2.26 The Department needed to understand the likely future performance of Eurostar UK and put in place a robust financial structure that would enable LCR to meet its obligations. The financial restructuring agreed in 1998 was based on two benchmarks (see Figure 7) A "Central Case" assumed construction of the Link to time and budget estimates provided by LCR and that Eurostar UK revenues would grow in line with forecasts prepared for the Department by Booze-Allen & Hamilton. A second set of forecasts was also prepared, below which Eurostar UK financial performance was considered unlikely to fall. This second benchmark is known as the "Downside Case" and was considered as having an 80 per cent chance of being bettered by Eurostar UK. In the event that the Downside Case is not achieved for two consecutive years, the Department has retained a fall-back option of taking Eurostar UK back into public ownership.
2.27 On this basis, the Department put in place an access charge loan facility under which LCR can borrow public funds at a favourable interest rate (LIBOR plus one percentage point) to cover access charge payments by Eurostar UK in the event of a cash shortfall. The amounts involved and the likelihood of their eventual repayment will depend on the performance of Eurostar UK. Such a facility will be required to fill a gap in LCR funds between the time when the finance raised with GGBs to build the Link would be exhausted and the time when Eurostar UK passenger revenues are expected to begin to have a positive effect on LCR cashflow. Under the Government Central Case at the time the deal was restructured in 1998, a cash shortfall of £140 million was forecast between 2010 and 2021. Under other scenarios, however, lending to LCR could range from nil to £360 million. The facility will also provide some flexibility before LCR has to call on one of the guarantees provided by the Government. Extra funding will be made available to generate around £3 million a year of positive cashflow in LCR, after Eurostar UK has paid access charges to Eurotunnel and Railtrack and LCR has met all payments due under the GGBs. This support will be triggered only if LCR has first used all its available financial resources, including any proceeds from property development, for those purposes.
2.28 Under this arrangement, failure to achieve the Downside Case over a period of time could lead to substantial direct lending to LCR, or the reversion of Eurostar UK to public ownership, to avoid calls on the Government guarantees of Eurostar UK access charges and the much larger amounts at risk on the GGBs. This is not a theoretical risk; a revised forecast of Eurostar UK performance, commissioned by the Department in April 2000, indicated that direct lending to LCR was likely to amount to at least £370 million and could, in extreme circumstances, reach £1,200 million. In the face of strong competition from low-cost airlines, which offer an increasingly diverse range of destinations across Europe, Eurostar UK performance has been disappointing. Operational losses in 1999 and 2000 were broadly in line with the losses forecast by the Government's Downside Case (Figure 15).