City backs Channel Tunnel Rail Link rescue

THE CITY yesterday gave the thumbs-up to the deal struck between Railtrack and the Government to rescue the pounds 5.5bn Channel Tunnel Rail Link.

Shares in Railtrack raced ahead as the operator of the national rail network announced that it had reached an agreement to take over the 68- mile link in two stages at a cost of pounds 3.3bn.

Under a complex financing plan announced in the Commons, the Government will in effect guarantee a pounds 3.7bn bond issued by the developers of the project, London & Continental Railways, to complete construction of the link from the Kent coast into London's St Pancras Station.

The bond issue will be in addition to the pounds 1.8bn of public subsidy already committed to the project.

Railtrack has agreed to acquire the first phase of the link, from the tunnel to Ebbsfleet in north Kent, for pounds 1.5bn in 2003. It has also taken an option to buy the second, more expensive phase of the link, into St Pancras, for pounds 1.8bn in 2006.

Railtrack will make a profit from the access charges British Airways and National Express will pay to operate Eurostar services between London, Paris and Brussels. The Government has agreed to fund pounds 140m of the access charges between 2010 and 2020 if there is insufficient passenger income to cover Eurostar's payments to Railtrack.

City advisers involved in the restructuring of the deal estimated that by agreeing to underwrite the bond with its own credit rating, the Government could save pounds 1.2bn in financing charges. This is equivalent to the amount of extra subsidy that LCR asked for in January and which the Government refused, casting doubt over the future of the rail link.

Railtrack's chief executive, Gerald Corbett, said it would have an incentive to build and take over the second phase of the link because it will be allowed to earn a bigger rate of return under the access charge agreement signed with the Government.

In return, the Government will take a 35 per cent stake in LCR, which will retain any profits above and beyond the access charges levied by Railtrack, and a 5 per cent stake in the Eurostar operation.

Railtrack and the Government are forecasting that passenger numbers on Eurostar will rise from 6 million last year to between 7.5 million and 8 million when the first phase of the high-speed link opens in 2003 and double to more than 12 million once the link goes to St Pancras.

Railtrack shares rose 41p - more than 3 per cent - as details of the rescue plan emerged. Chris Tarry, transport analyst with Dresdner Kleinwort Benson, said it was "pretty satisfactory" from Railtrack's standpoint. "It is an important signal that Britain will have a growing rail network and it represents a significant opportunity for Railtrack, given the incentives that are built in to to construct the second phase of the link."

Other analysts said the agreement demonstrated that Railtrack, which has been heavily attacked in the past by ministers for its bumper profits, could negotiate a ground-breaking deal with the Government on such an important and high-profile project.

By backing the bond with its credit rating, the Government is likely to shave financing costs by two percentage points which is worth pounds 120m a year on a pounds 6bn project. Although a commercial issue, the bond will in effect act like a gilt. When Railtrack repays the bond to the Government its cost of capital will be higher but this will be more than covered by the access charges it will levy.

Meanwhile Railtrack disclosed that it is to increase its investment spending on the rest of the rail network by 16 per cent to pounds 1.45bn this year and complete the refurbishment of half its stations by next year and all of them by 2001.

This came as it brought forward its full-year results by a day, announcing that pre-tax profits last year rose 12 per cent to pounds 388m on turnover of pounds 2.4bn. The final dividend was increased to 16p, making an increase for the year of 8.6 per cent.

The lobby group Save our Railways attacked the news, claiming that Railtrack was making more than pounds 1m a day on taxpayers' subsidies of pounds 5m a day. Its campaign director Jonathan Bray said Railtrack was "little more than a gigantic money laundering machine turning public subsidy into private profit".