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Time to make tracks Major obstacles must be cleared before the Channel Tunnel Rail Link is saved. Andrew Bolton explains the priorities ahead.

Efforts to get the Channel Tunnel Rail Link off its knees began in earnest last week as detailed talks to rescue the beleaguered project got under way.

Deputy Prime Minister John Prescott has agreed a framework for the plan, and has given rail link operator London & Continental Railways until 29 May to flesh it out. His decision to give LCR more time is seen as a positive sign, suggesting that, with a framework in place, a solution can be found.

But hopes that the project will ultimately be saved are tempered by a realisation that the package could still founder on one of several stumbling blocks.

Prescott has agreed a plan which involves splitting the link's construction into two phases. Phase one will run through Kent from Ashford to Ebbsfleet with conventional track taking trains to the existing Waterloo International station.

The more expensive, and risky, second phase will then be built to complete the link into St Pancras station and to the north of England running through tunnels in east London.

Railtrack and Bechtel are expected to play a vital role in getting the project and its finances going again. Speculation in the City suggests that they could step in and buy out LCR's other shareholders, taking control of the whole project.

As it is, John Neerhout, managing director of LCR project management subsidiary Union Railways - and a senior Bechtel executive - is to take over the running of LCR. He will replace chairman Derek Hornby and possibly combine his role with that of chief executive Adam Mills who is now expected to take a less senior role.

Railtrack is expected to underwrite the construction of the link by agreeing to buy the infrastructure for a price reflecting the construction cost. This will enable LCR to borrow cheaply on the strength of the track operator's strong AA-credit rating.

LCR is also expected to split the operation of Eurostar trains into a separate franchise. Rail and coach operator National Express plus British Airways and France's SNCF are understood to be negotiating an agreement with LCR, under which they will run the trains and pay an access charge for use of the track.

Revenue for the access charge should then provide some of the cashflow needed to underpin the finance for phase two, which is expected to start as Waterloo international reaches capacity.

But an increased public subsidy remains vital to the rescue package. And although Prescott brought about LCR's current financial crisis by rejecting a request for £1.2bn more public subsidy, he has implied that some more money might be available.

As it is, the government must maintain the Eurostar service in the absence of a private sector operator and it will have to cover debts estimated at £400M if the rescue package fails. The suggestion, therefore, is that several hundred million pounds of public subsidy could sensibly be put up.

But even as a framework for the rescue package starts to emerge, a number of key details remain to be resolved.

Among the biggest of these stumbling blocks will be the development of a suitable mechanism to ensure that phase two of the link is actually built.

For although a two phase construction programme has been agreed in principal, in practice it will be very difficult to secure a commitment from LCR or its banks for construction of the second phase before the first starts.

'There is no way you can make an investment case for phase two at the moment,' says one merchant banker. The feeling in the City is that the banks will only agree to finance phase two when Eurostar's revenues reach agreed levels.

For this to happen, much will depend on the accuracy of traffic forecasts. Banks will be wary about trusting these in the light of the debacle which caused LCR's current predicament.

Alternatively, banks could agree to back phase two, but only if they had control over when work would start. This means that they would almost certainly peg the start of phase two to a point when Eurostar was generating sufficient profits.

One banker commented that, while this is not a cast iron guarantee it would allow the politicians to boast a commitment to go ahead, however vague.

In the meantime, there are new concerns about British Airways' involvement in plans. Many City observers question BA's motives for wanting to get involved with Eurostar - especially after its arch-rival Virgin made such a mess of getting the service into profit.

Most believe BA will not be doing its shareholders any favours by investing in Eurostar - although others see the move as a way of neutralising the effects of losing its passengers to the train.

BA could also fall foul of competition rules if it gets involved in Eurostar. The airline already runs flights between London, Paris and Brussels so there is a possibility it could jack up fares.

BA's commitment to phase two is also questionable. The second stage of the link will substantially increase cross channel passenger capacity, and will almost certainly spark a price war between the airlines, Eurostar and the ferry companies.

LCR's decision to negotiate a sub-franchise with National Express, BA and SNCF could also be called into question as it appears that LCR has chosen its preferred bidder without a full competitive tender.

Disgruntled rail operators could delay agreement on this part of the rescue plan by challenging the franchise award under European public procurement laws which insist on competitive tenders.

Even if these issues are resolved, the project could still founder as agreement on the size and timing of the extra public subsidy is negotiated.

Originally the subsidy was timed to kick in after the link was two thirds finished. Now it looks as though subsidy will be spread over a longer period, effectively subsidising Eurostar's losses.

And if the CTRL is saved next month, a major effort will be needed to build up the project's momentum again. Almost half of the 950 strong LCR team based at its head office on London's Tottenham Court Road has now been stood down, with staff returning to LCR shareholder companies. Getting them back into LCR to work on CTRL quickly could be time consuming.

While hopes of a solution have risen, some hard bargaining still needs to be done before May 29.

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