DIGGING FOR DIVIDENDS

The Channel Tunnel is a project that will fly better than

Concorde, argues Edward Whitley

FORTY thousand feet above the embryonic Channel Tunnel lies one of the few flight paths allocated to Concorde, the last great Anglo-French project. Now when Concorde flies overhead it is saluted as a national triumph, proof that British technology can lead the world. After all nobody else has got one. It is widely forgotten that the reason why nobody else has got one is because it took 14 years to build and cost over £6 billion. Only 16 of these gleaming white paper darts were made, two of which were cannibalised for 'And you're sure that you can build all this in one day?'

spare parts and one put in a museum. As no other airline has bought a Concorde, only British Airways and Air France oper- ate them.

If these 13 aeroplanes had to meet the interest payments on their construction costs they would have to earn around SOO million a year, rather more than three times British Airways' annual profits. In order to utilise this supersonic technology Concorde flies gourmets to Bordeaux for wine-tasting weekends. Later in the year two Concordes will fly over the Soviet Union to film an eclipse of the sun.

Forty thousand feet below — and going steadily deeper — the Channel Tunnel shares the same origins as Concorde in that it was a Government initiative. There was no ground swell of public opinion deman- ding a Channel Tunnel any more than there was for supersonic aeroplanes. As arbiter of the public's best interests the Government of the day decided to commis- sion these projects. With Concorde it also enjoyed the public's open cheque book to pay for it. When there is no prospect of a commercial return it is important to use other people's money. If the Channel Tunnel was being paid for by the Government it is possible to imagine it being completed in the middle of the next century when it would be hailed as the world's most prestigious piece of construc- tion. A glass top would be added to transform it into something useful like an observation post for oceanic life. Gour- mets in open-topped carriages could admire displays of synchronised swimming and count the hulls of ferries crossing overhead. Once a year it could be filled with water for an Anglo-French lobster race.

The reason why this agreeable nonsense will not happen is that.the Channel Tunnel is not being built with other people's money. It is being built by Eurotunnel, a public company owned by shareholders. If at any point Eurotunnel's shareholders or bankers lose confidence in its ability. to make them a profit, they will withdraw their support. This is why Alastair Morton, the chief executive of Eurotunnel, is taking lumps out of the builders, Transmanche Link, and their profits. He has no choice, and privately, they know it. Eurotunnel is operating within the boundaries of profita- bility, a constraint which no other en- gineering project of this size has had to consider. It is the biggest test of Mrs Thatcher's vision of capitalism. It is allo as vulnerable to bankruptcy as Sock Shop.

As it happens Eurotunnel is currently on the verge of bankruptcy. It has until May

to sign a new agreement with Transmanche Link, which it is employing to build the tunnel. It will then need to raise around £1.5 billion to pay the additional construc- tion costs, some £400 million from asking shareholders to buy additional shares, and £1.1 billion from its bankers. If Eurotunnel cannot persuade anyone to contribute these funds, it will become bankrupt.

Three questions hang over Eurotunnel's future: the answers will decide whether it will become Britain's economic life-line to Europe or Merely the world's longest underground pier. These concern the costs Of building it, the profits from running it and the Government's attitude to support- ing it.

So far the attention has focused on the construction costs. On the assumption that the builders' revised estimate of £7.2 bil- lion represents the final cost, there are few further risks in the construction work. The tunnelling machines are using proven tech- nology and they have already dug a third of the way. The two holes in the ground will certainly meet to form a tunnel. At that Point they just leave behind them a legacy of debt and interest payments.

The risk then concerns the future earn- ings potential. Eurotunnel's profitability is a straightforward pay-off between the costs of building the tunnel and the profits from Operating it. The difficulty is that whilst the costs have to be paid in cash in today's money, the earnings are unquantifiable forecasts for the next 50 years for a market Which does not yet exist. As the real value of money — at today's inflation rates — halves every Seven years, it makes looking ahead into the future as murky as the bottom, of the Channel. .

Happily for Eurotunnel and its bankers and shareholders, forecasts of profits for the future have increased since the project was originally started. In 1986 when Euro- tunnel first raised equity finance it esti- mated that in the year 2003, ten years after the opening, the tunnel would earn re- venues of £460 million in today's values. By 1987 this had risen to £707 million and by 1988 to £768 million. Last year it rose again to £820 million — a total increase of 78 per cent. The revenue simply means the number of forecast passengers multiplied by the cost of their tickets plus the amount of freight. Once the tunnel is operating these figures will be the easiest to calcu- late. While itis currently just a hole in the ground they are the most difficult.

In order to decide whether to buy Eurotunnel shares, financial analysts have written computer models almost as long as the tunnel itself. These try to gauge every- thing from the market share the tunnel will take from the ferries to the price it could charge, the amount of freight and the percentage of travellers who will use it between Newcastle and Lyons. There is that particular unknown quantity: the number of people who, in the manner of Sir Edmund Hilary, will simply use it because it is there.

Underlying all these estimates is one essential question: will Eurotunnel be able to send a fully loaded train down the tunnel every three minutes? If it is successful then the 55-year lease will be an asset worth £7 billion when the tunnel opens and a license to print money until 2042. If it can only operate 12 trains a day, as Bernard Levin suggests, it will be in debt for ever. If, like London Underground, it oscillates wildly between these extremes and starts off with a Moorgate-style crash or a Kings Cross- type fire, then it will be back to the lobster racing.

..As financial analysts panic between these alternating views, the price of Euro- tunnel shares is highly volatile. It has swung from the original price of £3.50 up to £11 last year and now back to £6. Rather like a meticulously planned party, nobody will know how successful Eurotunnel is until everyone has arrived and it is too late to do anything about it.

Underlying these logistical problems is the most obscure question of all. What is the Government's attitude to the Channel Tunnel? On the face of it this is unambi-

guous: by force of law, in the Channel Tunnel Act the Government cannot invest public money in either the tunnel or any of the supporting infrastructure. We shall see.

The main bone of contention is the fast rail-link between London and the Channel Tunnel. Due to the cost of landscaping this railway, it will be commercially unviable. Unless the Government subsidises the cost of building this tract, it will not be built.

As the centre of European gravity shifts eastwards, the Channel Tunnel becomes increasingly important. If the fast rail-link is not built, the express trains from the Continent will speed through the tunnel at 80 mph then chug up to arrive at London two hours later. The prime benefit of the Channel Tunnel will be to the south east of England. Companies in other parts of the country will lose trading opportunities with the Continent. From the Continent's pers- pective, the Channel Tunnel will be a cul-de-sac which ends at Kent.

The French government has acted dif- ferently. It has recognised that public utilities are not always profitable and subsidised the cost of the rail-link between Calais and Paris. On either side of the tunnel there is an imbalance of expendi- ture.

The British Government's attitude would be more excusable if it was not going to receive any money. But as the tunnel is built the Government will receive tax on the workers' wages as well as the builders' profits — whatever Mr Morton leaves of them. During the tunnel's operation it will receive tax on Eurotunnel's earnings. It will also benefit from the increase in trade flowing in and out of the country. When the lease expires in 2042 it will. receive a fully operational tunnel. It receives these streams of income without exposing itself to any risks. By way of contrast, the Eurotunnel shareholders who have risked their capital to build the project will receive only a stream of dividends.

Eurotunnel has succeeded to date be- cause of the discipline of the commercial market. When it was floundering in 1986, the Bank of England appointed Alastair Morton to rescue it. Mr Morton has achieved more than any civil servant or MP ever did with Concorde, in that although costs have risen, the Stock Market — that most cynical investor — still believes that it will be profitable.

Once Mr Morton has resolved his differ- ences with the builders he will turn his formidable negotiating skills towards the Government itself. The builders complain that he is too difficult to deal with. Is the Government made of sterner stuff? Mr Morton will argue that the Government should give British Rail a grant to build the fast rail-link line. His threat could be that unless this is built, he will give the tunnel back to the Government in 2042 in roughly the same dilapidated state as the Northern Line on the London Underground. It is a threat worth taking seriously.