Outlook: Railtrack and rocket science to the rescue

WHO would have thought that Railtrack, not so long ago the Deputy Prime Minister's bete noire and the epitome of privatised greed, would emerge as the saviour of the Channel Tunnel Rail Link? While John Prescott has a lot to thank Railtrack for by agreeing to take the link off the Government's hands, the bigger debt of gratitude is owed to the rocket scientists at SBC Warburg Dillon Read. By a neat co-incidence, the pounds 1.2bn in extra public subsidy that London & Continental Railways asked for and was refused in January has miraculously become the amount by which the financing costs of the link have been shaved.

Of course it takes a lot of smoke and mirrors to get there and, at the end of the day, as Mr Prescott might have said, all it will save is 29 minutes off the journey time to Paris. But the important point is that it enabled the Deputy Prime Minister to stand up in the Commons and declare that, at most, the only additional public subsidies going into the project would be pounds 140m. This is the sum available to cover Railtrack's access charges if the Eurostar train service is not able to pay its way until later than planned.

The financing looks ingenious. Certainly it is an innovation for an infrastructure project of this scale anywhere in the world. By agreeing to stand behind the pounds 3.7bn commercial bond that will be used to finance the link, the Government has guaranteed that the link will be built for the lowest possible cost of capital. It also removes a large slice of the financing from the Government's books.

Although Railtrack's cost of capital will be higher when it buys the first phase of the link from LCR in 2003, its access charges will more than cover this. As an incentive to build and then buy the second phase of the link, it will be allowed to ratchet up access charges again.

While this is not an absolute guarantee that the link will be built in full, it is probably as near as the Government was ever going to get. This then makes the project about much more than shaving half an hour off the trip to Paris. With the link built in its entirety, capacity is increased enormously, train paths in the South-east are freed up for freight traffic, and the Thames corridor gets the benefits of economic regeneration. We may even see non-stop Eurostar services north of London.

Of course, the one threat to the financial edifice so lovingly crafted by SBC is that passengers vote with their feet and decide that ferry and air remains a safer bet. Another Channel Tunnel fire or two would not help sentiment.

Unless passenger numbers reach the, albeit more realistic, targets there will not be enough revenue to persuade Railtrack to buy the second phase. Although LCR would be obligated to complete the link and find another buyer, it could only do so at the kind of discount that would make the pounds 3.7bn government-backed bond an expensive exercise for the taxpayer. A small risk perhaps, especially with British Airways and National Express in the driver's seat. But Mr Prescott will not need reminding that the history of Eurostar has been one long financial disaster, which could yet return to haunt a future government.

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