Monday 16 June 2025

 

| home


archive


::: RMT ScotRail staff walk out



Railhub Archive
1998-06-02 RTK-001
Railtrack plc

0

Railtrack statement re: Channel Tunnel Rail Link


keywords: click to search
CTRL
Eurostar
HS1
John Prescott



Phrases in [single square brackets] are hyperlinks in the original document

Phrases in [[double square brackets]] are editorial additions or corrections

Phrases in [[[triple square brackets]]] indicate embedded images or graphics in the original document. (These are not usually archived unless they contain significant additional information.)


Railtrack plc

Railtrack statement re: Channel Tunnel Rail Link
_______________________________________________________________


date
6 June 1998
source Railtrack plc
type Statement

note (some figures illegible in originating copy)


Railtrack announces that it has reached preliminary agreement with London & Continental Railways Limited ("LCR") and with the Government to acquire a lease over certain infrastructure assets of LCR, once the construction of those assets has been completed. Railtrack has agreed to a Statement of Principles in relation to the plan for restructuring LCR ("the Restructuring Plan") by way of public private partnership, announced today by the Deputy Prime Minister, John Prescott.

On 27th March 1998, the Deputy Prime Minister announced that the "cure period" in respect of financing proposals for the restructuring of the Link should be extended to 29th May 1998; Railtrack has continued negotiations with LCR to agree an outline proposal in relation to the construction and subsequent operation of the infrastructure which would be acceptable to Government; parallel negotiations have been ongoing between Railtrack and Rail Link Engineering ("RLE") (a consortium led by Bechtel Limited ("Bechtel")) for RLE to continue to act as project managers for the construction of the Link. At the same time, LCR has engaged in discussions with a number of potential transport operators to produce a proposal for the operation of the Eurostar service which would be acceptable to Government. Government has now indicated that the proposals received from LCR, incorporating the proposals from Railtrack and transport operators, are acceptable in principle. A consortium led by National Express Group and SNCF, and including British Airways and SNCB ("the Train Operating Consortium"), has been selected by LCR as the operator of the Eurostar service.

The Restructuring Plan envisages that the infrastructure and railway operations of the LCR group will effectively be separated. Railtrack will take over responsibility for the design, construction, maintenance and operation of the infrastructure and the Train Operating Consortium will take over responsibility for the operation of the Eurostar train service. The CTRL will be constructed in two phases, with Phase 1 comprising 42 miles of the route from the Channel Tunnel portal to Fawkham Junction in Kent and with Phase 2 comprising the works, including a significant amount of tunnelling work, through north Kent to St Pancras. Fawkham Junction is the location where the CTRL meets the existing Railtrack infrastructure and the Phase 1 works will deliver journey time savings of up to 15 minutes to the Eurostar service which will continue to use Waterloo International until Phase 2 is completed. Phase 2 will deliver further journey time savings of up to 20 minutes.

LCR will continue to be the counter-party to the Development Agreement; LCR will therefore retain the commitment to construct the whole of the Link, including Phase 2 (over which Railtrack will have an option to acquire a lease), and LCR will retain the operational capability to complete construction. LCR's other responsibilities will be primarily related to raising finance for its subsidiaries; LCR also retains certain responsibilities in relation to Eurostar under the Development Agreement.

The basic elements of the Restructuring Plan are outlined below and in the annexed summary. Implementation of the Restructuring Plan remains subject to detailed documentation and there is a significant number of conditions precedent which need to be satisfied including approval, inter alia, by Railtrack's shareholders and various governmental authorities, including obtaining clearances from the EU for the Restructuring Plan. Once the detailed transaction documentation has been agreed, it is intended that a circular will be sent to shareholders to convene an EGM to approve the transaction; currently it is expected that the circular will be sent to shareholders no later than September.

Railtrack has been advised in relation to the Restructuring Plan by N M Rothschild & Sons Limited.


2. Benefits to Railtrack of participation in the CTRL project

The Board of Railtrack believes that its proposed participation in the CTRL represents an attractive opportunity for it to expand the business and capitalise upon the core railway skills of its management, whilst working in partnership with Government in a project of major national and European significance. Railtrack, however, has been adamant that it would only participate in the restructuring of LCR if it was in the best interests of Railtrack's shareholders and on commercial terms which justified involvement in a project of this scale and risk. The CTRL is a long term railway project: in this context, the Directors of Railtrack believe that the Restructuring Plan which has now been agreed in principle fully satisfies these objectives and is capable of delivering substantial benefits to Railtrack and its shareholders.

3. The Restructuring Plan

The Board of Railtrack believes that its proposed participation in the CTRL represents an attractive opportunity for it to expand the business and capitalise upon the core railway skills of its management, whilst working in partnership with Government in a project of major national and European significance. Railtrack, however, has been adamant that it would only participate in the restructuring of LCR if it was in the best interests of Railtrack's shareholders and on commercial terms which justified involvement in a project of this scale and risk. The CTRL is a long term railway project: in this context, the Directors of Railtrack believe that the Restructuring Plan which has now been agreed in principle fully satisfies these objectives and is capable of delivering substantial benefits to Railtrack and its shareholders.
Railtrack's participation in the Restructuring Plan includes the following basic elements:
Phase 1

Railtrack will enter into a binding commitment to acquire a lease over the assets comprising Phase 1 works on completion; this lease will run until 2086.
LCR will finance the construction of Phase 1 until its purchase by Railtrack: the details of LCR's financing arrangements are set out in paragraph 6.
Railtrack has agreed a Target Cost Estimate for building Phase 1 of approximately £7bn (at January 1997 prices). Construction is expected to start in October this year. Railtrack will acquire the Phase 1 works for the actual cost of the construction, less certain grant payments received by LCR, together with accrued interest thereon: it is expected that the purchase price for Phase 1 will be approximately £5bn (in nominal prices) and that purchase will occur towards the end of 2003.
Following acquisition of Phase 1 by Railtrack, Eurostar will pay an access charge to Railtrack to pay for the use of the track as described in paragraph 4 below.
Railtrack is proposing to enter into new arrangements with Bechtel and the other RLE members whereby RLE will continue to manage construction of Phase 1. Although Railtrack is assuming the construction cost overrun risk relating to Phase 1, a certain proportion of any cost overruns would be borne by RLE, in return for which it will receive additional fees if the project is delivered at below the Target Cost Estimate and on schedule, thereby providing a strong incentive to Bechtel and the other RLE members.

Phase 2
Railtrack has agreed to enter into an exclusive option arrangement, exercisable until 1st July, 2003, to acquire the right to construct Phase 2 works at a target cost. It is expected that Phase 2 will take approximately 5.5 years to construct. The Target Cost Estimate for building Phase 2 has been agreed at approximately £5bn (January 1997 prices). As for Phase 1, Railtrack will acquire Phase 2 for the actual cost of construction, net of certain grants receivable, together with accrued interest thereon.
On the basis of the Target Cost Estimate, the purchase price for Railtrack would be approximately £8bn for Phase 2 (in nominal prices). If Railtrack exercises its option construction of Phase 2 will commence in 2001: purchase would be expected to occur at the end of 2006.
Railtrack has, as referred to in paragraph 4 below, agreed to a higher rate of return on Phase 1 if it exercises its option to proceed with Phase 2, thereby incentivising Railtrack to do so. Railtrack intends to proceed with the exercise of the option and the building of Phase 2 but believes that it would be inappropriate to make such a commitment until after the outcome of its regulatory review is known in 2000.
LCR remains committed to build the whole Link and in the event that Railtrack does not exercise its option, LCR will either itself construct Phase 2 or find an alternative third party to do so.
Train operations
The Train Operating Consortium will take responsibility for the management and operation of Eurostar under a management contract to 2010.
Railtrack has also agreed that as part of the terms of its participation, it will enter into a revenue sharing arrangement with Eurostar (see paragraph 4 below), under which Railtrack's exposure has been capped, in terms both of upside and downside, at a pre-agreed limit.


4. Railtrack's remuneration

In relation to each phase of the project, Railtrack will receive an access charge from the operator of the Eurostar service, grant income in relation to train paths for domestic commuter services and any income from selling additional capacity, for example for freight services.
Railtrack's access charges to the Eurostar operator have been calculated so that, having regard to the other forms of income projected, Railtrack will earn specified rates of return on its investment over a 50 year period. Railtrack has agreed rates of return on the basis of the Target Cost Estimates for the full project (Phase 1 and Phase 2) by reference to three Eurostar revenue scenarios and the full rate of return will only be receivable in the event that Railtrack exercises its option to purchase the Phase 2 works; this is intended to give Railtrack an incentive to proceed with Phase 2, thereby meeting one of the specific objectives of the Deputy Prime Minister.

If the Eurostar revenues achieve the levels projected by the Eurostar management, the most favourable of the three scenarios, and if Railtrack has committed to both phases of the CTRL project, Railtrack will receive an access charge which will produce a real rate of return, over the life of the project at a premium to the Regulator's cost of capital for the construction risk.

If Eurostar revenues fall short of those projections, Railtrack will abate its access charges as part of the revenue sharing arrangements; however, this abatement is capped at a pessimistic view of passenger revenues. In the event that Eurostar revenues exceed those projected by the Eurostar management, Railtrack will receive a share of such excess. These revenue sharing arrangements relate only to the years 2004 to 2010.

Railtrack has offered Government certain clawback arrangements in the event of exceptional gains arising on a sale of the assets (or contractual rights to income) before 2015.


5. Construction of the CTRL

As referred to above, Railtrack will be remunerated on the target cost for each phase of the works, thereby assuming risk for any cost overrun. The Target Cost Estimates, which have been agreed between Railtrack and RLE at £7bn for Phase 1 and £5bn for Phase 2, are based on extensive investigation by Railtrack's own engineering teams, who have been supported by Franklin & Andrews, an independent property and construction consultancy. Railtrack has also commissioned WS Atkins, the leading civil engineering consultancy, to conduct a further review of the work performed so as to gain a further level of assurance in the Target Cost Estimates.
Railtrack has concluded from its investigations that the project is at an advanced stage of design and planning and that the project is being managed in a rigorous manner; Railtrack has drawn significant comfort from the work performed to date. As a result of these investigations, the Board of Railtrack has a high degree of confidence in its ability to deliver the project on time and within the scope of the Target Cost Estimates.

In order to mitigate the impact of the risks which Railtrack is taking on, Railtrack is putting in place extensive management controls over the project, whereby Railtrack will take full control of the delivery of Phase 1. This will be achieved, in particular, by the provision to LCR of experienced Railtrack personnel to co-ordinate the work of Bechtel, who will continue to act as project managers on a day-to-day basis.

Railtrack has offered Government some element of sharing of the benefit if the construction costs fall below the expected outturn; an element of these benefits would also be shared with Bechtel and the other RLE members under the incentivisation arrangements agreed with them.


6. Financing

Railtrack will not need to finance any investment in the CTRL until 2003 at the earliest and Railtrack believes that the secure nature of the access charge income will enable flexibility in raising debt financing at that time. Railtrack will therefore not need to raise equity to finance the purchase of Phase 1.
LCR, in conjunction with its financial advisers, has developed financing proposals which are at an advanced stage of development but the implementation of these arrangements will need several months to conclude. These financing proposals will enable LCR to finance the construction of Phase 1 of the CTRL, until its acquisition by Railtrack, to undertake preliminary works for Phase 2 and to provide financial support to the Eurostar service.

LCR's financing package will include a combination of commercial debt and bonds, some of which will be backed by direct Government guarantees to reduce the cost of financing. The Government has also agreed to support Railtrack's access charges if the train operator fails to do so.


7. Regulation

Under the terms of the Channel Tunnel Rail Link Act 1996, the CTRL is not subject to regulation by the Office of the Rail Regulator. It is intended that Phase 1 of the CTRL will be acquired by a newly formed subsidiary of Railtrack Group PLC. Accordingly, the CTRL assets will not form part of Railtrack's regulatory asset base and the returns from the investment will be unregulated.

8. Timetable

Negotiations will now commence to formalise the agreements and it is anticipated that detailed documentation, especially LCR's financing documentation, will take several months to conclude.
It is envisaged that definitive contracts will be signed, subject to conditions precedent (including the completion of LCR's financing package), by the end of July and that LCR's financing would be concluded by the end of September. On this basis, it is expected that a circular will be sent to shareholders no later than September convening an EGM to approve Railtrack's participation in the Restructuring Plan. This will enable construction to start on Phase 1 in October this year.

Commenting on Railtrack's participation in the Restructuring Plan, Sir Robert Horton, Chairman of Railtrack said:

"We are pleased that we have been able to agree with LCR and with Government a credible plan to complete the construction of the CTRL. I am pleased that Railtrack will be able to work in partnership with Government in the completion of this project of national and European significance on sensible terms for Railtrack and its shareholders."


8. Timetable
For further information please contact:

Railtrack Media Enquiries
0171 557 8292/3

N M Rothschild & Sons Limited
Simon Linnett - 0171 280 5000
Chris Brooks - 0171 280 5000


ANNEX

1. HM Government and London and Continental Railways (LCR), the company responsible for the design, construction, finance and operation of The Channel Tunnel Rail Link (CTRL) have agreed, together with Railtrack Group PLC (Railtrack), the principles of a public private partnership deal for taking forward the project and the management of Eurostar (UK) Ltd based on a restructuring of LCR. It is expected that the detailed contractual and financial arrangements will be concluded by 30 September 1998.
2. The CTRL Development Agreement between LCR and the Government, signed in February 1996, will remain in place but will be amended to reflect the new arrangements.


THE DEAL

Construction
3. LCR is to build the rail link defined by the CTRL Act 1996 between Cheriton and St Pancras. Railtrack and Bechtel will manage the construction on LCR's behalf with Railtrack itself being prospective owner of the whole of the new link.
4. LCR will form two wholly-owned subsidiaries, Infrastructure Company 1 ("IC1") and Infrastructure Company 2 ("IC2") which will be responsible for the construction of the CTRL in two phases. Phase 1 is from the Channel Tunnel to Fawkham Junction in north-west Kent where a connection to the existing Railtrack network allows Eurostar trains to run on to Waterloo. Phase 2 continues from north Kent through to St Pancras.

5. Construction of Phase 1 should, on present plans, begin in October with a completion date of 2003. Construction of Phase 2 is expected to start in 2001 and be completed by 2007.

6. Railtrack will commit to LCR to acquire Phase 1 by purchasing the CTRL assets of IC1 (once construction is complete in 2003, and will do so for the actual build cost of Phase 1. Railtrack will take construction and completion risk and will assume responsibility for the operational management of the Phase 1 infrastructure. Railtrack will levy track access charges on Eurostar for use of the CTRL.

7. Railtrack will have an option to purchase the CTRL assets of IC2 and then assume operational management of Phase 2 on the same basis as for Phase 1. Railtrack must exercise this option by 2003. In the event that Railtrack does not wish to go ahead, LCR would continue to be under a contractual obligation to complete the CTRL to St Pancras.

8. Railtrack and LCR have agreed a Target Cost for Phase 1 of £7bn and a Target Cost for Phase 2 of £5bn. Railtrack will purchase Phase 1 and, if it exercises its option, Phase 2, for the actual construction cost less certain grant payments received by LCR, together with accrued interest. This would give rise to a purchase price for Phase 1 and Phase 2 of £5bn and £8bn respectively.

9. In return for its investment in CTRL, Railtrack will receive access charges from Eurostar, which will vary according to the revenue of the Eurostar business and, as referred to above, whether Railtrack has committed to Phase 2. Railtrack's access charges will be calculated to give a premium to the Regulator's cost of capital to reflect the construction risk.

10.The concession for the CTRL - originally 999 years - will become 90 years and will thus expire in 2086 at which point ownership of the link will revert to the Government.

11. Railtrack's stated reason for a two step approach is the impending review of its domestic railway access charges by the Rail Regulator. Subject to the outcome of the review, the company's declared intention is to manage the construction and then acquire the whole CTRL.


Incentives for Railtrack to Commit to Phase 2

12. The deal is designed to incentivise Railtrack to commit to purchase Phase 2 as soon as possible. This has been achieved by providing Railtrack with a lower financial return on Phase 1 alone than on Phases 1 and 2 combined and by allocating the majority of the public sector financial support to Phase 2. In any event, the deal has been structured such that LCR will have the capability to complete the CTRL with or without Railtrack.
Eurostar (UK) Ltd

13. LCR will retain ownership of Eurostar (UK) Ltd (EUKL) - the UK arm of the Eurostar international train service operated jointly with the national railways of France and Belgium (SNCF and SNCB respectively). LCR will award a management contract to operate EUKL to a consortium comprising National Express Group, British Airways, SNCF and SNCB. The contract will run until 2010 when either the contract will be renewed or a new operator found. The operator will develop the EUKL business and will take a share of revenue risk. In 2086 EUKL will be returned to the Government.

14. Railtrack has agreed to enter into revenue sharing arrangements with Eurostar.


Financial Arrangements

15. Under the Development Agreement, the Government was committed to provide grant support worth £8bn (NPV). Under the proposed deal, that support will not increase but will now be split between the two phases of the project in proportion to the expected construction cost of each phase (approximately 38%/62%). The Government has also produced forecasts of Eurostar revenue. In the most likely case support will be [[?]]0 million NPV. In the pessimistic case, support will be [[?]]0 million NPV.
16. In addition to the public sector's grant contribution, the project is to be financed by a combination of commercial debt and bonds totalling approximately £8 billion. As part of the new arrangements some of the debt will be underwritten by direct Government guarantee which reduces the overall cost of financing. It is considered that the risk of a call on the guarantee is very low. Also, the Government will stand behind the payment of CTRL track access charges to Railtrack (see 6 above) in the event, and to the extent, that these cannot be met. LCR also expects to raise some new equity finance from private sources.

17. The Government will take a stakeholder share in LCR, which with other rights will entitle it to receive at least 35% of the company's pre-tax cash flow after 2020 and at least a 35% share of the proceeds of any future sale of LCR or its assets. Payments to the Government as a result of the stakeholder share are expected to be significantly greater than the [[?]]0m NPV support for Eurostar mentioned in paragraph 15 above.

18. The existing arrangements whereby the Government is to receive both rental payments from the owner of the infrastructure and a share of the profits of land redevelopment are preserved.


SUMMARY OF THE DEAL AND ITS BENEFITS


LCR is strengthened and contracted to build the whole CTRL.
Railtrack is involved, committed to purchase Phase 1 of CTRL: and intent on purchasing the second phase to complete the line.
The basic Government grant remains at £8 billion.
£8 billion of private funding will be raised through Government backed debt and bonds.
An additional [[?]]billion commercial debt to be raised without Government backing.
The prospect of an early start to construction with strong incentives to ensure completion of the CTRL.
A deal based on a realistic view of the CTRL and the Eurostar business with risk shared fairly among all the parties.
The Government's support for Eurostar likely to cost no more than [[?]]0m between 2010 and 2020.
A consortium of experienced transport operators to manage and further improve the Eurostar service.
A public stakeholder share for the Government in LCR and in the train operator.
The length of concession awarded to LCR for the rail link reduced from 999 years to less than 90 years.
Eurostar (UK) Ltd to be run as a fixed term concession rather than privatisation in perpetuity.


Railhub Archive ::: 1998-06-02 RTK-001





Monday
16

















1 story



5 collections