ABSTRACT
The work of the Franco-British Channel Link Financing Group received a mixed reception. Journalists were sceptical. When they met DTp officials for an off the record briefing on 22 May they expressed the view that the report did not take the link any further forward. Many felt, with the Financial Times and Le Figaro, that Ridley’s Commons statement had poured cold water on its conclusions and that the project was still at first base.1 To be fair, the Channel Link was an entirely novel challenge from a banking perspective. As the report pointed out, its sheer size, the very long gestation period, the dependence for revenue on traffic growth, and the insistence that there should be no government aid ‘put it outside the common experience of the private markets’. On top of this, the Link would be the longest crossing under or over water in the world, and the asset would have ‘no intrinsic value except to the project’.2 Beneath the almost impenetrable layers of detailed analysis, the banks presented revised traffic forecasts and costings, building upon the estimates provided for the Anglo/French Report (AF82) of 1982. A more conservative view was taken of contractors’ estimates by adding 10 per cent to capital costs and assuming an eight-year construction period, with up to two years overrun. The cost of their favoured option, a dual-bore rail tunnel with a shuttle for road vehicles, was put at £2.0 billion in 1983 prices, and the maximum level of indebtedness was estimated to be £7.5 billion, £2.4 billion in 1983 prices. The real rate of return was given as 8.3 per cent, higher than that for the alternative tunnel options, and attractive when compared with the much higher capital cost and indebtedness for a bridge or composite scheme (Table 9.1). The impasse was created in the critical area of financing, where the bankers ignored the British Government’s determination that there should be no government guarantees. Two financing plans were presented, both involving a mix of investment capital, bond issues (indexed or revenue) and loan facilities, and both assuming a measure of government support, including protection against political risks, and government and/or EEC financing of a two-year development stage costing £18 million [in 1983 prices]. In the first proposal, put up by the
British, all funds would be committed before construction began. There would be an investment capital of £540 million [£393 million in 1983 prices], mainly in the form of convertible loan stock, and the remainder – £5,398 million [£1,920 million in 1983 prices] – would be raised by the banks as non-recourse loans, to be converted after opening into revenue bonds. Governments would shoulder some responsibility in the event of a substantial cost overrun and share in the refinancing risks. In the second proposal, advanced by the French, there would be a progressive commitment of funds during the early construction period, and the Governments would therefore bear a higher degree of risk. Investment capital would be £540 million, with the remainder – £3,494 million [£1,242 million in 1983 prices] in bank loans – committed after the first two years of construction and progressively converted into non-recourse form – and indexed bonds. The banks would bear very limited risks until the service tunnel had been completed.3
