Inside Story: Dangerous Visions: The Channel tunnel has run massively over budget, but as Nicholas Faith argues, this syndrome is nothing new on great projects

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BACK IN 1971 Rolls- Royce was bankrupted by the ever-rising cost of developing the RB-211 engine. Sir Ian Morrow, called in to rescue the group, knew exactly what had gone wrong. 'Engineers never tell a firm's board the truth about the development costs of any projects,' he said. 'They give them the figures they know they will find just about acceptable.'

But then such accusations, however unfounded, have been levelled against the early estimates for any large project. In the Channel tunnel's case, the cost has risen fourfold to more than pounds 10bn since the plans were drawn up in 1986.

The story of big engineering projects throughout history reveals a similar pattern: costs are underestimated, and the motives are usually mixed, leading to built-in misunderstandings all round. Shareholders and / or taxpayers and / or banks usually end up footing the bill.

The result, inevitably, is that the mere idea of such projects attracts more cynicism than they deserve. For, in most cases, the long- term profit and loss account is positive, provided only that the idea of 'profit' is not limited to financial gain but includes broader economic and even social criteria.

Of course the critics have a case. Henning Christophersen, the European Commissioner for Economic Affairs, was talking of the Chunnel when he remarked that 'there must be a clearer division of labour and responsibility between the public authorities, the operators, contractors and financiers'.

He could have been talking about most such mega-projects over the ages undertaken on a purely financial analysis. Given the degree of government involvement, elements of prestige and wider economic benefit are almost invariably included in the decision- making process.

Unfortunately for the original investors - and for the taxpayers - the rewards generally accrue to latecomers: 'Never buy up a railroad until it's been bankrupt at least twice,' was the motto of one American 19th-century financier, and is as sound now as it was then.

Where the Chunnel differs from its predecessors is in the fact that the Government not only did not help financially, it piled on additional costs in the name of safety, which delayed construction and made the project much less viable than it would otherwise have been.

The RB-211 has been one of the very few British engineering success stories of the last 30 years of the 20th century. In 1971 the Heath government allowed Rolls- Royce to go broke. At that point it seemed highly improbable that the engine - like its contemporary the Jumbo jet - would become a mainstay of the world's airlines from the 1970s until well into the 21st century, and would bring in a continuing return to the government which, eventually, bailed out the project and the company. .

Most big projects contain unknown elements, surprises unforeseen by the promoters. Typically, when a handful of visionaries proposed a railway from the Indian Ocean to Lake Uganda in the late 19th century, neither they nor their opponents - who dubbed the idea the Lunatic Line - dreamed it would create Kenya.

Private capital could not be lured into the Lunatic Line, even though it was built when the use of private capital for large projects was well established, having begun in the late 18th century, with the canal-building boom in Britain. With railways, as with other ventures, the original capital raised was usually inadequate, creating an ever-increasing demand that developed all the arts and artifices of the capitalist financial system to a degree of sophistication not exceeded since.

In Britain, 'railway mania' exploded in a boom-and-bust in 1844-46 which left scars on the psyches and the pocket-books of the British middle and upper classes. In Yorkshire, the Brontes lost their all, and, according to one wicked cartoon, even Prince Albert had the royal fingers burnt.

The rush to the rails was led by one George Hudson, known as King Hudson in his brief heyday, who developed a network of railways between the Midlands and his native Yorkshire in a display of financial fireworks rarely seen since. According to Charles Kindleburger (in A Financial History of Western Europe), Hudson 'tended to believe himself above the law. He entered into contracts with companies of which he was himself an owner and officer; raised dividends before making up annual accounts; paid dividends out of capital; altered books and so on.' But in the end Hudson was undone, not only by his trickeries, but because a rival company built a more direct railway line from London to York.

In Britain the only help given by the state was to allow the promoters of new lines to pass bills in Parliament, allowing them to buy up the land they needed. Almost everywhere else in the world, railway-building, far and away the biggest investment activity of the century, relied on a usually unhappy partnership between private promoters and contractors eager for a quick buck; and governments anxious to build railways for a variety of reasons.

Early Belgian, German and Italian governments were involved from day one, anxious to strengthen the fragile unity of their newly- formed countries - and in Canada three of the country's provinces required railways as conditions of their adherence to the federation. And - a crucial theme in all such projects through the ages - national economic benefit did not automatically relate to financial profit. The Canadian National Railway opened up great stretches of the Northern Prairies, to the enormous benefit of the whole country, but never made any money and was nationalised a few years after it was completed. An earlier line, the Grand Trunk Railway from the Atlantic through eastern Canada, was subject to recurrent financial crises and was a failure as a commercial enterprise, yet made a significant contribution to Canada's economic development.

In the United States, the normal pattern was for the federal government to give promoters of pioneering lines, like those across the continent, grants of land either side of the tracks to enable them to finance the project. Later generations blamed the promoters as profiteers, but in most cases they had to sell the rights to the land, often for derisory sums, to raise the finance to get the railway built, and therefore did not benefit from the enormous value added to the land by the construction of the railroad - and although the CPR did benefit enormously, it was a close-run thing, with the company on the verge of bankruptcy throughout its construction period.

This is the pattern being followed by the Government in trying to attract private capital to build the long-delayed fast link between London and the Channel tunnel. The builders will be given the fleet of Eurostar cross-channel passenger trains, worth an estimated pounds 800m, as well as 35 acres of land north of King's Cross, which could be worth several hundred million pounds by the turn of the century.

The fast-link story could well follow the 19th-century pattern in which, if there were winners, they were the private promoters, while governments almost invariably lost out. The financial history of the Suez Canal shows how, even when a government put its money in a profitable project, it could still lose out, although in this case to another government with more money.

Ferdinand de Lesseps started borrowing money to build the canal in 1858, with little or no initial success. The Paris capital market contributed enough money to encourage the Khedive, Egypt's ruler, to put in some capital. Unfortunately the Khedive and his successor over-borrowed for other purposes - including providing funds to irrigate their own estates - and were ripped off by every spiv in the 19th-century equivalent of the Euromarkets. In the event, and with the help of a loan from the Rothschilds, Disraeli snatched the Khedive's 40 per cent holding on behalf of the British government, from under the nose of a French bank. And very profitable it proved to be.

In the case of that other profitable canal, the Panama, the loss was suffered by the original investors. The final scheme was born out of the ashes of one of the great financial 'smashes' of the 19th century, when thousands of Frenchmen lost their savings in a first ill-advised attempt to built a canal through the Isthmus - for, every so often, French investors throw their habitual caution to the winds and, their imagination caught by the dream of financial glory, invest in projects, judging them by their ambition rather than their financial potential.

Sometimes they win, as with the Suez Canal and - probably in the long term - with Eurotunnel: but more often, as with Euro Disney and the Trans-Siberian - which absorbed the savings of a generation of the French middle classes and put them off such daring investments for nearly a century - they lose their chemises.

French officialdom pays even less attention to the balance sheet where La Gloire is concerned. It was the French government that insisted on continuing with Concorde when the British wanted to pull out (and would have done so had the projects not been enshrined in a treaty rather than a mere legal agreement).

The same themes, of overly optimistic initial cost estimates, of bankruptcy followed by renaissance to end in glory, apply not only to transport projects but to developers. In the early 19th century, Thomas Nash went broke at least once in developing the part of London that included Regent's Park and Regent Street - and the bankruptcy court records are among the most useful sources for researchers working on the growth of London in the 19th century.

The bankrupts - and the successes, such as Thomas Cubitt, who developed Belgravia- had little or no help from the public sector. In contrast, all the post-war New Towns around London and other big cities were provided purely by public finance.

The English had, seemingly, lost the capacity to mix private capital with public finance, and, as a result of this inexperience, the development of London's Docklands has provided an exemplary lesson on how not to combine the two. In the 1970s the 11 local authorities involved seemed paralysed when presented with an enormous opportunity for redevelopment. In the early 1980s the Enterprise Zone, devised by Geoffrey Howe and Michael Heseltine, resulted in development on such a modest scale that the Treasury was only persuaded with the greatest difficulty to invest pounds 77m in the Docklands Light Railway, because forecast demand was so minimal.

The picture was transformed by the partnership between Margaret Thatcher and Paul Reichmann, the over-ambitious Canadian developer. The relationship has cost billions: for the banks who, however, may eventually get some of their money back; and for the British taxpayer, who is having to fork out up to pounds 4bn to provide transport links to Canary Wharf without the prospect of any return for the money.

Nearly pounds 300m has gone on a single mile-and-a-half stretch of road, the Limehouse Link, the DLR has required a further pounds 500m to satisfy the new demand created by Canary Wharf, while the extension to the Jubilee Line - a low priority in London's overall transport requirements - is going to cost another pounds 2bn. The only outside help comes in an immediate loan from the government-backed European Investment Bank and small payments starting when the line is completed.

The enormous sums being poured into Docklands are not only an argument against development-by-impulse, they also form a striking contrast with the official attitude to the Channel tunnel and the rail links to it. The fast link is still being planned, and the Government has even failed to order new trains to share the existing route with the Eurostars. As a result, many of the trains will be 30 years old and increasingly liable to breakdown. In contrast the French have already built a high-speed line between Paris and the French portal of the Chunnel.

Not that the private sector performed with any brilliance, initially at least. The winning consortium was a group of contractors who had banded together under the banner of Transmanche Link. They grossly underestimated the cost of the mechanical equipment required. They allowed a mere pounds 600m for equipping the tunnel with signalling and for building the shuttle trains to take passengers and freight under the Channel. It was only in 1987, with the arrival of Alastair (now Sir Alastair) Morton as chairman of Eurotunnel, that the project was tackled with the necessary mix of enthusiasm, bull- headedness and financial savvy.

But, as invariably happens with so ambitious a project, these costs continued to escalate. The tunnelling itself was completed on time, albeit with a 40 per cent cost overrun. Costs were inflated by several hundred millions by a decision to provide cooling for the tunnel, which will not be required until trains are running through every three minutes, in about a decade. Increasing demands made in the name of safety added several hundred million pounds and cost up to nine months' delay. Yet the Swiss have been running open-sided, car-carrying flat trucks under the Alps for nearly 40 years without an accident. One apparently small change to the wagons of Le Shuttle, widening the exit doors at each end of the car-carrying wagons by a mere 10cm - in case two people collided in the rush to escape - cost a full pounds 40m.

It made matters worse that the construction coincided with a prolonged period of high interest rates. As Sir Alistair put it: 'Victorian railways were built at a time when interest rates averaged 3 per cent. In the past few years they've been over 10 most of the time.'

At the same time, the inevitably conservative traffic estimates produced for the banks were proving far lower than the outcome, even in the recession of 1990-1992. As a result the revenue forecasts made by Eurotunnel are looking increasingly solid, despite the delays. Ever since the project started, the forecasts have been steadily upgraded, because the relevant traffic flows have increased faster than previously forecast, even during the recent recession. And since Eurotunnel is basing its estimates on capturing less than 10 per cent of the total cross-channel freight market and only one in seven of all the passengers crossing the Channel, there is plenty of room for happy surprises.

Now that the Chunnel is down and some of the services are running, Sir Alistair is transferring his energies to a new panel designed to institutionalise the infusion of private capital (and management know-how) to public projects. At the moment these are confined to relatively simple projects such as the Dartford Bridge across the Thames and the second crossing of the Severn, where costs and revenues can be forecast with some degree of accuracy.

The present chaos - and lack of reality in Treasury thinking - is illustrated by the delay in ordering badly needed new trains for London Underground's Northern Line. The Treasury is apparently asking the companies bidding to build the trains to share some of the risk in running them: in other words to be paid less if they don't attract enough new passengers, a matter out of their control.

So it seems unlikely that Sir Alastair will succeed, even though, in principle, the Treasury welcomes such public-private deals and has even issued guidelines to help the departments sponsoring new projects. Yet it remains to be seen if Sir Alastair and his new panel can prove wrong cynics like the well-placed, if jaundiced, observer: 'They assume that the private sector will bear all the risk, while private investors assume the opposite.' History, it has to be said, is on his side.

(Photograph omitted)