The Department wanted the Link completed without a material increase in the direct grants

1.27  Immediately following LCR's announcement in September 1997 that second stage financing could not be reached, the Department considered its options and instructed its advisers to scrutinise LEK's forecasts for Eurostar UK. The advisers considered that LEK's projections of revenue and demand appeared to lie towards the top end of the plausible range. In January 1998, the Department commissioned Booze-Allen & Hamilton to provide an independent review of the forecasts. In April 1998, the Department was provided with two new scenarios for future Eurostar UK revenues, a central case and a downside case. These scenarios are detailed in Figure 7.

1.28  The Department seriously considered abandoning the project and taking the Eurostar UK business, along with the intellectual and other assets of LCR, back into the public sector. However, the option of terminating the contract with LCR and abandoning or retendering the project was rejected. The Government wanted the Link built and the Department considered that a new contract would take two years to negotiate and so prolong property blight, that Railtrack's likely participation would deter others from entering a competition and those that did would seek a significant price premium to avoid the difficulties experienced by LCR.

1.29  In the Department's view, the best deal would be won through restructuring the existing deal with LCR. The Department was aware of this as early as November 1997, but decided to wait until the LCR Board publicly announced that the company was in difficulty before taking the initiative. The Department rejected LCR's request for additional direct grants, but, in accordance with the contract, granted LCR a cure period of 30 days to find an acceptable solution. The objectives the Department set LCR for such a solution included:

■  the construction of the entire Link;

■  the injection of new private sector management into Eurostar UK;

■  the commitment of third parties with the financial strength to meet their obligations; and

Notes:  There were four main forecasts of Eurostar UK patronage. Two forecasts were prepared for LCR, and two were prepared by the Government's advisers, Booze-Allen & Hamilton. The forecasts provided estimated passenger numbers and revenues per passenger (known as Yields):

The LCR Management Case: This was LCR's view of the most likely level of demand and revenues. It assumed there would be an increase in passenger numbers of seven per cent on the opening of Section 1, 7.5 per cent on completion of the Link and that there would be an uplift of 4.9 per cent in revenue per passenger at the opening of each Section.

The LCR Downside Case: This assumed lower passenger and revenue uplifts and represented LCR's pessimistic scenario. It assumed a 5.6 per cent uplift in passenger numbers at Section 1 opening, a further five per cent uplift on completion of the Link and that revenue per passenger would increase by 2.45 per cent at the opening of each Section.

The Government Central Case: This was the forecast of expected passenger numbers and yields per passenger that formed the basis of the value for money assessment of the project. As Booze-Allen & Hamilton considered that LCR's forecasts were optimistic, the Government Central Case used lower estimates of passengers and, in particular, revenue per passenger. The Central Case assumed a 6.7 per cent increase in passenger numbers for Section 1 and 11 per cent for Section 2. The increases in revenues per passenger, however, were much lower at 1.4 per cent for Section 1 and 2.5 per cent on completion of the Link.

The Government Downside Case: This was the pessimistic scenario. It assumed a 5.7 per cent increase in passengers for Section 1 and a 9.7 per cent increase on completion. The increases in revenue per passenger were one per cent for Section 1 and three per cent on completion.

■  the achievement of a true Public Private Partnership with each risk allocated to the party best able to manage it and with rewards commensurate with the risks.

Apart from the principal participants in the project, the restructuring also involved a large number of professional advisers. The key advisers are listed at Appendix 4.

1.30  In February 1998 LCR submitted the framework of a solution that was seen as providing the basis for meeting these objectives. This won LCR an extension of the cure period so that details of changes to the contract could be considered. To keep LCR solvent during this period, the Department agreed the sale and lease back of Eurostar train sets, but with proceeds paid into an account over which the Department and LCR had joint control. As a result, the Department acquired powers to scrutinise LCR's outgoings. The Department also won concessions from Bechtel Limited, SG Warburg & Company Limited and Railtrack. The two shareholders in LCR agreed to defer charges for their work and Railtrack agreed to defer existing Eurostar UK track access charges until the conclusion of the restructured deal. These charges were at risk if the negotiations broke down and the contract terminated.

1.31  The basis of a restructured deal acceptable to the Government was reached in June 1998. The agreed principles were that:

■  there would be no material increase in the amount of direct grants for the project;

■  construction of the Link would be split into two sections;

■  the construction risk and the revenue risk from the ownership of the Eurostar UK business would be split and re-allocated;

■  there would be additional public support in the form of guarantees and direct loans; and

■  the length of the concession would be reduced from 999 years to 90 years, ending in 2086.

1.32  After receiving LCR's final proposals the Department undertook a benchmarking exercise to ascertain whether the restructured deal offered value for money. The Department compared the restructured deal with its own assessment of a retendered deal. The Department considered that a new competition could have yielded savings of up to £200 million. Such savings were, however, based on the assumption that other bidders would be interested in competing against Railtrack, something the Department considered was unlikely.