As the first 70km section of the Channel Tunnel Rail Link opens, Andrew Bolton looks back on the project's roller coaster ride and how it was successfully restructured.
Britain's first ever truly high speed railway line opened in Kent on 16 September, at a ceremony marking the completion on time and to budget of Section One of the 108km Channel Tunnel Rail Link (CTRL). The first 70km section of the line runs from the Channel Tunnel to Fawkham Junction in Kent. It will allow Eurostar passenger trains to zip across the English countryside at speeds approaching 300km/h, knocking 20 minutes off journey times between London and Paris.
Initially, continental passenger services will continue to feed into London's Waterloo International via a connection with Network Rail's system. But by 2007 the CTRL will have been extended by 38km to a new terminus now under construction at London St Pancras station at the end of Section Two of the line.
When Section Two opens, journey times between London and Paris will be cut to just two and a half hours, making a trip to the French capital quicker than the rail journey from London to Manchester. It will also trigger the start of high speed commuter services between Kent and the capital and provide the opportunity for faster Channel Tunnel freight services.
Completion of Section One of the CTRL marks the end of the first phase of Britain's biggest public private partnership. In February 1996, London & Continental Railways (LCR) won the 999 year concession to design, build, finance and operate the entire 109km line between the Channel Tunnel and London's St Pancras station.
As a whole, the CTRL deal was a hugely ambitious. At $8.3bn it remains the largest private finance initiative (PFI) project undertaken in Britain. Most of the money was to be raised by LCR, although the government agreed to put $4bn towards construction costs and $1.6bn as a subsidy for commuter train paths on CTRL.
LCR is a consortium made up of construction manager Bechtel, consulting engineers Arup, Systra and Halcrow, plus National Express, Virgin, French rail operator SNCF, merchant bank SG Warburg and London Electricity. It subcontracted design work to Rail Link Engineering (RLE), a joint venture between Bechtel, Arup, Systra and Halcrow.
As part of the deal, LCR acquired Union Railways which was set up by the British Railways Board to devise the route design and shepherd the project's enabling bill through parliament. Union Railways remains the project client for the CTRL, responsible for its delivery to the specification set out in the concession agreement between the government and LCR. The government also handed LCR large brownfield development sites at Stratford and King's Cross in the capital, and around the Ebbsfleet station site in north Kent Unusually for a PFI project, the deal also involved the privatisation of the fledgling Eurostar high speed passenger rail service between London and mainland Europe. It had never made money and was losing $8M a week when the CTRL deal was signed. But LCR and the Department of Transport expected it to break even by 2001. Profits would be vital to underpinning some of the project finance.
With the project under its belt, LCR started work on an $1.3bn stockmarket flotation and $5bn debt finance package in parallel with work on detail designs and contract packages.
But disaster struck in November 1990 when the Channel Tunnel suffered a serious fire. Even though the tunnel reopened to Eurostar trains shortly afterwards, passenger numbers were hit hard.
'There was a dawning realisation that Eurostar's traffic forecasts were way off, ' recalls LCR's current finance director Mark Bayley who had joined LCR from SG Warburg as treasurer in 1997. This was supported by detailed due diligence which indicated that Eurostar was not going to achieve its original forecasts.
The 12 months following the fire were difficult. Plans to float the company on the stockmarket were put back from October 1997 to March 1998.
In June 1997, LCR's problems came to the attention of deputy prime minister John Prescott.
With the share flotation an increasingly distant proposition, LCR had begun to explore ways of boosting the government's contribution to the project.
'We came up with more and more elaborate variations where the government put in more money and shared more of the upside, ' says Bayley. 'But the fundamental problem was paying for the high rate of return that investors and banks would require on such a risky project'.
After five months of talks with Prescott's department, LCR boiled down its proposals to a request for a $2.2bn subsidy increase. In two make or break days in January 1998, Prescott turned down the request and announced that unless LCR came up with an acceptable restructuring plan, he would take the project back. In accordance with the LCR concession agreement, he gave the company 30 days to come up with a plan.
'It was personally devastating, ' recalls chief executive Rob Holden. 'I'd moved south from Cumbria. I had changed job and industry. Some of my younger colleagues who had left previous positions were very concerned.
They had young families and mortgages.'
The next 30 days saw Holden and the LCR team working day and night to thrash out a plan.
The meeting with Prescott had refocused efforts.
What emerged was a radical plan aimed at insulating the project from Eurostar, reducing the cost of capital and ensuring the government did not have to put in significant extra amounts of public money. Railtrack was involved in proposals to buy the completed CTRL from LCR, taking risk on the actual cost of the project.
By deadline day, Prescott was satisfied that the plan was moving in the right direction, and granted an extension. Over the next five months the restructuring firmed up.
By June Prescott was able to announce that a full restructuring had been secured. This involved splitting the line into two, with work to start on Section One between Ashford and Fawkham Junction in Kent rather than at the London end of the scheme.
For the first time on a PFI project the government agreed to guarantee some of the finance.
LCR was to issue $3.2bn of government backed bonds in February 1999 to fund Section One.
The most dramatic effect of this move was to lower the cost of capital for the CTRL very substantially since the bonds attracted an interest cost of only 4.75%.
The operation of the Eurostar service in the UK was outsourced to a consortium comprising National Express, SNCF, Belgian rail company SNCB and British Airways. This insulated the project from Eurostar's fortunes.
Section One was to be built first because it provided an immediate journey time saving.
It was also considered the easier of the two sections to build, with relatively few major structures and running mostly through flat countryside apart from complex works through Ashford. It also involves the smaller government subsidy. Section Two, which takes the line under the Thames and then mainly underground to the complex terminus at St Pancras was considered more risky.
It was agreed that raising finance for this would be easier if LCR could demonstrate that Section One was progressing well.
With the deal in place, the way was clear for construction contracts to be awarded.
At that stage LCR had become little more than a shell acting as a conduit for project funds. While its subsidiary Union Railways was responsible as project client for building the link, LCR was now obliged to sell Section One to Railtrack when it was completed for $2.4bn and it was agreed that Railtrack would have an option to purchase Section Two.
But Railtrack was having problems of its own. Its financial position was becoming increasingly shaky and at the same time it was hamstrung by an unexpectedly tough regulatory review.
Holden and Bayley became convinced that Railtrack would not have the financial capacity to exercise its Section Two option, as this would further increase the debt burden.
So LCR went about devising its own strategy to secure funding. It was to produce a cost overrun protection plan, developed and arranged in the insurance market by Bechtel. This was to reassure the government that it would only be at serious risk if costs overran by more than $950M.
The deal strengthened LCR's hand to the point where in July 2001 it was able to raise a further $1.8bn of government-backed finance to pay for this part of the project, without relying on Railtrack exercising its option.
It also put LCR in a strong position in 2001 when spiralling costs of the West Coast Main Line upgrade further imperilled Railtrack's financial position.
In October 2001, transport secretary Stephen Byers finally put Railtrack into Railway Administration. The news could have been devastating for LCR and the project. But LCR was ready to take advantage. 'It was an opportunity to bring back together the two sections of the project under common ownership, ' says Holden. The move also meant further savings for the project and its cost of capital.
LCR offered Railtrack's administrators $600M to buy out its interests in Section One, which by now was 80% complete. The deal was completed a year later, leaving LCR once more sole owner of the CTRL.