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PFI hits the buffers as Chunnel rail link falters

Michael Harrison On the collapse of the channel rail link project and BA's NEW LOW-COST AIRLINE
One swallow does not a summer make, as President Bill Clinton might observe. But the demise of London & Continental Railways does rather throw the future of the Private Finance Initiative back under the spotlight. The Channel Tunnel Rail Link was far and away the biggest project conceived under the PFI. If it is cancelled or postponed, as now seems quite possible, then the Government will have to motor to achieve its target of concluding pounds 14bn worth of deals under the initiative by the end of next financial year. Take away the pounds 3bn capital cost of the CTRL and the running total falls to some pounds 5.5bn.

More seriously, the failure of LCR throws doubts on whether other large transport projects, funded jointly by the private and public sectors, will ever see the light of day. There is never a shortage of contractors looking to create work for themselves. There is also an endless supply of investment banks happy to work up financing plans for any scheme under the sun. But the LCR experience has left a credibility gap in the market. Three days before he asked John Prescott for another pounds 1.2bn of public subsidy, the chairman of LCR, Sir Derek Hornby, said the consortium was "not talking about an extensive refinancing". LCR and its roll call of shareholders (SBC Warburg, Bechtel, Virgin, National Express) is now a busted flush. But it has poisoned the well for everyone else.

A sure sign that things were unravelling was the unofficial appointment of Sir Alastair Morton, former chairman of Eurotunnel, as Mr Prescott's CTRL adviser. It was rather like putting the fox in charge of the chicken run.

Sir Alastair knows all the tricks in the book when it comes to raising funds for projects that are worth only half their actual cost. The Channel Tunnel stands as a permanent memorial to his art.

When investors know that the government is not ready to act as lender of last resort for projects like the CTRL and when the forecasts and public utterances of promoters like LCR are so far removed from reality, then the combination is fatal

By coincidence the man now in charge of the PFI, Adrian Montague, is the former Dresdner Kleinwort Benson financier who helped Sir Alastair refinance the Channel Tunnel. Together they persuaded the shareholders to surrender control of the business and the banks to swop half their junior debt for paper and shares which will not pay a dividend until 2006 at the earliest.

His political master at the Treasury is the Paymaster General, Geoffrey Robinson. When Labour came to power, one of the first things Mr Robinson did was turf out the chairman of the Private Finance Panel, Alastair Ross Goobey and his chief executive and install his own men and procedures.

Mr Robinson has dispensed with the "scores on the doors" approach to the PFI. He prefers to highlight the Treasury's success in clearing the bottlenecks in the PFI process and getting good quality projects onto the market more speedily.

Since then it has signed off 30 or so projects with a capital value of pounds 1.5bn. More importantly, it has finally managed to get the PFI going in one of the Government's two priority areas, the health sector. To date four of the 15 health projects identified as suitable cases for PFI treatment have been agreed including the biggest hospital scheme to date, the Norfolk and Norwich.

The next target is the local authority sector where the PFI will be deployed to refurbish Britain's crumbing education infrastruture, perhaps even to build new schools.

But it may be a long time before we see another big transport project funded through the PFI. There are other mechanisms for financing a better road and rail system. Mr Prescott believes the Treasury has accepted his argument for the hypothecation of taxation so that money raised from transport taxes may be used to finance improvements in the transport system.

Alternatively, the London Underground, for instance, could be allowed to issue bonds secured against its revenue stream to fund modernisation of the Tube system.

Ironically, one of the first casualties of the LCR debacle is likely to be Mr Prescott's plan to transform London Underground into a public- private partnership. With the shock waves still reverberating from the Channel Tunnel Rail Link, such partnerships have not got a very good name, either in Whitehall or the City.