The Department retained the business risk in Eurostar UK

1.4 In 1994, after the pre-qualification round of the competition, the Department informed the bidders that there were two principal criteria for evaluating bids. The contract would be awarded to the bidder that had sought the lowest level of direct grants, provided this was not offset by the amount of risk the bidder wanted the Department to bear.

1.5 At the conclusion of the last round of bidding in December 1995, LCR's bid for direct grants was valued at £1,733 million (Figure 3), approximately £400 million less than that sought by Eurorail CTRL Limited. The assessment of the risks that the bidders wanted the Department to bear did not reveal a great disparity between them, although on balance the Department concluded that the terms offered by LCR were more favourable.

1.6 To reduce the risk that the direct grants would be paid too early during the construction of the Link, the Department and LCR agreed that payments would not commence until construction was 68 per cent complete. This precaution, however, did not eliminate the Department's financial risk in the early stages of the project.

3	Breakdown of the direct grants to LCR under the original deal
	Grants	Present value of grants (£ millions at 1995 prices)	Dates when payments would have been due
	Capital Grant	796	This grant would have been paid in 12 quarterly instalments, the first being £103.96 million and the remaining eleven each being £100 million. The first payment would have been due on the later of either the third anniversary of Financial Close or when construction of the Link was 68 per cent complete.
	Deferred Grant	603	This grant would have been paid in four equal quarterly instalments of £270 million. The first payment would have been due 78 months after Financial Close, provided the final permit to use had been issued.
	Domestic Capacity	334	This grant would have been paid in 34 equal half-yearly instalments of £26.10 million. The first payment would have been due 78 months after Financial Close, provided the final permit to use had been issued.
	TOTAL	1,733

Notes:	1.	Financial Close was to have been the later of the date upon which the funding agreements for the second stage of financing were executed or the date the lenders' agent certified to the Department that all conditions precedent to draw down the second stage financing had been complied with or waived.
	2.	Rebasing the grants to 1997 prices produces a present value of £2,014 million.
	3.	The Domestic Capacity Charge would have been paid to LCR for providing capacity on the Link for other train operating companies to run services between London and north and east Kent.
Source: The Department

1.7 The Department anticipated that there would be two stages to the winning bidder's financing of the project. The first stage financing would fund the first two years of the project while the winning bidder secured, through a second stage financing, the bulk of the funds it would require to fulfil its obligations. The competition required the bidders to set out the details of their plans for financing the project. LCR adopted the Department's two-stage approach, proposing to raise the second stage finance through the proceeds of a flotation in October 1997 and long-term bank debt. LCR's first stage financing plan comprised £430 million of short- to medium-term bank debt (Figure 4) and £60 million of equity from its shareholders. In May 1996, LCR's banks agreed to provide loans for the first stage financing, secured against Eurostar UK.

1.8 As LCR did not have the commercial strength to raise such substantial loans on its own, the Department decided to support the basis on which the loans would be repaid. In a Direct Agreement with LCR's banks the Department agreed that, if the contract with LCR was terminated, the Department would take over and continue operating Eurostar UK as a going concern. In the event of reversion, Eurostar UK would have to service the debt but the Department agreed to pay the operating costs of the business if revenues were insufficient to meet both debt servicing and operating costs. In the unlikely circumstances

4	Loans for the first stage of financing under the original deal
	Bank Loans:	Amounts (£ million)
	Commercial Banks Facility1,2,3
	United Bank of Switzerland	66 2/3
	Dai-Icho Kangyo Bank	66 2/3
	Dresdner Bank (Luxembourg)	66 2/3
	Citibank	55
	Credit Foncier	45
		300
	4,5 European Investment Bank (EIB)	100
	4,5 Kreditantstalt für Wiederaufbau (KfW)	30
	TOTAL		430

Notes:	1.	Bank Facility Agent was the United Bank of Switzerland.
	2.	The Commercial Banks Facility could be used to fund Eurostar UK operations, for designing and developing the Link and for the purchase of land necessary for its construction.
	3.	The term of the Commercial Banks Facility was 90 months from 31 May 1996.
	4.	The EIB and the KfW Facilities could only be used to fund the design and development of the Link and the purchase of land necessary for construction. LCR could not use these funds for Eurostar UK.
	5.	The term of the EIB and KfW Facilities was 120 months from 31 May 1996.
Source: The Department

5	Eurostar UK turnover, costs and operational losses
	£ million	1998	1999	2000	2001*
	Turnover	159	167	187	204
	Costs	(257)	(243)	(235)	(248)
	Operational Loss (before depreciation)	98	76	48	44
	* Budgeted figure
	Source: The Department and LCR

(see Figure 5) that Eurostar UK's revenues were insufficient to service the outstanding debt, the term over which the debt was to be repaid would be extended. If the deal with LCR was terminated, the Department would therefore get back not just the assets of Eurostar UK but also the liabilities.