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.
STATION MARVEL
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.
