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In 1996, the Department for Transport (the Department) awarded a contract to London & Continental Railways Limited (LCR), a private sector consortium, to build the Channel Tunnel Rail Link (the Link), a high speed railway linking St Pancras Station, London, to the Channel Tunnel, and to run the British arm of the Eurostar international train service (Eurostar UK).
Construction of the Link was to have been funded partly by government grants and by LCR borrowing money, secured on future revenue from Eurostar UK. By the end of 1997, Eurostar UK revenues were well below LCR's forecasts. Consequently, LCR abandoned its plans to borrow money and approached the Department for an increase in the government grants.
In 1998, the Department and LCR agreed to restructure the deal. Construction of the Link was split into two sections and Railtrack Group joined the project taking management control of construction and agreeing to purchase Section 1 once it was complete. Although direct government grants were not increased, the Department agreed to guarantee most of the money LCR would borrow to fund construction. The Department also agreed to lend money directly to LCR if it, as forecast, ran out of cash several years after completion of the Link (the Access Charge loan).
Even though the economic justification of the project remained marginal, the Department decided to allow LCR to go ahead with the construction of Section 2. Railtrack Group subsequently withdrew from the project following Railtrack plc's entry into administration. The deal was restructured for a second time with LCR backed by the Department, Bechtel and a group of insurers sharing construction risk for Section 2. LCR paid Bechtel and the insurers £87 million to bear £315 million of the first £600 million of any cost construction overrun.
Section 1 of the Link was completed in 2003 on schedule and within budget. Revenues from Eurostar UK have increased but remain below forecasts and it is likely that the Department will have to lend more than the currently estimated £260 million to LCR to cover future cash shortfalls. The Department and LCR expect that Section 2 will open in 2007, but that costs will exceed budget, mainly due to higher than expected construction inflation and changes to the works.
In 2001, the Committee examined and reported on the 1998 restructuring. On the basis of a further Report by the Comptroller and Auditor General, we took evidence from the Department and LCR on progress of the project, in particular: the forecasting of future Eurostar passenger numbers and revenues; the decision to go ahead with the construction of Section 2 of the Link; and the continuing exposure of the taxpayer to the risks inherent in this project.
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