Appendix D | Inflation

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Introduction

The estimates for the capital costs of the interventions included in this Report of the Review were developed in the first half of 2022 using prices from 2021. In March 2022, interest rates in Ireland were 0.25%, Consumer Price Index (CPI) inflation was 6.7%, and Tender Price Index inflation estimate published by the Society of Chartered Surveyor Ireland (SCIS) was 7%. At the same time, in the United Kingdom (UK) interest rates were 0.75%, CPI was 1%, and construction inflation (across all forms of construction) was estimated to be 1.9%.

This note presents a summary of analysis of the potential impact of inflation on capital cost estimates for interventions included in this Report of the All-Island Strategic Rail Review.

The estimates presented in this note are based on an assumed exchange rate between the Euro (€) and Pound Sterling (£) of €1.2/£1. While the current exchange rate differs to this ratio, this was the exchange agreed at the start of the Review, and so has been maintained throughout the study to ensure consistency.

Since the capital costs for these interventions were estimated, there were significant changes to interest rates and inflation in both jurisdictions. Furthermore, there is value in examining what impact recent changes in inflation may have on the Review’s capital cost estimates.

The sources used to inform this analysis are provided at the end of this note.

Background

The capital costs for the interventions outlined in the Review are estimated to be in the order of €32bn/£27bn in 2021 prices. This includes an allowance of 56% for optimism bias, which reflects UK guidance on the presentation of capital cost estimates for early stage schemes. Further details about how these costs were estimated are provided in Chapter 5 of this Report (“Benefits and Costs”), as well as in the accompanying Technical Note “Work Package 3: Appraisal and Definition”.

Revisions

The Review’s technical adviser team has reviewed seven published indicators from the UK and Ireland, which are summarised Table D.1.

If these inflation indicators were applied to the cost estimates for the interventions presented in this Report, then the estimated total capital costs of all interventions would rise from circa €32bn/£27bn in 2021 prices to €35bn/£29bn – €37bn/£31bn in 2023 prices (reflecting the range of the lowest and highest estimates considered).

Qualifications and caveats

Approximate split by jurisdiction

•These estimates are based on recently published public data sets – data has not been sourced from procurement sources.

In broad terms, the split of capital costs between Ireland and Northern Ireland is estimated to be around 75% for Ireland and 25% for Northern Ireland. There is some uncertainty to the precise split as this will depend on the ultimate routes agreed for new/reinstated cross-border railways that serve both jurisdictions. For the highest estimate identified in this analysis (€36.8bn/£30.7bn), the capital cost estimate for the interventions included in the Review that broadly apply to Ireland would total €27.6bn/£23.0bn.

•At the time of analysis, some datasets had only recently been published, and therefore could change in later revisions.

•Some indicators reflect the whole economy, while others are more specific to construction.

•The total cost estimate applies to all interventions in the Review, covering both jurisdictions on the island. At the time of writing, inflation estimates for the UK were different (in most cases, slightly higher) than for Ireland.

If this investment were split evenly across 25 years in 2023 prices, then it would amount to €1.00bn/£0.92bn per annum (rounded to the nearest 10m). Similarly, for Northern Ireland the capital cost estimate would be €9.2bn/£7.7bn, which approximates to €0.37bn/£0.31bn per annum in 2023 prices (rounded to the nearest 10m) over a 25 year period.

•This analysis has not estimated potential changes in benefits due to the significant amount of uncertainty on the impact of inflation on these elements at the time of writing.

•The project team has not examined the potential impact of inflation on operations, maintenance, and renewals costs.

•We have not amended any appraisal models to reflect these changes.

Furthermore, as stated earlier in this Report, the future development of all interventions cited in the Review will be directed by their respective governments and legislatures and would be subject to separate appraisal and decision in line with applicable governance processes.

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UK CPIH 109.7 Mar-23 126.8 UK CPI 109.4 Mar-23 128.9 UK All Construction 113.3 Mar-23 131.9 UK All New Work 115.9 Mar-23 138.6 UK New Infrastructure 114.1 Mar-23 137.6 Ireland CPI 102.7 Mar-23 118.0 Ireland Tender Price 171.7 2022 (H2) 202.9

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Table D.1 Inflation indicator analysis (2021 – 23)

Sources

United Kingdom

Ireland

•Interest Rates https://www.bankofengland.co.uk/monetary-policy/theinterest-rate-bank-rate

•Interest Rates https://www.centralbank.ie/statistics/interest-rates-exchangerates/ecb-interestrates#:~:text=Fixed%20Rate%20Tender%3A%203.75%25

•Consumer Price Index Households (CPIH): https://www.ons.gov.uk/economy/inflationandpriceindices/tim eseries/l55o/mm23 and https://www.ons.gov.uk/economy/inflationandpriceindice s/timeseries/l522/mm23

•Consumer Price Index (CPI) https://www.cso.ie/en/statistics/prices/consumerpriceindex/

•Tender Price Index https://scsi.ie/tender-price-index-february-2023-2/

•Consumer Price Index (CPI): https://www.ons.gov.uk/economy/inflationandpriceindices/bul letins/consumerpriceinflation/april2021 and https://www.ons.gov.uk/economy/inflationandpriceindice s/bulletins/consumerpriceinflation/april2023

•Construction output price indices https://www.ons.gov.uk/businessindustryandtrade/construction industry/datasets/interimconstructionoutputpriceindices

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