SUMMARY
1 In February 1996, the Department for Transport (the Department) awarded a contract to London & Continental Railways Limited (LCR) to:
■ build the Channel Tunnel Rail Link (the Link), a high speed railway between St Pancras Station in London and the Channel Tunnel, and
■ run the British arm of the Eurostar international train service (Eurostar UK).
2 LCR proposed to fund the construction of the Link from private finance (debt and equity) raised on the back of future revenue from Eurostar UK and from direct Government grants. By the end of 1997, actual Eurostar UK revenues indicated that LCR's forecasts were overly optimistic. Consequently, LCR abandoned its plans to raise private finance and approached the Department for additional grants in return for a share of future profits.
3 At this stage, the Department seriously considered abandoning the project and taking Eurostar UK, along with the intellectual and other assets of LCR, back into the public sector. The Government wanted the Link built, however. After reviewing options, the Department came to the view that the best way forward would be restructuring the existing deal with LCR.
4 In June 1998, the Deputy Prime Minister set out the principles of a negotiated restructuring that enhanced public sector support for the project. Although direct Government grants would not be increased, the Government agreed to guarantee most of the private sector funding. The Department also agreed to lend public money directly to LCR, up to a specified limit, if it ran out of cash. Construction was split into two sections (Figure 1 overleaf). Railtrack Group joined the project to manage and eventually to purchase Section 1 and took an option to do the same for Section 2.
5 In 2001, we reported1 on: the circumstances that led to the 1998 restructuring; the new financing arrangements; and the economic justification for the project. There have, however, been major new and problematic developments since. In particular, in 2001 Railtrack Group did not take up the option to build Section 2 of the Link and it then withdrew altogether from the project in 2002 following the entry of its subsidiary, Railtrack plc, into railway administration.
6 Taking account of the new developments, this report considers the steps the Department and LCR have taken to minimise the potential future call on the taxpayer. We found that:
■ Our adviser, RBC Capital Markets, part of the Royal Bank of Canada Group, considers that the financing of the project, post 2001, was obtained on good terms. Construction of Section 1 was completed to time and budget, and good progress is being made with the construction of Section 2;
■ The likely future call on the taxpayer is uncertain. Current revenue forecasts prepared for the Department suggest that the 1997 present value of the Government's loan to LCR to cover cash flow shortfalls could range between £0 and £400 million2,3, (1997 prices), net of repayments and the Government's share of revenue from forecast project related property developments. The most likely revenue scenario suggests a figure of £260 million4 (1997 prices). The range is similar to that forecast at the time of the 1998 restructuring. LCR expects that it will have repaid the loan by 2086, the year its concession is due to end; and
■ The economic justification for the project remains marginal. The project depends heavily on assumptions about regeneration benefits. There are, however, encouraging signs at King's Cross, Stratford and Ebbsfleet that these are beginning to materialise.
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1 The Channel Tunnel Rail Link, HC 302, Session 2000-2001.
2 This figure is a present value calculated using a discount rate of six percent, which was the Government's discount rate prior to April 2003. For consistency, all present values appearing in the main text of this report have been calculated using the six per cent discount rate. We have produced, in footnotes, present values of future cash flows calculated using the Government's current discount rate of 3½ per cent.
3 £650 million (a 1997 present value in 1997 prices calculated by discounting cash flows using the Government's current discount rate of 3½ per cent).
4 £400 million (a 1997 present value in 1997 prices calculated by discounting cash flows using the Government's current discount rate of 3½ per cent).