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I also associate myself with the noble Lord, Lord Jenkin, and other noble Lords who are concerned with CO2 cost-predictability—an important point. One structural problem that we had was that we do this in common with the EU, which generally tends to play all games better than we do, as do the Australians.

The noble Lord, Lord Teverson, raised the difficulty of getting planning permission for windmills, whereas the country is strewn with transmission towers. His comments reminded me of an occasion in Scotland when I had to meet the government adviser on the environment, as I was required to do once a year. This gentleman, an architect, said that he did not really object to having transmission lines; it was the wires in between that irritated him. I replied that, frankly, we were not clever enough to manage without the wires but, if we could, I wondered how long it would be before someone came along and asked for a unifying motif. Beauty is in the eye of the beholder.

The noble Lord, Lord Teverson, also mentioned hot rocks. I had some experience of very hot rocks in a geothermal station in New Zealand, which I was responsible for building. I am not sure that the opportunity even exists in this country; perhaps that is just as well.

The noble Lord, Lord Dixon-Smith, was a little puzzled by my comments on this being the end of this series of debates. I did not mean to suggest that I was giving up the baton, simply that the question of strategy in the electricity industry has now been fully ventilated. The Government have had every opportunity of taking up the sensible arguments that have been made but have chosen not to do so. I therefore see no point in continuing it. I hope, as I am sure other noble Lords do, that the visit of the noble Lord, Lord Dixon-Smith, to Russia is a brief one. If he persists in criticising them to the extent that he has today, it may not be.

The noble Lord, Lord Redesdale, embarked on our customary argument—which ultimately always comes down to nuclear power. I do not know where his figure of 13 per cent losses on the grid came from. I speak from wide experience when I assure him that that is quite wrong; it is much too high.

The noble Lord, Lord De Mauley, again mentioned Ofgem. Ofgem is doing a useful job but it is not able to do other than deal with current market forces. It is neither equipped nor able to take a long view beyond current market requirements. That need remains, and the Government’s pretence or belief that a statutory body is not necessary is very hollow. There is a strategy of a kind in the Government but it is not significant. The Government will remind Russia about the need for the agreements we have. I welcome that and hope that it will reinforce consumers when they lose their supplies.

I thank noble Lords for taking part in this debate and for their support in previous years. I beg leave to withdraw the Motion for Papers.

Motion for Papers, by leave, withdrawn.

Channel Tunnel

1.32 pm

Lord Dykes rose to call attention to the present financial situation of the Channel Tunnel; and to move for Papers.

The noble Lord said: My Lords, I am grateful for the chance of raising in the House today the recent judicial decision reached in France for the rescue plan for the Channel Tunnel. I am also grateful that other noble Lords have come along today to join in this discussion. I am especially grateful to the Minister for being present.

I must declare an interest, both emotional and literal. I was long a fan of this wonderful and amazing project. I am an amateur train buff anyway, and especially pleased that the original plan was accepted as “trains only”. I also had the privilege of riding on the inaugural Eurostar passenger train in May 1994, when the tunnel was officially opened by Her Majesty the Queen and President Mitterand of France. Finally, my family seem to have a minuscule residual shareholding which was left behind in a reorganisation of some portfolios a long time ago, too small to qualify for fare reductions, but the shares in their old form are suspended anyway because of the recent crisis.

Although this debate should logically focus on the details of the court decision at the Paris commercial court, some noble Lords may inevitably wish to raise matters of transport, train and freight policy. I heartily welcome that; it fits in with the debate, as well as consideration of the future perspectives for the company in its new form. Not least, I notice the noble Lord, Lord Berkeley, in his place. No one in the whole country could be more of an expert in these complex matters than him. I am also grateful to the noble Lord, Lord Harrison, for coming in today, with his European expertise. Although this is a bilateral project, it has a European emotional flavour and is part of the overall trans-European network plans, even though it has not thus far received any European money directly.

I supported the original plan for many years, as an enthusiastic supporter of the need for France and Britain to get even closer. I declare an interest as a regular shuttle user, going at weekends to where we have now lived for quite a few years in Normandy. I also supported it as a keen European, hoping that the physical linkage to the Continent would help to dissipate some of the last vestiges of our irritating and unnecessary insularity in this country. Indeed, that positive psychological effect has taken root among the public in general. Agreeably, it has helped thousands of mainly young French professionals, but older ones as well, to commute regularly or live and work in the UK as executives and in other professions and activities; they are estimated as some 350,000, but no one has exact figures.

I was therefore always very frustrated and dismayed that the project start was delayed for some time, with prolonged negotiations between the two Governments, the original earlier plan having been suspended by Tony Crosland anyway; a painful memory. Much time was wasted. When the scheme was agreed after many complex discussions and the Thatcher Government insisted on the project being in the private sector, the French authorities could not believe their ears. An ideologically right-wing Government in Britain was adamant, and especially suspicious of the devious ideas of the fairly new French socialist Government of Monsieur Mitterand.

As we remember, the then British Government were quite happy to use unlimited taxpayers’ money on endless new motorways—with no tolls of any kind for gas-guzzling Jaguars and, of course, heavy lorries to use on a heavily subsidised basis—but, oh no, there could be no public money available for what was and is still the greatest single transport link in the history of the world. Fortunately for the project itself—because otherwise the project would not have got going—the President gave in. It was unfortunate, however, for the form and shape of a hugely expensive costs and debt structure which no normally viable private company could have managed. It was the biggest privately funded infrastructure project for transport linkages at that time; it probably still is, although the figures can always be argued about.

The way that the French Government gave in reflected their anxieties. The Nord Pas de Calais department was at that time a depressed area, with massive closures of textiles, mines and other old industries, with little to compensate. The British Prime Minister was happy to fund the entire Docklands preparation scheme with public money only—the famous pump-priming exercise mentioned by Mrs Thatcher—and equally happy to prepare major UK entities for lucrative privatisations with massive cancellations of private debt to make them attractive share prospects. That was all regarded as okay. I recall, incidentally, that the entire development costs of the Concorde project were borne by the public sector account, allowing right-wing businessmen to travel faster to New York for unnecessary meetings. Many journalists at the time thought that this revealed the Thatcherites’ emotional antipathy to trains as a concept, as often reflected and commented on at the time by the well known Mr Robert Adley, MP.

True to quite realistic expectations, the final construction costs were hugely in excess of original estimates. The original company and the revised company never had the slightest chance of paying off the debt and interest accumulations. As noble Lords may recall, the Eurotunnel company has now undergone debt refinancing and restructuring on a number of occasions, with the banks getting increasingly alarmed and difficult as the company’s future looked more and more shackled.

Thus was this, the first and only major Europe-wide infrastructure project, set up for its inevitably shaky career, from the original equity fundraising from founder shareholders and institutions, to the public flotation in November 1987 raising nearly £800 million, mainly from the British and French. There were subsequent issues of equity in November 1990 of £566 million, another in May 1994—the opening—of just over £800 million, and then a further £160 million at the end of 1999. Meanwhile, the banks put in £5 billion in November 1987, £1.8 billion in October 1990, nearly £700 million in 1994 and £740 million in 2002; good business indeed. Over that period, various short-term advances by the banks were converted into bonds.

At the end of 2005, total net debt reached £6 billion, with £240 million of contractual interest charges for a company with an annual revenue of about £500 million. As we were able to observe over the years of pain and travail, with the excellent physical train operations contrasting with the Byzantine debt burden, the centre of gravity of the downtrodden equity shareholders moved substantially from the UK to France and elsewhere on the Continent. Ironically, this has helped to save the company from extinction.

In April 2004, a revolt of French registered shareholders at the AGM ousted the entire board and a three-year recovery plan was announced in the following October. Prolonged negotiations for a debt-for-equity swap were launched, and the new chairman, Monsieur Jacques Gounon, rejected the banks’ initial standard terms for negotiations. As the complex talks unfolded, it became clear that a major cancellation of the by then colossal £6.4 billion debt would be needed. Monsieur Gounon also decided bravely to resist the debt-for-equity dilution that would hit hard at the long-suffering shareholders and courageously advocated two-thirds debt forgiveness. With an agreed-terms waiver in place to keep the creditors at bay temporarily, the chairman decided to postpone the results in the spring of 2006. He also decided that Eurotunnel had cash flow only until the end of that year and if the debt holders did not like the rescue proposals, they would have take over the running of the company. There was no other solution.

The ad hoc committee that had been created signed the memorandum of understanding for the restructuring plan by May. The plan was also bolstered by the financing commitment of a group of lenders led by Goldman Sachs and Barclays Bank. A preliminary agreement was signed in May 2006 as a binding deal that would help the company to continue. It was then rejected by the lowest tier of bondholders—Deutsche Bank proved to be particularly difficult in this context—so the company had no choice but to apply for bankruptcy in July because the final waivers had expired. Eurotunnel initiated legal proceedings to place itself under the protection of the commercial court of Paris under the procédure de sauvegarde of French law. The request for bankruptcy protection was granted at the beginning of August last year. The court appointed two judicial administrators to assist in securing agreement from the joint board and creditors on a restructuring plan.

In October 2006, in accordance with French procedures, Eurotunnel sent out its draft safeguard restructuring plan on which creditors were required to vote. Under the new proposal, Eurotunnel’s debt would be reduced from more than £6 billion to £2.84 billion, leaving existing shareholders with 13 per cent of a new, restructured company called Groupe Eurotunnel and creditors with the remaining 87 per cent. The plan received approval from a majority of creditors in two separate votes on 27 November and 14 December, although various objections were raised by creditors on technical matters. On 15 January, the court rejected appeals from creditors opposed to the plan and approved the safeguard restructuring plan. Eurotunnel now needs to persuade 60 per cent of shareholders to surrender their shares for conversion into stakes in the new, restructured company—that percentage is regarded as desirable, but is not compulsory. I am glad to say that after all these dramas the creditors voted positively on 27 November—72 per cent of the total senior and junior debt. I am sad to say that some foreign hedge funds stayed away from those decisions. The effect was to leave the creditors with 87 per cent and the equity holders with 13 per cent of Groupe Eurotunnel SA. The bondholders’ vote followed, and in mid-December 82 per cent of them voted to approve the arrangement.

Two years of intensive negotiating and wrangling had produced not only the common sense outcome but the only realistic outcome. It was good at last to see Deutsche Bank coming back on board, so to speak, in the consortium for the new debt configuration with Goldman Sachs, Citigroup and others. The board now feels that the repayment schedules for capital and interest appear to be sustainable and manageable on current cash flow and revenue expectations from a market which, in respect of its two priority services, is reaching a mature stage because of physical capacity limits. However, there are freight possibilities and options, which I leave to other noble Lords to raise today, if they wish.

The long-suffering shareholders can finally allow themselves a small glass of champagne now that the Paris court has approved the safeguard plan, which has full legal effect. The 2,300 employees can do the same. They have been patient and stoic, and accepted a one-third cut to put the company on a lower cost basis. A new listing will be arranged in the two countries this year. There will be an exchange tender offer for the old companies and tier three debt holders will enjoy a cash or shares option in due course. The chairman and chief executive, Jacques Gounon, reminded any further potential troublemakers among the creditors that, even if there were legal appeals against some of the provisions, the court’s decision is binding on all parties to the agreement.

He and his colleagues showed great resilience and imagination, and I was amused by the churlish reluctance by sections of the British press, led by the Financial Times, to praise the agreement. They never used to grumble when this kind of debt cancellation was being done in Britain to put companies in a healthier shape. There is not much difference, except that French law protects employment and jobs. The decision the court reached could not have been reached in a British court under British legislation, so we have to thank the French for having moved in and rescued the company. The shuttle service and Eurostar are now announcing optimistic forecasts of business growth.

The whole saga has been interesting to observe in detail. Millions of passengers, car drivers and truck drivers who have used the tunnel since 1994 can reflect that it took Gallic common sense and fair play to overcome the mistakes made in the 1980s by dotty and arrogant Thatcherites, who saddled the company with an impossible debt mountain. I beg to move for Papers.

1.45 pm

Lord Harrison: My Lords, I thank the noble Lord, Lord Dykes, for opening this debate and for his kind words to me as a fellow supporter of Europe. He mentioned that the Channel Tunnel was a bilateral project, but my view was always that the balance of advantage was with the United Kingdom because it meant that we would have access to the whole of the European Union and belong, whereas the EU had access only to us, delightful as that may be. Although I do not see the noble Baroness, Lady Thatcher, in her place, while I am handing out compliments I should say that I always thought of this as her grand projet. She was not one for grands projets, but I admire the way that she drove this project forward.

The basis on which the project was done and the estimates that were made at the time were less than satisfactory. The costs were underestimated and the projected income was overestimated. I am pleased that these days we have PFI to try to remedy the mistake—which has happened throughout the ages—of underestimating costs on big projects. I am reminded that the House of Lords over-ran its budget tenfold when it was built in the 19th century. That is forgotten today because of the splendour of the building that we have. Before I leave this topic, I say to the Minister that when we are trying to estimate the cost of anything we ought to use the old playground technique of thinking of a number and doubling it.

A big glass of champagne should welcome the debt restructuring plan. As the noble Lord, Lord Dykes, noted, 2,300 employees will rest the better, as will the shareholders. With the backing of Eurotunnel’s creditors, it paves the way for Eurotunnel to leave bankruptcy protection, which I understand is the French version of Chapter 11. It also allows the new Groupe Eurotunnel to make a share-swap offer for the French and UK share units of current Eurotunnel companies, and I understand that Eurotunnel shares, which have been suspended since last May, will start trading this month. Perhaps my noble friend can update us on that.

I have some questions. We were encouraged by the noble Lord, Lord Dykes, to talk about ancillary matters. I welcome the development of St Pancras as the terminus for Eurostar in future but, because of the financial problems that have been experienced, I am less certain that we should phase out Waterloo. I should have thought that London was well capable, and should be capable, of supporting those two points of boarding. Does my noble friend have anything to say on that?

Furthermore, as the green agenda rises in political concerns in this country and, indeed, across Europe, to what extent does that bring into sharper focus the problems experienced by Eurotunnel, and should we in the United Kingdom take a greater interest in these matters, especially as we are now front-runners in trying to reduce CO2 levels in our own country as well as throughout the European Union and in the world more widely? Incidentally, the European Union Select Committee habitually takes the tunnel to go to meetings in Brussels, where it is very good to talk and to act on these environmental issues. I notice that the noble Lord, Lord Berkeley, is in his seat. I very much admire the decision made by the Rail Freight Group to go by train on a future visit to Holland and not to take advantage of flights. We must have this increasing use of trains to try to contribute to reducing CO2 levels.

I have some final questions. As the noble Lord, Lord Dykes, said, chairman Jacques Gounon has been seeking concessions from the British and French Governments on lower regulatory costs and lower licensing costs. Has my noble friend or his colleagues talked to the French Government about that? What is their attitude to that request, especially bearing in mind what I said about the importance of trying to move the green agenda up the political agenda?

Secondly, do HMG have a view on the minimum user guarantee income charge, which was agreed in 1994 for 12 years, and whose withdrawal, as I understand it, precipitated the current crises? Are we contemplating any help? Finally, I draw attention to Eurotunnel’s Eurotunnel on Track, a publication that came out in 2007. Much of it is good news. It states:

“During the year more than 2 million passenger vehicles and 1.3 million trucks were carried on Eurotunnel Shuttles. These results, which are above the forecast in the business plan, allow me to be optimistic about the future”.

It is true that the revenues have gone up by 5 per cent, but that is interpreted by the fact that they have a targeted higher yielding business. Behind these figures is the fact that actually car numbers have gone down by 1 per cent, truck numbers have gone down by 1 per cent and coaches, which I do not think are mentioned in this publication—I may be wrong about that— have gone down by 12 per cent. That is a little disappointing, and it puts a gloss on these figures which we need to look at more closely and understand better.

As I mentioned before, a glass of champagne is required. We seem to be on track. I believe that Her Majesty’s Government should take a very close interest, and if help is needed it should be well considered and thought about.

1.53 pm

Lord Berkeley: My Lords, I declare an interest as chairman of the Rail Freight Group. For about 15 years I worked on the construction of the Channel Tunnel—not, I should say, on the financial side. I congratulate the noble Lord, Lord Dykes, on getting the debate. It is time we had a good airing of the subject of the Channel Tunnel. His support over the years—I remember when I worked on the project—was very important along with that of other European Parliament Members, and I think that my noble friend Lord Harrison was there too. Having political support across not just Britain and France but the whole of Europe was extremely important.

My noble friend mentioned the noble Baroness, Lady Thatcher, who was a great supporter. Without her, as was said, it would not have happened. Of course, by the time we got half way through the construction we felt that we were building her project to the country which was her greatest enemy at the time, but that is how things change. Anyway, it is great that she got it started.

It is good that the French changed the law so that Eurotunnel could survive. It would be nice if we could change laws just like that so quickly, but that is not the way it works. Noble Lords have mentioned costs. It is important to get the definition and the reason behind the cost increases into perspective. There seemed to be a hurry about getting this project going for various reasons. When the finance had to be committed the civil engineering design was virtually finished, and the fixed equipment design was not so finished but it was there, but the rolling stock for the shuttles had hardly started. As a result, the cost of the shuttle design probably trebled, largely because of the needs and wishes of the various safety people involved. They had a blank cheque because the project was committed. The lesson there is that the Channel Tunnel civil engineering was on budget, fixed equipment was a bit over, and the rolling stock just about killed it. That is because the project finance was committed before the design was finished. We all should remember that—get the details right first.

Forecasts are always difficult, as we find on many other projects, but certainly no account was taken—maybe it could not have been—of the competition from the ferries or the low-cost airlines. Therefore, the Governments used the back-door of a contract with the two nationalised railways, as they then were, to guarantee a certain amount of revenue regardless of whether the trains ran. That was called a usage contract and, as my noble friend said, the minimum usage charge, which was payable by both railways to get Eurotunnel off the ground on the financing side, finished at the end of November—a matter that we can come on to.

We now have a 50-year contract with the railways—the British half was sold on to EWS Railway, which is a private sector company—with the rates fixed. The airline industry having rates fixed for 50 years is unimaginable. This complete anomaly is, I believe, illegal under the open access directives, but it is why very little freight is going through. Before I get on to freight, I would like to remind noble Lords that this is not some glorious nationalistic emblem connecting the UK to the rest of Europe; it is an ordinary rail tunnel. If we were able to look at it in those terms, we might not get quite so hung up by all the requirements of the intergovernmental commission, its safety people, its security people and everything else, which are used by everybody as an excuse not to do anything and to add costs. They add a lot of costs. My noble friend is absolutely right; getting some of these reduced will certainly help Eurotunnel.

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