1.35 As the principal risk taker for the construction, in terms of both cost and time, Railtrack has acquired effective control over an LCR subsidiary company, Union Railways (South), that is responsible for constructing Section 1 of the Link and owns all the relevant assets. Railtrack has agreed to purchase Section 1 from Union Railways (South) for the actual cost of construction plus financing costs, less the direct grants paid by the Department to LCR.
1.36 Railtrack's rate of return for Section 1 of the Link depends on a number of factors, but was set to be broadly comparable to the rate of return of 7.5 per cent7 allowed on the regulated network at the time the deal was restructured. A construction cost overrun would result in a higher purchase price, reducing Railtrack's rate of return. A cost underrun would improve the return.
8 |
| The distribution of savings if the actual construction costs of Section 1 of the Link are less than the target construction cost | ||
|
|
| Share of Savings (per cent) | |
|
|
| Savings up to million £239 | Savings above £239 million |
|
| Railtrack | 40 | 50 |
|
| Rail Link Engineering | 40 | - |
|
| 20 | 50 | |
|
| Source: The Department |
|
|
9 |
| Shareholdings in ICRR |
|
|
| Members | Percentage shareholding |
|
| National Express Group* | 40 |
|
| SNCF* | 35 |
|
| SNCB | 15 |
|
| British Airways | 10 |
|
| TOTAL | 100 |
|
|
| |
|
| Source: The Department |
|
10 |
| ICRR's reduction of revenue risk by reducing operating cost | |||
|
| This figure shows that ICRR has reduced the addressable costs of operating Eurostar UK by £19 million in 1999 and £23 million in 200 compared with the operating costs incurred in 1998. | |||
|
|
| 1998 £m | 1999 £m | 2000 £m |
|
| Total costs | 257 | 243 | 235 |
|
| Less: |
|
|
|
|
| Eurotunnel usage charges | 80 | 83 | 81 |
|
| Railtrack access charges | 39 | 40 | 36 |
|
| Redundancy | - | - | 1 |
|
| Distribution and sales | 20 | 21 | 22 |
|
| Addressable costs | 118 | 99 | 95 |
|
| Cost reductions achieved | - | 19 | 23 |
|
| Cost reductions forecast in ICRR bid | - | 10 | 11 |
|
|
|
|
| |
1.37 Concerned that the target construction cost could be too high and that savings against this figure would enhance Railtrack's rate of return, the Department negotiated a right to a share of any such savings (see Figure 8).
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7 Railtrack's Access Charges for Franchised Passenger Services: The Future Level of Charges (Office of the Rail Regulator, January 1995)