Select Committee on Environment, Transport and Regional Affairs Minutes of Evidence


Examination of witnesses (Questions 460 - 479)

WEDNESDAY 1 JULY 1998

MR JOHN BALLARD, MR CHRIS BREARLEY and MR DAVID ROWLANDS

  460.  And who was it assessed the need for the rolling-stock?
  (Mr Rowlands)  That assessment was originally undertaken by European Night Services, which, as I say, was a joint venture, partially owned by British Rail.

  461.  Well, what are the prospects of finding alternative users? Let us accept the sterling history of deeds past; what hope have you got, for the taxpayer, of getting an alternative user for this rolling-stock, at some point in the far distant future?
  (Mr Rowlands)  This rolling-stock, with the termination of the lease, is now owned by Metro-Cammell, who are the builders, and the arrangement struck at the time of the lease termination was that, in the event that Metro-Cammell find an alternative use for the rolling-stock, any profits they make in excess of £14 million on it, 50 per cent of that will accrue to Eurostar UK Limited, and, as part of the, as I say, CTRL negotiations, we will want to ensure that, should any such profit accrue to Eurostar UK, we strip it out.

  462.  So if they, for example, come back to you with a figure of £13.5 million, somehow or other the taxpayer will not get any satisfaction at all; is that what you are saying to us?
  (Mr Rowlands)  That would be the case.

Chairman:  Oh, well. Thameslink. Mr Pickles.

Mr Pickles

  463.  When do you think Thameslink 2000 is likely to be completed?
  (Mr Rowlands)  The present position is that, can I take you to the Channel Tunnel Rail Link project, because, as part of that project, there needs to be built a new underground box for a combined station at Kings Cross St Pancras.

  464.  Yes, this is basically what I am asking, when do you think it is going to be there?
  (Mr Rowlands)  The present position is that the building of that box is part of the second phase of the Channel Tunnel Rail Link project, where the position is that it is expected the second phase should start building in 2001 for completion of that entire second phase in 2007, but, of course, it does not follow that building the box as part of the second phase means that you cannot use the box, or the Thameslink part of it, until 2007, it will depend on the phasing of the box as part of the stage 2 element of the CTRL project. I am in a slight difficulty, as I am sure you will wish to press me further, I have actually got negotiations next week with OPRAF and Railtrack on the Thameslink project and specifically the Thameslink box at Kings Cross St Pancras. There is a clear wish on Railtrack's part to press on with the Thameslink project, there is a belief on OPRAF's part that there continues to be a good business case for this, but what we need, as part of the commercial negotiation between the three of us, is really to settle the parameters of the project and its timing.

  465.  I am not entirely clear what you are saying. Are you saying that it is entirely dependent on phase two of the Channel Tunnel Link?
  (Mr Rowlands)  At the present moment, the box, which is a critical part of the Thameslink 2000 project, is part of phase two of the Channel Tunnel Rail Link; the issue is when, within phase two, would you build it, and if you had Railtrack here I am sure they would say could you detach the box from phase two and start it earlier.

  466.  Yes; so it is possible?
  (Mr Rowlands)  It is possible.

  467.  But what about the work on Kings Cross and St Pancras Underground stations, is that dependent upon phase two?
  (Mr Rowlands)  It is dependent on building the box, because the Underground needs to spend some quite significant sums in terms of linking the current Underground system at Kings Cross into a new Thameslink station in the box.

  468.  Yes, so you have got to build the Thameslink 2000 before you can do the work on the Underground; is that what you are saying?
  (Mr Rowlands)  Most of it is linking the box with the existing Underground; there is little point in doing the Underground works if you have not got the box so that the two march together.

  469.  Have you come to a view as to how expensive it would be to wait until phase two before doing the box, or whether it would be cheaper to do the box now?
  (Mr Rowlands)  I think the answer to your question is that, in today's prices, as we discount back, it should not make any difference which particular year you start the box in, and it is a well-designed piece of infrastructure, the costs are well understood, and they ought not to vary with the year of construction, other than, of course, what is happening in the market-place, in terms of whether the construction industry is up or down, because that clearly does reflect in the price of building anything, not just the Thameslink box. I think, leaving that aside, the answer to your question is, it does not materially affect today's cost of the box, whichever year you start building it in.

Mr Stringer

  470.  On the Channel Tunnel Rail Link, the whole lot, what is the total potential Government liability on that?
  (Mr Rowlands)  The project itself, for both phases of the Channel Tunnel Rail Link, has a capital cost of £4.2 billion, in net present value terms, and will receive a grant, again in net present value terms, of £1.8 billion, which is unchanged from the grant originally proposed for the project. The overall cost of the project, which is not just the capital cost because it includes the interest costs of the financing arrangements, is £5.8 billion as an overall capital plus financing cost, and that splits into two elements. Of the £5.8 billion overall cost, £3.8 billion is to be financed using Government-guaranteed bonds, and the other £2 billion, the balance, is to be financed by commercial debt. The Government carries no risk on the commercial debt; the question is, does it carry a risk or a liability in relation to the Government-enhanced bonds. This gets a little complicated, so forgive me. If we go back to when the problem began with London and Continental Railways, the problem was not in relation to building the Channel Tunnel Rail Link itself as a project, which by the standards of major infrastructure projects is now very well designed, a lot of time and a lot of effort has been spent on it, the problem arose because London and Continental Railways used traffic forecasts for Eurostar that, experience has shown, were clearly over-optimistic. They forecast, for example, that in 1997 Eurostar would carry nine million passengers, it only carried six million passengers, and, at an average yield of £50, or so, a passenger, three million £50's is a very big hole in the financing, that is why it ran into trouble. The Government had its own assessment of traffic forecasts undertaken, both a central forecast and a downside forecast, using some quite severe assumptions, on the pessimistic side of the scenario, and when those different traffic forecasts that the Government had prepared were run on our computer model what it shows is that on the Government's central traffic forecast, in addition to the £1.8 billion grant that was always there for CTRL, Eurostar requires, in net present value terms, something like another £140 million to make sure that the numbers add up, and the downside traffic forecast requires about another £360 million net present value. With the input of those additional sums then the deal as modelled throws off enough cash to repay all of the commercial debt and all of the Government-enhanced bonds. Remember, what we have done with this financing arrangement, to deal with the Eurostar problem, because traffic is less than forecast but is still going to build up and will still be eventually generating the revenues, is to push back an awful lot of the costs in time. So the Government-enhanced bonds will be 30 to 40 year maturity, so you have pushed the redemption of those bonds a long way back, and even the commercial debt, it will be seven to 12 years maturity if you push that back to a point beyond the Eurostar break-even. So the combination of the Government grant plus some additional modest revenue support for Eurostar, plus the forecasts of revenues on these reduced traffic forecasts that we are now using, even in the downside case, really throws off enough cash to pay off very long-dated bonds plus the commercial debt. And, just to complete, it is that that led the Treasury and the Office of National Statistics to conclude that the risk of the Government guarantee on the bonds being called was not significant, and because it is not significant it is not classed as public expenditure, though it will count as a contingent liability which in due course will have to be declared to Parliament.

  471.  I think I understand what you are saying. What you are saying is that the cost of getting the show back on the road, or the rail, was potentially between £120 million, £300 and odd million, in extra grant, plus £3 billion in terms of underwriting bonds; but, for the purposes of this, a deal is being done with the National Statistics Office which says, unlike every other guarantee, this is not public money?
  (Mr Rowlands)  I ought to be fair to the Office of National Statistics, you cannot do deals with them, they are their own masters, and that is the conclusion they came to.

  472.  Are there any other examples you can think of where the Government underwrites a scheme that in the past has failed, sorry to be blunt about it, it underwrites it to the tune of £3 billion and a project cost of £5.8 billion, and, all of a sudden, this is not public expenditure? After all the discussions we had earlier on, I find this quite extraordinary. Can you give me any comparators?
  (Mr Rowlands)  No. We have been asked that question by others, and the absolutely straight answer is, to the best of our knowledge and the Treasury's knowledge, there are no comparable previous arrangements to the ones that have been reached on the Channel Tunnel Rail Link.

  473.  But have there been any special reasons given, because there have been lots of times when the public sector and Government have been asked to underwrite schemes, and every time it has been classified as public expenditure? What are the special circumstances in this case?
  (Mr Rowlands)  If you had a Treasury representative with you this afternoon, he would explain that the Channel Tunnel Rail Link is a unique project, reflecting in part our international obligations under the Treaty of Canterbury to provide infrastructure for services between Paris and London.

  474.  So for an international treaty you changed the definition of public expenditure?

 
  (Mr Rowlands)  And it is a reflection of that unique characteristic that led the Treasury to agree to the Government guaranteeing of bonds, although, as I say, it is the independent Office of National Statistics which has concluded, because the risk of their being called is so insignificant, they are not classed as public expenditure. Can I just go on a second. If we had arrived at this self-same arrangement but when we looked at the computer modelling it did not throw off enough cash to repay or to give you reassurance that the bonds would be repaid, there would then have been a significant risk of the Government guarantee being called; in that case, the Office of National Statistics would have said this is classified as public expenditure.

  475.  How sensitive is the model to a drop in passenger numbers, for instance, if passenger numbers go down to four million?
  (Mr Rowlands)  If passenger numbers go down to four million, we are all bust, we should not be building the Channel Tunnel Rail Link, and, arguably, we should not even be running services to Paris, at that level of passenger ridership. But both the modellers we have used, the consortium who will be taking on the management contract for Eurostar, that is the National Express Group, British Airways, SNCF, SNCB consortium, and indeed the people who built the Channel Tunnel, I suppose, in the first place, all believe that, over time, consistent with what you have seen with the ferry traffic on the Channel, you can expect passenger ridership to increase. And that has been the experience since Eurostar opened. It is not that the numbers have not grown, it is just that they have not grown as fast as the optimistic LCR forecast.

  476.  Just one last question, in terms of the consortium which is to run these services, it is very convenient to have one of the competitors to the train service in the consortium to run the trains, is it not, in terms of British Airways; was the conflict between British Airways, their obvious conflict of interest, how was that dealt with, in the discussions and negotiations?
  (Mr Rowlands)  I suppose there are perhaps two points. One is, the British Airways share of what will eventually be a joint venture company that has the management contract is, certainly, initially, only proposed at 10 per cent, which does not leave them in any position, compared with 90 per cent of the shares held by other parties, to unduly influence the operation of Eurostar. The second point, I suppose, is that it perhaps ought to be an open question whether it is a conflict or not; certainly, from the Department's perspective, we are trying as hard as we can to look at transport in integrated terms, not in terms of separate boxes called aviation, rail, roads, buses, and it opens up the potential——

  477.  This is a commercial conflict, is it not?
  (Mr Rowlands)  But if there is a commercial conflict, which was the third point I was going to make, and I suppose what I ought to say there is that, before this particular part of the arrangements is concluded, we will need to obtain clearance both from DG IV in Brussels, on competition grounds, and the Office of Fair Trading will also need to be assured that it does not give rise to unacceptable competition questions.

Mr Bennett

  478.  On the questions, if there is a major problem with the Tunnel, an accident, or anything like that, does the insurance on the Tunnel cover these bonds?
  (Mr Rowlands)  The insurance on the Tunnel, at the moment, there is insurance taken out by EuroTunnel in respect of its operations, and Eurostar as well, and both of them were reimbursed by the insurance companies for the consequences of the fire in November 1996, I think it was. Those insurance arrangements will continue, though, I have to say, if for any reason the Tunnel were to go permanently out of operation I suspect that this whole structure would obviously collapse. But, in looking at the risk associated with the Government guarantee, one has to put issues like the complete cessation of use of the Channel Tunnel at the level of insignificant risk.

Mr Pickles

  479.  So when the Office of National Statistics have brought it together, do they make a valued judgement against a given time and that is the judgement that exists for all time; or are you saying that, if, say, God forbid, something should happen to the Tunnel, at some point the National Office would say, "Well it looks like this might come into public expenditure, that risk now looks like a strong risk", is there a mechanism which clicks it into public expenditure?
  (Mr Rowlands)  I suppose that is probably a question ONS should answer, but shall I have a go anyway. I may get it wrong though.


 
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