Memorandum by the Department of the Environment,
Transport and the Regions (RES 11)
PROPOSALS FOR REGIONAL EUROSTAR SERVICES
1. This memorandum is provided at the request
of the Sub-committee to inform its inquiry into proposals for
regional Eurostar services. It sets out the history of the Eurostar
business and gives the views of the Department of the Environment,
Transport and the Regions.
2. The Government welcomes this Inquiry. As
the Government's Transport White Paper made clear, the prosperity
and vitality of our towns and cities and countryside depend critically
on good transport links. The Government is committed to helping
to raise the quality of and quantity of rail passenger journeys,
and move more freight by rail, and is determined that Scotland,
Wales and the English Regions should not be denied the opportunity
fully to share in the benefits of the Channel Tunnel and the Channel
Tunnel Rail Link. As this memorandum makes clear, the Government
intends to work with the parties in an effort to ensure that people
living beyond London have convenient and effective access to Channel
Tunnel rail services.
BACKGROUND—HISTORY
OF SERVICE
3. In 1987, Parliament passed the Channel Tunnel
Act. This required the British Railways Board, under Section 40,
to prepare a plan by the end of 1989 which would have the aim
of securing "the provision or improvement of international
through services serving various parts of the United Kingdom"
and which would "have regard to the financial resources likely
to be available".
4. During 1988 and 1989, in order to meet this
requirement, the Board undertook extensive regional consultations
with 13 forums comprising business, community, regional and local
authorities, transport associations and others, and in December
1989, the Board published its plan, "International Rail Services
for the United Kingdom". The plan set out a range of options
for regional services, including direct through services and connecting
train services to Paris and Brussels. The proposals for direct
through services from beyond London to Paris and Brussels included
stops on the West Coast Main Line and East Coast Main line serving
cities including Manchester, Wolverhampton, Edinburgh and Leeds.
5. In 1988, European Passenger Services Ltd
(EPS) was set up as a wholly owned subsidiary of the British Railways
Board. Its remit, together with its European partners, SNCF and
SNCB, the national railways of France and Belgium respectively,
was to plan and run international passenger services through the
Channel Tunnel from summer 1994.
6. In December 1991, EPS placed an order with
GEC-Alsthom for seven regional trains, each consisting of 14 coaches
plus two power cars, and with each train being capable of drawing
from four different traction current supply systems and responding
to four different signalling systems. These trains were delivered
in 1995 and 1996 and extensive testing has been undertaken since
their delivery to ensure that the strong electro-magnetic fields
which the regional Eurostar trains produce will not interfere
with the track circuits which control signalling equipment.
7. In 1994, EPS became a Government owned company.
This was in order to prepare for the transfer of the company,
in due course, to the winner of the competition to be run by Government
for the right to design, build, finance, operate and maintain
the Channel Tunnel Rail Link. In February 1996, London and Continental
Railways Limited (LCR) won the competition. A Development Agreement
between the Government and LCR was entered into which, inter
alia, allowed for the transfer of EPS to LCR. Shortly after
the transfer of EPS to LCR, the train operating company was renamed
Eurostar (UK) Limited (EUKL).
8. In May 1996 LCR arranged financing for the
design and development phase of the project and for the funding
of EUKL's continuing losses during that period. The debt was secured
on future Eurostar revenue. At the same time, LCR developed their
plans for funding construction of the CTRL, based on a substantial
stock market flotation and a new debt facility. This refinancing
would include repayment of the original loans. However, the prospects
for achieving this second stage of finance raising were heavily
dependent on the performance of EUKL. It became clear that passenger
numbers were not increasing at the rate forecast by LCR in its
successful bid, and that EUKL would not break even until some
time after the proposed date for refinancing. Doubts about EUKL
and about the project resulted in higher financing costs and steadily
undermined the viability of LCR's funding proposals.
9. In January 1998, LCR informed the Government
that it was unable to fulfil its obligations under the Development
Agreement because of its inability to raise the necessary finance
and that its initial funding was close to running out. It sought
an additional £1.2 billion of public support, a proposal
which was rejected by the Government. In accordance with the Development
Agreement, the Government provided LCR with a period to produce
revised proposals. Although these were initially unacceptable,
the Deputy Prime Minister gave LCR more time to develop their
proposals, but subject to three specific requirements: further
reduction in the level of additional public subsidy; greater risk
transfer to the private sector; and clear incentives on LCR to
ensure the construction of the whole link.
10. On 3 June 1998, the Deputy Prime Minister
announced to Parliament a deal which met these requirements. As
part of the restructuring which LCR proposed, a consortium comprising
National Express Group, SNCF, SNCB and British Airways would be
appointed by LCR to manage and operate EUKL. In addition to operating
the existing Eurostar intercapital services, the consortium expressed
its intention, subject to confirmation of feasibility, to operate
a service from Heathrow Airport to Paris which would provide an
interchange for various modes of transport, and provide a hub
for regional rail services to points North of London.
11. Concerned that the regions should also benefit
from the construction of the Channel Tunnel Rail Link, the Deputy
Prime Minister also announced that the consortium had been asked
to undertake an urgent review of the feasibility on such services.
Subsequently, the consortium were asked to include an assessment
of the outline proposals which Government and LCR had received
from the Virgin Group to operate regional services from a number
of points north of London.
OWNERSHIP AND
USE OF
THE ROLLING
STOCK
12. The regional rolling stock was ordered in
1991 by EPS, with beneficial ownership of the train sets being
transferred to the Government in 1994 and then transferred with
EPS (now EUKL) to LCR when they were awarded the joint venture
competition. Government policy was that in the event of LCR failing,
the integrity of the Eurostar business should be maintained. Core
assets, such as the rolling stock, both intercapital and regional,
were therefore subject to a ringfencing agreement with LCR. This
provided that core assets could not be sold, otherwise disposed
of, or put to a use which would not be considered part of EUKL's
train operating business without the consent of the Secretary
of State. The aim was to ensure that in the event of LCR collapsing,
EUKL could be brought back into the public sector without compromising
its ability to continue operating services. The ringfence allowed
the EUKL board to take decisions about the use of all the core
assets, including regional rolling stock, provided the use would
support EUKL's train operating business, and provided the use
came within the ringfence.
13. Under the deal which was announced on 3
June, the ringfence concept remains central to the CTRL project.
Arrangements remain in place to ensure that the EUKL business
can be returned to Government if LCR, at any time, default under
the terms of the Development Agreement, and in any event in 2086
when the CTRL and EUKL return to Government at the end of the
concession.
14. The ringfence makes clear that EUKL have
beneficial ownership of all the Eurostar train sets including
the regional train sets and that the EUKL board have to consider
uses for the train sets which are both within the ringfence and
in the best interests of the company. As before, the EUKL board
would still need the consent of the Secretary of State for use
of the train sets for purposes which lie beyond the ringfence,
including their disposal.
15. The ringfencing mechanism is a negative
instrument, setting out the Secretary of State's powers to prevent
uses of EUKL assets which might inhibit the ability of Government
to continue to run international rail services in the event of
the termination of the Development Agreement with LCR. However,
the mechanism does not extend to a power of direction over the
activities on which EUKL's assets must be deployed.
16. The Deputy Prime Minster explained in his
statement on 3 June that the consortium's proposal to operate
a service from Heathrow Airport to Paris would be welcomed in
it own right, as would proposals for regional services. The final
decision on the operation of a Eurostar regional service will
be taken by the EUKL board, but the Government is keen to work
with the parties to seek to ensure that the regions have access
to convenient, effective Channel Tunnel services.
ALTERNATE PROPOSALS
17. The Virgin Group submitted an outline proposal
to Government to operate regional services which would require
the use of the rolling stock owned by EUKL, and which is covered
by the ringfence. The Deputy Prime Minster made clear his desire
to see regional services operate if they are viable, and he asked
the consortium to take account of the Virgin Group's proposals
in their review of the feasibility of regional services.
SAFETY CLEARANCE
OF ROLLING
STOCK
18. The regional rolling stock is technically
complex, needing to be able to draw from four different traction
current supply systems. Early testing revealed serious electro-magnetic
reduction problems where regional train sets interfered with the
operation of track circuits. A range of complex technical tests
was necessary and collection of technical data has been undertaken
on the West Coast and East Coast Main Lines. A number of tests
have now been completed, and Railtrack and EUKL expect all technical
data on the West Coast Main Line to have been collected by late
December/early January. They are currently preparing to undertake
detailed analysis of the data, and once Railtrack are satisfied
that the analysis demonstrates that the power cars from the regional
rolling stock will not interfere with track circuitry, Railtrack
will be able to issue a safety certificate. Railtrack and EUKL
continue to work closely together to ensure that this happens
as soon as possible, and although they can give no definitive
date as to when safety clearances will be obtained, they expect
this to be in Spring 1999 for the West Coast Main Line. On the
East Coast Main Line, the programme of testing will require longer
to complete, with safety clearance unlikely before the year 2000.
WHAT HAPPENS
19. The consortium presented its report, "Review
of Regional Eurostar Services" to the Government on 13 November
1998 and a copy has now been placed in the library.
20. The Government has noted the contents of
the report and intends to subject the report to a thorough and
independent review. The Government also wishes to examine the
proposals from the Virgin Group, and intends again to seek full
details from Virgin, and to review those proposals independently.
Those reviews will commence urgently.
December 1998
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