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Thursday, 21 March, 2002, 13:25 GMT
Chunnel link 'a flawed deal'
Eurostar train on Channel Tunnel rail link
The rail link has suffered from optimistic passenger forecasts
MPs have criticised the government for putting billions of pounds of public money at risk in a "flawed deal" to build the rail link to the Channel Tunnel.

In 1998, Deputy Prime Minister John Prescott gave a government guarantee against 4bn of bonds to keep afloat the developer London and Continental Railways.

The Transport Department says the deal was good value for money and the project rmains "on time and on budget".

But a report by the Public Accounts Committee (PAC) has said taxpayers face footing the bill for many years to come, if there are any problems in the future.

And in its report on Wednesday, the committee warned the government might have to find another 1bn to fund the project.

The department allowed this deal to proceed on the basis of a business plan that was fundamentally flawed

Edward Leigh MP
PAC chairman

The news will come as a blow to ministers, who regarded the rescuing of the scheme as a triumphant private finance initiative (PFI).

Mr Prescott's Department of Environment, Transport and the Regions had rejected a cash request from the London and Continental Railways.

The private consortium wanted 1.2m in grants in addition to the 1.7m it had already received, to cover a shortfall after income from Eurostar ticket sales proved lower than predicted.

Instead of the handout, the company agreed to issue 4bn worth of bonds, subject to government guarantees, the committee found.

'Another Dome'

The report said: "In deciding to restructure the deal rather than pull the plug, the department put in place complex arrangements that will expose the taxpayer to substantial risk for many years to come."

It added that "further substantial sums" of public money would be needed to keep the company afloat.

And the report called for the department to monitor carefully the risks to the taxpayer "throughout the life of the project".

London and Continental won the PFI contract to build the 3bn, 67-mile rail link between London and the Channel Tunnel, and operate Eurostar, from John Major's Tory Government in 1996.
Deputy Prime Minister John Prescott
Prescott thought he saved public money

Although the construction remains on schedule, the financial plans have not been smooth and from the start, they were "over-optimistic" in terms of passenger numbers.

Committee chairman Edward Leigh said: "The department allowed this deal to proceed on the basis of a business plan that was fundamentally flawed, based as it was on inherently uncertain forecasts of passenger numbers - all very reminiscent of the Dome.

"Thus the commercial basis of the original deal was highly risky and when these risks materialised, the company had the department over a barrel.

"The shareholders were in a win-win position. They were awarding themselves substantial contracts from the company and their so-called `risk capital' was never actually at risk."

Limited risk

He called on the government in future to ensure the companies paid the price for "flawed planning or poor delivery".

The Transport deparment said it was possible that "further unexpected costs could hit the taxpayer, but the risk should not be exaggerated".

It said: "As a result of the Deputy Prime Minister's 1998 deal to save the link, the project remains on time and on budget.

"Government support for the project was justified by the benefits.

"The 1996 business plan was flawed, but the 1998 rescue deal was based on a business case that showed value for money."

The department said the Dome and the Channel Tunnel were unique projects and it was impossible to compare them sensibly with each other or other PFI schemes.

"In the case of the typical PFI project, including the Tube public-private partnership, there is a long history of actual demand and forecasting experience to draw on," it continued.

"Thus we do not expect to have the same uncertainty in other PFI schemes."

The BBC's Tom Symonds
"Taxpayers may well get the bill"
See also:

15 Oct 01 | Business
Railtrack set for Chunnel deal
11 Oct 01 | Business
Railtrack pushes for rail link deal
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