TRU, Alm.del - 2016-17 - Bilag 266: Henvendelse af 2/4-17 vedrørende Femern Bælt forbindelsen, fra Hans Schjær-Jacobsen, Hellerup

Transport-, Bygnings- og Boligudvalget 2016-17
TRU Alm.del Bilag 266
Offentligt

Internal report

Version 1.5, 18 March 2017

External quality assurance of the Fehmarn Belt fixed link business case

−

too little, too late, and too unreliable

Hans Schjær-Jacobsen

RD&I Consulting

Dyssebakken 19

2900 Hellerup

Denmark

Abstract

The external quality assurance (EQA) of the Fehmarn Belt fixed link business case

commissioned by the Danish Ministry of Transport is critically analyzed regarding the

New Construction Budgeting

requirements as well as common practical criteria. A

time line of analyses, decisions and external quality assurance activities as well as

external criticism is established as a basis for analyzing the completeness, timeliness

and trustworthiness of the quality assurance. Information obtained per the Public

Records Act is included. It is found that the external quality assurance was grossly

incomplete with limited scopes and exclusion of major elements of the project. The

overall financial performance and financial uncertainty analyses were not subject to

external quality assurance at all. The bulk of external quality assurance was carried

out only after the decision-to-build was made, preparatory construction activities

initiated or major economic commitments made, thus jeopardizing the timeliness.

The trustworthiness of the external quality assurance is limited for different reasons:

Bad timing of activities, lack of independence of consultancies, and controversial

findings of opposing analyses. The external quality assurance is found to be too little,

too late, and too unreliable. The status of the project as a high-risk business case is

not improved by the external quality assurance.

Keywords: External quality assurance, Fehmarn Belt, New Construction Budgeting,

high-risk, business case.

Former professor, director, and rector at the Copenhagen University College of Engineering and professor, director and

vice-dean at the Technical University of Denmark.

TRU, Alm.del - 2016-17 - Bilag 266: Henvendelse af 2/4-17 vedrørende Femern Bælt forbindelsen, fra Hans Schjær-Jacobsen, Hellerup

1. Introduction

The Fehmarn Belt fixed link project, currently put on hold due to lacking German approval, has a long and

turbulent history, of which a short account is given. (In the Appendix, a detailed timeline is presented). Way

back in 1991 in connection with the Danish

–

Swedish agreement to build the Øresund fixed link the project

was put on the official political agenda of the Danish Parliament. Denmark announced that the possibility of a

fixed link crossing the Fehmarn Belt should be further investigated as an important element in the direct

connection between Stockholm and Paris. Some of the early investigations may be found in FTC (1999), TRM

(1999) and Femern A/S (2003). In 2000 the Ministries of Transport of Germany and Denmark launched an

inquiry of commercial interest (ECI

to i estigate the pri ate se tor s i

terest in implementing a fixed link for

road and railway traffic across the Fehmarn Belt, State Memorandum (2000), and the results were published,

FDJV (2002). The forecasted income from the project was considered too low and uncertain to support a

private sector investment, in part due to the competition from other links, such as ferry services and the Great

Belt fixed link. The conclusion from the ECI is that the project can only be realized with substantial public

support either in the form of guarantees or direct government support. The Ministers of Transport agreed on

13 June 2002 to review some of the most important questions regarding the commercial risks involved in the

project, including the traffic forecasts and the revenues from both the road and railway traffic, TRM (2003).

Another memorandum confirming German and Danish cooperation was agreed upon, State Memorandum

(2004). The Danish Ministry of Transport published quite a lot of positive information about the project, COWI

(2004), TRM (2006b), however, in vain. On 19 June 2007, the state-owned shipping business Scandlines, jointly

owned by Denmark and Germany, was sold off to a consortium of German and British private investors,

Berlingske Business (2007). Only ten days later yet another memorandum was agreed upon, State

Memorandum (2007). However, the German government had already decided to pull out, except for building

and financing the German hinterland constructions, State Treaty (2008). The treaty followed a binding political

agreement between a majority of Danish political parties, Danish Parliament (2008). Still, the environmental

approval of the project part on German soil must be given by the local state government of Schleswig

–

Holstein, or more precisely by the organization: Landesbetrieb Strassenbau und Verkehr Schleswig

–

Holstein.

The agreement, Danish Parliament (2008), only two pages long, was unconditional. It merely stated the

political intention to build, finance and operate such a fixed link without mentioning any economic or other

conditions to be fulfilled. At the time, some initial financial analyses had been done, Femern A/S (2003), TRM

(2004), based on a recent traffic forecast, FTC (2003). Also, external criticism was exercised prior to the political

agreement, Jespersen (2007) and Vieregg-Rössler GmbH (2008). A new financial analysis was carried out,

Femern A/S (2008), however still using the traffic forecast from 2003.

As from 2008 the Danish political parties behind the project have continued the struggle to implement the

project despite the lack of commercial and German political support (except for the hinterland constructions)

and severe public criticism from sceptics. Following another binding political agreement on a green transport

poli , o also i ludi g the Da ish People s Part i the Feh ar Belt agree e t,

Danish Parliament

TRU, Alm.del - 2016-17 - Bilag 266: Henvendelse af 2/4-17 vedrørende Femern Bælt forbindelsen, fra Hans Schjær-Jacobsen, Hellerup

(2009a), a planning act was passed that allowed for the planning process to continue with increased intensity,

Danish Parliament (2009b). At the same time the State Treaty (2008) was ratified. The rivalry between a cable

stayed bridge, originally preferred, and a submersed tunnel was ended with a victory for the immersed tunnel,

Femern A/S (2010a, 2010b, 2010c), decided by the politicians behind the fixed link on 1 February 2011, Femern

A/S (2011a), and calculated by Femern A/S (2011d). A proposal to locate the tunnel element factory in

Rødbyhavn, Femern A/S (2011c) was also agreed upon on, TRM (2011b). Construction activities were advanced

by the approval of the Ministry of Finance, Danish Parliament (2011), and consolidated construction costs of

the immersed tunnel were put together, Femern A/S (2011d). To advance the bidding process for the tunnel

construction works the Ministry of Finance had to approve of yet another act, Danish Parliament (2013).

At the time, there was a lot of optimism concerning the implementation time schedule of the project, Femern

A/S (2012). It was planned that the application for German approval would be submitted by April 2013 and the

approval obtained by January 2015. Resolving of potential court cases was not considered. As of today, the

approval is expected by 2020 at the earliest, including the resolution of court cases. The building process was

expected to take 6�½ years, today 8�½ years are expected. Initially, the fixed link was expected to be inaugurated

by 2018, State Treaty (2008), now the expectation is 2028, at the earliest, Femern A/S (2016a).

In Section 2 an outline is given of the concept of

New Construction Budgeting

initiated by the Danish Ministry

of Transport in 2006, and how and to what extend external quality assurance should be applied to the Fehmarn

fixed link project. In the following sections the paper deals with quality assurance of elements of the Fehmarn

Belt fixed link project. Section 3 covers road traffic forecast quality assurance, which is of critical importance for

link economy. Special attention is devoted to the question of assumed road traffic transfer from the Great Belt

and discontinuation of the existing privately owned ferry service crossing Fehmarn Belt. Section 4 focuses on

quality assurance of the construction costs of hinterland constructions, tunnel construction and allocated

reserves and the delayed German approval process, including the contractual consequences. In Section 5 the

consolidated financial analysis is considered including financial uncertainties. Finally, the conclusion and

references follow.

This version of the paper was completed by 18 March 2017. Quite a substantial part of the information and

documents used in the paper has been obtained while the author and others were granted access to public

records in accordance with the Public Records Act. A few access applications are still pending.

New Construction Budgeting,

quality assurance and reserves

After a couple of years with many serious cost overruns on projects run by the Ministry of Transport, an

analysis done by the Ministry of Finance revealed usage of inadequate budgeting methods and uncertainty

analyses. Consequently, in 2006 the Ministry of Transport launched a new approach by the name

New

TRU, Alm.del - 2016-17 - Bilag 266: Henvendelse af 2/4-17 vedrørende Femern Bælt forbindelsen, fra Hans Schjær-Jacobsen, Hellerup

Construction Budgeting

and informed the Ministry of Finance about it, TRM (2006a). Two new instruments are

introduced in the decision process:

1) External quality assurance carried out by an external and independent consultancy.

2) Experience-based correction supplements which are percentage reserves added on the cost side.

The aim is to improve cost control and prioritizing of projects. The principles should be used in all larger

infrastructure projects within the domain of the Ministry of Transport and apply to the appraisals at the two

points in the decision process labeled Level 1 and Level 2. At Level 1 it is decided which projects are taken

forward and at Level 2 the decision-to-build is made. The standard for experience-based correction supplement

is 30% of the base budget, TRM (2010a).

In the main memorandum, TRM (2010a), the principles for implementation are laid out. Terms of reference for

the external quality assurance at Level 1 is found in TRM (2010b) and Level 2 in TRM (2011b). We will focus on

Level 2 external quality assurance that should be carried out as a basis for the political decision-to-build to be

taken by Parliament, usually by passing a construction act.

The financing of the fixed link across the Fehmarn Belt is based on a state guarantee model. This model entails

financing of the project via loans guaranteed by the Danish Government, and which are to be repaid via

revenue from the users of the fixed link. These and further details of the Fehmarn Belt immersed tunnel

project are available from the subsidiary project company, Femern A/S (2017b) fully owned by a state

company, Sund & Bælt Holding (2017a), which in turn is fully owned by the Danish state.

New Construction Budgeting

is applicable to the Danish land works but, surprisingly enough, not to the

immersed tunnel construction or to the entire fixed link project. It is argued by the Ministry of Transport, TRM

(2015b), that this is the case because the construction of the land works is done by Banedanmark and the

Danish Road Directory, respectively, while the immersed tunnel construction is the responsibility of Femern

A/S. Apparently, state-owned companies are exempted from

New Construction Budgeting.

This does not make

much sense when it comes to the consolidated finances of the total project where income from the users plays

a major role. In fact, no external quality assurance of income and consolidated project finances, including

uncertainties, was ever carried out.

Despite the fact that

New Construction Budgeting

is not applicable to the tunnel construction and the entire

project, it was the guiding principle for some of the external quality assurance carried out. It is therefore

interesting to study the timing in relation to the decision process, see Table 1. Following the guideline of

New

Construction Budgeting,

external quality assurance at Level 2 should be carried out before the decision-to-build

is taken in Parliament, usually represented by the passing of the construction act. Obviously, in the Fehmarn

Belt case the decision process is creeping. It is a mix of unconditional and conditional decisions taken over time,

TRU, Alm.del - 2016-17 - Bilag 266: Henvendelse af 2/4-17 vedrørende Femern Bælt forbindelsen, fra Hans Schjær-Jacobsen, Hellerup

constantly increasing the cost incurred and approved while confirming the commitment to build. The decision-

to-build was in fact taken already on 2 September 2008 by the binding political agreement because it was

unconditional: No matter how costs and other consequences develop the agreeing political parties wanted to

build. This decision was reconfirmed several times during the following years. The phenomenon is

characteristic of a particular culture in the Danish Parliament: Once a binding political agreement has been

reached it will be practically unbreakable independent of changing circumstances. Furthermore, there are no

obligations to take down minutes of meetings between members of Parliament or to make them available to

the public.

Date

19 June 2007

29 June 2007

2 September

2008

3 September

2008

29 January 2009

15 April 2009

23 June 2011

26 April 2012

8 June 2012

20 March 2013

20 April

–

May 2015

28 April 2015

1 October 2015

21 October

2015

1 June 2015

10 November

2015

12 November

2015

24 January 2016

28 January 2016

Decision

Scandlines sold off

Memorandum of understanding between

Denmark and Germany

Binding political agreement to build fixed

link

Agreement between Denmark and

Germany

Binding political agreement: Green

transport policy

Parliament passes Planning Act No. 285

Construction activities advanced, Act No.

149

External Quality Assurance (EQA)

Reference

Berlingske Business

(2007)

State Memorandum

(2007)

Danish Parliament

(2008)

State Treaty (2008)

Danish Parliament

(2009a)

Danish Parliament

(2009b)

Danish Parliament

(2011)

EQA of railroad constructions published

EQA of E47 South Motorway published

Authorization of call for tenders, Act No. 97

Work program for EQA of Fehmarn traffic

developed

Parliament passes Construction Act L141

conditionally

Due dilige e of reser es a d risk

distribution

Commissioning of EQA of tunnel

construction reserves and risks

EQA of competition by ferry services

started

EQA of road traffic forecasts published

EQA of road traffic transfer from the Great

Belt requested

EQA of competition by ferry services

published

EQA of tunnel construction costs, reserves

and German approval process published

KPMG (2012)

Deloitte (2012)

Danish Parliament

(2013)

COWI (2015a)

Danish Parliament

(2015)

TRM (2015a)

Ernst & Young

(2016)

KPMG (2016)

COWI (2015b)

TRM (2015d)

KPMG (2016)

Ernst & Young

(2016)

TRU, Alm.del - 2016-17 - Bilag 266: Henvendelse af 2/4-17 vedrørende Femern Bælt forbindelsen, fra Hans Schjær-Jacobsen, Hellerup

Date

4 March 2016

30 May 2016

17 March 2017

Decision

Binding political agreement about future

development

Upgrading of existing rail track begins

Conditional tunnel construction contracts

signed

Contracts signed with engineering

consultants

External Quality Assurance (EQA)

Reference

Danish Parliament

(2016)

Ingeniøren (2016a)

Femern A/S (2016d)

Femern A/S (2017d)

EQA of road traffic transfer from Great Belt

not yet completed

Sund & Bælt Holding

(2017b)

Table 1. Timeline of decision process and external quality assurance. Extracted from the Appendix.

Obviously, it is seen from Table 1 that none of the external quality assurance activities was timed in accordance

with the guidance of

New Construction Budgeting.

The earliest attempts were made in 2012 and concerned the

land works, KPMG (2012) and Deloitte (2012), but at that time construction works had already begun, Danish

Parliament (2011), and construction costs already incurred. The rest of external quality assurance activities

were all begun after the construction act had been passed, Danish Parliament (2015), some are even not

completed yet, TRM (2015d). Additional spending was authorized by another binding political agreement,

Danish Parliament (2016). In March 2016 costs totaling DKK 13.2 billion had been spent or allocated while still

awaiting German approval, Ingeniøren (2016a, 2016c). In practice, Danish politicians have made the project

too ig to fail

, Bent Flyvbjerg in Ingeniøren (2016c), translated by the author. Since then, major contracts

representing a value of approximately DKK 30 billion were conditionally signed with the tunnel contractors,

Femern A/S (2016d). Consequently, it is fair to conclude that the timing of external quality assurance has been

inadequate in relation to the practical decision process and the accelerating economic commitment. Some

initial investigations by the author on the external quality assurance were presented, Schjær-Jacobsen (2016d).

A status of the Fehmarn Belt fixed link may be found in TRM (2017a).

3. Road traffic forecasts

The consulting company COWI was chosen to perform external quality assurance of the road traffic forecasts.

Since COWI has a major interest in the realization of the Fehmarn Belt fixed link and is a consulting partner of

the consortium Fehmarn Link Contractors that won the Tunnel North Contract, the Tunnel South Contract and

the Tunnel Portals and Ramps Contract (only the Tunnel Dredging and Reclamation Contract was won by

another consortium), Ingeniøren (2016b) and Femern A/S (2016d), it is obvious that COWI is disqualified as an

independent, external quality assurance consultancy as required by

New Construction Budgeting

and by

common sense as well.

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During April and May 2015, the work program, COWI (2015a), for an external quality assurance of the road

traffic forecasts was negotiated between The Ministry of Transport and COWI simultaneously with the

preparatory work of the construction act. The method adopted for the quality assurance was

New Construction

Budgeting,

TRM (2006a, 2010a, 2010b, 2011a). When the report came out, COWI (2015b), the initiative had

not been announced publicly, and the timing was peculiar considering that the subject of traffic forecasts was

not considered to be critical in relation to the passing of the construction act, Danish Parliament (2015). The

early traffic forecasts, FTC (1999, 2003), had been criticized by Jespersen (2007) and Vieregg-Rössler GmbH

(2008) and Andersen (2014) and the updated forecasts, Intraplan (2014a, 2014b, 2015a) and Femern A/S

(2014a), by Andersen (2015) and DIW Econ (2015a, 2015b, 2015c). The criticism was answered, Femern A/S

(2015a), but the matter was not closed. Consequently, at the time of Parliament passing the construction act

there was plenty of evidence that the traffic forecasts were under heavy external criticism. Nevertheless, the

construction act was passed without mentioning any doubts concerning the validity of the traffic forecasts.

Apparently, the Ministry of Transport had second thoughts, as it decided to commission the external quality

assurance, COWI (2015a, 2015b).

During the years 1999

−

2015 the estimated construction costs of the fixed link had escalated considerably by

almost 100%, thereby jeopardizing the entire project (see Section 4). It is interesting to observe that the road

traffic forecast during the same period underwent a substantial growth in volume, FTC (1999), FTC (2003),

Intraplan (2014a, 2014b, 2014c) and Femern A/S (2014a).

The external assurance report, COWI (2015b, p. 9) has a main conclusion in two parts (translated by the

author):

The ai o lusio is that COWI assesses that the traffi fore ast of the ai s e ario is a realisti

estimate

of the traffic volume on a Fehmarn Belt fixed link provided the ferry operation Rødby

–

Puttgarden is

discontinued. The forecasted growth over time corresponds to the historical growth in later years. The

assumptions are considered reasonable and the forecast models are consistent with the professional practice

of traffic forecasts. However, we think that there are elements in the forecast that appear to be difficult to

substantiate. Particularly, the expected transfer of passenger car traffic from the Great Belt is difficult to

substantiate due to a lack of data concerning the actual traffic pattern crossing the Great Belt fixed link. The

forecast is conservative in estimating the creation of new traffic due to the lack of tools for forecasting the

pote tial d a i effe ts of the fi ed li k .

In the report COWI does not address several fundamental questions of great importance for the

trustworthiness of the traffic forecasts, such as the inability of the forecasting method, FTC (2003) and

Intraplan (2014a, 2014b), applied to handle the complexity created by two different segments of passenger

cars (Europe travelers and border shoppers) and two competing transport modes (tunnel and ferry). Likewise,

the lack of evaluating the degree of uncertainty in data for the traffic forecasts is ignored. However, the

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estimated transfer of passenger car traffic from the Great Belt is explicitly addressed. This is particularly

important because the estimated volume amounts to approximately 800,000 one-way cars per year,

corresponding to approximately 25% of the expected tunnel traffic.

Despite the reservation in the main conclusion and the weaknesses mentioned above the Minister of Transport

is quoted as saying on 12 November 2015

tra slated the author : COWI has fou d that the traffi fore ast

is thorough and presents a realistic estimate of the tunnel traffic. This is an important conclusion and then we

politicians can concentrate on the remainder of the

proje t , T‘M

). The

i ister s o issio

was

pointed out, Bredsdorff (2015b) and Schjær-Jacobsen (2015b), but even more interestingly: On the very same

day, namely 12 November 2015, as the Minister of Transport approved the traffic forecast quality assurance, it

turned out that the Ministry of Transport requested an analysis, TRM (2015d) and Sund & Bælt Holding (2016),

of the traffic transfer from the Great Belt which has not yet been delivered although announced to be finished

by 1 February 2017, at the latest. 16 months after being requested, the analysis has not yet been completed

and results have not even been exchanged between Sund & Bælt Holding, Femern A/S and the Ministry of

Transport, Sund & Bælt Holding (2017b). Being the exclusive owner of the project company Femern A/S and

the future operator of the Fehmarn Belt fixed link on behalf of the Danish state, Sund & Bælt Holding does

certainly not qualify as an independent external consultancy for quality assurance.

The transfer of passenger car traffic from the Great Belt fixed link to the Fehmarn Belt fixed link had already

caused some controversy, COWI (2011), Andersen (2015), Femern A/S (2015c, 2015c), Sund & Bælt Holding

(2015), and Intraplan (2015b), but no trustworthy forecast has been produced so far.

Although the growth of traffic crossing the Fehmarn Belt during the period 2011

–

2019 is markedly lower than

presumed in the traffic forecasts, the long-term growth assumption is maintained by the Ministry of Transport,

Ingeniøren (2016e).

Commissioned by the Ministry of Transport and unknown to the public, a consulting company had already

started a business analysis of the Scandlines ferry business by 1 June 2015, and the confidential report was

finished by 14 January 2016, KPMG (2016). Prompted by a leakage of the report to a German journalist, the

report was made public by the Ministry of Transport by 14 March 2016. As to be expected, Scandlines was

furious about having been kept ignorant of the work and the content of the report as well, TRM (2016b), and

commissioned a response report, Deloitte (2016). The two reports arrive at completely opposite conclusions.

The former concludes (translated

the author : After

opening of the fixed link in 2026 Scandlines will be a

loss-ge

erati g usi ess . The latter o ludes: I our opi io , there are sig ifi a t u ertai ties related to

conclusion in the KPMG report that the Rødby

–

Puttgarden ferry service be loss-making from 2026. We

consider it more likely that the Rødby

– Puttgarde ferr ser i e ill o ti ue to e profita le i

To the

author s k o ledge the o l atte pts to ase this

discussion on a genuine competitive theory were DIW Econ

(2015c) and Aigner (2016). Particularly the latter suggests that the ferry is a much stronger competitor to the

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fixed link than assumed and that one should not take it for granted that the ferry will exit the market. In fact, it

seems more likely that the ferry will make positive profits in equilibrium and stay in the market. This is quite a

challenge for the fixed link because the results also suggest that if the ferry competes, the tunnel will not be a

profitable business, Aigner (2016).

4. Reserves and risk distribution of tunnel constructions

Already in 2012, the external quality assurance of the Danish land works was carried out according to the

procedures laid out in

New Construction Budgeting,

TRM (2006a), for the railroad constructions, KPMG (2012),

and the E47 South Motorway, Deloitte (2012). No serious problems were uncovered and these subprojects of

the Fehmarn belt fixed link are non-controversial, partly because they are standard technology. The estimates

of the land works construction costs have been stable over time and reserves have been allocated in

accordance with

New Construction Budgeting,

see Table 2.

Base Case construction costs

(DKK billion)

Price level

Danish land works

Construction costs excl. reserves

Correction allowance (10%)

Reserves (20%)

Sum reserves

Sum reserves (%)

Sum construct. costs incl. reserves

Coast-to-coast construction

Construction costs excl. reserves

Reserve for contractor risk

Other reserves:

Client reserve

Extra reserves (16.4%)

Total other reserves

Sum reserves

Sum reserves (%)

Project preparation, organisation etc.

Sum construction costs incl. reserves

Total project

Total construction costs excl. reserves

Total reserves

Total reserves (%)

Total construction costs incl. reserves

Base Case Payback Period (Years)

Partial sensitivity analysis (Years)

Femern A/S

(2014b)

Main Scenario

2014

7.3

0.7

1.5

2.2

30%

9.5

40.5

1.8

3.7

5.5

14%

46.0

47.8

7.7

16%

55.5

[28; 41]

Femern A/S

(2014b)

Table 20

2014

7.3

0.7

1.5

2.2

30%

9.5

40.5

1.8

3.7

6.7

10.5

12.3

30%

52.7

47.8

14.5

30%

62.2

Femern A/S

(2015b)

2014

7.3

0.7

1.5

2.2

30%

9.5

49.4

1.8

3.7

5.5

11%

54.9

56.7

7.7

14%

64.4

Femern A/S

(2016a)

L141

2015

7.3

0.7

1.5

2.2

30%

9.5

45.8

Femern A/S

(2016a)

2015

7.3

0.7

1.5

2.2

30%

9.5

38.9

3.7

5.6

55.1

53.1

5.9

11%

64.6

7.3

19%

6.4

52.6

9.5

18%

62.1

[31; 48]

Table 2. Estimates of Base Case construction costs of the Fehmarn Belt fixed link.

Based on Schjær-Jacobsen (2016c).

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Otherwise, see Table 2 for the coast-to-coast tunnel constructions. Even though New Construction Budgeting

did not apply, two alternative calculations made in 2014, one with reserves of only 14% and one with 30%,

Femern (2014b). The former was based on estimates from the tunnel construction consortia, the latter on

requirements from New Construction Budgeting. Only a few months later the construction costs exclusive of

reserves had risen from DKK 40.5 to 49.4 billion due to new incoming bids from the tunnel construction

consortia, Femern A/S (2015a, 2015b). This was essentially the financial calculations behind the presentation of

the construction act L141 to Parliament, Danish Parliament (2015). The act was passed conditionally, meaning

that construction work startup had to await a negotiated reduction of construction costs, a clarification of the

amount of EU subsidies that could be obtained, and an acceptable time schedule for the German

environmental project approval. It turned out that negotiations with the tunnel construction consortia resulted

in a lower bid, a prolonged construction period, and a redistribution of risks between the master builder and

the construction consortia, Femern A/S (2016b). The question about EU subsidies was clarified by 29 June

2015, resulting in much lower subsidy than expected, Børsen (2015). A time schedule for the German approval

process has not yet been presented by the Germans, Femern A/S (2016f).

On 1 October 2015, the Danish Ministry of Transport decided to have a due diligence made, TRM (2015a) and

on 21 October 2015, the agreeing political parties, Danish Parliament (2009a), decided to commission an

external assessment and quality assurance of the Fehmarn Belt fixed link reserves and risk distribution

between the master builder and the main contractors of the tunnel construction works, including a perspective

of the delay of the German approval process, Ernst & Young (2016). This initiative was taken after the

construction act was conditionally passed by the Danish Parliament, Danish Parliament (2015). The task was to

answer four questions (translated and edited by the author):

Ho are toda s risks distri uted et ee the aster uilder a d

the construction consortia and how

were they distributed earlier? 112 risks were identified, 9 of which changed the risk allocation and 12

aused a ha ge of Feh ar A/“ s risk e posure. O l

-15% of the reported cost reduction is caused

by change of risk distribution while 85-90% is caused by a reduction of tasks and an increase of the

building period.

2. Does the risk distribution correspond with the common praxis of construction contracts for large

projects? The actual distribution is comparable with international standards of other large international

projects. The risk distribution should be supported by an improved risk management process.

3. What are the risks connected with the German approval plan? Are there sufficient reserves to cover

additional costs of the German approval plan and special approval conditions, that may cause

additional costs, delays etc. in the construction phase? It is highly likely that the construction work can

be started during the period medio 2018

–

medio 2020. Approximately 25% of the actual reserves are

related to the German approval process. There are still several unknown circumstances connected to

the German approval process.

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4. How many reserves should be included in the construction budget based on the binding bids? Since 75-

80% of the total construction costs are covered by the bids, a reserve of minimum 15-20% at a P80

level gives a greater confidence that the reserves are sufficient. Benchmarking with other projects

indicates reserves of 10-20%. The necessary reserves are calculated to be DKK 7.3 billion at a P80 level,

Femern A/S (2016a).

In Ernst & Young (2016) it is further observed that the risk categories applied by Femern A/S (2014b, 2016a) are

not in compliance with the recommendations in

New Construction Budgeting,

TRM (2010a). This could lead to

a problem in relation to the Ministry of Transport reporting process. It is further observed that uncertainty of

revenue is ignored and missing in the risk analyses, Femern A/S (2014b, 2016a).

The statistical approach applied by Ernst & Young (2016) to arrive at a forecast of the date of the German

approval is criticized, Ingeniøren (2016d). Actually, the approval has already been delayed by another 6 months

since the forecast was published, TRM (2016c). Consequently, it is highly likely that construction work

cannot

be started before medio 2020. The delay of the German environmental approval has got the political attention

of the Danish Minister of Transport. Bypassing the political parties behind the project as well as the state

government of Schleswig

–

Holstein he addresses the federal government in Berlin directly to find ways of

speeding up the approval process, TRM (2017b).

5. Financial analysis and uncertainty

The financing of the fixed link across the Fehmarn Belt is based on a state-guaranteed model. The model entails

financing of the project via loans guaranteed by the Danish Government which are to be repaid via revenue

from the users of the fixed link. These and further details of the Fehmarn Belt immersed tunnel project are

available from the project company, Femern A/S (2017b), fully owned by the state company, Sund & Bælt

Holding A/S (2017).

The political criteria for the go/no-go of the project were expressed at the first readings of the construction act

L141 on 18 March 2015, Danish Parliament (2015), by the spokesman of the Liberal Party of Denmark using the

metaphor of traffic lights, Lorentzen (2015): With the actual economic assumptions, the expected payback

period is 39 years. This means that we are still in the green zone. The Liberal Party does not want to go into the

yellow or red zone, thereby taking the risk that the taxpayers must pay part of the project . When asked about

what lengths of the payback period he associated with the colored zones mentioned, he responded: We have

the rule of thumb in the Liberal Party

–

and I think this is also the case elsewhere

–

that as long as we are under

40 years we are in the green zone, then we are on safe ground regarding the taxpayers avoiding to pay. When

we are between 40 and 50 years we are in the yellow zone, then it begins to be on shaking ground. When we

are over 50 years we are in the red zone and we must stay completely out of that one, that is what I mean

quoted from Schjær-Jacobsen (2016b, 2017).

TRU, Alm.del - 2016-17 - Bilag 266: Henvendelse af 2/4-17 vedrørende Femern Bælt forbindelsen, fra Hans Schjær-Jacobsen, Hellerup

Based on alternative calculations, Bredsdorff (2015a), Schjær-Jacobsen (2015a), Rasmussen (2015), the

finances of the Fehmarn Belt business case were criticized prior to the passing of the construction act on 28

April 2015.

Although of immense importance for the financial feasibility of the fixed link project, the external quality

assurance efforts carried out as described in this paper did not address such vital items as:

•

Inability of the traffic forecasts methods to handle a business case subject to competition.

Transfer of road traffic from the Great Belt to the tunnel (quality assurance requested 16 months ago).

Uncertainty analysis of road traffic volume.

Tariffs for tunnel road traffic.

Uncertainty analysis of road traffic income.

Amount of EU subsidies.

Economic consequences of needed renegotiations of main tunnel construction contracts.

Maintenance and administration costs of the fixed link.

Consolidated financial analysis of the business case.

Financial risk and uncertainty analysis of the business case.

Genuine uncertainty analyses beyond simple partial sensitivity analyses applied by Femern A/S can be found in

Table 3. By comparison with Table 2 it turns out that the financial uncertainties are much larger than the

impression left by the official financial reports conveyed to Parliament and the public. Clearly, the likelihood

that the Payback Period will be in the green zone is practically equal to zero.

Payback Periods and uncertainties

Road traffic income/volume

Tunnel construction costs excl. reserves (DKK billion)

EU subsidies (DKK billion)

Base Case Payback Period (Years)

Likelihood of Payback Period in green zone

Likelihood of Payback Period in yellow zone

Likelihood of Payback Period in red zone

Worst and Best Case (Years)

Base Case 1

Femern A/S (2014b)

40.5

10.3

7.5%

55.9%

36.6%

[37; >60]

Base Case 2

DIW Econ GmbH (2015b)

49.4

4.4

>60

0.0%

12.3%

87.7%

[48; >60]

Table 3. Payback periods and uncertainty analyses, extracted from Schjær-Jacobsen (2016b, 2017).

Consequently, the external quality assurance was rather incomplete leaving large areas of continued doubt

concerning the financial performance of the fixed link.

TRU, Alm.del - 2016-17 - Bilag 266: Henvendelse af 2/4-17 vedrørende Femern Bælt forbindelsen, fra Hans Schjær-Jacobsen, Hellerup

Since the most recent financial analysis, Femern A/S (2016a), exhibiting a Base Case Payback Period of 36 years

and a partial sensitivity range of [31, 48] years (see Table 2) and the external quality assurance of reserves and

risk distribution, Ernst & Young (2016), was published, a lot of things have happened, for example:

•

Tunnel contractors have been appointed, Femern A/S (2016c), and conditional tunnel construction

contracts have been signed, Femern A/S (2016d). Thus, extra costs will be incurred due to stand-by fees

until construction start-up and additional costs for keeping Femern A/S operating over an extended period,

estimated in total to DKK 0.5 billion per year.

A renewed application for German approval has been completed and submitted, Femern A/S (2016e),

replacing the previous one, Femern A/S (2013). This has incurred extra costs.

The German approval process has been delayed by another 6 months, TRM (2016c). Consequently, the

tunnel construction contracts must be renegotiated because the German approval will probably not be

obtained before the contracts expire. The amount of extra costs is unknown.

Answers to 12,600 German objections to the fixed link projects have been completed and submitted,

Femern A/S (2017a). This has been a cumbersome and costly affair, costs being unknown.

“ a dli es a ou es lo g ter o petitio ith the Feh ar Belt fi ed li k upgradi g the Gedser −

Rostock ferry connection, Børsen (2017a). This initiative may cut away a substantial part of the forecasted

traffic transfer from Gedser

–

Rostock to the Fehmarn tunnel.

Scandlines announces a possible court case concerning obstruction of ferry operations during the tunnel

construction period, Børsen (2017b).

Femern A/S signs contracts with two consortia of engineering consultants, Femern A/S (2017d).

•

On 27 February 2017, Femern (2017c), it is claimed that the financial analysis from 3 February 2016, Femern

(2016a), is still valid. No new financial analyses are presented, only one-year old key figures are repeated.

Apparently, all the above-mentioned potential costs are expected to be accommodated in the budget without

depleting the reserves and jeopardizing the economy of the project. Particularly notable is the absence of any

kind of risk or uncertainty analysis, not even partial sensitivity analyses are included.

I the author s opi io ,

the Fehmarn Belt fixed link business case is still a financial high-risk project, as pointed out by Schjær-Jacobsen

(2016a, 2017), despite the efforts of the project owners to rationalize the decisions and the economic

commitments made by performing external quality assurance.

6. Conclusion

In summary, the external quality assurance dealt with in this paper includes the following official reports (in

chronological order) as well and the contexts in which they were created, published, and received:

•

KPMG (2012). EQA of railroad constructions.

Deloitte (2012). EQA of E47 South Motorway.

TRU, Alm.del - 2016-17 - Bilag 266: Henvendelse af 2/4-17 vedrørende Femern Bælt forbindelsen, fra Hans Schjær-Jacobsen, Hellerup

•

COWI (2015). EQA of road traffic forecasts.

KPMG (2016). EQA of competition by ferry services.

Ernst & Young (2016). EQA of tunnel construction reserves, risk distributions and German approval process.

Sund & Bælt Holding A/S, EQA of road traffic transfer from the Great Belt to Fehmarn Belt (in process since

12 November 2015).

The paper finds that the quality assurance concerning the Danish land works is carried out in compliance with

the principles laid out in

New Construction Budgeting

concerning completeness, timeliness and

trustworthiness.

This is not the case concerning the tunnel construction work and the entire business case including Danish land

works. Paradoxically,

New Construction Budgeting

is claimed not to apply but nevertheless it is invoked,

however in general not complied with. The quality assurance commissioned and carried out is not complete,

since large and important issues are not dealt with and left out of the analyses. The quality assurance is not

timely since it is carried out at times when decisions and large economic commitments have already been

made. Largely, the quality assurance is limited in trustworthiness, partly due to bad timing, partly due to lack of

independence of consultancies, and partly due to findings of opposing analyses. In other words, the external

quality assurance of the Fehmarn Belt fixed link business case is too little, too late, and too unreliable. Thus,

the Fehmarn Belt fixed link project is still a high-risk business case, which contrasts with the impression created

by official communications. The political majority of Parliament has decided to continuously promote the

Fehmarn Belt fixed link project despite the large likelihood of a financial project failure. Generally, the external

quality assurance efforts have not contributed to verification of the financial viability of the project.

TRU, Alm.del - 2016-17 - Bilag 266: Henvendelse af 2/4-17 vedrørende Femern Bælt forbindelsen, fra Hans Schjær-Jacobsen, Hellerup

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TRU, Alm.del - 2016-17 - Bilag 266: Henvendelse af 2/4-17 vedrørende Femern Bælt forbindelsen, fra Hans Schjær-Jacobsen, Hellerup

Appendix: Timeline

Fehmarn Belt fixed link analyses, decisions, external quality assurance (EQA), and external criticism. Extracted

from References.

Date

January 1999

August 1999

6 December 2000

June 2002

March 2003

1 April 2003

29 March 2004

23 June 2004

June 2004

Financial analysis

Finances and

organization

Summary report

Financial analysis

Traffic forecast

Economic analysis

Cooperation,

Germany-Denmark

Germany and

DDenmark

Analysis

Traffic demand study

Economic investigations

Decision

External Quality

Assurance (EQA) External criticism

Reference

FTC (1999)

TRM (1999)

Further development

of fixed link

State Memo-

randum (2000)

FDJV (2002)

TRM (2003)

Femern A/S (2003)

FTC (2003)

COWI (2004)

State Memo-

randum (2004)

TRM (2004)

TRM (2006b)

19 December 2006 Overview of project

19 June 2007

29 June 2007

August 2007

January 2008

2 September 2008

3 September 2008

September 2008

29 January 2009

15 April 2009

1 November 2010

1 February 2011

Construction costs of a

cable sustained bridge

Construction costs of an

immersed tunnel

Construction costs of

bridge and tunnel

Backing of immersed

tunnel

Financial analysis

Binding political

agreement

Parliament passes

Planning Act No. 285

Binding political

agreement to build

Agreement Denmark-

Germany

Scandlines sold off

Memorandum of

understanding

Berlingske Business

(2007)

State Memo-

randum (2007)

Road freight transport Jespersen (2007)

Traffic forecasts and

cost calculations

Vieregg-Rössler

GmbH (2008)

Danish Parliament

(2008)

State Treaty (2008)

Femern A/S (2008)

Danish Parliament

(2009a)

Danish Parliament

(2009b)

Femern A/S

(2010a)

Femern A/S

(2010b)

Femern A/S

(2010c)

Femern A/S

(2011a)

TRU, Alm.del - 2016-17 - Bilag 266: Henvendelse af 2/4-17 vedrørende Femern Bælt forbindelsen, fra Hans Schjær-Jacobsen, Hellerup

Date

16 February 2011

21 April 2011

25 May 2011

1 June 2011

23 June 2011

24 August 2011

17 April 2012

26 April 2012

8 June 2012

20 March 2013

1 October 2013

June 2014

November 2014

January 2015

16 January 2015

20 January 2015

17 February 2015

19 February 2015

2015

February 2015

2015

26 February 2015

2 March 2015

9 March 2015

Analysis

Customer survey of

Fehmarn Belt

Great Belt traffic

Zealand-Germany

Decision

External Quality External criticism

Assurance (EQA)

Reference

COWI (2011)

Femern A/S

(2011b)

Femern A/S

(2011c)

TRM (2011b)

Danish Parliament

(2011)

Femern A/S

(2011d)

Femern A/S (2012)

Proposal of

production site

Decision on

production site

Construction activities

advanced, Act No. 149

Construction costs of

immersed tunnel

Time schedule for tunnel

construction

EQA of railroad

published

EQA of E47 South

Motorway published

Call for tenders, Act

No. 97

Application for

German approval

Critical analysis of

2003 traffic forecasts

Update of traffic

forecasts from 2002

Traffic forecast

Financial analysis

Critical analysis of

2014 traffic forecasts

Analyses based on

misinterpretation

Comments to new

traffic forecasts

Status of construction

budget

Investigation of cost-

benefit analysis

Robustness of

financial analysis

Addendum to update of

traffic forecasts

Transfer of Great Belt

road traffic

Status of work in Femern

A/S

Under estimation of

financial uncertainty

Worst investment in

Danish history

KPMG (2012)

Deloitte (2012)

Danish Parliament

(2013)

Femern A/S (2013)

Andersen (2014)

Intraplan (2014a,

2014b)

Femern A/S

(2014a)

Femern A/S

(2014b)

Andersen (2015)

Femern A/S

(2015a)

DIW Econ GmbH

(2015a)

Femern A/S

(2015b)

DIW Econ GmbH

(2015b)

DIW Econ GmbH

(2015c)

Intraplan (2015a)

Intraplan (2015b)

Femern A/S

(2015c)

Schjær-Jacobsen

(2015a)

Rasmussen (2015)

TRU, Alm.del - 2016-17 - Bilag 266: Henvendelse af 2/4-17 vedrørende Femern Bælt forbindelsen, fra Hans Schjær-Jacobsen, Hellerup

Date

20 April

–

21 May

2015

21 April 2015

28 April 2015

5 May 2015

1 June 2015

29 June 2015

1 October 2015

2 October 2015

21 October 2015

10 November 2015

11 November 2015

12 November 2015

20 November 2015

26 November 2015

13 January 2016

20 January 2016

24 January 2016

28 January 2016

January 2016

3 February 2016

10 February 2016

22 February 2016

4 March 2016

Analysis

Decision

External Quality External criticism

Assurance (EQA)

Work program for

traffic EQA

Reference

COWI (2015a)

Femern A/S

(2015d)

Danish Parliament

(2015)

Sund & Bælt

Holding (2015)

Road users on the Great

Belt

Construction Act L141

passed conditionally

Foreign passages of the

Great Belt

EQA of ferry services

started

EU appropriates reduced

subsidy

Due dilige e of

reserves etc.

Financial uncertainty

analysis

EQA of tunnel

commissioned

EQA of road traffic

forecasts published

Appl. of

New

Construction Budgeting

Traffic forecast

approved by Minister

EQA of road traffic

transfer requested

Traffic transfer from

the Great Belt

Minister ignores

criticism from EQA

Financial high risk

project

Proposal of Great Belt

traffic analysis

EQA of competition

by ferry services

published

EQA of tunnel

published

KPMG (2016)

Børsen (2015)

TRM (2015a)

Bredsdorff (2015a)

Ernst & Young

(2016)

COWI (2015b)

TRM (2015b)

TRM (2015c)

TRM (2015d)

Bredsdorff (2015b)

Schjær-Jacobsen

(2015b)

Schjær-Jacobsen

(2016a)

Sund & Bælt

Holding (2016)

KPMG (2016)

Ernst & Young

(2016)

Competition between

Aigner (2016)

ferry and tunnel

Femern A/S

(2016a)

Femern A/S

(2016b)

High risk business

Schjær-Jacobsen

case

(2016b)

Danish Parliament

(2016)

TRM (2016a)

Ingeniøren (2016a)

Financial analysis

Memo: Financial

analyses

Binding political

agreement

Upgrading of existing

rail track begins

Upgrading of existing

rail track begins

TRU, Alm.del - 2016-17 - Bilag 266: Henvendelse af 2/4-17 vedrørende Femern Bælt forbindelsen, fra Hans Schjær-Jacobsen, Hellerup

Date

4 March 2016

− 8 Mar h

2016

11 March 2016

21 March 2016

31 March 2016

3 April 2016

30 May 2016

13 June 2016

24 June 2016

22 August 2016

8 September 2016

Analysis

Decision

External Quality External criticism

Assurance (EQA)

COWI is the big

winner

Correspondence

Scandlines - Ministry

Proje t is too ig to

fail

Criticism of EQA of

German approval

Five questions

answered by TRM

Reference

Ingeniøren (2016b)

TRM (2016b)

Ingeniøren (2016c)

Ingeniøren (2016d)

Ingeniøren (2016e)

Femern A/S

(2016c)

Femern A/S

(2016d)

Femern A/S

(2016e)

Preferred tunnel

contractors appointed

Tunnel construction

contracts signed

Renewed application

for German approval

Review of KPMG

quality assurance

Revisiting financial

uncertainty

Financial uncertainty

Deloitte (2016)

Schjær-Jacobsen

(2016c)

Schjær-Jacobsen

(2016d)

Femern A/S (2016f)

TRM (2016c)

TRM (2017a)

Memo: German approval

status

German approval

12 December 2016

delayed by 6 months

Status of Fehmarn Belt

2017

construction project

14 November 2016

14 February 2017

15 February 2017

16 February 2017

27 February 2017

14 March 2017

17 March 2017

Engineering

consultants signed up

engineering

consultants

Confirmation of financial

analysis

12,600 German

objections answered

Letter to German

minister

High risk business

case

Schjær-Jacobsen

(2017)

Femern A/S

(2017a)

TRM (2017b)

Femern A/S

(2017c)

Scandlines announces

Børsen (2017)

possible court case

Femern A/S

(2017d)