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

Memorandum by the Department of the Environment, Transport and the Regions (RES 11)


  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.


  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.


  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.


  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.


  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.


  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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