The benefits to customers, businesses, and the economy of a tunnel under the sea seem obvious: choice, convenience, competitive cross-Channel travel prices. And the cultural symbolism of a land link between our introverted island and the Continent is welcome, too.
But contrary to customers' and investors' intuitions, the operating company Eurotunnel has been a financial disaster zone. Building the tunnel took two years longer than planned and cost double its original budget. Stuck with debts it could not afford to service, Eurotunnel has settled another complex financial deal with its creditors this week, to keep the company afloat.
How could something so self-evidently useful be such a commercial failure? Eurotunnel is a bad advertisement, both to voters and investors, for the Government's Nineties version of privatisation: the Private Finance Initiative. If this is what happens every time we turn vital infrastructure projects over to the private sector, we might as well give up now. Investors won't get burnt twice.
But look at it differently. Though a commercial nightmare now, the Channel Tunnel should prove an immense economic success in the long run. Even with hindsight it was better done privately than publicly. And though the Eurotunnel example can never, and should never, be replicated, it is a valuable lesson for both governments and private investors of the benefits and limits of private infrastructure investment.
The bottom line is that the tunnel was worth building. People will use it. If we ever get round to building a high- speed rail link, even more people and businesses will travel under the sea. With the ferry companies now starting to consolidate and reduce the number of sailings, the tunnel is likely to become a veritable gold mine.
Part of the problem for Eurotunnel has been that private investors are unwilling to operate over such long horizons. Had those shareholders and creditor banks known at the start of the project quite how long building would take, how much it would cost, and how slow the returns would be, they would probably never have invested the cash. And we would have no tunnel today.
The fact that our continental link exists at all is testimony to the over-optimism of those determined to get it built whatever the cost. Small shareholders in particular feel peeved. But it is hard to feel too sorry for them. In the short term, they took a risk. In the long term it will pay off, if only they have the patience to stick around. In fact, it could yet prove a needed lesson in long-termism for our inconstant private shareowners and financiers.
Moreover, it is exactly the kind of project that should be privately financed. The problem with many of the projects that fall under the Private Finance Initiative is that they are merely ways for the Government to shift its own capital spending today forward into immeasurable (and possibly more expensive) current costs tomorrow. A privately financed new hospital saves the taxpayer the money needed to build a public one in the short term, but costs us as the NHS trust rents the building back year by year.
Not so the Channel Tunnel. The eventual customers who pay the final price for the investment are the travelling public, rather than the government. So private investors can recoup their money without placing huge unanticipated burdens on the taxpayer.
More important, the tunnel would have been even more expensive and even further delayed had it been publicly paid for. The fact that private money was involved proved a big incentive to get the job done faster and contain costs - far more of an incentive than if taxpayers' money had been at stake. The tension between the banks, Eurotunnel's shareholders, and the contracted companies who carried out the digging had far more impact on the eventual bill and completion date than a few officials and politicians complaining from Whitehall could ever have done. The entire point of using private finance rather than public finance to pay for these kinds of projects is to give the companies involved stronger incentives to do the work well. By making them bear some of the risk if projects over-run, we reduce the chance of it happening in the first place.
In fact the real failing of the Channel Tunnel project was that it didn't distribute the risks and the incentives properly. Transferring the risk from the taxpayer to Eurotunnel, its shareholders and its creditors, rather missed the point. The private companies who needed to bear risks and be given incentives were the ones doing the digging: the contractors. Instead, the contractors drove the project from the start, set it up on their terms and paid almost none of the cost of completing late or going over budget. No wonder Eurotunnel got into trouble.
But we should be optimistic about the future of privately financed infrastructure. Whenever great engineering projects are launched they run up against new obstacles. Unexpected technical problems arise and are resolved, and human knowledge is furthered as a result. The next time we do it better. The same is true of financial structuring. The first great privately financed infrastructure projects were bound to have teething troubles. But the more we learn from the Eurotunnel fiasco, the better we will do it next time.Reuse content