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2001-04-03 DET-001
Department of the Environment, Transport and the Regions


Final phase of Channel Tunnel rail link will be major regeneration boost - Prescott

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Department of the Environment, Transport and the Regions

Final phase of Channel Tunnel rail link will be major regeneration boost - Prescott

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3 April 2001
source Department of the Environment, Transport and the Regions
type Press release

note News Release 207

The final phase of the Channel Tunnel Rail Link has today been given the green light by Deputy Prime Minister John Prescott, creating tens of thousands of jobs in a major regeneration boost to East London, East Kent and the Thames Gateway.

Speaking at the official signing ceremony hosted by London and Continental Railway at St Pancras, Mr Prescott said:

"Back in 1998 I said that the time had come to stop talking and start digging, and this deal means that a whole lot more digging is about to start. This agreement shows just what can be achieved when the private and public sectors work together in partnership.

"The Channel Tunnel Rail Link (CTRL) is the biggest construction project in the U.K. We are already over halfway through building the first section which is on time and on budget. Today we've made sure that the section to complete the line to London will start on time as well. Britain's first high-speed railway, and the first new line in the country for over a century, will soon become a reality. And this arrangement is at no extra cost to the taxpayer.

"This is a great project. And it's not just about delivering 21st century transport infrastructure for Britain. This project is going to bring real regeneration benefits to the Thames Gateway, to East London and to Kent - as we've already witnessed with the booming Ashford economy following the construction of an international station in the town.

"For Section 2, I am talking about something in the region of 50,000 jobs and 26 million square feet of industrial, commercial and retail floorspace. That's the sort of regeneration you can lever in when you build three new stations on Britain's first high-speed railway. And it's all in keeping with our strategy for the South East - making the most of the spare capacity in the east of the region to take the pressure off the overheated west."

The ceremony marks the signing of an 'in principle' agreement between the Government, London & Continental Railways (LCR) Ltd (the company building the link) and Railtrack. Under the terms of the agreement, which is the first of its kind for a major construction project in the U.K., construction will commence as planned in July this year and no extra Government funding will be required.

As anticipated when the CTRL deal was restructured in 1998, LCR expects to fund construction of Section 2 through a combination of Government Guaranteed Bonds, commercial debt and Government capital grants. Railtrack, which has already committed to purchase Section 1 of the link, will work with LCR during construction and will operate Section 2 once construction is complete.

Under an innovative risk-sharing programme co-ordinated by LCR, the project management company Bechtel has agreed to take a significant share of construction cost over-run risk and to secure insurance cover for a further share of over-run risk in return for a fee. The expected construction cost of building Section 2 remains unchanged at £3.3 billion in out-turn prices.

Reflecting the changed circumstances since 1998, Railtrack has waived its option to purchase Section 2 but will provide specialist services to LCR during the construction phase of the project and sign an exclusive operator agreement to run the railway once it is complete in 2007. Ownership of Section 2 will therefore remain with LCR, which also owns Eurostar U.K. Ltd, whilst Railtrack will be able to operate the whole of the CTRL as a seamless high-speed railway.

Notes to Editors
HM Government, Railtrack and London & Continental Railways (LCR), the company responsible for the delivery and financing of the Channel Tunnel Rail Link project (CTRL), have reached an agreement in principle on arrangements to complete the project.

Railtrack is currently managing the construction of Section 1 of the CTRL project and will purchase Section 1 following completion. It has an option to manage the construction of Section 2 and purchase Section 2 following completion. However, LCR, Government and Railtrack have agreed alternative arrangements for taking Section 2 forward and completing the CTRL, which still transfer a significant proportion of the construction risk to the private sector.

Railtrack will relinquish its option on Section 2 of the CTRL and will remain involved providing services during construction and operating Section 2 following its completion. Railtrack has also agreed to continue to make available certain staff to Section 2 in order to preserve continuity alongside its involvement in Section 1. Railtrack's role in managing the construction of Section 1 and purchasing it following completion will not be affected.

LCR has agreed terms to transfer a significant proportion of construction risk on the project in a cost-overrun protection programme developed and arranged by Bechtel, a shareholder in LCR. No additional Government grant is required in order to complete Section 2 and the CTRL project.

It is expected that the detailed contractual and financial arrangements will be concluded by the start of construction of Section 2 in July 2001.

The Channel Tunnel Rail Link
1. The CTRL is Britain's first high-speed railway being built from the Channel Tunnel to London. It forms part of the 'Trans European Network' ('TENs') of transport corridors across the European Union and will carry both Eurostar and domestic passenger services, and some freight traffic. As a 'TENs' project, the CTRL has received an EU grant towards its design and development.

2. In 1996, LCR was awarded the contract under the PFI programme to build and operate the CTRL and to own and operate Eurostar (UK) Limited (EUKL), the UK arm of the Eurostar train service between London, Paris and Brussels. The contract, known as the Development Agreement, set out the basis on which the CTRL was to be designed, financed, constructed, maintained and operated. It also provided for public sector support for the CTRL project and EUKL's cashflow requirements, principally in the form of grants to LCR for the construction of the CTRL and payments for the provision on the CTRL of train paths for domestic services.

3. Under the restructuring arrangements for the CTRL project agreed in 1998 between the Government, LCR and Railtrack, the CTRL was to be built in two sections with construction of Section 1 starting in October 1998. Section 1 runs from the Channel Tunnel to Fawkham Junction, via Southfleet Junction, in north west Kent. At Fawkham Junction, Section 1 will connect with the existing railway to Waterloo International station. Section 2 will complete the CTRL between Southfleet Junction and London St. Pancras via new stations at Ebbsfleet and Stratford.

4. Section 1 of the CTRL is being undertaken by Union Railways (South) Limited, a wholly owned subsidiary of LCR under the management control of Railtrack, who will buy Section 1 following completion. Section 2 of the CTRL is being undertaken by Union Railways (North) Limited, another wholly-owned subsidiary of LCR under LCR's control. Union Railways (South) and (North) act as project clients for their respective sections, with the design and project management for both sections contracted to Rail Link Engineering (RLE). RLE is an unincorporated joint venture of Ove Arup, Bechtel, Halcrow and Systra, project managers and engineering consultants. As work is completed on Section 1, many of the staff within Union Railways (South) and RLE transfer to perform similar roles for Section 2.

5. Section 1 of the CTRL is now two and a half years into its five year construction programme. The project is 60% complete in cost terms, on schedule to open in 2003, and within budget. The target cost of Section 1 is approximately £1.9bn in outturn prices.

6. Construction of Section 2 is on schedule to start in July this year. Union Railways (North) has already been engaged in a substantial programme of work in preparation for the start of construction, including design, engineering and contract tendering as well as land acquisition and certain preparatory or "enabling" works. Completion of Section 2 is scheduled for the end of 2006 at a cost of approximately £3.3bn in outturn prices.

7. Union Railways (North) has now let over £800m worth of construction contracts for Section 2, including contracts for the Thames and London tunnels. In total, Union Railways (North) will have awarded construction contracts worth approximately £1.4bn by the end of 2001 and largely completed a land acquisition programme for Section 2 of approximately £200m.

8. Further information on the CTRL project may be obtained from the CTRL web-site

Railtrack Involvement In Section 2
9. As part of the 1998 restructuring arrangements, Railtrack was granted an option to take management control of Union Railways (North) and purchase Section 2 following completion, similar to the arrangements in place for Section 1. As part of the arrangements for taking forward Section 2, Railtrack will relinquish its option and instead enter into new contracts with Union Railways (North).

10. Railtrack will provide services to Union Railways (North) during construction to assist in areas such as the specification of the finished railway, commissioning and the development of the operating and maintenance strategy. Railtrack will be reimbursed its costs by Union Railways (North) and will receive a fee. Railtrack's involvement will allow experience gained in the management of Section 1 construction to be applied to Section 2, ensuring continuity for the CTRL project as a whole.

11. Following completion of Section 2, Railtrack will enter into an agreement with Union Railways (North) for the operation of Section 2. As owner and operator of Section 1 Railtrack will be in a position to operate both sections of the CTRL as a seamless railway. Equally important, Railtrack will also be able to ensure a seamless interface with the national network for commuter services on the CTRL from Kent.

12. Railtrack will be reimbursed the costs of operation, maintenance and renewal of Section 1 as well as Section 2, and will receive an operator fee. Railtrack will also have the opportunity to earn significant performance bonuses in order to encourage high standards of punctuality and reliability in the operation of CTRL.

Risk transfer
13. LCR has engaged Bechtel to develop and arrange an innovative £600m cost-overrun protection programme for Section 2 construction. This programme will cover cost increases arising out of the design, engineering, project management and construction of Section 2 above the target cost for these activities. Bechtel is a 22% shareholder in LCR and a 52% member of RLE.

14. The programme provides risk transfer in addition to risk-sharing arrangements with both RLE, part of whose fees for project management are at risk to cost-overruns, and contractors. The standard construction contracts for the CTRL project contain incentives based on the target cost of the works covered by each contract, requiring the contractors to contribute to any cost-overruns but entitling the contractors to a share of any cost-underruns.

15. The LCR risk under the programme will be shared with Bechtel and under an insurance programme, which is anticipated to be placed by Bechtel on behalf of LCR and Union Railways (North) with a group of leading insurers.

16. Under these risk transfer arrangements, all parties involved in the construction of Section 2 will be strongly encouraged to avoid cost-overruns. LCR will reduce by approximately 60% to 65% its exposure to overruns in the areas of cost covered by the programme and in the risk-sharing arrangements with RLE and contractors.

17. In the 1998 restructuring arrangements for the CTRL project, the management of EUKL was contracted out to a consortium comprising National Express, British Airways, SNCF (French Railways) and SNCB (Belgian Railways) until 2010. The consortium is encouraged to maximise the performance of EUKL with pain-share/gain-share arrangements based on agreed annual targets for EUKL's operating cashflow.

18. EUKL's business continues to develop with revenues in 2001 approximately 10% ahead of the same period last year. The Eurostar service will utilise approximately 40% of the capacity of the CTRL once Section 2 is completed and is expected to benefit greatly from the reduction in journey times between the Channel Tunnel and London.

Financing of Section 2
19. LCR expects to finance Section 2 and EUKL's continuing activities from the following sources:

the issue of a further £1.1bn of Government-guaranteed bonds envisaged for Section 2 as part of the restructuring of the CTRL project in 1998. These bonds are expected to have a maturity of 30 to 40 years

the proceeds from the sale of Section 1 to Railtrack following completion, of approximately £1.7bn. LCR has agreed to facilitate Railtrack's securitisation of Section 1 access charges in order to finance the purchase of Section 1

Government grant instalments committed to Section 2 of approximately £2.2bn in outturn prices. No additional Government grant beyond that committed in the 1998 agreement is required in order to complete Section 2 and the CTRL.
20. LCR expects that the cost of the risk transfer programme and the revised arrangements for taking Section 2 forward, in terms of financial support required for EUKL's activities, will be lower than if Railtrack had exercised its option

21. LCR also expects to raise some long term bank financing. Due diligence on behalf of the prospective banks financing Section 2 has largely been completed by LCR's financial adviser, UBS Warburg. LCR will complete the financing of Section 2 following receipt of all necessary regulatory and EU clearances for the proposed arrangements for taking Section 2 forward.

22. Section 1 of the CTRL is financed in full with £700m of bank facilities guaranteed by Railtrack, Government grants of £900m in outturn prices, and part of the proceeds of the issue by LCR in early 1999 of £2.65bn of Government-guaranteed bonds. The proceeds of these bond issues are also financing LCR's other activities including the land acquisition and pre-construction activities on Section 2 and EUKL's cashflow requirements.

Press Enquiries: 020 7944 3106; out of hours: 020 7944 5925 / 5945;
Public Enquiries: 020 7944 3000

Railhub Archive ::: 2001-04-03 DET-001


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