range from a further £20m to £125m.

4.12 Dft has very thoroughly scrutinised and assessed the Croxley Rail Link proposals in

accordance with the five case model and WebTAG2 (with some allowance for wider economic benefits) and this assessment has been validated and cleared at the highest level in the Department. These have been scrutinised by the DfT Chief Economist.

4.13 The DfT assessment was cleared by DfT’s Board Investment & Commercial Committee (the

highest tier of investment approval in DfT and chaired by Philip Rutnam (Permanent Secretary) and also cleared separately by Philip Rutnam, in his role as DfT Accounting Officer, before being approved by the DfT Secretary of State. Subsequently the Chief Secretary to the Treasury has approved the scheme.

4.14 The additional benefits of Croxley Rail Link need to be weighed against the benefits which

would have occurred due to the other transport schemes going ahead and the targets in our overall Growth Deal. However, there are several reasons why it is not straightforward to identify the difference it will make overall.

4.15 Firstly, our growth aspirations were developed from an overall view on potential for

economic growth and housing delivery rather than calculating the houses and jobs which could be attributed to individual projects. Our overall growth ambitions and the logic for them has not changed.

4.16 Secondly, the timescales for the benefits to occur are different. Our Growth Deal focuses on

up to 2021, our SEP on up to 2030, the nlp work on Croxley Rail Link up to 2031 and the transport appraisal work on the transport packages accrues the benefits for up to 60 years.

4.17 Thirdly, HCC have undertaken to deliver the transport projects that would go ahead in

15/16, are likely to deliver the majority of those identified for future years and are working on submitting funding bids for the resilience projects when opportunities arise.

4.18 Overall, the suggested wider economic benefits identified in the nlp report are greater than

those originally allocated to Croxley Rail Link in Watford alone (6,500 jobs identified against 7,400 in the nlp study). However, it is not possible from the report to dis-aggregate the jobs to the Hertfordshire level or up to 2021 (our Growth Deal period) and for the period 2021-2031. Realistically, most of the job growth will be delivered post 2021, although some of the

2 WebTAG is the methodology developed by the DfT for the appraisal of transport projects. All major transport

schemes have to be scrutinised through this methodology.

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developments should be on site or completed prior to this. Further work would be needed to dis-aggregate this figure further and identify changes needed to the Growth Deal.

4.19 However, it is clear that the timescale for the opening of Croxley Rail Link has slipped from

2017 (as set out in the SEP) to potentially 2019 and this is also pushing the wider economic impacts into post 2021, beyond our Growth Deal timescale. Further analysis on this is required but will be discussed with the LEP’s BIS Relationship Manager in terms of possible changes to the Growth Deal once a new government is formed.

4.20 There will potentially be political issues with moving funding around the County that was

previously committed to particular projects and schemes. HCC will fund the 15/16 transport schemes and will seek to replace future year schemes over the next ten years.

4.21 If, however, the additional funding is not agreed, then the Growth Deal would need to be re-

negotiated due to changes in the level of funding (£50.5m) would go back to central Government as well as the negative impact on Watford and the surrounding sub-regions growth prospects.

Transport for London’s commitment

4.22 The Mayor of London signed a direction at the end of March requiring Transport for London

to take on Croxley Rail Link and to provide funding for the project. TfL have allocated a total of £46.5m towards the project. As mentioned above, they are taking on the project at a fixed cost to Hertfordshire of £284.4m. They will take on the risk of cost overruns as well as benefitting from any cost savings.

4.23 The project will be subject to London Underground Limited’s internal governance

arrangements and - Will form part of LUL’s overall investment programme

- Have LUL’s established project management methodologies applied to it

- Is expected to sit within the Sub-Surface Upgrade Programme governance

arrangements

- Will be within the remit of TfL’s Independent Investment Programme Advisory group

- Report, as required, to the Watford Regeneration Board

Other conditions

4.24 The LEP Board agreed that a number of other conditions should be attached to the agreement of the additional allocation of funding for Croxley Rail Link. Most of these have been met and thus it is felt that the LEP has been successful in securing the assurance that it required in terms of control of costs, no further funding requests to the LEP, the economic benefits and TfL’s commitment to deliver the scheme.

4.25 The outstanding matters will be picked up either through discussions with HCC/TfL or with

central Government as appropriate. The details on the sought conditions are set out overleaf:

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Board Condition Current position

No further requests to LEP to cover funding gap

MET – TfL will cover cost overruns

LUL to take on the project management of delivering Croxley Rail Link

MET – TfL have been directed by Mayor of London to take on the scheme

HCC commitment to delivery transport studies and transport schemes already identified for Growth Deal 1 funding that is being re-allocated

PART MET – HCC will fund transport schemes and studies in 15/16 and seek funding for schemes and maintenance projects in future years

Commitment from HCC and LEP to bid to Maintenance Challenge Fund

MET – bids were submitted but were unsuccessful

HCC to take on contract management of CRL on behalf of LEP

MET – HCC will lead negotiations with TfL and employ a Liaison Officer

Commitment from Government to look at possible other funding solutions including Tax incremental Financing and/or involvement of UKTI Regeneration

No RESPONSE

Payback mechanism if cost ceilings not reached

NOT MET – TfL will deliver at a fixed price

DfT release A10/M11 package funding (£20.2m)

MET – funding has been released

DfT release A120 and A602 scheme funding from their “retained scheme” process

NOT MET – the major scheme elements (A120 and A602) have been retained

Remaining funding gap met by top-up of GD2 £6-£8m on top of the existing proposed £22.2m

PART MET – funding gap has been met but not through increase of Growth Deal

Next steps

4.26 Hertfordshire County Council will be the lead organisation in relation to the discussions with TfL on the release of funding and the content of the funding agreement between TfL and HCC (both for HCC and as our accountable body). These discussions have yet to commence.

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The Board are asked to provide delegated authority to the Executive Director to conclude these negotiations which could take several months.

4.27 The main governance arrangements will be through a Watford Regeneration Board which

will need to be set up. The LEP Board is one of the key organisations to sit on the Board and will need to nominate a representative from existing Board members. It is proposed that it will meet quarterly and provide an overseeing role, ensuring that the regeneration stated outcomes are delivered on time in a co-ordinated way. The LUL Senior Responsible Officer and project manager are expected to attend. In relation to Croxley rail Link the WRB will:

Monitor programme and raise any concerns or issues with LUL, key dates will be

monitored including expected opening and co-ordination with other regeneration

projects such as the Health Campus

Monitor service levels, particular any proposed changes to service levels as well as

consideration of promoting services to Amersham or extension of the Bakerloo Line

Co-ordinating funding – WRB will be responsible for co-ordinating the complex

funding arrangements between the local contributors (HCC,WBC and Hertfordshire

LEP) and managing the cash flow.

4.28 As part of the DfT changing the funding arrangements, the LEP has received £24m in 14/15 in the form of revenue funding. This provides an opportunity to use some Growing Places Funding for Croxley Rail Link, as well as use it for revenue for SLGF projects rather than Growing Places Funding. The details of these funding changes has not yet been worked out in detail and delegated authority is sought for the Executive Director in discussion with the LEP Chairman to agree these changes in funding source conditional on no changes to project funding taking place. This will not change the amount of funding for individual projects or the Growth Deal overall but aims to provide the LEP with a source of revenue funding for projects and match funding for European funding which it previously did not have access to. Under local government finance rules, revenue funding can be turned to capital but capital funding cannot be turned into revenue funding.

5. Recommendations

5.1 That the LEP Board agree to re-allocate £37.35m from the M1/M25, A1(M) and A10/M11 packages to Croxley Rail Link

5.2 To nominate a LEP Board member to represent the Board on the Watford Regeneration

Board 5.3 To provide delegated authority to the Executive Director to agree the terms of the

agreement with Hertfordshire County Council on the transfer of funding for Croxley Rail Link and those between HCC and TfL.

5.4 To provide delegated authority for the Executive Director, in consultation with the LEP

Chairman, to agree changes in the composition of funding for Croxley Rail Link from LEP funding sources providing there is no change to the total amount of funding provided to Growth Deal projects.

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Supporting documents LEP Board 22 January 2015 – Croxley Rail Link LEP Board Minutes 22 January 2015 LEP Board 19 March 2015 – Growth Deal 2 (extension) and Croxley Rail Link Email from Robert S Fox, DfT to Joan Hancox re: Croxley Assurance – 24 March 2015

Croxley Rail Link: Full Business Case Summary Tables: March 2015 – DfT Croxley Rail Link: Appraisal Summary Table : March 2015 Annex F – Croxley Rail Link Economic Regeneration benefits – DfT March 2015 Croxley Rail Link – VfM Statement – Source : DfT March 2015

Croxley Rail Link Wider Economic Impacts Study – nlp – March 2015 - Summary available only Mayoral Direction 1478 Croxley Rail Link (signed) – 26 March 2015 150330 Croxley Rail Link – Funding letter to Herts LEP and HCC from DfT – 30 March 2015 Croxley Rail Link – Funding letter to TfL from DfT – 30 March 2015 BICC/HCC/AECOM cost comparison (confidential)

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Appendix 1: Wider Economic Benefits – Croxley Rail Link 3

3 Source: Croxley Rail Link: Wider Economic Impacts