Waterways Ireland’s Ulster Canal Upper Lough Erne to Clones Draft Restoration Plan (2010) is an extremely sketchy document. Perhaps it had to be produced in a hurry, to get a consultation process over and done with in about six weeks and to “advance to the next level of planning” before the Minister for Finance wields his chopper in the next budget. It is perhaps as a result that the cost figures are not explained.
The document says:
This project commenced in 2007 and is programmed to be completed in 2013. The full capital cost of the project (estimated at €35m/£23.8m) will be met by the Irish Exchequer with annual maintenance costs on the completion of the project, in the order of €300,000/£201,000, to be met by the Northern Ireland Executive and the Irish Government.
But the document gives five options for the Lough Erne end of the canal to Clones, with costs ranging from €8.5 million to €15.9 million. So is any of them included in the €35 million figure? Should the real figure be somewhere between €43.5 and €50.9 million? Or has WI plumped, in advance of the consultation, for one of the five options and included that in the €35 million total? Or did it not think of showing the cost as a range from, say, €35 million (assuming that includes the lowest-cost option) to €42.4 million? The difference of €7.4 million between the lowest- and highest-cost options is about 20% of the €35 million quoted, and it seems remiss to omit an explanation of what the quoted figure covers. So perhaps I have missed the explanation, in which case I will be happy to be corrected and to give the explanation here.
But where does the €35 million figure come from? It is the figure that has been quoted by ministers on both sides of the border since 2007, perhaps by converting the sterling amount of around £24 million at the rates prevailing at that time. But what is the basis for the figure?
The age of the estimates
The Outline Business Case (2007) puts the cost of restoring the western (ie Clones) end of the Ulster Canal at £24,403,821 and says:
Table 5.1 presents the updated estimates prepared for the new appraisal set out in the Annex to this report. Figures are total costs, including land and ongoing operational costs, and are in £Sterling, 2007 prices. The basis of these is given in Section VI of the Annex.
According to Reuters[i] today (14 September 2010) £24,403,821 is €29,272,382. So that doesn’t help to explain the €35 million figure.
Turning to Section VI of the Annex (Updated Economic Appraisal), we find:
VI Quantifiable Evaluation of Options
6.2 The financial information in this report was obtained from various external sources. We have not performed any verification work in preparing this report nor have we carried out any work in the nature of an independent audit of information provided. […]
6.4 All costs and benefits have been updated to 2007 prices using the construction industry inflation increases for capital costs and the RPI for benefits and operating costs. […]
Capital Costs
6.6 The capital costs estimates were provided by Ferguson McIlveen and ESB, they are based on similar work on projects undertaken by the consultants and in particular on those rates which applied to the Shannon-Erne Waterway Project. Two feasibility studies carried out in 2001 looked at the costs associated with the restoration of the full canal and the stretch from Lough Neagh to Milltown and Lough Erne to Clones. A further study carried out in 2006 focused on the cost of restoring the canal from Lough Neagh to Maydown (this is the route considered under option 5c, however is a slightly different route to that investigated in 2001) and Lough Erne to Clones.
6.7 It is our understanding that the 2006 study costs were updated by Ferguson Mcllveen based on their knowledge of increases in construction costs since the time of the 2001 study and their understanding of the revised route for the Lough Neagh to Maydown option.
6.8 In the absence of any in depth study or analysis of the current costs of restoring the full canal the 2001 costs have been updated by the same rates applied to the Lough Erne to Clones section of the canal from 2001 to 2006. All 2006 costs have been inflated to 2007 prices by applying a construction inflation rate of 5.69%.
6.9 A breakdown of cost components and the adjustments from 2001 prices to 2007 prices has been included at Appendix C.
6.10 Capital costs comprise of land costs, capital restoration costs (construction costs) and non capital costs (incidental/replacement costs). A breakdown of these costs is provided in Table 6.1 below.
Being neither an engineer nor an economist, I cannot claim any knowledge of the conventions of costing capital expenditure projects, so I do not know whether this approach is reasonable (guidance would be welcome). If I have understood this account correctly, it seems that the last ab initio assessment of costs was in the work done by ESB International and Ferguson McIlveen for Waterways Ireland in 2000–2001. But that was described as an updating exercise, so it in turn may have been derived from work done on the feasibility study of 1997–1998. Accordingly, it seems that the figures shown may be based on adjusted figures based on costings that are at least ten years old.
This point came up in the NI Assembly Committee for Culture, Arts and Leisure’s discussion of the Blackwater Regional Partnership’s presentation on the Ulster Canal in 2008:
David McNarry MLA: The estimated capital cost of the canal restoration was £125 million in January 2006. What is the estimated cost now?
Neil McCullough (PwC): It is difficult to say; we would need Ferguson & McIlveen to examine that estimate.
Julie McClean (PwC): That figure was worked out by the engineers, Ferguson & McIlveen. The estimate was made specifically for our study at that time, and would need to be recalculated.
David McNarry MLA: It is unsatisfactory to be presented with figures estimated at a time when the project was still five years away. Surely a guestimate of the current figures could be made. Has the estimated cost increased by 10%?
Barry McElduff MLA, Chairperson: The Department would ask that same question.
David McNarry MLA: It is the question that I am asking, and that anyone would ask. An investor would not accept an estimated cost figure of £125 million that had been worked out two years ago. If you quoted those figures to Sir Alan Sugar in ‘The Apprentice’, you would be fired.
[…]
Councillor Sean Conlon (BRP): Wage costs and the annual rate of inflation have been factored in. Property prices in the Monaghan area have steadied off considerably, and, indeed, reduced by 15%. I cannot give the specific answer that Mr McNarry wants, but I do not envisage the estimated cost increasing hugely. We will formalise the necessary mechanisms and return to the Committee with a figure.
[…]
Julie McClean (PwC): At this point, it would be dangerous to estimate a figure. However, we are happy to consult with our counterparts Ferguson & McIlveen, which made the initial calculations.
David McNarry MLA: I do not want to mention the Maze stadium, the Committee’s hardy annual; we are blowed if we can get any accurate figures about how much that will cost. Similarly, we are not going to agree to the canal project without knowing the relevant figures.[ii]
The capital costs
Table 6.1 in the Updated Economic Appraisal shows the total costs of several options at 2007 sterling rates, before adjusting for optimism bias. The relevant option is 5b Restore South West Section:
- land £1,268,280
- construction costs £19,626,633
- non-construction costs £3,508,908
- total costs £24,403,821.
The Updated Economic Appraisal then shows costs adjusted for an optimism bias, the benefits at three different displacement rates (taking account of the fact that some visitor spending would have occurred anyway) and at the different discount rates set by the UK and Irish governments. It is a very impressive piece of work, and great care has been taken to show where assumptions have been made. Here are its conclusions.
9.7 The main conclusions of this analysis are as follows:
- Applying the ROI and UK discount rates does not materially affect the conclusions.
- At 85% displacement the Net Present Value of the Costs strongly outweigh the Net Present Value of the benefits for all options.
- At 50% displacement the NPV of the benefits increases significantly for all options but is still well short of the NPV of the costs.
- At zero displacement the NPV of the benefits increase further but remain below the NPV of the costs.
- At 50% displacement the NPV of the benefits is greater than the NPV of the revenue costs for options involving full restoration in two stages.
If the costs turn out to be even higher than the appraisal shows, the net present costs will be even higher and the project will be even worse value. As Martin McGuinness MLA, Deputy First Minister, said:
There is a six-year time frame. Subsequently, in taking forward the project, Waterways Ireland officials have met representatives of statutory agencies North and South, along with relevant local interest groups. Waterways Ireland will progress the matter further by seeking to appoint a project manager and a consultant to undertake preliminary design work. After that, we will have a better idea of cost.[iii]
But the same figure is still being quoted, and the basis for doing so is not clear.
Update 16 December 2011: see here for an updated figure from Waterways Ireland: €38 million plus VAT.
Next: the supposed benefits.
[i] uk.reuters.com/business/currencies/
[ii] Northern Ireland Assembly Committee For Culture Arts And Leisure Presentation from the Blackwater Regional Partnership on the Ulster Canal 24 April 2008
[iii] Martin McGuinness MLA, Deputy First Minister, Ministerial Statement to the Northern Ireland Assembly 19 February 2008 on the meeting of the North/South Ministerial Council in Plenary Format
- All options at all levels of displacement show high overall net present costs.
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