Project Finance

Eurotunnel Case Study

Group Project Report

Submitted to: Dr. Suchi Dubey

Submitted by: Section C Group 7 & 8

Hitesh Deora 170201053
Lokesh Yadav 170201064
Rishabh Sharma 170201098
Rushi Prajapati 170201102
Shubham Bhatia 170201118
Aekansh Jain 170201009
Anurag Bang 170201024
Lovenesh 170201065
Prakhar Goel 170201087
Shriya 170201115

EUROTUNNEL CASE STUDY 1

EXECUTIVE SUMMARY

The Eurotunnel project also referred to as Channel Tunnel or simply Chunnel was created with
the idea of having a fixed transportation between France and England. The architectural result
is a 50-kilometre(31-mile) tunnel connecting Folkestone, England and Calais, France. In May
1984 the idea was reborn after the initial idea of 1750’s. the bids were called for the project
and CTG-FM Eurotunnel System was selected. The SPV was not a company but a partnership.
The official contract was estimated to be 4.8 billion pounds. There were three sources of
revenue namely, shuttle fares, railway charges and tolls and finally ancillary revenues. But due
to it being an ambitious project, there were cost overrun and ran into economic risk. But it
faced variety of problems since the beginning and faced increasing competition from ferry
services and the new no-frills airlines. The project faced problems in all spheres of project be
it construction to political and safety problems. The project highlighted the financial problems
that high leverage brings. But the European financial community feels that the project would
continue to operate. There were many debts restructuring which had positive effect on the net
profits. It is a project which is too big and too visible to be allowed to fail for both the two
national governments and the consortium of the creditor banks.

BACKGROUND

The first recorded plans for a co English Channel link between United Kingdom and France
date back to 1750’s. However, the Eurotunnel project officially started in 1987. The
construction was planned as a twin bore rail transport tunnel with associated infrastructure,
rolling stock and terminals. In 1973, French president Georges Pompidou and British Prime
Minister Edward heath signed a treaty to construct a twin-bore rail tunnel under the English
Channel. In My 1984, The National Westminster Bank and Midland bank proposed to the
governments of UK and France a report detailing how a fixed link across channel, consisting
of twin bore line, might be project finance entirely with private capital. The project has a
symbolic value that is it was initiated at a time when the members of EEC were ratifying the
single European act to create by 1992, a single integrated European ecosystem. The arranging
banks subsequently came together with some of the largest construction companies of United
Kingdom and France to form The Channel Tunnel Group Limited in United Kingdom and
France Manche SA in France. The tenders of the project were called upon by the end of October

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1985 for financing, construction and operation of the fixed link of the tunnel. Ten proposals
came, out of which CTG-FM Eurotunnel won the bid on Jan 1986, for quoting a $2.6 Billion
Twin-Bore Tunnel. The concession gave CTG-FM the right to build and operate the Euro-
tunnel for the period of 55 years from the date the treaty was ratified. At the end of 2042, the
ownership of Eurotunnel would revert to British and French government. The structure shows
the Build-Operate-Transfer (BOT) model.

The Eurotunnel got early opposition, when a group of ferry owners, Port interests, and
environmentalists established Flexi link for the construction of fixed link between England and
France. They predicted that the growth in cross channel traffic would slow down and that the
tunnel proves to be unprofitable and end up drain on the British taxpayers.

OBJECTIVE OF THE PROJECT

Though the first plans date back to late 18th century but the due to the Napoleon war, it was
just a dream in those days. In 1979, the "Mouse-gap Project" was proposed when the
Conservatives came to control in Britain. The idea was a solitary track rail burrow with an
administration burrow, yet without carry terminals. The British government appreciated
financing the task, but Margaret Thatcher, the head administrator, said she had no protest to a
secretly supported undertaking. In 1981 Thatcher and François Mitterrand, the French
president, consented to set up a working gathering to assess a secretly financed venture. In June
1982, the Franco-British investigation gather supported a twin passage to suit traditional trains
and a vehicle carry benefit.

The main idea behind this project was that after the completion, it would join the rail systems
of United Kingdom, France and Rest of Mainland Europe. Its comfortable fast and reliable
service would furnish a valuable link between United Kingdom and France, beneath the
English Channel. Both the countries were the Heavyweights of the European as well as the
global arena. Hence, a direct transportation channel was required by both the governments.

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CAPITAL STRUCTURE OF THE PROJECT

The ownership structure for the Eurotunnel Project could be described as a dual-bodied
transitional hybrid. It involves two groups of separately registered parallel group of companies;
Eurotunnel PLC in the United Kingdom and Eurotunnel S.A. located in France. They would
jointly be referred as “Eurotunnel” and would form a general partnership, equally sharing the
profits and losses. Eurotunnel’s finances would be jointly managed by Eurotunnel Finance
Limited and Eurotunnel Finance S.A.

According to Eurotunnel’s estimates, it would cost around £4.8 billion for making the
Eurotunnel System; which includes £2.8 billion worth of construction costs, £0.5 billion in
Corporate and other costs, £0.5 billion provided for inflation and £1 billion in Net Financing
Costs.

Eurotunnel planned to raise £6 billion to cover the costs of the project. It would comprise of
£1 billion worth of Equity and the rest £5 billion in Debt.

Eurotunnel planned to raise the funds in stages:

• Equity was raised in various tranches. The initial public offer, raised in 1987, was
valued for £770 million.
• The Arranging banks obtained strongly worded letters of intent were issued by 33 banks
to underwrite the loans £4.3 billion prior to the Eurotunnel Project’s selection by the
British and French governments.
• Following the selection in January 1986, the Eurotunnel raised £50 million from its
founding shareholders under Founder’s equity, constituted as Equity Offering I.
• With the second issue of shares, namely Equity Offering II, Eurotunnel hoped to raise
an additional amount of £150-£250 million.
• The Arranging banks, after the construction contract had been signed and the Equity
Offering II had been completed, planned to syndicate 40 banks in the spring of 1986
via formal legal obligations with collective bidding commitment to underwrite a £5
billion syndicate loan.
• Drawdowns on the underwritten loan would not be permitted until a total equity of £1
billion had been raised and the value invested in the Eurotunnel Project had been at
least £700 million.

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 • In the first half of 1987, Equity Offering III, the third and final equity offering would
raise the remaining balance £1 billion equity.

Eurotunnel expected to further reduce the debt service burden by refinancing much of the
project debt with cheaper financing once the completion risk had been eliminated.

PROBLEMS IDENTIFIED

❖ Incorrect Budget Estimation: Due to delay of about 19 months the project ended with
incurring approximately £10.5 Billion which was almost double of its original expected
cost of £4.8 Billion.
❖ Disputes: The cost overruns also led to disputes between Transmanche Link and
Eurotunnel which lead to further delay in the project.
❖ Price War and Traffic Estimates: Their analysis of driving the existing ferry operators
out of business ignored the possibility that the Ferry operators will react with better
services and lower prices to retain their market share. This difficulty increased when
some new budget airlines started providing cheap air travel between UK and France.
Due to such unforeseen factors the traffic estimate of the Eurotunnel project also failed
to meet, leading to loss of revenue
❖ Financial Problems: Failing to meet its profit projections, Eurotunnel landed in a
position where profit shortfalls led to violation of certain covenants in the bank loan
agreements resulting in drawdown of the line of credit giving rise to further cash crisis.
❖ Winners Curse: Eurotunnel Project got request from multiple bidders and the bidder
having the lowest and most optimistic price estimates was selected rather than the one
with the most realistic estimates, which led to ‘winners curse’. The bidder had crossed
the budget estimates and quality was also compromised.
❖ Credit Default: Before the commercial opening of the tunnel, the SPV presented a
typical structure with a leverage ratio of about 80% but due to financial crisis
Eurotunnel was unable to continue its payment obligations. In the year 1995,
Eurotunnel suspended the payment of interest on some debts which had the effect under
credit agreement of triggering a standstill.

EUROTUNNEL CASE STUDY 5

RECOMMENDED SOLUTIONS

❖ Cost Management
1. Replacement of material, equipment with alternate options of same specifications
could have been done.
2. Specification and Validation of functional and technical requirements at the front
end should be done.
3. A standardized change-control management to eliminate future cost considerations
could have been adopted.
❖ Stakeholder Management
1. Project Stakeholder management was not prepared in detail. Project life cycle
should have been taken into consideration.
2. By implementing Project life cycle variance in cost, schedules and extra claims can
always be minimized.
❖ Risk Management
1. Project process and approval risk were overlooked. They were not prepared to
handle the degree of IGC supervision and change management controls.
2. Contingencies for known and unknown risk and a strategy should have been made
to avoid future risks.
3. In large international construction projects like Eurotunnel Government support and
communication channels should be roped in.

LESSONS LEARNT

Pre-Phase

❖ During construction stages, efforts should be made to manage the interests and
incentives of contractors rather than cost containment as it earns positive impact from
investors.
❖ Once construction is done the investors priority becomes overall cost and impact of
construction events on the expected returns.
❖ While making strategic forecasts the company should always bear in mind that how the
competitors will react to the project and how their reactions might affect the forecasts

EUROTUNNEL CASE STUDY 6

 and estimations made. In the Eurotunnel project the analysts failed to consider the
reaction from Ferry Operators of entering into a fare war to retain their market share.

Post-Phase

❖ In large infrastructure projects, the efforts required to accomplish proper due diligence
are vastly underestimated.
❖ Since every project requires cash flows, its extensive and accurate analyses is very
important for its functioning.
❖ The cost of the project should not be undermined and with time its value may increase
to two to threefold.
❖ Past engineering studies should always be reviewed and taken into consideration.
❖ Technical as well as functional aspects of project management should be given equal
importance.
❖ Detailed risk analysis required in inception stage needs to be monitored and tracked
during Project Life Cycle(PLC) of the project.
❖ Maintaining communication throughout the project yields better operational project
results.

CURRENT STATUS OF THE PROJECT

Eurotunnel is coming good. As Britain's economy develops, it is pulling the organization up.
In 2013, 20.4m individuals utilized the passage, either in their own particular vehicles on board
the passage carry or as travellers on Eurostar's rapid trains. The prior year it was 19.9m. Rail
cargo expanded, as well. Incomes in 2013, at €1.1 billion ($1.5 billion), were 12% higher than
in 2012. One year from now Eurotunnel, which is headquartered in Paris, may start to pay
French corporate-benefits charges.

Indeed, even now, the passage is working at just somewhat finished portion of its ability. Be
that as it may, the following two decades are probably going to change it from a helpful
respective connection into a lane through which whatever remains of Europe can travel. The
reason is more rivalry.

EUROTUNNEL CASE STUDY 7

The European Commission is quick to open rail framework to prepare administrators from all
part states. That is now occurring in cargo, with organizations from different nations running
trains through the passage. Eurotunnel is cutting its cargo charges from June after the
commission undermined to go to court, so volumes should increment. In any case, traveller
travel has been saved for the fast prepares worked by Eurostar, which is 55% possessed by
France's state rail administrator, SNCF. England claims 40% (however the administration is
considering offering) and Belgium has 5%. That syndication is going to end.

Deutsche Bahn, the German rail organization and SNCF's awesome opponent, has been
disturbing for a considerable length of time to run its trains through the passage, interfacing
London with Germany and the Netherlands. In June 2013, after genuine poking from the
commission, Britain and France, which formally regulate Eurotunnel, said it could. Deferrals
in kicking it into high gear stock from Siemens have pushed back the date of Deutsche Bahn's
imaginable passage make a big appearance. Eurostar itself isn't stopping. It has tried associating
London with Lyon and the south of France and reported plans to stretch out the system to
Marseille and Amsterdam. Other nations' administrators will soon participate.

Calorie counter Helm of Oxford University says the time has come to scrap Eurostar's
restraining infrastructure. The essential thing with framework, he considers, is to keep tracks,
systems, pipelines et cetera isolate from the stuff that experiences them to enable rivalry to
bring down costs and enhance benefit. As Eurotunnel opens up to new administrators, he says,
"throughout the following 20-30 years it just needs a little creative energy to figure you will
have the capacity to get on a prepare in any city in Europe and go to some other city."
Imagination, and a major whack of venture.

REFERENCES

• https://www.constructionnews.co.uk/best-practice/legal/the-channel-tunnel-have-we-
learnt-our-lessons/8662983.article
• http://news.bbc.co.uk/2/hi/business/4088868.stm
• https://www.economist.com/news/business/21601882-bad-project-comes-goodwith-
better-yet-store-next-20-years
• https://www.youtube.com/watch?v=r_HN26VVXAk

EUROTUNNEL CASE STUDY 8