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Too little, too late

Andrew Bolton unravels what went wrong.

Railtrack could already be running CTRL had it not been for a boardroom bust up at LCR just over a year ago.

Conflict broke out between LCR chief executive Adam Mills and his then deputy Nick Wakefield in early 1996 when it became clear that something needed to be done to stop the project running out of money before flotation.

Wakefield suggested that LCR approach Railtrack and other corporate investors for financial support to tide it over. He also urged Mills to let Railtrack take over as the long term owner of the project.

The move came after it became clear that over- optimistic traffic forecasts were starting to undermine LCR's plans to float the project on the stockmarket. It caused a row with Mills and resulted in Wakefield's resignation.

The success of LCR's financing package hinged on its ability to predict when the loss-making Eurostar passenger service would move into profit. Eurostar made an operating loss of £102M in 1995, its last year in public ownership, although these were wiped out when the government wrote off interest charges of £120M (NCE 7 March 1996). Losses since the transfer to Eurostar to LCR in 1996 are running at £180M

After taking advice from transport consultants such as Steer Davies Gleeve, LCR decided it could turn Eurostar around by early 1997, even though this meant doubling passenger numbers from 3.5M to 7M a year. Passenger levels only reached 6M last year.

'In cashflow terms it (Eurostar) is unlikely to break even before 2001,' said LCR finance director Robert Holden. On revised forecasts, this is two years later than expected.

Eurostar revenues were vital to the success of LCR's financial package. Only when the passenger service had gone into profit could its cashflow start to underpin the mix of bank loans, bonds and equity which was to finance the construction phase.

But timing was everything. If Eurostar went into profit too late, LCR would be unable to convince the City to put up the necessary bank debt or underwrite the planned bond issue and share flotation before the start of construction in 1999.

Delaying the start of work until Eurostar became profitable was also out of the question. Break-even is not expected before2001 at least, the year when planning consent for the link expires.

So with construction about to start, LCR opted to ask for an extra £1.2bn of government money on top of the £1.8bn already promised. This would tide the project through the early part of the construction phase and subsidise Eurostar cashflow until the end of the next decade.

LCR thought that it could reduce the government's long term financial exposure to the project by offering a profit share deal on future revenues. This was expected to reduce the net cost of the extra subsidy to £400M.

But the decision to go cap in hand to John Prescott now appears to have badly backfired. Sources close to the project and in the City agree that Mills and LCR chairman Sir Derek Hornby played their hand badly, losing any credibility they had with potential investors.

Even if LCR survives it is doubtful if either will keep his job.

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