The decision by the Office of National Statistics that the CTRL should be included on the government’s books has exposed the pretence that it is a private sector project, argues CHRISTIAN WOLMAR.
In the 14 years that I have been writing about the railways, there have been scandals that have cost the taxpayers billions. There are all kinds of little ones, such as the waste of money in drawing up tram projects which the Department for Transport casually ditches at a cost to the public purse of a mere £284 million, or the massive waste of money during the administration period after Railtrack collapsed.
However, there are three longstanding scandals that are worthy of the name and which receive far less attention in the wider media than they ought to. It will not surprise regular readers that rail privatisation is, in my mind, the biggest of these, nor that the PPP for the London Underground – the £30 billion contract that was pushed through by Gordon Brown in the face of opposition from everyone with expertise on the subject – is my number two.
In this column, I will concentrate on number three, the fi nancing of the Channel Tunnel Rail Link, which may be lesser known but nevertheless is an absolutely outrageous saga of government incompetence and arrogance. There have been several incarnations of the project, and at each stage more government cash gets poured into the scheme, and yet the pretence remains that it is a private sector project.
Well, that fig-leaf was blown off last month, exposing the naked dishonesty of the government’s attempt to keep the scheme off its books, because the Offi ce of National Statistics decided, rather embarrassingly for the government, that the scheme is state-run and therefore should be on the books. This not only put £5bn instantly on the public debt but raised the spectre that the same thing might happen to the £17bn-indebted Network Rail. (An article of staggering complexity on the ONS website explaining why CTRL has been reclassifi ed and NR has not been can be found athttp://www.statistics.gov.uk/articles/nojournal/LCR_class_article.pdf).
The CTRL saga started a decade ago when a deal to build the link – which should, of course, have been completed at the same time as the tunnel – was signed by the Tory government on February 29 1996, a very appropriate day for wishful thinking. A reader has kindly sent me the original press release and it makes salutary reading. It boasts of the CTRL as ‘the fl agship of the Private Finance Initiative’, which then was somewhat in its infancy, and yet within two years the scheme had effectively gone bust.
The essence of the deal was that profits from the Eurostar service, whose trains worth a cool £1bn were given away to the winning consortium, London & Continental Railways (LCR), would fund the construction of the CTRL together with grants given to the consortium worth £1.7bn. It was to prove a fantasy. The optimistic forecasts for the number of Eurostar passengers could never be realised, and soon after I predicted its demise early in 1998 (RAIL 323), the deal collapsed.
As I wrote at the time, the terms had been pretty generous as the link was supposed to cost £3bn and LCR had been given assets and cash worth almost as much as that. But with no cash fl ow from Eurostar, LCR could not pay for the line and came to John Prescott, then Transport Secretary, with the begging bowl. The scandalous aspect is that it took less than two years for LCR Mk 1 to go bust, questioning whether the private fi rms and the government had done their due diligence.
As ever with these stories, it was the taxpayers who lost out since the project had to be baled out, and the LCR name had to be retained for legal reasons.
Notionally, the government did not provide LCR with any extra cash but created a ridiculous charade which involved guaranteeing £3.75bn of debt and a further ‘access loan facility’ of £1.2bn. Railtrack (remember it?) also agreed to guarantee a further £700m which, of course, is also now with the government – with other odds and sods, we are talking at least a clear £6bn here.
The building of the scheme, which was split into two parts, was no longer dependent on the performance of Eurostar. Eurostar had, effectively, been renationalised since, as the National Audit Offi ce report on the CTRL published in March 2001 put it, “the taxpayer is exposed to considerable fi nancial risk if Eurostar UK does not perform as well as expected”. The scandal was that the original backers of LCR (which include Bechtel and National Express) retained an interest even though they should have lost all their money given that the scheme they backed was effectively dead.
As the NAO said, “under the PFI, the private sector is paid for taking risk. Responsibility should therefore remain with the private sector should these risks actually occur. In the restructured deal, LCR’s shareholders have retained an economic interest in the project, while avoiding the full fi nancial consequences of its near-collapse.” And remember, the NAO always hasto mince its words somewhat because its reports are shown to the relevant government department fi rst.
It is not the overall cost that is at issue here but the fact that there is so much dishonesty about the way this spending is presented. The CTRL is, as the ONS now has found, a state-funded scheme paid for by you and me. It was government-created and driven for political reasons not transport ones, and in fact there are serious questions about its value.
There is a way of making projects like this and Crossrail genuinely funded by the private sector, and that is to tax those who benefi t from the increased land value generated by major infrastructure schemes. This has long been promoted, from the left, by Dave Wetzel, who ran London’s buses when he was a member of the Greater London Council in the 1980s and is now a member of the Transport for London board. Now, however, the very free market thinkers of the Institute of Economic Affairs have come up with the same idea in a booklet, Wheels of Fortune, published last month.
The author, Fred Harrison, argues that the way to fund major infrastructure is by “capturing and using the increases in land values they bring”. Instead, landowners near such projects get a windfall profi t as the value of their holdings increases without any investment on their part. This concept has been around for some time, but the government has never been brave enough even to undertake a serious study of how it could work in practice.
“There’s so much dishonesty about the way this spending is presented.”
This idea is too late for the CTRL but should be considered for Crossrail and other major infrastructure schemes. For the CTRL, the government seems intent on squandering the taxpayers’ existing interest in it. There are large land banks at Stratford, Ebbsfl eet and, most important, King’s Cross owned by LCR. Because of the government’s obsession with getting things off its books, LCR is up for sale, which is bad for the taxpayer as the value of the land is bound to increase when the scheme is completed and projects for its use firm up. The haste to get the scheme reprivatised is likely to waste yet more of our money and also divert management attention when it should be focused on getting the railway completed.
Suspicions that all is not quite above board are heightened by the fact there is only one bidder so far, a team led by Sir Adrian Montague, an ex-Treasury official who enjoys a close relationship with Gordon Brown. As Liam Halligan in the Sunday Telegraph put it, “this auction could be construed as one of the government’s friends, knighted last year, using an inside track to reap profi ts at the taxpayers’ expense.” Indeed, Montague was involved in the original rescue deal in 1998 (as well as the PPP for the London Underground) and there are bounds to be accusations of cronyism if his outfi t wins the contract.
The wider question for Gordon Brown is whether Network Rail, with its £20bn debt, will follow suit on to the government’s books. Remember it did briefl y get on them when the Strategic Rail Authority interfered with its bonus system for managers, but then was removed when NR determined its own (lavish) scheme.
The Offi ce of National Statistics is a bit vague about this. It says: “Classification depends on who controls the general corporate policy… In respect to the governance arrangements for the two companies there are signifi cant differences. The main differences between the two are government’s powers over LCR concerning the forced sale of the company, the veto over windingup, control of dividend policy and rights to profi ts, which do not exist in the case of Network Rail.” Indeed, but that is because NR does not have any shareholders. One suspects that the government has the same control over NR as over LCR.
The decision on the CTRL is a warning for the department that it cannot be seen to exercise too much direct control over NR at the risk of reclassifi cation. Certainly, a little shiver must have gone down the spines of the bigwigs at the Black Tower and the mandarins at the Treasury when ONS made its move. Watch this space.