The Channel Tunnel: A case study of financing and governance after 25 and 125 years
Résumés
Cet article juxtapose le projet du tunnel sous la Manche des années 1880 avec le projet d’Eurotunnel 100 ans plus tard pour mettre en lumière les problèmes qui affectent le financement et la gouvernance des grands projets d’infrastructure complexes. Le document conclut en tentant de tirer des leçons sur le fonctionnement des partenariats public-privé et de mesurer le succès du tunnel.
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- 1 There are many accounts of this project. From the British side see the bibliography in Terry Gourvi (...)
- 2 On Watkin see David Hodgkins, (2002), The Second Railway King. The Life and Times of Sir Edward Wat (...)
1In Britain and France, 125 years ago, a number of promoters were still touting their ‘grand projet’, a tunnel under the sea between Britain and France. The story is as follows. In the third quarter of the nineteenth century a spirit of free trade had emerged, and in 1868 Napoleon III had lent his support to an Anglo-French consortium led by Michel Chevalier and Lord Richard Grosvenor. In 1872 the British and French governments confirmed that they had no objection in principle to the building of a tunnel, and by 1876 a joint commission had set out the basic ground-rules for a treaty. On the French side a tunnel company, the Société du chemin de fer sous-marin entre la France et l’Angleterre, was established in 1875. Supported by the Rothschilds in France and the Nord railway, it was granted a concession for construction and began work on a pilot tunnel which extended to about 1,840 metres by 1883.1 Not for the last time, the British were more cautious, however. Further progress depended on the French company reaching an agreement with a British counterpart, and although a Channel Tunnel Co had been created in 1872, this failed to attract support from either the British railway companies or the Rothschilds in England. Consequently, there was an impasse. It was at this stage that the Liberal politician Sir Edward Watkin, Chairman of the South Eastern Railway and other companies, entered the fray. In 1880 the South Eastern obtained powers to bore pilot tunnels at a site favourable to the railway, and construction work began in the following year. The works were then handed over to a separate concern, the Submarine Continental Railway Company. By 1883 it had driven three tunnels through the chalk, including a 7-foot tunnel some 2,026 yards (1,852 metres) in length.2 All this effort, came to nothing however, and it is clear that financing and governance difficulties lay at the heart of the matter. These problems were also present a century later when the successful Tunnel, which will soon celebrate 25 years of operation, was promoted. There was a further connection between the two projects, because a small portion of Watkin’s tunnel was incorporated into the service tunnel that exists today.
- 3 Ibid., Gourvish, The Official History, p. 5-6, 388.
2The opportunity thus presents itself to look at the financing and governance of major infrastructure projects through the experience of these two tunnels, a hundred years apart. In both cases financing was affected by the reluctance of the private sector to commit to a large project with a long gestation period and uncertain outcomes. Like many buccaneering capitalists, Sir Edward Watkin was no philanthropist when it came to bearing financial risk. With his dreams for a Manchester-Paris Railroad, had he been born in the Brexit era he would certainly have been a Remainer. But, anticipating discussions which were repeated in relation to the 1960s tunnel promotion and then Eurotunnel 20 years later, he asserted that the tunnel could not be built by the private sector unless the governments provided some kind of financial guarantee. By the time tunnelling was under way in the early 1880s his view had hardened, and in 1881 he tried to persuade Joseph Chamberlain, the President of the Board of Trade, that the tunnel should be a public investment. However, the British government revealed that it was unwilling either to take the project on or to underwrite it financially.3 Personal and political considerations worked against the tunnel. Watkin’s entrepreneurial style embraced corner-cutting, which irritated both government ministers and civil servants.
- 4 Wolseley, 10 December 1881, in Correspondence with reference to the Proposed Construction of a Chan (...)
- 5 Correspondence, p. xiv-xvi.
3In 1882 the Board of Trade discovered that the South Eastern had exceeded its powers in tunnelling beyond the low-water mark without permission, and work was halted pending a decision by the High Court. Watkin’s abrasive approach also alienated the other promoters and the merchant bankers, and prevented an agreement with other parties, notably the other interested railway company, the London Chatham & Dover Railway. Then the window of opportunity closed when military opposition surfaced. The threat to Britain from a continental invasion was an old anxiety, but its resurgence lay behind the Government’s decision to halt the tunnelling work. In 1881‑2 an inter-departmental committee (Board of Trade, War Office, Admiralty) examined the threat to Britain’s security, but also heard evidence emphasising the commercial advantages that a tunnel would bring. But the most impassioned evidence was provided by Lt.-General Sir Garnet Wolseley, the Adjutant-General, who contended that a tunnel would destroy all the strategic advantages that the channel provided for Britain as a naval power. ‘Surely’, he wrote, ‘John Bull will not endanger his birth-right, his liberty, his property… simply in order that men and women may cross to and fro between Britain and France without running the risk of sea-sickness’.4 With the inter-departmental committee unable to make a firm decision one way or the other, the matter passed to a special ‘scientific’ committee appointed by the War Office. Led by Major-General Sir Archibald Alison, it was asked to report on the military safeguards that would be needed to render the tunnel useless to an enemy power. Unsurprisingly, this committee found in May 1882 that neither Watkin’s project, nor its rival scheme, complied with the suggested requirements.5 In the process, it became clear that the number of influential tunnel opponents exceeded the number of supporters, the former including the Chancellor of the Exchequer and the Governor of the Bank of England. The public debate culminated in the appointment of a joint parliamentary select committee in 1883, chaired by Lord Lansdowne. Lansdowne was in fact a tunnel supporter, but he was unable to carry his committee with him, and it eventually voted 6‑4 to withhold parliamentary approval of the scheme. The intensification of Anglo-German rivalry then made success less likely.
- 6 Sartiaux A. (1907). Le Tunnel sous-marin entre La France et l’Angleterre, Lille, Imp. L. Danel; Wil (...)
4In the period to 1895 several more tunnel bills were introduced in parliament, but all failed to surmount military objections. By the early twentieth century the development of electric traction offered a more satisfactory solution to the problem of transit in a long tunnel. Despite British equivocation the French remained enthusiastic about the prospects, none more so than Albert Sartiaux, General Manager of the Nord Railway, who drew up a tunnel scheme in 1904‑6. This attempted to counter military objections by incorporating a viaduct close to the tunnel mouth, which could be disabled in the event of a war. However, attempts to progress the scheme on the British side, in 1907 and 1914, proved unsuccessful. Military and naval objections, together with insular sentiment, remained paramount.6
- 7 On the French side, we should note the equally important contributions of Pierre Mauroy, Jean Aurou (...)
- 8 Ibid., Gourvish, The Official History, p. 224ff.
5The successful tunnel in the 1980s was mercifully free of such barriers to progress, and indeed, the role of individuals such as the British Transport Minister, Nicholas Ridley, the Eurotunnel Co-chairman, Alastair Morton and others was instrumental in driving the project forward to success in spite of numerous financial and political obstacles.7 The only time politico-military considerations intruded in the passage of the 1980s scheme came during the Falklands War, when the sinking of HMS Sheffield in May 1982 provided Thatcher’s Cabinet with a reason for calling a halt to the consideration of a positive report from an Anglo-French study group, which had argued for a twin-bore tunnel. In fact, the circumstances were rather more complicated. The British welcomed French support during the Falklands War, and were keen to maintain a co-operative stance during the tunnel negotiations. But consideration of the project was shelved at this stage because British ministers were attracted by a road/rail alternative called EuroRoute and championed by a Thatcher favourite, Ian MacGregor. There were other complications, too. The French had surprised the British by changing their minds on the funding issue. Having assured their co-partners in September 1981 that their share of the capital investment would come from the public sector, they were now stating that the French promoters would have to obtain capital from the market. There were many parallels with the situation in the 1880s, but fortunately, the impasse of 1982 proved temporary.8
- 9 Department of the Environment, ‘Channel Tunnel: Experience of Project Abandoned January 1975. Notes (...)
6The engagement of the public and private sectors was a theme which ran through the promotion of the eventually successful project. This inevitably brought financing and governance issues to the fore, and they remained as important as the challenge of construction and new technology for the promoters. The first point I wish to make here is the need to place the Tunnel securely within its historical context. Eurotunnel was an amazing ‘mega-project’, but its structure clearly owed much to what had gone before, not only in Watkin’s time, but subsequently in the 1960s, when a feasible tunnel was developed and costed, and during the more turbulent conditions of 1970‑5, when the first serious attempt to build the tunnel was abandoned. It was during this period that the complexities of public-private partnership were first rehearsed properly; and it was instructive that civil servants called up the files on the period to inform them when progressing the project a decade later.9
7Second, we should take into account the nature of social overhead capital investment from the 19th century. The large sums required, the long gestation period before revenue streams, and often uncertain returns, have historically deterred the private sector from participating in many major transport investments without some form of public sector support. Of course, paradoxically, the UK was one of the few countries where the relative abundance of private capital in the 19th century enabled the private sector to bear the risk of railway promotion and construction. In most countries, the government was heavily involved as promoter, constructor, or guarantor. After the world wars, of course, the UK private sector found it harder to fund social infrastructure, and the government played a correspondingly greater role. More recently, constraints on the public purse have led to private sector involvement, not just in railways, but in the entire arena of social capital. In relation to the several tunnel projects, we should note that all of them required some kind of government support.
- 10 Peter Kemp, interviewed in 2002.
- 11 Ibid. Notes 2 and 4; Gourvish, The Official History, p. 170; Bonnaud L. (1994). Le Tunnel sous la M (...)
- 12 The 1960s tunnel project has been described in many places. For my analysis see ibid., Gourvish, Th (...)
8The negotiations stretching over decades provided something of a learning curve for the eventual scheme in the 1980s. In the 1930s, after Watkin’s time, the Channel Tunnel Company advocated private construction, presumably for public operation, but the scheme was ruled out by the government. Only two schemes, the initial 1960s scheme orchestrated by the Americans, Alfred and Frank Davidson, and Thatcher’s tunnel, if we may call it that, proposed private involvement for both the construction and operating phases. But the 1960s scheme was affected by problems in raising equity finance, and some kind of government involvement became inevitable, with the French exhibiting a preference for ‘économie mixte’ institutions. This scheme was essentially a government-dominated PPP, with the public contribution to funding amounting to a substantial 90 per cent, and private project management for what was to become a public facility. Indeed, the civil servants reviewing its failure concluded that private capital should have been excluded altogether. As it was, the project was unusually complex, with the involvement of three countries (including Belgium), and for the project management, two sets of public and private institutions. One British civil servant called this the ‘tartan quilt of quadripartite negotiations’,10 which required considerable patience and skill on all sides. Undoubtedly, the experience helped when shaping the 1980s/90s arrangements, when a major weakness, the lack of a project champion, was rectified. As for the abandonment, this came when there was a conflict of interest between the two sides, and the cost of the British public sector rail link escalated substantially. ‘In the end’, the officials concluded, ‘we came unstuck because the shared interest of most of those concerned with an adequate review of the rail link in the UK, and in a complete assessment of the changes in the world economic situation, conflicted with the interest of some of the shareholders… we came unstuck because we had inadvertently built in a major financial incentive to two parties to withdraw in circumstances which arose accidentally’.11 Throughout the tunnel’s long gestation period, then, there was a lively debate about the pros and cons of public and private participation. In the early 1970s the British government’s difficulties in reaching an accommodation with the private sector project managers, and especially Rio Tinto, in relation to the sharing of risk and rewards undoubtedly created negative attitudes towards PPPs for some time. For its part the private sector found dealing with Whitehall equally frustrating. |The difficulty in getting the two governments to pledge unequivocal support for the project tried the patience of business executives used to a more straightforward environment.12
- 13 On these issues see Allen Sykes (Willis Faber), ‘Reducing Neglected Risks on Giant Projects’, Arthu (...)
- 14 Ibid., Gourvish, The Official History, p. 247-363.
9The Channel Tunnel of 1986‑94 is often quoted in textbooks about project management, and the financing and governance of large infrastructure projects. Developing such projects brings numerous frustrations. The long gestation period, asset specificity and high risk involved encourages public sector investment. However, when Governments find it impossible to raise the money out of their own resources, they inevitably turn to the private sector for a solution. The common reaction of private interests, whether banks or contractors, is to seek to maximise their advantage in risk-reward bargaining, particularly since profit forecasts are frequently uncertain (despite the protestations of consultants). Thus, demands are made to guarantee the companies against the risks of cancellation, to severely limit the extent of equity financing, and to secure government guarantee of the loan capital. But if governments provide guarantees, whether financial or political (i.e. compensation against cancellation), they clearly take a share in the project’s risks, and therefore make it difficult for them to escape from the constraints of public sector funding.13 It was a testimony to the determination of the parties in the mid-1980s that this circularity was broken, although the decision to insist on private sector funding for the Tunnel, and the project’s continuing and deep-seated financial difficulties, drew the two governments into the arena, inviting further questions about the efficacy of public-private ventures. To describe the progress of the Tunnel after 1984 is to provide a litany of bankers’ doubts, central bank interventions, concerns about contracting consortia, shareholder worries, and brinksmanship which surfaced when Eurotunnel was faced with security and environmental issues.14
- 15 Here defined as arrangements between the government or a public body and the private sector whereby (...)
- 16 See, for example, Rob Ball et al., (2001). ‘Private Finance initiative – a good deal for the public (...)
10The current research project has contributed some very useful studies of PPP-type solutions, notably from Roger Vickerman and Julien Dehornoy, in the London conference. The literature on PPPs15 is growing, and among the contributors there are both advocates and critics.16 I am certainly not an expert in this field, but should like to offer some comments on this popular phenomenon from the early 1990s, drawing on the experience of the Channel Tunnel project in detail. First, it is clear that the results of such transactions have been mixed, though there is some evidence that in recent years some of the more problematic areas in the public-private interface have been addressed more satisfactorily. In seeking to improve on the inadequate contracts of the past, we might ask the following questions: Have risks and returns been shared equitably? Can costs be constrained (are transaction costs higher in a PPP)? Can the final cost be predicted with more certainty? Can complexity and transaction costs be minimised? Finally, in the context of Brexit, how important are European institutions, including the European Investment Bank, in driving through ambitious projects?
- 17 Merrow E W. (2011). Industrial Megaprojects: Concepts, Strategies and Practices for Success, John W (...)
- 18 A recent study of railway PPPs suggested the use of surety bonds to deter withdrawal, or linking pr (...)
- 19 Details in ibid., Gourvish, The Official History, p. 289.
11I would argue, first of all, that the contracting process should be improved, in order to optimise beneficial outcomes for all parties. In this context, the American commentator, Ed Merrow, has some illuminating things to offer in his recent book. He refers to seven ‘danger signs’ which indicate when things may be going wrong in contracting relationships, including impatience in concluding a deal, such that a contract is signed before all the details have actually been addressed. With the Channel Tunnel, the negotiation with the contractors took several months, but the promoters were keen to get everything signed up before the 1987 election, in case Margaret Thatcher lost that election, and a Labour government had second thoughts about the project. In fact, of course, Thatcher won.17 Second, an obvious point, perhaps, but there should be a fairer division of risks and rewards between the public and private sectors, for example, with higher exit costs for private sector partners. The role of the various stakeholders should also be made unambiguous. Behaviour described by the terms ‘hostage-taking’ and ‘lock-in’ should be avoided.18 We should note that the Tunnel contracts were incentive-based only for the tunnelling, with most of the riskier elements, such as electrical systems, rolling stock, etc., arranged on a cost-plus basis. This clearly favoured the contractors.19 Three final points. The number of parties to a contract should be limited as far as possible, to improve operational aspects; when the private sector requires incentives, such as subsidies, these should be calculated with more sophistication; and ‘additionality’ should be encouraged by governments, so that PPPs are additional to the ‘normal’ public sector rate of transport investment, rather than being a substitute for public sector investment.
- 20 Merrow’s data for 52 infrastructure projects found an average cost over-run of 88% and time over-ru (...)
- 21 For gloomy verdicts on the Tunnel see the criticisms of Ricard Anguera, ‘The Channel Tunnel – an ex (...)
12Notwithstanding all this, we should note that despite the numerous disputes between promoters and contractors, and despite the several engineering and financing challenges the project presented, the Tunnel project of 1986‑94 was a success. The facility was built, and it also performed quite well in relation to cost and time over-runs. The private sector, whether banks, contractors or concession-holders, were prepared to take on risks, the French were happy with private sector financing, which was the key to British involvement, and although the British emphasised private financing, they were happy to commit some £7 billion in public money to support the tunnel and the HS1 rail link. The project was also, I would argue, a relatively successful example of project management, if not, of course, commercially sensible. Like many such projects, it was late and the budget was exceeded. But the cost over-run of 64 per cent above the 1987 forecast and the time over-run of 17 per cent compared well with many of the large projects analysed by Merrow, and referred to by Bent Flyvbjerg et al. in their study of megaprojects.20 More disappointing was the financial over-run of some 122 per cent, compared with the forecast of 1987. The Tunnel’s cost-benefit analyses make for sorry reading in the light of actual results, and the profits anticipated by consultants such as Warburgs failed to materialise. However, the financial health of the project would have been much better had it not been constructed during a time of comparatively high inflation, and then operated when inflation was much more modest. In this situation, revenues failed to rise relative to the large burden of debt, prompting Eurotunnel’s series of painful financial reorganisations.21 However, even here, as with the 2008 financial crash, there were winners and losers, and those institutions that organised the debt were not necessarily the ones who had to pick up the bill. The project remains an exciting piece of transport infrastructure which will continue to produce economic and social benefits for years to come, whatever the political complexion of Europe.
Notes
1 There are many accounts of this project. From the British side see the bibliography in Terry Gourvish, (1986), The Official History of Britain and the Channel Tunnel, London, Routledge, p.386 n1, and especially Donald Hunt, (1994), The Tunnel: The Story of the Channel Tunnel 1802-1994, Images Pub., and Keith Wilson, (1994), Channel Tunnel Visions, 1850-1945: Dreams and Nightmares, Hambledon Continuum.
2 On Watkin see David Hodgkins, (2002), The Second Railway King. The Life and Times of Sir Edward Watkin (1819-1901), Merton Priory Press.
3 Ibid., Gourvish, The Official History, p. 5-6, 388.
4 Wolseley, 10 December 1881, in Correspondence with reference to the Proposed Construction of a Channel Tunnel, British Parl. Papers, 1882, liii, C.3358.
5 Correspondence, p. xiv-xvi.
6 Sartiaux A. (1907). Le Tunnel sous-marin entre La France et l’Angleterre, Lille, Imp. L. Danel; Wilson K. (1994). Channel Tunnel Visions, Rio Grande, Ohio, Hambledon Press, p.73-88.
7 On the French side, we should note the equally important contributions of Pierre Mauroy, Jean Auroux, Guy Braibant, André Bénard, and Patrick Ponsolle.
8 Ibid., Gourvish, The Official History, p. 224ff.
9 Department of the Environment, ‘Channel Tunnel: Experience of Project Abandoned January 1975. Notes for our Successors’, August 1975, The (British) National Archives, Kew, MT144/534.
10 Peter Kemp, interviewed in 2002.
11 Ibid. Notes 2 and 4; Gourvish, The Official History, p. 170; Bonnaud L. (1994). Le Tunnel sous la Manche : deux siècles de passions, Paris, Hachette, p.182.
12 The 1960s tunnel project has been described in many places. For my analysis see ibid., Gourvish, The Official History, p. 26-170. For Rio Tinto, see ibid., p. 98-102, 133, and 141.
13 On these issues see Allen Sykes (Willis Faber), ‘Reducing Neglected Risks on Giant Projects’, Arthur D. Little Symposium on ‘New Dimensions of Project Management’, Boston, April 1981.
14 Ibid., Gourvish, The Official History, p. 247-363.
15 Here defined as arrangements between the government or a public body and the private sector whereby a public service is delivered in co-operation. There are several forms, but they usually involve risk-sharing and finance.
16 See, for example, Rob Ball et al., (2001). ‘Private Finance initiative – a good deal for the public purse or a drain on future generations?’, Policy & Politics, no 29:1, p. 95-108; Jay H. Walder and Thomas L. Amenta, (2003). ‘Financing New Infrastructures: Public/Private Partnerships and Private Finance Initiatives’, in Richard E. Hanley, Moving People, Goods and Information in the 21st Century, Routledge, p.79-98; Darrin Grimsey and Mervyn K. Lewis, (2007), Public Private Partnerships: The Worldwide Revolution in Infrastructure Provision and Project Finance, Edward Elgar ; Stephen Perl, Public Private Partnerships: Costs, Benefits and Efficiencies, Nova Science Publishers Inc; Jean Shaoul et al., (2012), ‘The fantasy world of private finance for transport via public private partnerships’, OECD ITF discussion paper 2012-06.
17 Merrow E W. (2011). Industrial Megaprojects: Concepts, Strategies and Practices for Success, John Wiley & Sons, and note Merrow EW et al. (1988). Understanding the Outcomes of Megaprojects: a Quantitative Analysis of Very Large Civil Projects, Rand Corp.; Ibid., Gourvish, The Official History, p. 289ff.
18 A recent study of railway PPPs suggested the use of surety bonds to deter withdrawal, or linking projects together so that if a company wants to withdraw from one contract, it has to give up others. See Gunnar A, Hulten S. (2009). ‘Prospects and pitfalls of Public-Private Partnerships in Railway Transportation. Theoretical Issues and Empirical Evidence’, International Journal of Transport Economics, no 36(1), p. 98-117.
19 Details in ibid., Gourvish, The Official History, p. 289.
20 Merrow’s data for 52 infrastructure projects found an average cost over-run of 88% and time over-run of 17%. Merrow et al., Understanding the Outcomes of Megaprojects, ibid.; and see also Flyvbjerg B, Bruzelius N, Rothengatter W. (2003). Megaprojects and Risk: An Anatomy of Ambition, ibid.; and see also Mott McDonald study for the UK Treasury, on 'Review of Large Public Procurement in the UK', 2002, July, [Online], available at : https://www.parliament.vic.gov.au/images/stories/committees/paec/2010-11_Budget_Estimates/Extra_bits/Mott_McDonald_Flyvberg_Blake_Dawson_Waldron_studies.pdf; and Flyvbjerg’s B. (2005). 'Policy and Planning for Large Infrastructure Projects: Problems, Causes, Cures', World Bank Policy Research Working Paper, no 3781, December 2005.
21 For gloomy verdicts on the Tunnel see the criticisms of Ricard Anguera, ‘The Channel Tunnel – an ex post economic evaluation’, Transportation Research, Part A (2006), p. 291-315; Myddelton D. (2007). They Meant Well: Government Project Disasters, IEA; and Millward R. (2007). Review of Gourvish, The Official History, in Enterprise and Society, no 8(4), p. 970-2.
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Terence Gourvish, « The Channel Tunnel: A case study of financing and governance after 25 and 125 years », Revue d’histoire des chemins de fer, 52 | 2019, 23-33.
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Terence Gourvish, « The Channel Tunnel: A case study of financing and governance after 25 and 125 years », Revue d’histoire des chemins de fer [En ligne], 52 | 2019, mis en ligne le 01 avril 2022, consulté le 20 juin 2025. URL : http://journals.openedition.org/rhcf/2440 ; DOI : https://doi.org/10.4000/rhcf.2440
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