Executive summary

1  The contract under the Private Finance Initiative to build the Channel Tunnel Rail Link (the Link) and run the UK arm of the Eurostar international train service (Eurostar UK) was awarded to London & Continental Railways Limited (LCR) in February 1996. The contract was in line with the principles of the Private Finance Initiative: it envisaged that LCR would finance, build and operate the Link drawing revenue primarily from Eurostar UK and from use of the Link by domestic train services. The Department of the Environment, Transport and the Regions (the Department) agreed to provide LCR with direct grants totalling £1,7301 million for the construction of the Link and its use by domestic train services. It was expected that construction would start in 1998 and that the Link would open in 2003.

2  At the end of 1997 it had become clear that overly optimistic forecasts for the operating performance of Eurostar UK had scuppered LCR's efforts to raise all the money it needed from private investors to build the Link. In January 1998, the company therefore asked for an additional £1,200 million2 in direct grants from the Department. Following negotiations, the Deputy Prime Minister announced in June 1998 that the Department had agreed with LCR on a way forward which would not involve a material increase in the direct grants to be paid to LCR. However, it did involve a radical restructuring of the project and the role of LCR. A chronology of key events is at Appendix 1.

3  The restructured deal retains the same route for the Link but splits construction into two sections: Section 1, from the Channel Tunnel to near Ebbsfleet on the outskirts of London and Section 2, from near Ebbsfleet to St. Pancras. Railtrack has been brought in both to manage construction and, when it is completed, to purchase Section 1. Railtrack also has an option to purchase Section 2 on the same basis. Construction of Section 1 began in October 1998 and is on target for completion by 30 September 2003. Completion of the entire Link is now scheduled for late 2006. The financing of the restructured project is fundamentally different to that envisaged in 1996, and so is the distribution of risks among the various parties now involved with the deal.

4  This report examines:

a)  the Department's reasons for restructuring the deal rather than choosing other options;

b)  the likely implications of the restructured deal for public expenditure; and

c)  the justification for the direct grants which the Link will require.

Our methodology is summarised at Appendix 2.

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1  Future cashflows in the original deal were evaluated at 1995 prices, discounted at 6 per cent real to 1995.

2  To allow comparison with the original deal, LCR's request for additional direct grants of £1,200 million was expressed in 1995 prices, discounted at 6 per cent real to 1995. When expressed in 1997 prices, discounted at 6 per cent real to 1997, the figure increases to £1,294 million.