Customers & Industries: RD&I Consulting

@RISK Models Financial Uncertainty of Fehmarn Belt Fixed Link

  • Industry: Construction
  • Product(s): @RISK
  • Application: Fehmarn belt Fixed Link

Summary

The Fehmarn Belt Fixed Link is a planned immersed tunnel that will cross the Fehmarn Strait to connect Denmark and Germany. This large infrastructure project is mainly user funded, with an official projected payback period of less than 40 years. RD&I Consulting, based in Denmark, used Palisade’s risk analysis software to create financial models for the Fixed Link to determine the likelihood of project success – or failure – in terms of the payback period. The results are detailed in this presentation by Hans Schjær-Jacobsen, Director of RD&I Consulting and former Professor and Director at the Technical University of Denmark: Financial Uncertainty Profiles of the Fehmarn Belt Immersed Tunnel Project.

As nobody had done this kind of analysis on the project before, the results were a surprise... We will see how they impact future development of the Fehmarn Belt Fixed Link.
Hans Schjær-Jacobsen, Director, RD&I Consulting

Background

The Fehmarn Belt Fixed Link is a visionary endeavour and technological marvel: It is a planned, 18km immersed tunnel that will cross the Fehmarn Strait to connect Denmark’s Lolland Island with Germany’s Fehmarn Island, making it the world’s longest road and rail tunnel. As Fehmarn Island is already connected by bridge to the German mainland, and Lolland Island is already connected by bridge to Zealand (including Copenhagen), this new Fixed Link will enable a fast and easy route by railway and highway from Germany to Copenhagen, as well as Sweden and Norway. The project, which was last valued at a total cost of DKK 64.4B (USD 9.7B), including Danish land works, is being financed by loans guaranteed by the Danish government, which are expected to be repaid via revenue generated from users of the Fixed Link within the next 40 years. However, based on the latest research from RD&I Consulting, it is highly unlikely that this projected payback deadline will be met. According to Hans Schjær-Jacobsen, Director of RD&I Consulting and former Professor and Director at the Technical University of Denmark, “While looking at the publicly available reports, I discovered there were no serious financial uncertainty analyses made for this project. Instead, there were only partial sensitivity analyses, as well as many estimations made of input variables that were too optimistic and one-sided – including the calculations for the payback period.”

Recent research has revealed that large infrastructure projects are seldom realized within scheduled budget, time and specification. The Fehmarn Belt Fixed Link project is the third largest Danish infrastructure project supported by the government. The first was the Great Belt, comprising two bridges and a tunnel, which was a financial success. Despite a substantial construction cost overrun, positive traffic flow developed far beyond the forecasted numbers. The second was a fixed link between Denmark and Sweden, which was less of a success. It was haunted by substantial construction cost overruns as well as an income shortfall due to lower traffic rates – 60% lower than budgeted in 2001 alone.

Unfortunately, while many financial reports are available regarding construction costs and traffic forecasts for this third project, the Fehmarn Belt Fixed Link project, no financial models have been published to evaluate the uncertainty of the payback period. So, Schjær-Jacobsen used Palisade’s @RISK to develop his own model to determine if he could reproduce the published deterministic results, and subsequently apply Monte Carlo simulation to come up with realistic uncertainty profiles.

Building the Model

Schjær-Jacobsen focused on two key aspects of the Fehmarn Belt Fixed Link to create a comprehensive, financial model of uncertainty and risk: construction cost estimates including EU subsidies and traffic forecasts. He used inputs derived from publicly-available data and uniform distributions of worst and best case figures. “For example,” explained Schjær-Jacobsen, “in the case of EU subsidies, I used DKK 4.4B as a worst case because that was actually granted by the EU. As the best case, I used DKK 10.3B because that was used in the official calculation – and some additional EU support may still be obtained at a later time.” For construction estimates, he considered costs for the Danish land works as well as the coast-to-coast tunnel work. For the traffic forecasts, he considered passenger cars, trucks, busses and trains, with primary emphasis placed on passenger cars which are expected to generate a majority of the traffic income. “I used uncertainty data derived from official data published by Femern A/S, the master builder, and by external consultants for the project as well as critical consultant reports; I didn’t invent any input data myself,” added Schjær-Jacobsen.

Uncertainty in the model was calculated by probabilistic uncertainty representation and Monte Carlo simulation, as well as interval analysis. Schjær-Jacobsen leveraged @RISK software’s ability to calculate a genuine uncertainty profile by Monte Carlo simulation in contrast to just partial sensitivity analyses, using uniform and also triangular distributions as they were easily derived from double estimates (i.e. best- and worst-case), and triple estimates (i.e. best-, base- and worst-case), respectively. The simulation generated the probability distribution of the payback period for the Fehmarn Belt Fixed Link over 60 years, providing a project uncertainty profile presented in terms of a traffic light metaphor: a green light corresponds to a payback period of less than 40 years, a yellow light corresponds to a payback period of 40-50 years, and a red light corresponds to a payback period of more than 50 years.

For the Danish government, the only acceptable outcome of the model for the projected payback period is in the green light zone: less than 40 years. However, based on the model created by Schjær-Jacobsen, the Fehmarn Belt Fixed Link is a high-risk business case and the likelihood of financial project failure in terms of the payback period taking longer than 40 years is equal to 92.5% and substantially larger than acknowledged by the project proponents and presented to the public. This is due to several realistic uncertainties based on readily available facts, including traffic volume and income, construction costs, services and EU subsidies.

"As nobody had done this kind of analysis on the project before, the results were a surprise," explained Schjær-Jacobsen. "However, now that these results have been presented to Femern A/S and the Commission of Transport, we will see how they impact future development of the Fehmarn Belt Fixed Link."

Note: On May 30, 2016, Femern A/S signed construction contracts worth DKK 30B with the main tunnel construction consortia. The contracts were made conditional of project approval by the German environmental authorities within a period of approximately 2 years.

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