Eurotunnel:

 Eyes  Wide  Shut  case  question  answers  

 
 
1. How  well  did  the  Eurotunnel  project  perform?    Evaluate  the  Eurotunnel  project  on  the  
dimensions  of  budget,  schedule,  and  "quality"  (in  this  case,  meaning  specification  
attainment).  
 
The  classic  performance  dimensions  on  which  project  performance  is  assessed  are  budget,  
schedule,  and  quality  where  “quality”  typically  means  “meeting  specifications.”    On  these  
dimensions,  the  Eurotunnel  clearly  did  not  perform  well:  
 
• Budget      The  project  budget,  determined  in  1987,  was  £  4.8  billion  including  £  2.8  billion  
in  construction  costs.    The  following  table  shows  the  cost  overruns  from  1987-­‐1994.  
 

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Cost  Category   1987  Estimate   1994  Actual     %  

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(£  million)   (£  million)   Change  

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Tunneling  (Target  costing  works)   1,329   2,110   59%  

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Terminals  and  fixed  equipment  (lump  sum  works)   1,136   1,753   54%  
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Rolling  stock  (procurement  items)   245   705   188%  
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Bonuses  and  contingency     46   -­‐  
Direct  and  additional  works     230   -­‐  
Total  construction  costs   2,719   4,844   79%  
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Owner’s  costs   565   723   28%  

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Adjustments  for  inflation   489   824   69%  

Finance  fees  and  costs   1,024   1,591   55%  
Total  costs   4,831   7,982   65%  
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The  Eurotunnel  was  unable  to  make  a  profit.    No  profit  was  generated  from  the  start  of  
operations  in  1994  -­‐  2007.    The  costs  of  the  tunnel  were  simply  too  high.  
 
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• Schedule      Construction  began  in  December  1987  with  operations  targeted  to  begin  in  
May  1993.    Although  freight  services  started  in  June  1994,  passenger  service  didn’t  
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begin  until  December  1994.    Delays  in  obtaining  operations  certificates  for  all  four  kinds  
of  services  resulted  in  19  months  of  delay,  29%  longer  than  the  original  project  schedule  
of  66  months.  
 
• Quality        Several  specifications  were  weakened  to  a  lower  level  of  performance  during  
construction.    The  maximum  speed  in  the  tunnel  was  reduced  with  a  resulting  increase  
in  travel  time;  the  capacity  of  the  tunnel  was  reduced  as  well  (p.  8  of  the  case).    There  
were  many  “optimization”  compromises  that  caused  the  Eurotunnel’s  operating  costs  to  
go  up  (p.  9  of  the  case).    These  are  indications  that  the  original  specifications  were  not  
all  met,  meaning  that  quality  was  compromised.  

 
https://www.coursehero.com/file/26992649/Eurotunnel-Eyes-Wide-Shut-HW-answerspdf/
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2. What  were  the  reasons  for  the  Eurotunnel  project's  performance?  In  particular,  what  roles  
did  technical  and  market  uncertainty  play?  
 
Technical  uncertainty:  
 
Technical  uncertainty  was  considered  to  be  insignificant  –  a  point  made  in  the  CTG-­‐FM  proposal  
–  due  to  the  belief  that  ground  conditions  -­‐  the  geology  and  water  conditions  through  which  
the  Eurotunnel  had  to  be  bored  -­‐  were  favorable  and  well  understood.    CTG-­‐FM  believed  that  it  
had  proven,  dependable  tunneling  methods  and  would  not  be  challenged  by  the  straight-­‐
forward  design  of  the  Eurolink.    It  turned  out  that  there  were  technical  risks  –  e.g.,  cleft  rock  
that  enabled  water  to  flow  into  the  area  that  was  being  bored,  causing  wet  ground  on  the  UK  
side.  This  required  changes  to  the  technology  of  the  tunnel  boring  machines,  resulting  in  
unexpected  increases  in  specifications  and  costs.    The  technology  of  the  French  boring  

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machines  was  inappropriate  for  boring  through  water,  resulting  in  start-­‐up  delays  and  

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unnecessary  expenses.    Both  sets  of  technical  risks  could  have  been  better  managed  using  risk  

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management  methods,  which  would  have  led  to  fewer  delays  and  lower  unforeseen  expenses.  

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Market  uncertainty:  
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Eurotunnel’s  continued  inability  to  turn  a  profit  also  could  have  been  caused  by  market  
uncertainty.    When  Eurotunnel  started  operations,  the  channel  ferry  contractors  merged  and  
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started  much  more  aggressive  pricing.    In  addition,  low-­‐fare  airlines  started  flying  between  the  
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UK  and  continental  Europe  during  the  1990s.    Also,  the  high-­‐speed  link  from  Dover  to  London  
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didn’t  open  until  November  2007.  

 
The  market  consultants  that  CTG-­‐FM  used  in  1986  were  relatively  accurate  in  forecasting  the  
routine  functioning  of  the  Eurotunnel  over  the  next  20  years.    They  predicted  revenues  of  £  642  
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million  (in  1987  prices)  for  2003,  which  was  pretty  close  to  the  1987  revenue  estimate  with  
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inflation  figured  in.    (The  UK  consumer  price  index  from  1987  to  2003  was  ~  25%  per  year.)    So  
it  appears  that  market  uncertainty  didn’t  cause  the  Eurotunnel’s  inability  to  achieve  a  profit.    
 
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3. What  else  could  affect  the  Eurotunnel's  ability  to  turn  a  profit?  
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Debt.      
 
The  source  of  the  Eurotunnel’s  inability  to  turn  a  profit  was  its  disproportionate  debt  load.    The  
original  plan  predicted  that  debt  servicing  would  represent  79%  of  total  cost  (see  the  top  of  
page  5  in  the  case).    Supporting  this  level  of  debt  servicing  would  require  an  operating  margin  
of  44.1%  -­‐  somewhat  unrealistic  in  the  transportation  industry.        
 
The  profitability  problem  was  due  to  competing  interests  of  the  various  parties  involved  in  the  
original  1985  bid.      Exhibit  5  in  the  case  shows  the  interests  and  contractual  obligations  that  

 
https://www.coursehero.com/file/26992649/Eurotunnel-Eyes-Wide-Shut-HW-answerspdf/
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 controlled  the  relationships  of  the  most  important  players  in  the  Eurotunnel  project.    These  
different  relations  caused  the  parties  to  compete  rather  than  cooperate  with  each  other:  banks  
wanted  to  get  their  money  back  (from  their  loans)  with  interest;  shareholders  wanted  
operating  profit  and  a  high  share  price;  the  Trans  Manche  Link  (TML)  that  constructed  the  
tunnel  wanted  to  make  a  profit  on  its  construction;  and  the  Eurotunnel  itself  wants  to  make  
money  owning  and  operating  the  tunnel  for  the  next  50  years.    Given  the  enormous  amount  of  
debt  the  Eurotunnel  had  incurred,  not  all  of  these  goals  could  be  satisfied.  
 
 
4. Describe  the  interests  and  obligations  (i.e.,  contract  structures)  between  the  Eurotunnel  
and  the  banks  and  the  Eurotunnel  and  TML.  
 
Eurotunnel  and  the  Banks  
 

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The  banks  were  initially  reluctant  to  invest  in  the  financing  of  the  Eurotunnel,  realizing  that  the  

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project  had  many  risks.    As  a  result,  the  banks  were  determined  to  structure  the  equity  and  loan  

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agreements  in  order  to  secure  maximum  protection.    This  had  direct  and  measurable  effects  on  

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the  project  and  on  Eurotunnel’s  later  operations.    Loans  were  structured  so  that  Eurotunnel  
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bore  all  interest  risk  and  had  to  pay  fees  each  time  changes  were  negotiated.    As  a  result,  
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financing  fees  and  costs  exploded,  adding  to  the  Eurotunnel’s  debt  load  directly  and  
exacerbating  its  formidable  challenge  of  achieving  profitability.    
 
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Facing  a  total  accumulated  financing  need  of  about  ₤10  billion  by  mid-­‐1994,  the  Eurotunnel  had  
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to  raise  cash  both  from  shareholders  and  banks,  and  then  completely  restructure  its  debts  in  
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July  1997.    Even  after  this  financial  restructuring,  the  Eurotunnel’s  debt  was  too  high  to  allow  
the  firm  operating  it  to  recover.    Banks  maneuvered  to  retain  their  bargaining  power  in  
subsequent  restructuring  negotiations  so  that  they  could  exact  as  many  of  the  tunnel’s  future  
operating  revenues  as  possible.    The  banks  did  this  to  avoid  a  costly  (for  them)  bankruptcy.  
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Eurotunnel  and  TML
 
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The  building  contractors’  priority  was  to  derive  a  profit  from  the  construction  contract  and  to  
shed  as  much  risk  as  possible.  The  investment  made  by  the  building  contracting    companies  in  
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TML  were  negligible  compared  to  the  revenues  they  could  derive  from  the  construction  work.    
Losing  their  stake  in  TML  was  thus  a  relatively  minor  risk.  
 
There  are  two  types  of  cost  reimbursement  contracts:  one  with  a  fixed  “management  fee”  and  
one  with  “cost-­‐plus-­‐effort  percent”  reimbursement.    The  logic  behind  both  is  that  the  
contractor  doesn’t  influence  key  design  decisions  but  only  coordinates  them  and  should  be  
protected  from  cost  risks.    A  cost-­‐plus  contract  was  used  for  rolling  stock  in  the  Eurotunnel  
project.    Cost-­‐plus  contracts  are  appropriate  only  if  the  client  (in  this  case  Eurotunnel)  is  very  
familiar  with  the  work  to  be  done  and  can  judge  the  appropriateness  of  every  step,  since  the  
contractor  receives  a  “volume  fee”.    Eurotunnel  wasn’t  knowledgeable  about  rolling  stock  and  

 
https://www.coursehero.com/file/26992649/Eurotunnel-Eyes-Wide-Shut-HW-answerspdf/
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 this  handicapped  its  supervisory  ability.    Trans  Manche  Link  (TML)  was  reluctant  to  get  involved  
in  this  kind  of  work  since  they  had  the  least  expertise  in  this  particular  facet.  However,  the  
banks  wanted  one  party  (TML)  to  take  overall  responsibility  for  delivering  the  entire  project.    
The  procurement  contract  was  a  compromise,  which  enabled  TML  to  avoid  cost  risks  on  the  
procurement  of  the  rolling  stock.    A  combination  of  TML’s  lack  of  expertise  and  discharge  from  
responsibility  inevitably  led  to  uncontrolled  cost  increases.    A  cost-­‐plus  contract  was  not  the  
right  type  of  procurement  contract  for  the  rolling  stock.    
 
 
5. What  kind  of  support  did  the  British  &  French  governments  and  IGC  give  the  Eurotunnel?  
 
In  1987,  just  after  its  formation,  the  Eurotunnel  claimed  that  the  schedule  imposed  by  the  
British  Government,  from  its  inception  to  the  granting  of  Royal  Assent  to  the  Bill,  was  
ridiculously  tight  for  a  project  of  its  enormity  and  importance.  The  tunnel  project  was  politically  

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driven;  it  was  supported  by  two  governments  with  very  different  philosophies  on  infrastructure  

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projects.    Both  governments  wanted  the  project  to  succeed  and  did  support  the  initial  

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financing,  but  the  commitment  of  the  French  government  was  stronger.    While  the  French  

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government  built  a  high-­‐speed  rail  link  between  Paris  and  Calais,  the  British  government  
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cancelled  its  planned  link  (which  lengthened  the  travel  time  from  Paris  to  London  by  one  hour),  
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and  did  not  build  it  until  November  2007.    Again,  the  respective  interests  of  the  key  drivers  of  
the  project  were  not  fully  aligned  with  the  success  of  the  project.    
 
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The  supervising  body,  IGC,  did  not  unambiguously  support  the  project  either—slow  decision-­‐
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making  and  opaque  project  requirements  added  to  the  project’s  costs.    
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6. Would  it  have  made  sense  to  stop  the  project?    What  could  have  been  done  differently?  
 
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It  might  have  made  sense  to  stop  the  project  but  it  would  have  been  necessary  for  the  
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Eurotunnel  managers  to  have  recognized  the  constant  escalation  in  project  costs  early  on.    
Also,  there  was  probably  too  much  at  stake  for  the  governments  involved  to  stop  the  project.    
The  Eurotunnel  had  a  strong  political  objective  and  perhaps  for  different  reasons,  neither  the  
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British  nor  the  French  would  accept  the  loss  of  face  from  pulling  out  of  the  project.    The  ideal  of  
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European  unification  promoted  the  project  and  contributed  to  the  Eurotunnel’s  continuation.    
 
 
What  Could  Have  Ben  Done  Differently?  
 
The  need  for  an  initial  win-­‐win  deal  and  the  ability  to  work  through  unexpected  (but  inevitable)  
changes  in  long-­‐term  projects  requires  that  the  contracts  be  rooted  in  an  overarching  business  
approach  and  business  relationship  that  includes  transparency  and  a  fair  process  for  managing  
changes  that  will  inevitably  occur  in  a  project  of  this  magnitude.  The  process  begins  with  the  
choice  of  contracting  partners.    Traditionally,  the  norm  in  the  construction  industry  has  been  to  

 
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 select  the  contractor  on  price  alone.    But  choosing  a  contractor  based  on  track  record,  
reputation  and  previous  working  relationships  is  a  much  better  predictor  of  project  success.    
 
The  second  step  is  to  draw  up  a  contract  as  a  business  deal,  which  specifies  value  for  both  
parties,  explicitly  allocates  risks  (neither  hiding  them  nor  politically  ignoring  them),  and  leaves  
flexibility  for  changes,  according  to  an  agreed-­‐upon  governance  structure  and  an  attitude  of  
collaboration.    
 
Third,  the  process  must  address  the  inevitable  changes  that  characterize  uncertain,  complex  
and  long-­‐term  projects.  If  changes  are  made  transparently,  with  the  possibility  for  all  sides  to  be  
heard  and  explicitly  discuss  trade-­‐offs,  the  changes  have  a  higher  chance  of  succeeding  and  
keeping  all  parties  on  board.  This  includes  early  warning  systems,  which  make  potential  
changes  visible  earlier  (allowing  more  time  to  react)  and  also  make  the  changes  equally  visible  
to  everyone  involved.  Ultimately,  this  process  helps  to  build  relationships,  which  are  the  first  

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safeguard  against  opportunistic  behavior.    

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The  Eurotunnel  project  blatantly  failed  to  build  these  kind  of  working  relationships  and  trust.    

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TML  and  Eurotunnel  detested  each  other.  The  lack  of  trust  was  made  worse  by  the  two  very  
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different  management  cultures  present  in  the  project:  the  French  and  British  managers  did  not  
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see  eye  to  eye  on  many  operational  decisions.    A  lesson  of  this  case  is  that  not  only  do  you  need  
to  understand  your  customer’s  requirements  but  you  need  to  understand  your  business  
partners  as  well.    Relationships  matter!  
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