COMMENT : Rail link could succeed where Eurotunnel failed
'Since the Eurotunnel disaster, there surely cannot be much of an appetite for privately financed projects with anything resembling a tunnel attached to them'
Friday 01 March 1996
In the case of the high speed rail link, there are 26km of the things and that is not the only similarity with Eurotunnel. The proposed method of finance - debt supported by a very sizeable stock market flotation - also bears a marked similarity. Nor do you need much of a memory to know that Warburgs was the bank which convinced a generation of hapless investors to sink their money into Eurotunnel, not just once, but twice.
Enough scepticism, though. There are in fact a number of good reasons for believing that the high speed rail link might succeed where Eurotunnel failed. The first and most important is a whopping pounds 1.5bn in Government and EU grants. Most of this is a capital grant towards the estimated pounds 4bn eventual cost of the project. Though this will not be paid until well into the project's construction phase, it does provide a degree of comfort not available to Eurotunnel.
The balance is in the form of deferred payments by the Government for use of the track by comuter trains - rental income, in other words. Add this to the revenue stream London & Continental will get from the one- third interest it inherits from British Rail in Eurostar, and the company already has a quite considerable guaranteed income. The idea is that this will be used as a way of guaranteeing to bankers that debt servicing and repayment obligations will be met. The guaranteed income will in some way be securitised. No wonder that even Eurotunnel-scarred bankers are saying, "Hold on, this might actually work".
A further plus point is that there are no contractors in this consortium. True, Arup and Bechtel are closely related towards the bottom of the evolutionary chain, but as design engineers and project managers, they are also an entirely different species. With Eurotunnel, the contractors were allowed to write their own blank cheque. That won't happen this time round.
Furthermore, Eurotunnel began tapping the equity market before it knew in any detail what it was supposed to be building. In this case a detailed design and engineering plan involving expenditure of up to pounds 250m will be completed before a penny's worth of equity is raised on the stock market.
All good reasons, then, why the high speed rail link, the largest project so far to have emerged from the Government's private finance initiative, might work. Even so, it is going to require all SBC Warburg's powers of persuasion to close the credibility gap - the more so since it is equity investors, rather than bankers, who this time will be expected to provide the bulk of the finance.
Stakeholding is a dangerous slogan
Tony Blair may have stirred up more than he bargained for when he pinned New Labour's colours to the stakeholding mast. In a speech yesterday, John Monks, general secretary of the TUC, interpreted this woolly concept as an open door to winning new employment rights. Speaking at a conference organised by the Commission on Public Policy and British Business, Mr Monks added fuel to the debate by arguing that stakeholding could only be built "on a floor of employment rights." He used the occasion to argue for a new industrial relations settlement based on new employment rights for individual employees. These would include, for example, the right to be consulted about major changes in a company through democratically chosen representatives; and the right for unions to be recognised when a majority want it. Rest assured, the Tory party machine will demonise Mr Monks' words as the smoking gun of recidivist trade unionism lurking behind stakeholding rhetoric.
However, it was some less predictable voices at the conference which should give Mr Blair real food for thought about the possible dangers of his new umbrella slogan. Colin Mayer, Professor of Management Studies at Oxford University, drew a contrast between the more rigid economic structures of the stakeholding countries of Europe and the greater flexibility that came with the Anglo-Saxon model of shareholder capitalism. He warned that we could be leaping onto the stakeholder bandwagon at the very moment when technical innovation made flexibility particularly important.
Another perspective came from Matthew Gaved, a specialist on corporate governance at the London School of Economics. He argued that the real problem with shareholder capitalism in the UK was not one of excessive power but of impotence. Big fund managers like Hermes and M&G complained they were next to powerless when trying to influence the management of a poorly performing company. That left exit - the sale of their shares - or a takeover battle as their only real sanctions. Reforms were needed to allow shareholders to exercise their voting power on their own resolutions more frequently than the AGM.
The slogan of the stakeholding economy may make for good soundbites for Tony Blair in the run-up to an election but Labour needs to do a lot more work on the policy if it is to be taken seriously as a solution to the vexed problem of corporate governance in Britain, let alone the still more ambitious task of improving the performance of the economy.
BP attempts to crunch the customer
The last one out switches off the lights. The rationalisation of great swathes of European industry continues apace with BP and Mobil merging their European downstream activities in a deal which, competition authories allowing, will almost certainly prove a trend setter. Where's it all going to end?
In theory, the relentless drive towards lower costs in industry and commerce, should result in lower prices. If the market is doing its job as it should, the consequent savings flow into new industries, new technologies and ultimately new jobs. But it is not altruism alone which drives businesses into these huge, rationalising mergers. The motivation is as much about market power and dominance as anything else. Don't be fooled. Competitive pressures may be the immediate cause of the BP/Mobil get together. By becoming number one in Europe, or close to it, however, the ultimate idea is to crunch the customer.
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