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Crossrail 2's Michèle Dix: How London can find the funds

In an exclusive interview, Crossrail 2 managing director Michèle Dix reveals how the £31bn project can overcome huge funding challenges and what she really thinks of being snubbed by the Tories’ manifesto.

“Were we disappointed? No, no we weren’t.”

For Michèle Dix, Crossrail 2’s omission from the Conservatives’ 2017 manifesto was far from the setback many in the industry had feared, despite the £31bn line having featured prominently among the party’s previous election pledges just two years earlier.

“[Yes] it was in the manifesto before, but there was a lot more in that,” the project’s managing director points out.

Ms Dix is talking to Construction News from Transport for London’s St James’ Park offices, a place she has come to know well in her 17 years at the organisation. During that time she has taken on some of TfL’s most high-profile jobs: first as co-director of the congestion charge, before spending eight years as head of planning.

Her latest role, however, is arguably the most challenging yet.

As head of Crossrail 2, the past two years has involved two principal tasks: persuading government the scheme is essential, and proving it is also affordable.

A few days prior to our conversation, the project had overcome a major hurdle when transport secretary Chris Grayling gave it public backing. But while marking a step forward, Ms Dix is keen to stress this is far from a green light. “It’s a sort of yellowy light,” she smiles. “The news isn’t an approval of the scheme, it is not an approval of the strategic outline business case.”

CREDIT Number 10_Chris Grayling business energy and industrial strategy secretary

Chris Grayling

Source: Number 10

Transport secretary Chris Grayling has backed the project – but on one crucial condition

Getting this secured will hinge on this caveat in Mr Grayling’s statement: “The mayor and transport secretary want to see how London could fund half of the scheme during construction.”

With construction scheduled to start in the early 2020s and take around 10 years to complete, this gives just over a decade to find half the cash for the £31bn project to connect north-east and south-west London.

The affordability challenge

Crossrail 2’s funding was a challenge even before Mr Grayling’s announcement.

“Because we borrowed to pay to build Crossrail, we can’t necessarily borrow all of that money again”

“Other schemes haven’t been asked up front to pay half; other bids will say instead, ‘This is a good scheme, the government’s going to pay for it’, and they usually do,” Ms Dix points out.

The only other transport project that has faced a similar funding challenge to Crossrail 2 is its forbearer, Crossrail. Under the funding agreement set out for Crossrail, London and Londoners were required to provide more than 60 per cent construction costs, but with a few significant differences to Mr Grayling is asking of its successor.

Firstly, 60 per cent of Crossrail 1’s costs equated to around £9bn, whereas half of Crossrail 2 currently stands at £15.5bn. Moreover, Crossrail 1 was not built shortly after another multi-billion-pound London rail line. “Because we borrowed to pay to build Crossrail, we can’t necessarily borrow all of that money again,” Ms Dix explains.

Crossrail multi purpose gantry Thames tunnel near Woolwich station

Crossrail Thames tunnel near Woolwich

Crossrail 1’s funding differs from what its successor will be able to secure

In addition to the funds given to it by the Greater London Authority and TfL, Crossrail 1 also benefited from the Mayor’s Community Infrastructure Levy (MCIL) imposed on new developments and the Business Rate Supplement charged against the capital’s properties.

The latter saw a 2p levy placed on all non-domestic properties of more than £55,000 and is projected to raise £254.8m in 2017/18. The supplement is set to continue paying for Crossrail 1 for a further 16 years. “We are still paying for Crossrail through the BRS until 2033; it is only then we can use it for Crossrail 2,” Ms Dix says.

And it is the period over which paying the construction cost can be spread that marks the other main difference between how the two projects can be funded. Mr Grayling’s stipulations mean Crossrail 2, unlike Crossrail 1, will not have the luxury of paying for itself decades after construction stops.

Making the case

Since National Infrastructure Commission chairman Lord Adonis backed Crossrail 2 in March 2016, Ms Dix and her team of around 100 – a mix of full-time employees and staff seconded from TfL and Network Rail – have been hard at work.

Lord Adonis’s approval came with the conditions that London would have to pay for half of the scheme over the course of its lifetime and a strategic outline business case on how this could be achieved needed to be put forward within a year.

In March, that business case was submitted to government.

Crossrail 2 route options Oct 15_CREDIT TfL

Crossrail 2 route options Oct 15_CREDIT TfL

Source: TfL

“It had a 49-page overall executive summary, with each case having its own executive summary,” Ms Dix tells me, using her hands to illustrate the sheer size of the business case – the third produced by TfL. The document contained a number of sections, including one explaining how it would pay for construction over the lifetime of the project.

Using a combination of money raised through the MCIL, Business Rate Supplement, operating surplus and oversite development, Ms Dix says the team came up with what she calls a “robust plan”. 

However, the majority of these funding streams come with significant caveats. “The BRS we won’t get until 2033, the operating surplus you don’t get any until you are operating, and oversite development you don’t get until you’ve built them.”

This leaves the MCIL as the only funding stream available to Crossrail 2 in the short term. With TfL estimating that this would account for only 16 per cent of construction costs, there is a lot more money left to find. “We’ve always known we’ve had to pay for half, but now we are going to have to show we can do more and upfront,” she says.

Cutting the cost

The options are to either drastically reduce the cost of the project, or come up with new funding streams.

“There is over £60bn [of] potential in land value capture as a result of Crossrail 2”

On the first point, progress is already being made. As part of the NIC’s report last year, one of the recommendations was to shave £4bn of the project’s budget by delaying the north-western branch of the line to New Southgate.

Ms Dix remains tight-lipped about whether construction on any parts of the line will be pushed back, but says her team has come up with a number of options that deal with cutting costs. “We’ve put forward some proposals which show how we can do that, but I’m not telling you them,” she smiles.

While an overall £4bn reduction would chip £2bn off what the team needs to find, it still leaves at least £13.5bn.

One potential solution could be found by returning to the MCIL. Under the current levy, rolled out in 2012 to help fund Crossrail 1, developers pay a fee for every square foot of new development created. Schemes in central London currently pay up to £50 per sq ft, with other areas of London charging up to £35.

Current MCIL rates

Zone Borough Rate (per sq m)
1 Camden, City of London, City of Westminster, Hammersmith and Fulham, Islington, Kensington and Chelsea, Richmond-upon-Thames, Wandsworth £50
2 Barnet, Brent, Bromley, Ealing, Greenwich, Hackney, Haringey, Harrow, Hillingdon, Hounslow, Kingston upon Thames, Lambeth, Lewisham, Merton, Redbridge, Southwark, Tower Hamlets £35
3 Barking and Dagenham, Bexley, Croydon, Enfield, Havering, Newham, Sutton, Waltham Forest £20

As of the beginning of 2016, the MCIL had contributed around £244m to Crossrail 1’s construction cost.

But these rates could be set to rise from 2019, Ms Dix tells me. “The mayor launched a consultation on that a few weeks ago, with a view to implementing some changes for implementation in 2019.”

As part of the consultation, the Greater London Authority has proposed to raise the MCIL on new developments to £80 per sq ft in zone 1 and £60 in other areas.

Proposed MCIL2 from April 2019

Zone Borough Rate (per sq m)
1 Camden, City of London, City of Westminster, Hammersmith and Fulham, Islington, Kensington and Chelsea, Richmond-upon-Thames, Wandsworth £80
2 Barnet, Brent, Bromley, Ealing, Greenwich, Hackney, Haringey, Harrow, Hillingdon, Hounslow, Kingston upon Thames, Lambeth, Lewisham, Merton, Redbridge, Southwark, Tower Hamlets £65
3 Barking and Dagenham, Bexley, Croydon, Enfield, Havering, Newham, Sutton, Waltham Forest £25

“Lots of people have said that if you put an MCIL in you would adversely affect and slow down development, but we have seen [through the current MCIL] it has not had that effect.”

An increase in MCIL would no doubt help address Crossrail 2’s affordability conundrum, but Ms Dix is clear that other new mechanisms will be needed.

Taking advantage of the growth in land value as a result of Crossrail 2 could do just that. “There is over £60bn [of] potential in land value capture as a result of Crossrail 2,” she says.

A report from consultant CBRE in 2016 estimated that property values near stations on the Elizabeth line – as Crossrail 1 will be known once operational – will have increased 3.3 per cent annually over and above local price growth up to when the line opens in 2018 – an average of £133,000.

CREDIT Jason Hawkes_generic_offices City of London towers skyline Tower 42 Leadenhall Walkie Talkie Gherkin

City of London

Source: Jason Hawkes

London faces the possibility of increased levies to fund the £31bn project

Ms Dix says the opportunity is clear, but London has so far been poor at finding ways to extract this value uplift.

As part of his spring Budget in March, chancellor Philip Hammond announced a memorandum of understanding with London over further devolution, which included piloting new ways of funding infrastructure through land value uplifts. The agreement comes off the back off a piece of work completed in February by the GLA, in which it looked into various means of better extracting the uplift in value. Potential options include a collection mechanism through the capital gains tax or extracting part of stamp duty receipts.

Another possibility is the introduction of a transport premium, which would see properties closest to projects hand over a proportion of the resulting rise in their property values. TfL estimates that this could potentially raise between £13bn and £28bn.

Ms Dix is encouraged by these possibilities. “There are different ways you can look at the construction period and how you construct it. In terms of land value capture, some can occur sooner depending on mechanism you put in place.”

Private cash

Then there is the option of private cash.

Ms Dix admits that she and the project had previously been averse to the idea of bringing private funds into the project, but this stance has recently softened. “We must understand the government has other projects to fund and there is a finite pot of money,” she tells me. “If looking at the private sector helps the public purse then we are revisiting that.”

In the month where Network Rail has put forward plans to increase private money in the delivery of railway investment projects, Ms Dix’s comments seem timely.

“The second reading is important because it means the project is supported in principle and will not be pushed back to square one”

As with Network Rail’s plans, could this involve suppliers potentially helping fund some of the work? Ms Dix confirms these conversations have taken place and that it is a possibility, but she adds that this is a less likely option due to the risk.

Ms Dix is open to bringing in private backers to help fund the stations, but warns that this would have to be mutually beneficial. “You are not giving stations away to build so the private investor can recoup all of the oversite benefits in the long term.”

The other private financing stream over which discussions are taking place is the potential for bringing UK pension funds on board. 

London’s infrastructure has most recently benefited from pension funds to finance the £4bn Tideway project. Around £440m of the finance raised by the project’s backers, the Bazalgette Consortium, comes directly from UK’s leading pension funds.

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Ms Dix reveals she has had conversations with leaders at Tideway about leveraging such funds for Crossrail 2, but cautions that there are significant differences in how it could work on both projects.

“With Tideway there is a direct link between what they are building and what water rate payers pay,” she explains. “We are looking at a number of groups such as fare payers, business and developers as obvious beneficiaries, which is a lot more complicated than saying I’m going to take sewage down here and everyone is going to add more to their rates.”

Keeping to timeline

If the project is going to keep to its £31bn budget, sticking to the timeline set out will be paramount.

Speaking at a transport event in June, Ms Dix revealed that every year delayed would add an extra £1.8bn to Crossrail 2’s cost. This came just minutes after she revealed the snap general election had delayed the hybrid bill’s submission to parliament from 2019 to 2020.

Ms Dix explains that the figure was based purely on forecast construction cost inflation over the coming years. “But that is not the net cost,” she adds.

Though she will not give the exact net figure, she says this could likely be lower than £1.8bn when you offset it against the extra revenue received through the MCIL and other funding streams.

Houses of Parliament government Westminster

Houses of Parliament

The hybrid bill’s progress in parliament will be crucial 

She also reveals that while the snap election resulted in this delay, this could potentially help the project in securing royal assent. Ms Dix had previously stated the importance of the hybrid bill’s second reading taking place before the end of parliament, which had been due in May 2020. 

“The second reading is important because it means the project is supported in principle and will not be pushed back to square one.” But with parliament now ending – on paper – in June 2022, the bill could even progress further than a second reading before then. “Being ever optimistic, we could actually get the whole thing done by 2022 – certainly the second reading.”

What contractors must do

So how will that hybrid bill be delivered? Will Crossrail 2 follow projects such as High Speed 2 and bring in a development partner to support the team?

Ms Dix rules that out: “We have been developing it as an intelligent client with consultants brought on board.”

Earlier this year, Crossrail 2 put out an invitation to tender for the design contracts covering more detailed design work associated with the hybrid bill, which can start when the business case is confirmed.

“I’m not worried about capacity issues as long as there is a commitment to the scheme going ahead”

Bidders will be from Transport for London’s professional services framework, which features Arcadis, Atkins, CH2M, Frankham, Jacobs, Mott MacDonald, Ove Arup, Pell Frischmann, Peter Brett Associates, Ramboll and WSP.

As part of this tender, Ms Dix has encouraged bidding consultants to bring contractors on board earlier to create a smoother delivery and save money. “Talking to the supply chain, contractors always say you need to involve us earlier. They say, ‘The designers design something, and then you give them to us and if you told us beforehand and we could have knocked half the price off’.”

Many lessons have been learned from Crossrail 1, she continues – particularly from a construction point of view, such as increased peer review between contractors and designers. “It’s about needing that hard-hat insight; best practice in construction needs to influence design at this stage, not when we have the stations designed.”

When Crossrail 2 reaches the delivery phase, is Ms Dix concerned about the industry’s ability to deliver the works? “I’m not worried about capacity issues as long as there is a commitment to the scheme going ahead. If interested firms know there is a pipeline of projects, capacity concerns go out of the window and people will staff up.”

There is, of course, still plenty of work for the team to do before spades hit the ground.

“What we hope is that Mr Grayling gives us the green light in the autumn,” she says. “What we have here are real-life challenging problems that we have to address in London. The need is to start as quickly as possible, and to start we need to find a mechanism that enables us to pay for it.”

Despite acknowledging the intense competition for government resources, Ms Dix remains upbeat. “I am positive that this scheme will be delivered,” she declares.

“After all, we’re still here aren’t we?”

  • Michele Dix managing director Crossrail 2 TfL

    Crossrail 2's Michèle Dix: How London can find the funds

Readers' comments (1)

  • Perhaps the government can use the money they have saved in halting electrification schemes and the slow down in support for Infrastructure in the North to fill any gap in money required for Crossrail 2.

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