1.17 The Department knew before the award of the contract that revenues from Eurostar UK were crucial to the success of the project. In August 1996, the Department's financial advisers, (J Henry Schroder & Co Ltd and Deloitte and Touche) set out detailed proposals for monitoring LCR's financial health. The Department did not, however, insist that LCR comply fully with its obligations to supply financial information.
1.18 Until the fire in the Channel Tunnel in November 1996, the Department instructed its advisers not to press LCR for information about Eurostar UK revenues. The Department's reasons were:
a) that LCR, having taken over Eurostar UK on 31 May 1996, required time to convert the business culture within the company from a public sector railway operator to a market driven business;
b) that the implementation of LCR's marketing strategies required time to become effective; and
c) that a rigorous analysis of LCR's performance, shortly after it had taken control of Eurostar UK, could have impacted adversely on the contractual relationship.
1.19 The Department's stance contributed to the decision not to implement a proposal, made in August 1996, for an independent review of LCR's revenue projections. When the Department did sanction this work in December 1996, LCR had already commissioned L.E.K. Consulting (LEK), a transport consultancy, to analyse the demand for the Eurostar UK service. The Department therefore decided to await LEK's report before considering what action, if any, needed to be taken.
1.20 The Department did not institute formal and regular finance progress meetings with LCR until April 1997. At the inaugural meeting the Department, after taking advice from its legal advisers (CMS Cameron McKenna), agreed that rather than receive detailed monthly reports on progress towards the second stage financing, it would receive outline reports that LCR would expand upon at subsequent progress meetings. LCR had informed the Department that the second stage financing was still possible but, following the disruption caused by the Channel Tunnel fire, LCR's position would be precarious if the Department insisted on receiving detailed reports and, in compliance with its obligations, forwarded these reports to LCR's bankers. LCR was concerned that its bankers would call in the loans despite the Department's support for repayment of the bank debt in the Direct Agreement. The Department considered that this would have been likely as only £192 million of the £430 million loans package had been drawn down and the banks would have been able to cap their exposure. By allowing LCR to continue to operate Eurostar UK, extra time was secured to turn the business around. The Department reasoned that with the debt fully drawn down, there would be an incentive on the banks to support a restructuring of the deal which would result in earlier repayments of the outstanding loans than would be likely if they had to depend on revenues from a publicly run Eurostar UK.