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Select Committee on Public Accounts Twenty-Second Report


Government-guaranteed bonds

28. In restructuring the deal, the Department agreed to provide Government guarantees of the payment of interest and repayment of principal on up to £3,750 million of bonds issued by London & Continental.[20] The Department told the Committee that if the company got into financial difficulties again, the assets and liabilities of the business would come back to the Government. However such a situation, which would lead to calls on the Government guarantees, was seen as highly unlikely. The decision to give such guarantees had been based on realistic forecasts of the rate of growth in revenues from the Eurostar business and the view that construction risk was under control.[21] Under the terms of the restructured deal, the Department had in any case agreed to lend London & Continental the money it would need to service the bonds.[22]

29. In the event that London & Continental had not been able to build up sufficient cash reserves to repay the bonds as they fell due, and provided that a breakeven point for the company was in sight, the bonds could be refinanced without further Government guarantees. The ability to refinance would depend on the financial markets at the time and the prospects for future Eurostar cashflows, which the Department believed could now withstand scenarios that were more pessimistic than the original Government downside case. The point at which any of the guarantees for the bonds might be called was therefore a matter of judgement rather than precise calculation.[23]

30. Our predecessors asked how the extra funding costs of some £80 million resulting from the use of Government-guaranteed bonds had been justified. They were told that the use of Government guarantees had been the right decision, though a fairly fine judgement. The Department considered that direct Government financing of the project would have weakened the incentives on the private sector to manage it properly and could have encouraged the view that the Government would find more money for the Link, if needed, in the future. Direct funding would also have sent a signal to other Public Private Partnerships that the Government would fund future projects if they went wrong. The use of the guarantees had also avoided further delays to the project, as European Union clearance for State Aid would have had to be sought.[24]

Direct lending to London & Continental

31. Failure to achieve the revenues forecast by the Government's downside case over a period of time could lead to substantial direct lending to London & Continental. A revised forecast of Eurostar performance, commissioned by the Department in April 2000, had indicated that such lending was likely to amount to at least £370 million and could, in extreme circumstances, reach £1,200 million.[25]

32. The Department said that it now expected direct lending to London & Continental to amount to £350 million.[26] Asked when such a large sum of taxpayer's money would be repaid, the Department said it expected that the company would require additional funding until sustained growth in passenger numbers and modest fare increases enabled it to break even in around 2030.[27] In a supplementary note following the evidence session, the Department stated that the most recent forecasts of Eurostar performance and outturn construction costs indicated that London & Continental would break even between 2029 and 2032. The breakeven point was sensitive to the timing and method of replacement of Eurostar trains, on which assumptions had changed since 1998. It was therefore not possible, at this stage, to say precisely when in the second half of the 2020s London & Continental would break even and begin repaying the large amounts of public money it is expected to need from the taxpayer.[28]


33. The Department considered that direct public financing for the project would weaken the incentives for the private sector to manage construction to time and budget and to maximise the revenue yield from the Eurostar business. It accordingly preferred the option of Government guaranteed bonds, though these were rather more costly to service than conventional Government funding. The price of these private sector incentives amounted to some £80 million over the life of the project. For the future, departments need to consider the balance between the additional cost of retaining private investment in a project and the expected financial discipline and management expertise this will bring.

34. Under the terms of the restructuring, the taxpayer may have to lend significant sums of money to London & Continental if Eurostar UK continues to perform poorly against forecasts. The Department was, however, unable to give clear answers as to whether, and if so when, any of the guarantees might be called or when the company could be expected to start repaying any future borrowing from the public purse. Whenever a department enters into such open-ended commitments to support a private sector company, it should have clear milestones for the eventual repayment of money borrowed, and should work toward these milestones in partnership with the company concerned.


The Department's value for money assessment

35. The Department justified public grants for the project by comparing the estimated costs with the benefits it expected from the Link. The key benefits consisted mainly of time savings for passengers, increased rail capacity and economic regeneration in the areas through which the Link would run. As the original passenger forecasts had been based on a relatively short experience of actual Eurostar operation, the Department had to revise its assessment several times.[29]

36. The Department explained that the value for money assessments had shown that the benefits of the Link outweighed the costs and that this had continued to be the case whenever forecasts of passenger demand had been revised downwards. At the time the restructured deal was signed in 1998, the Department's most likely estimate of passenger demand had shown that the project would yield a net benefit of some £1,000 million, even though the existing rail network would have provided sufficient capacity to meet forecast passenger demand until around 2025. The Department had since revised its passenger forecasts downwards as more information had become available about actual patronage, so our predecessor Committee asked why construction of the Link had not been delayed until a more accurate assessment of demand for the Eurostar service and the net benefits expected from the project could have been made.

37. The Department believed that the Link would lead to increases in passenger market share to Brussels and Paris and was convinced that increased passenger numbers would deliver the estimated benefits.[30] Furthermore, it considered that the Link had wider policy benefits, which had not been included in the value for money assessment. The Government had seen the project as one of national prestige as it would provide a high-speed rail service to Europe. France and Belgium already had such links to the Channel Tunnel.[31] The Department said that it had not sought to quantify these wider policy benefits, nor would it have attempted to do so when appraising other transport projects. It did, however, believe that they were positive.[32]

38. The C&AG's Report noted that the Department's 1998 value for money assessment had contained a number of inconsistencies. For example, forecasts of the rate of economic growth had not been revised, leading to the overestimation of time saving benefits.[33] Our predecessors asked why up to date figures had not been used. The Department agreed that the use of up to date economic growth assumptions would have provided the most accurate assessment. It had considered, however, that a change to these assumptions would have introduced further complications into what was an already highly complicated assessment.[34]

39. In the course of its evidence, the Department stated that it disagreed with parts of the C&AG's Report.[35] During the evidence session, the Department also provided our predecessor Committee with a copy of a letter to the National Audit Office that was said to detail the areas of disagreement.[36] The supposed disagreements related to the treatment of costs for the proposed Thameslink 2000 project if the Link did go ahead, the time savings for passengers once the Link was open and updated information on the costs of associated works at King's Cross and on the A2/M2. Our predecessors asked the Accounting Officer for a fuller explanation of the reasons for these differences in a supplementary note:[37]

  • The Department said that it had not accepted the National Audit Office's view that £240 million of estimated costs for the Thameslink 2000 project should be excluded from the value for money assessment. Such costs had been taken into account in the Link and would have had to be funded from another public source if the Link had not gone ahead. But it was apparent from the C&AG's Report that the National Audit Office had accepted the Department's view and had included a figure of £240 million for work avoided on Thameslink 2000;[38]

  • Estimates of time savings for passengers had been calculated by the Department on the basis of timetable information produced in 1996, whereas the National Audit Office had used updated assumptions made by London & Continental in June 1998. In its supplementary note, the Department accepted that the National Audit Office had recorded these differences in the C&AG's Report and had also noted that the latest timetables for the Link now showed time savings which were closer to the 1996 figures;

  • During the evidence session, the Department stated that the estimate of £170 million included in the C&AG's Report for associated works on London Underground ticket halls at King's Cross and road works on the A2/M2, both of which depended on the Link going ahead, had been reduced to £100 million.

40. The Department's supplementary note concluded that the differences with the National Audit Office centred on the inclusion of a monetary estimate of regeneration benefits and the calculation of time savings for passengers, both of which had been noted as differences in the C&AG's Report. Following further reconsideration of the 1998 assessment, which now included revised economic growth assumptions, the Department considered that the value for money assessment should have shown a lower benefit-cost ratio of 1.4:1, as opposed to the ratio of 1.5:1 included in the C&AG's Report as the Department's estimate.[39]

Regional Eurostar services

41. Section 40 of the Channel Tunnel Act 1987 required British Rail to prepare plans for providing or improving international rail services to areas other than the south east of England. In December 1989 British Rail announced plans to introduce such services and orders were placed for suitable trains at a total cost of nearly £300 million.[40] As no services to the regions were currently operating, our predecessors asked the Department whether it expected Eurostar to provide such services in the near future.

42. The Department said that the Strategic Rail Authority had not yet made a final decision on regional services. However, the Department did not expect services to be introduced in the near future.[41] Consultants had been employed to consider whether such services would represent value for money. These studies had shown that passenger volumes were likely to be too small to justify the further use of trains beyond London, though this might be possible after 2008.[42] However, the Department doubted that the services would be economic even if non-financial benefits, such as regeneration, were taken into account.[43] Some 12 per cent of existing Eurostar passengers were from regions outside the south east of England, though this percentage was expected to increase once the St Pancras terminal opened, as passengers would be able to transfer more easily from other rail services.[44]

43. Asked whether the trains purchased for regional services were being used for other purposes, the Department and London & Continental explained that some of the trains had been used for testing, but not in service as the fleet was greater than currently needed. London & Continental had leased three of the sets to GNER, and was negotiating with other train operating companies on leasing the remaining sets.[45]


44. The principal justification for the Link was that it would lead to significant regeneration benefits in the Thames Gateway area and in east London. Such benefits from the Link had been quantified in money terms, although guidance issued by the Department to others still advised against the inclusion of such estimates, which were considered too vague.

45. In putting together value for money assessments for long-term projects such as the Link, the Department should use up-to-date assumptions, including the expected rate of future economic growth.

46. At our predecessors' evidence session, the Accounting Officer disagreed with factual material in the Comptroller and Auditor General's Report which was either not disagreed by the Department at the time or had not been noted as a point of difference between the National Audit Office and the Department. The Accounting Officer also presented the Committee with a revised cost estimate which had not been shared with the National Audit Office in advance of the session. This situation is unsatisfactory. We therefore reiterate that it is not acceptable for the Committee's inquiries to be frustrated by conflicts of evidence which were or which could have been resolved in advance.

47. Regional Eurostar services have not yet been implemented, on the grounds that they are considered to be uneconomic. We note that the new Eurostar terminal at St. Pancras will allow passengers from some regions to connect more easily than at present with the international train service. It is disappointing that large sums of public money have been wasted on buying expensive trains in advance of need or evidence of need.

20   C&AG's Report, para 2.5 Back

21   Q185 Back

22   Q30 Back

23   Ev, Appendix 2, p31 (Qs 274-276) Back

24   Qs 218-220; Ev, Appendix 2, p31 (Q219) Back

25   C&AG's Report, para 2.28 Back

26   Q26 Back

27   Qs 120-131, 235, 274 Back

28   Ev, Appendix 2, p30 (Q124) Back

29   C&AG's Report, paras 3.13-3.14, 3.27 Back

30   Qs 8, 100, 104; C&AG's Report, paras 3.6, 3.18 Back

31   C&AG's Report, para 3.23 Back

32   Qs 118-119 Back

33   C&AG's Report, para 3.35(a) Back

34   Qs 36-43; Ev, Appendix 2, pp 27-30 (Qs 95-99) Back

35   C&AG's Report, paras 3.35-3.38 Back

36   Ev, Appendix 1, pp 24-27 Back

37   Ev, Appendix 2, pp 27-30 (Qs 95-99) Back

38   C&AG's Report, Figure 20 and Appendix 8 Back

39   Ev, Appendix 2, pp 27-30 (Qs 95-99) Back

40   C&AG's Report, Appendix 3, paras 18-25 Back

41   Qs 77-79, 190 Back

42   Q200 Back

43   Qs 81-82; Ev, Appendix 2, pp 30-31 (Q191) Back

44   Qs 237-238 Back

45   Qs 193-199 Back

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