Costs of construction, operation, upgrading - financial aspects

• 1. Foreword
• 2. Construction costs
• 3. Operation costs
• 4. Costs of renovation and upgrading
• 5. Aspects relating to financing

1. Foreword

Tunnels are relatively expensive civil engineering structures with respect to their construction and operation. Particular attention must be paid from the beginning of the project in order to spot any possible technical and financial optimisations.

It is recommended from the first stages of the design to implement a process including:

• the detailed definition of the "function" of the tunnel,
• an iterative process of “value engineering analysis" achieved at all strategic stages of the project, to which must be integrated into the various stages of the risk analysis,
• detailed analysis and monitoring of the potential risks in the design and construction stages. These potential risks are related to:
  • technical uncertainties relating in particular to the complexity of the ground (geological and geotechnical uncertainties),
  • uncertainties of traffic volume forecasts, that constitute an important risk concerning earnings in the case of construction and financing by “concession",
  • uncertainties and risks concerning the financial environment, in particular changes in interest rates and conditions of financing and refinancing. This aspect constitutes an important risk in the case of construction and financing by "concession" or by PPP (Private Public Partnership) with a financial contribution.

This process will enable the optimisation of the project (construction and operation costs) and an improved management of the technical and financial risks, as well as the schedule.

2. Construction costs

2.1. Cost ratios per kilometre

The construction costs of tunnels are very variable and it is impossible to give representative ratios of costs per kilometre, because these ratios may vary in important proportions (average of 1 to 5) according in particular to:

• the geological conditions,
• difficulties concerning the access roads and the tunnel portals,
• the geographical location of the tunnel: urban or non-urban,
• the length of the tunnel: in particular the "weight of the ventilation facilities and safety arrangements is more significant for a long tunnel; on the other hand all the works concerning the access roads and portals have a more important impact for a short tunnel,
• the traffic volume which is a determining factor for the dimensioning of the number of lanes, as well as for the ventilation facilities,
• the nature of the traffic: in particular a tunnel used by vehicles carrying dangerous goods will require expensive arrangements for ventilation, safety and possibly the resistance of the structure to fire; conversely, a tunnel dedicated to the passage of only light vehicles may enable significant savings because of the possible reduction of the width of the lanes, headroom and reduced requirements for the ventilation facilities,
• the tunnel environment that may lead to expensive protection arrangements for the mitigation of its impact,
• arrangements taken for the management or the sharing of construction risks,
• the socioeconomic environment of the country in which the tunnel is to be constructed. The impact can reach about 20% of the costs,
• chosen construction methods as found to be the most technical and economically viable. However, tunnelling works must also comply with all external requirements imposed from  authorities, stakeholders and neighbours with regard to environmental protection and health and safety aspects during construction.

At most it is possible to indicate that the average cost of a usual tunnel, built under average geotechnical conditions is about ten times the cost of the equivalent infrastructure built in open air (outside of urban areas).

2.2. Breakdown of the construction costs

The construction cost of a tunnel may be broken down into three types of cost:

• the cost of the civil engineering structures,
• the cost of the operation facilities, including the supervision centre and the energy supply from public networks,
• various costs including in particular: owner’s costs for the development of the project – project management – design and site supervision – survey and ground investigations - environmental studies and mitigation measures – land acquisitions - various procedures - etc.

The two diagrams below show examples of the breakdown of construction costs, on the one hand for tunnels for which the conditions of the civil engineering works are not complex, and on the other hand for tunnels for which the conditions of the civil engineering works are less favourable.

Note: these two diagrams show how important the costs are of the civil works and illustrate the consequences of an almost doubling the costs of civil works (right-hand diagram).

3. Operation costs

The operation costs of a tunnel may be broken down into three types of cost:

• the operation costs as such, which essentially include staffing, energy, as well as the management and expendable equipment. These are recurrent costs;
• the recurrent yearly costs of maintenance;
• the costs of heavy repairs, as well as the replacement costs of the equipment according to its life span and its state during the tunnel life. These costs are not recurrent and depend on the equipment, its quality and the conditions of maintenance, from the tenth or twelfth year after the start of the operation period.

The two diagrams below represent examples of breakdown (with constant economic conditions) of the construction costs (civil works, operation facilities, various costs) and of the global operation costs (accumulated over a duration of thirty years after the start of the operation period).

Note: these diagrams show how important the operation and maintenance costs are and how it is necessary to choose from the first stages of the tunnel design the arrangements that enable the optimisation of the recurrent operation and maintenance costs.

4. Costs of renovation and upgrading

This section concerns the renovation or upgrading works that are required for “upgrading” to new regulations. The works concern the arrangements for evacuation, the resistance of the structure to fire, the operation and safety facilities, and all the requirements to satisfy the new safety regulations.

It is not possible to give statistical prices due to the diversity of existing tunnels, their condition, their traffic and the more or less important requirements of new safety regulations that may vary from one country to another.

The observations made in France for this nature of upgrading works for complying with the new regulations, which have been carried out since the year 2000, show a large variation of the corresponding budgets with a range of costs between about ten million Euros and several hundred million Euros (there have been several upgrading programmes with a budget of more than 200 million Euros).

5. Aspects relating to financing

Tunnels constitute costly infrastructure in terms of construction and operation, but this is offset by economic benefits including regional development, traffic fluidity, comfort, safety, reliable routes (mountain crossings) as well as protection of the environment.

Financing of these works is ensured either by:

• the “traditional mode”: financing and maintenance by a public authority, the financial resources coming then from public taxation or fuel taxes,
• a "concession" to a private or semi-public body, which is charged with the construction and the operation of the tunnel during a contractual period of time. This body is in charge of the financing (often partly by loan), which is offset by a toll paid by the users, that reimburses the costs of the construction and the operation, as well as the risks and the financial expenses. This type of "concession" can be granted by the financial involvement of the grantor or by particular guarantees (example: guarantee of a minimal traffic volume with the payment of a financial compensation if this minimal traffic volume is not reached),
• “mixed mode” of PPP (Public Private Partnership) or similar, that may concern:
  • only the construction or the construction and the operation,
  • construction under a “turnkey” scheme in the case of a “design and build” process,
  • partial or whole financing.

The present manual does not intend detailing these various modes of financing, or presenting their mechanisms, their advantages or disadvantages. However, it is interesting to present some main guidelines found from experience, which give a preliminary illustration.

a) Financing by a public authority

This mode of financing is employed widely. It allows the development of an infrastructure project, whose financing could not be achieved by a “concession” (by lack of sufficient income from toll collection), or when there is political will to avoid a toll.

It requires however, that the public authority has the financial capacity to ensure this financing, or that it has the capacity to borrow money and to support a debt. The financial resources essentially come from public taxation or fuel taxes and sometimes partially from toll collection.

b) Financing by “concession” – tunnel part of a global infrastructure 

The financing of a “non-freestanding tunnel” by a “concession” (with or without financial involvement of the grantor) is the general case for a tunnel that is part of a new interurban highway with toll collection. The costs (construction and operation) of the tunnel are shared out among the tunnel and the linear infrastructure above ground. Experience shows that the over-cost of the average toll ratio per kilometre is accepted by the users as long as the new infrastructure brings sufficient added value concerning time savings, better or more reliable service, comfort and safety.

c) Financing by "concession" - isolated tunnel 

Two main categories of isolated tunnels exist.

• Tunnels corresponding to a major improvement of the traffic conditions. This is in particular the case of urban tunnels aiming to alleviate traffic and to reduce travel times. Experience shows that financing by “concession” is only really foreseeable when the following conditions are met:
  • high traffic volumes,
  • country with high standard of living and revenues, enabling substantial toll rates, which are essential to ensure the financial balance,
  • Significant time gains for the users so that they will accept in return a relatively high toll rate,
  • duration of the concession of about fifty years at least.
• “Regional development” tunnels, intended to cross a major natural obstacle (chain of mountains - estuary). These obstacles constitute an important handicap for trade. The initial traffic volume is usually relatively low. The new link with the tunnel will enable the growth of traffic, but such a development is often very difficult to predict in advance, and it constitutes an essential parameter of financial risk for the funding of the concession. Experience shows that financing by "concession" is then only realistic when the following conditions are met:
  • The natural obstacle is significant and the tunnel is sufficiently attractive (gain of time, level of service, delivered service, reliability of the link) in order to attract all existing traffic in spite of the toll,
  • Financial involvement of the grantor (possibly also the stakeholders), either with a financial contribution or direct involvement in the construction and the financing of a part of the works (for example construction of the access roads),
  • Guarantee of a minimal traffic volume by the grantor, with the payment of a contractual financial contribution if the minimal traffic volume is not reached,
  • Contractual arrangements for sharing major risks can put the financial model at risk if they over-run limits or conditions defined by the contract,
  • Very long concession duration: often 70 years or more,
  • Financial guarantee brought by the grantor, in order to enable the concession body to benefit from more favourable conditions of loans on the financial market, which may better ensure the feasibility of the financial plan.

d) Financing by PPP or similar

• The range of contents of a PPP mode is very wide, and it is difficult to establish guidelines because of the scope of possibilities.
• This mode of financing commits public authorities to financial contribution in the long term. Detailed analysis is necessary to evaluate the real advantage of this mode of financing compared to traditional financing. Indeed, this mode of financing very often contributes to increasing the global cost of the project (with equal functionality and quality) because of the compensation of the risk assumed by the developer.
• Public authorities have to carefully define the required functions of the tunnel, as well as objectives concerning quality, comfort, safety, level of service, life span, rate of availability, penalties etc. in order to prevent any ambiguity that may result in important misunderstandings and financial overruns in the development of the project.