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Dan, a rail planner, called me at the time of at the Eurotunnel initial public offering in 1987. “We have to buy shares in this company,” he said. “With greatly reduced cross-Channel travel times and marginal costs near zero the company’s going to have a virtual monopoly. This is our chance to get rich!” Dan is American.
Today, Eurotunnel is on a n increasingly slippery slope to insolvency. In fact, If it was were Eurotunnel were a normal company , with moveable assets, it would already have been liquidated. and its possessions put to better use.elsewhereBut we are stuck with the €8bn (£5.5bn) hole in the ground that is Eurotunnel. How did Margaret Baroness Thatcher’s planned beacon of infrastructure privatisation become such a disaster? What are the lessons for future large-scale infrastructure projects? The cause If a single cause has to be identified for the failure of Eurotunnel, it lies with the IPO, which was as pie-in-the-sky as any dot.com dotcom IPO a decade later. Promoters overstated ments of revenues and understated were matched only by their understatements of costs and risks. The IPO aimed was designed to get construction started, with little concern for creating a sound company.with sound operations.
The IPO’s false cost and revenue forecasts worked like a disaster gene implanted deep in Eurotunnel. With unfailing logic the disaster unfolded. triggered in two stages. FirstDuring construction, understated costs boomeranged as costs began to overrun, 80 per cent on capital costs and 140 per cent on financing costs. Share prices fell by two-thirds between 1989 and 1990. SecondWhen operations began in 1994, overstated revenues returned came back to haunt the company as revenue shortfalls; less than half the traffic forecast actually materialised. Share prices fell another two-thirds during 1995. Since then, endless financial Restructurings and talk of fiscal collapse have since pressed share prices down to share prices further, to about 17p per share yesterday, at the writing of this article, or less than 2 per cent of the peak value.
Is this price a bargain, then, at which investors should buy? No, the price of Eurotunnel stock is the price of a lottery ticket in a company more likely to fail than to succeed.
In one important sense, however, Eurotunnel is a success. In the wake of massive cost overruns on defence projects and transnational collaborative ventures such as Concorde in the 1960s and 1970s, the Channel tunnel treaty, signed by Britain and France in 1987, stipulates that the taxpayer must be protected from financial risk, which is to be borne fully by the private sector. The British and French governments must be commended for having succeeded so far in protecting the taxpayer from the mismanagement of Eurotunnel, and for not having conceded to pressures to aid the failing company with public subsidies. Only people who actively decided to invest in Eurotunnel have lost money. doing so. That is no small feat for a project like such as this.
Compare this with what happened with the second-longest underwater rail tunnel in Europe, the Great Belt underwater rail tunnel, which was opened in 1997 and links Scandinavia with continental Europe. Here, the Costs over-ran by The cost overrun was 110 per cent and the tunnel proved non-viable even before operations began. The Danish state owns the tunnel and decided to cover the deficit with cross-subsidies taken from tolls road revenues on the nearby state-owned Great Belt road bridge. The Danish government, like most other governments and the EU, officially considers cross-subsidies unsound public policy, because they tend to lead to an inefficient use of funds. But the embarrassment of having a hugely expensive, non-viable rail tunnel on its hands dominated sound policy. The problem was swept under the carpet. This is more typical of large-scale infrastructure projects than what happened with the Channel tunnel. , and it is a lesson in what not to do for such projects. In terms of transparency, accountability and economic efficiency, Eurotunnel is a more healthy set-up than crosssubsidising state-owned enterprises.
like that responsible for the Great Belt tunnel and bridge.
The main lesson to be learnt from Eurotunnel and similar projects is that tmegaprojects without tears” is something very difficult to achieve. here is no easy short-cut. Technological, political and financial risks are large. Jockeying for position and profit is rampant. because of the prestige and large sums of money involved. Thus, the core problem is risk allocation. Risk should be placed on those best able to identify and manage it. riskBut this is easier said than done.
Privatisation , which was supposed to be an improvement on the public sector’s handling of risk, has clearly not been come the cure-all many predicted. thought it would be. Eurotunnel, Railtrack and similar failures bear witness to this. Ironically, more than any other project, Eurotunnel has scared private investors away from infrastructure provision, where the opposite was the intention. Relying solely on the public or the private sector is has proven insufficient. The best of both private and public sectors must be brought into play. brought into play if we are to make progress. Public-private partnerships PPPstry to do just that and offer a glimmer of hope. A recent study by the UK National Audit Office found that cost overruns were lower and value for money higher in PPPs than in other projects. But PPPs will get us out of the frying pan into the fire, if we are not careful. the many complex interfaces between public and private in PPPs provide endless opportunity to fleece users and taxpayers if they are not regulated properly. Here the engineering of contracts is as important as the engineering of projects. This is something the players are only just learning and at high legal costs.
More than anything, Eurotunnel shows we need to get better at call ing the bluff of misleading IPOs and appraisals of major infrastructure projects. Such bluff started the problems for Eurotunnel and It is where problems start for nine out of 10 projects. , public or private. The incentives to mislead are strong and must be changed to disincentives. This is done by balancing The short-term interests of those who profit from construction must be balanced with long-term operational interests. And by letting forecasters and promoters must carry the full risks of their forecasts. Good infrastructure governance also requires that cost and revenue forecasts be reviewed and possibly redone by independent bodies such as , for instance national auditors or independent analysts. Professional and even criminal penalties should be considered for people who consistently produce highly misleading IPOs and appraisals. Finally, we need to get better at stop projects with inflated benefit-cost ratios. Too many projects are built that should not have been. And Many projects that should have been built are not, because they losing lost out to projects that looked good on paper but were bad in reality.
Eurotunnel is a failure as a business and may soon collapse. but the tunnel is unlikely to close. It will live on as a technological and transport legacy. It will also live on as a legacy to the experimental attitude that is necessary to achieve efficient,make improvement in the difficult field that is large-scale infrastructure provision.
The writer is principal author of the book Megaprojects and Risk. He is professor of planning at Aalborg University, Denmark and founding director of the university’s research program on megaprojects. He serves as advisor to government and business on questions of megaprojects.
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