The tunnel under the English Channel failed to fire public imagination. After years of debt refinancing and changes in management, the central problem remains that no one really owns the tunnel project. Now, the debt has wandered into the hands of hedge funds, whose principal interest is not close and efficient transport links between Britain and the rest of Europe.
The tunnel under the English Channel should not have been built. The optimistic calculations of its supporters made the project commercially viable if not exciting. But construction costs were almost double original estimates and security worries have driven operating costs above expectations.
Perhaps a more imaginative scheme – a realisation of the dream of a road from London to Paris – would have fired the public imagination and stimulated traffic growth. The proposal selected, for twin rail tunnels, was the cheapest and least ambitious of the shortlisted schemes. The service offered to motorists and truck drivers provides few advantages over high-speed ferries.
The costs of building the tunnel are literally and metaphorically sunk, and a fundamental principle of business economics is that irrecoverable costs should be irrelevant to current decisions. But capital markets do not permit this. This autumn, the tunnel operating companies must go through another financial reconstruction. Debt requires refinancing and contracts by which the rail users pay for more traffic than they provide come to an end.
Baroness Thatcher’s determination ensured that the tunnel would be built, and her ideology required that it had at least the appearance of a private rather than a public project.
The central problem of the tunnel project is that no one owns it. The legal structure – a long lease to twinned British and French companies with rights of reversion enjoyed by the governments – is so complex that the project can never be allowed to fail because it is too hard to sort out the consequences. Nor is there ownership in the modern metaphorical sense of product champion: there has never been anyone to whom managers have really been accountable for the project’s success. It is hard to assess how much this governance failure has contributed to the project’s failure to meet the ideals or commercial expectations of those who inspired it. But it has certainly not helped.
The tunnel was initially promoted, and effectively controlled, by the construction interests which won the contracts to build it. As squabbles, delays and cost overruns continued, the British government appointed Sir Alastair Morton, an abrasive but effective troubleshooter, to ensure that it was actually completed.
The scheme was mainly debt financed: large European banks were pressured to put up the cash. After the contractors left the site, and Sir Alastair departed, de facto control passed to these banks: but they had little capacity and less inclination to exercise that control.
A modest amount of equity had been introduced, mostly provided by individuals encouraged to subscribe by the prospect of free crossings. Offered at £3.50, the shares rose above £10, before falling below 20p today. Most have passed into the hands of small French shareholders for whom this investment is an amusing alternative to backing horses through the Pari Mutuel. In 2004 the author of a market tip sheet mobilised these holders to eject Eurotunnel’s establishment board. Experience since then is salutary for anyone who thinks that shareholder democracy should be anything but metaphorical rhetoric.
The banks, despairing, have now let much of the debt pass into the hands of hedge funds. These funds have wandered into a legal and political quagmire, which, perhaps naively, they believe they can exploit opportunistically. In any event, their principal interest is not close and efficient transport links between Britain and the rest of Europe.
But that is the public interest and the tunnel’s only rationale. Around the world, large infrastructure projects are mostly controlled by public authorities. Where they are not – as with 19th century railroads and modern oil and gas pipelines – they came into existence under the sponsorship of committed and well capitalised private promoters with relevant experience. It may be too late to secure either of these structures for Eurotunnel. But the lesson that ill-defined public-private partnerships make for poor management and blurred accountability should be taken to heart.