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.

Start your day with The Independent, sign up for daily news emails
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Senior SEO Executive

£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

Recruitment Genius: Online Customer Service Administrator

£16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...

Recruitment Genius: Digital Marketing Executive

£18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...

Day In a Page

'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

Everyone is talking about The Trews

Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living
Increasing numbers of homeless people in America keep their mobile phones on the streets

Homeless people keep mobile phones

A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before
'Queer saint' Peter Watson left his mark on British culture by bankrolling artworld giants

'Queer saint' who bankrolled artworld giants

British culture owes a huge debt to Peter Watson, says Michael Prodger
Pushkin Prizes: Unusual exchange programme aims to bring countries together through culture

Pushkin Prizes brings countries together

Ten Scottish schoolchildren and their Russian peers attended a creative writing workshop in the Highlands this week
14 best kids' hoodies

14 best kids' hoodies

Don't get caught out by that wind on the beach. Zip them up in a lightweight top to see them through summer to autumn
Robert Fisk in Abu Dhabi: The acceptable face of the Emirates

The acceptable face of the Emirates

Has Abu Dhabi found a way to blend petrodollars with principles, asks Robert Fisk