Sunday Times: November 4, 2007
John Prescott’s deal to underwrite £4bn of loans made the Channel high-speed link a reality.
IN the summer of 1998, John Prescott bustled into a press conference in the bowels of the Department for Transport’s unloved, asbestos-ridden and since-demolished headquarters in Marsham Street, central London.
He had been a hard-hitting spokesman on transport while Labour was in opposition, but now Prescott was facing his first crisis as minister in charge of the sector. The consortium building the high-speed rail line linking London to the Channel tunnel, a flagship project for Britain, had run out of money and was about to go bust.
As he faced the waiting journalists, Prescott wore a tight smile of triumph. The project that had looked doomed just a few weeks earlier had been kept alive by him.
The key to the deal was an agreement by the government to step in and underwrite nearly £4 billion of new loans, the first time a British government had agreed to give its backing to borrowing by a private company for a specific project. The deal was anathema to Treasury mandarins, who feared creating a precedent and a flood of similar fundraisings.
Nine years on, Prescott’s gambit is about to bear fruit. On November 14, the first Eurostar train will slide out of a renovated St Pancras station, race at high speed across north and east London, through Kent and the Channel tunnel, arriving in Paris just 2 hours and 15 minutes after it set off – 20 minutes faster than at present.
Thanks to the former deputy prime minister’s financial manoeuvring, Britain has made a belated entry to the high-speed rail club.
But amid the fanfare, difficult questions remain about the financing of the project, its ability to pay its way, and how the government accounts for and procures such large pieces of infrastructure.
If the lessons of High Speed 1, as the new line has rebranded itself, are not learnt, ambitious plans for new railways within Britain, such as the £14 billion Crossrail London commuter scheme, and a new line from London to the Midlands and the north, may suffer the same difficult birth.
The original plan for the high-speed link was for it to be financed and built by the private sector, a throwback to the days of Victorian railway building when individual entrepreneurs, rather than the government, were the driving force.
The billions of pounds needed to build the track and revive St Pancras would have been borrowed and then repaid from the revenues earned by Eurostar.
Unfortunately for LCR, the consortium that took on the project, its forecasts of passenger numbers turned out to be hugely optimistic.
The group, comprising Bech-tel, UBS, Arup, Halcrow, EDF, National Express and SNCF, reckoned that by 2004 about 21m people a year would be using the Eurostar service. The reality turned out to be a third of that. Last year the total was 7.85m, with a target of 10m a year by 2010.
LCR’s financing plan was shot to pieces, prompting Prescott’s rescue. The solution was novel – the company would issue bonds with an implicit government guarantee – and it was disliked in parts of the Treasury, which had a horror of “hypothecation” – the raising of government funds for a specific purpose.
The dodge was that they were funds that did not form part of government borrowing – they were merely government-supported. In total, LCR raised £6.1 billion, with the project likely to finally cost about £5.8 billion.
Rob Holden, the man brought in to run LCR after the funding crisis, said it was the right solution. “We needed the financial muscle to bring it to a close, and this allowed us to borrow at very keen rates, but without it being the state that was actually providing the funds. We were able to say to our contractors that this is the amount available – they were not dealing with a bottomless purse.”
When the deal was being hammered out, there were long negotiations with the Treasury over the best way forward, he said. Some argued that it would be cheaper simply for the government to raise the money by issuing gilts, rather than have it borrowed, at slightly higher interest rates, by LCR.
“On the narrow argument, that is correct. The loans would have been cheaper. But I am certain that in the end we would have paid more to complete the project because we would have got into poker games with contractors. It’s a bit of an illusion, but we pulled it off.”
The negotiations were also influenced by another big rail project that was having problems at the same time. An extension to London Underground’s Jubilee line, which was being managed and paid for by the public sector, was running seriously late and overbudget.
Holden said the detail of the rail-link agreement had permitted some innovative risk-sharing deals to be struck with individual contractors.
“I would say we have had £100m to £200m at risk for contractors on this project. It’s not a lot in the total budget, but it influences behaviour on the front line. Overall, I think we have come up with a new model for the delivery of large infrastructure in the UK.”
This has not prevented critics from harping on about the call on the public purse – particularly now that the Office of National Statistics has seen through the figleaf of government “support” and put LCR’s borrowings on the government’s books.
There have been critical National Audit Office reports, and the House of Commons public accounts select committee concluded last year that the economic case for the link’s construction was “marginal”.
Holden in turn is critical that the regeneration benefits of the scheme have not been taken into account in the National Audit Office or the select committee reckonings.
“The public accounting rules for these types of projects have allowed us to claim only £500m worth of regeneration benefits. But we can point to £10 billion worth, and that’s not a figment of our imagination.
“These are real schemes, at Stratford, Ebbsfleet and around St Pancras itself,” he said.
But as the finances are currently structured, it is not clear whether High Speed 1 will be able to pay back its debts. The full picture will become clearer once the project is refinanced with longer-term loans after it is completed.
Holden added that schemes such as High Speed 1 should not be expected to yield quick returns. “This is an asset that has a 90-year life. That’s the sort of period over which its finances should be judged,” he said.
Last week Ruth Kelly, the transport secretary, floated plans for another high-speed line in Britain. It would link London with Birmingham at first, and then later be extended to Scot-land. Britain’s existing north-south lines were likely to run out of capacity in the middle of the next decade, she said.
Holden said the lesson of the Channel tunnel link was to proceed in stages, with the track from Birmingham to London being built first as a discreet project.
A question mark now hangs over the future of LCR. Shortly after the change of view at the Office of National Statistics brought it on to the public books, it was subject to a takeover approach led by Sir Adrian Montague, chairman of Friends Provident. The then transport secretary Alistair Darling said he would put the company up for auction.
The bidding was later called off, with LCR’s management insisting it was vital that all their energies be devoted to completing the work.
The government is now expected to make an announcement on the company’s future early next year. Insiders say a break-up is the likely option.
The property assets, which are likely to be worth several billion pounds, will be auctioned to developers. The concession to run the line itself is likely to prove attractive to infrastructure funds, such as Australia’s Mac-quarie. It will make its money from access charges paid by Eurostar and other operators, including, possibly, Germany’s Deutsche Bahn, which has registered its interest in running its high-speed ICE trains to London.
More problematic is the future of Eurostar, which operates the cross-Channel rail service.
LCR has a 40% stake in the business, with the rest split between the French and Belgian national railways.
Efforts to unite the three divisions into a single corporate entity have failed in the past, but sources at LCR said it was likely that these efforts would be resurrected after a period in which the effect of the high-speed line on passenger numbers could be gauged. Passenger numbers have soared this year thanks to problems at UK airports and the stimulus of the Rugby World Cup.
HIGH SPEED 1, the first section of which opened four years ago, is Britain’s first new mainline railway in more than a hundred years.
Yet the real star of the show when the second half of the line opens in 10 days is likely to be a relic of the 19th century – St Pancras station.
The most visible sign of the work to date has been the restoration of the once-decayed Midland Grand Hotel, Sir George Gilbert Scott’s famous neo-Gothic pile on Euston Road.
But when the station behind the hotel reopens on November 14, travellers will be treated to another restored Victorian marvel – the St Pancras train shed built by William Barlow.
Barlow is less well-known than his contemporary, Brunel, but the train shed may change that. When it first opened, its 74-metre single-span roof made it the largest enclosed space in the world, and, with ironwork repainted in the original peacock blue and reglazed, it retains its “wow” factor.
Beneath the platforms is another Barlow gem, the station’s undercroft, originally used for storing Burton’s beer. It is now a passenger concourse, but the 900 original cast-iron pillars that support the platforms above remain in place – the spacing between them was reputedly dictated by the width of three beer barrels.
Mammon - Driver of Britain's fastest train set
The Observer: November 4, 2007
The high-speed rail link from St Pancras to Paris has cost £6.2bn, but LCR boss Rob Holden says it will pay off its debts - in time.
On Tuesday at St Pancras station in London, three Eurostar trains will move forwards and backwards in a choreographed 'dance' to specially composed music played by the Royal Philharmonic Orchestra. It's a bizarre way to mark the opening of the final stage of the high-speed Channel Tunnel Rail Link. The Queen will lead proceedings, assisted by a cast including Welsh opera singer Katherine Jenkins and former BBC Fame Academy singer Lemar, as well as Gordon Brown and political counterparts from France and Belgium. Some 1,500 other dignitaries will look on from a grandstand erected on one platform.
Amid the throng will be the man who made it happen, Rob Holden, chief executive of London Continental Railways, (LCR) which makes up the British arm of the UK-French-Belgian venture Eurostar. This week's opening - services from St Pancras to Paris and Brussels begin in a fortnight - is the culmination of a decade of government bail-outs, rows with shareholders and the French, and political shenanigans. Yet, as everyone at the company keeps repeating, the project has come in on time and on budget (it is another matter whose budget it is).
To signal the fraternity between the Eurostar partners, the train drivers performing the world's first railway ballet will be French and English. But, as with many other European business collaborations, such mutual respect has not always been so apparent. Admittedly, Britain hardly assuaged French sensibilities by picking Waterloo - named after the field of Britain's decisive victory over Napoleon - as the first UK terminus for Eurostar trains.
'Vacating Waterloo for St Pancras is a real bonus,' says Holden. 'The media made it more of an issue, but I guess some people felt a little uncomfortable.' Fortunately, St Pancras has no such anti-French connotations. 'Someone's looked into that. There were two St Pancrases I'm told. It's much more friendly.'
It's not just history that divides the partners but engineering. Holden says that the Eurostar trains are some of the most complex in the world because they have to be able to operate with different signalling and electrical supply systems on either side of the Channel. He says European Commission rules on harmonising rail infrastructure have made things easier. 'It's not as much of a nightmare now as it used to be,' he says, not altogether convincingly.
All drivers are multi-lingual, Holden adds, and have to speak the appropriate language as they emerge from either end of the tunnel.
The old British Rail culture also clashed with that of French state-owned counterpart SNCF. 'British Rail had their way of doing things, so did SNCF and neither recognised the other,' Holden says. 'But in the past four or five years the culture has changed. There is much more of a willingness to look at both countries and say, that is a better way of doing it, let's do that.'
Eurostar trains have been running between London, Paris and Brussels since 1994. But on this side of the Channel trains have mostly had to trundle along at a modest pace, while on the French side they have been able to hit 186mph since Eurostar's inception. The first part of the high-speed rail link in the UK, from Folkestone to Ebbsfleet in Kent, opened in 2003, shaving 20 minutes from journey times between Paris and London. This month's opening of the second part of the link - from Ebbsfleet to St Pancras via Stratford in east London - will knock a further 20 minutes off journey times between the capitals, reducing them to two hours and 15 minutes.
Holden, who has worked for LCR since 1996 and is also a director of Eurostar Group, denies he has ever felt embarrassed about having to wait a decade to get up to speed with the French and Belgians. 'I'm proud. We use that word a lot at the moment. I get the sense we've joined the high-speed club.'
The great - albeit belated - achievement has cost £5.8bn, which includes the overhaul of St Pancras station. The members of the Eurostar consortium originally claimed that the train service would recoup the outlay. But in reality, the government - and taxpayers - will foot the bill for now. Eurostar claimed that more than 15 million passengers would use the service each year but numbers are currently half that. Directors have since admitted they exaggerated the figures because they knew there was no political appetite for governments to pay for the project themselves. Without this claim, the project 'would never have happened', admits Holden.
When this funding black hole became apparent in the late Nineties, Railtrack agreed to buy the first stage of the link. When the precursor to Network Rail collapsed a few years later, the government promised to repay the entire debt in the likely event LCR could not, effectively nationalising the company. This led to the National Audit Office questioning if this was taxpayers' money well spent.
However, Holden points to the benefits of regeneration, worth up to £11bn, he claims, which he says will make good the investment. 'In an ideal world, the return on £5.8bn would come from [rail] users and access charges. But it's not an ideal world. We have to recognise the priorities for investment have changed.'
As well as owning the high-speed rail link, LCR also owns huge swathes of land around Stratford and other points along the route which are being redeveloped. If, as seems likely, the land is sold when the company is broken up next year, the government should get its cash back eventually, once the rest of the regeneration is factored in.
Daniel Roth, director at Ernst & Young, says the lesson for future private sector funding of such risky large rail projects is that the government must ultimately guarantee them. 'The financial community perceives a significant risk in these projects. They are very large and there is a risk of them going wrong. However, LCR demonstrates these delivery risks can be successfully managed.'
Last week, 4,000 people converged on St Pancras to 'stress test' the refurbished station. Among them were actors who pretended to be lost or aggressive to see how staff coped. Along with the dancing trains, it seems a surreal culmination to the project. But, as Holden knows only too well, rail rarely runs smoothly in this country; better to be safe than sorry.
Name Rob Holden
Education BA in economics and financial control
Career Arthur Young (now Ernst & Young) 1977-1983; Vickers Shipbuilding and Engineering, 1983-1996; LCR 1996-2007 (chief executive since 2004), executive chairman Eurostar Group
Family Married, two children
LCR to offload Channel link debts
The Observer: November 4, 2007
Tim Webb and Heather Stewart
London & Continental Railways (LCR), the UK arm of Eurostar and builder of the new Channel Tunnel Rail Link, is in talks with the Treasury to move its £5.8bn debt mountain off the government's books.
Rob Holden, chief executive, told The Observer that LCR could ape Network Rail, which has a £21bn debt pile. This controversially remains off the government's balance sheet despite being backed by taxpayers.
He also revealed that LCR's shareholders, which include Bechtel, UBS, National Express and EDF Energy, have recently sold their remaining shares in the consortium to the government for £50m, finally recouping the investment they made over a decade ago. This means they have no further liability to LCR.
LCR was set up to finance and operate the rail link but had to be bailed out by the government. With the completion of the link this month, the government is expected to sell off parts of the company but could wait decades to clear the debt.
Holden said: '[Reclassifying the debt] is one of the issues we're looking at with the Department of Transport and Treasury. If the government was seen to be standing behind the major income streams, it would be a bit like Network Rail.'