Lessons learned on rail infrastructure privately financed projects
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1As said before, my resume shows plainly that I am not an historian, not even a researcher. I am here nevertheless as a witness, and I’ve made my best to stick to the theme of the conference and try and tell you about the lessons I’ve learned from my professional experience. I was from 1998 to 2002 with LCR and Eurostar, and later on at Vinci Concessions, at SNCF or in the French Government Shareholding Agency overseeing, amongst others, RFF and SNCF. So, the upcoming comments spring from my experience in the tunnel-related business, but were prompted also by a larger field.
2The main lesson I have actually learned during these twelve years is: neither financial techniques, nor even engineering capabilities are the key to success for a privately financed project. Under some respect they almost may be said to be mere commodities. Understanding the organization and governance which are behind the project, as well as the delivery of the project, is far more important a factor than usually thought. This is maybe because engineers and financiers have the upper hand in this industry, and not social scientists and historians…
3Why are these factors such an important thing in rail infrastructure projects?
4First of all because in the European Union (this is not the case in most of other geographic situations where such an organization has not happened) infrastructure and operators are “unbundled”; this actually was not the case when the Channel Tunnel was launched. As a result, the owner/operator of the infrastructure does not have access to its end market but through third parties: the train operators. This is widely different from your situation as a tolled motorway owner, where each motorist is your client, or even an airport operator, the largest part of the revenue of whom is generated by retail and car parks. I just said ‘train operators’, but the word is misleading. In most cases, the infrastructure owner relies on one single operator, thus creating an unfavourable balance of power to the detriment of the party bearing the largest fixed costs. There lies the main difference with airports, where more than a handful of airlines are able to compete to use your infrastructure.
5Such an absence of competition amongst train operators can be explained by the fact that capacity is limited on a line but, more importantly, by the second characteristic of the rail sector –and not only this time in the European Union– which was perfectly explained earlier today by prof. James Cohen: you don’t make money in the rail sector out of transporting passengers. I don’t know of any passenger rail system which could have been self-funded in human history if rail companies had not cross subsidized those, thanks to the monopoly they enjoyed for long distance freight and cargo operations, for a century or more. My observation is, that anywhere in the world passenger transportation does not make money per se. Government grants or subsidies are needed, unless there is a business model not relying on passengers revenues, but on real estate revenues generated by construction rights around stations for example, or retail revenues generated by consumers accessing your airport or your general store through the line you own. So this is the most important thing, which differentiates rail from air or road– the last being true when you consider a privatized stretch of road, and not the whole road system which is obviously heavily State funded. As a result, no rail infrastructure project can be considered as self-sustainable without a considerable level of government subsidies: a “privately financed” project always includes a publicly financed element. If your client, the train operator, cannot survive, you, the infrastructure owner, are dead. That’s something that the British government and the Department of Transport perfectly understood when they decided to write off 660 million pounds of EUKL liabilities related to HS1 before creating Eurostar International. Had they not recognised that, without this level of subsidies, the EUKL/HS1 system was not able to continue, Eurostar International would not have been created and HS1 could not have been sold.
6Third characteristic of rail transportation, which explains that it does not make much sense to unbundle it, and as well explains why it is such an expensive technology to operate is the fact that a rail network and the services operated on it make up a tightly bound system. There is a gap between rail and road, air or shipping, which are much lighter systems, not as integrated and interdependent as the rail. Let me give you two examples. l: The fact that the patronage in Eurotunnel has not been far below expectations has indeed many causes, as explained by previous speakers; they include anyhow the fact that the last bit of the rail system, HS1, was not built on time. In 1985, when the shareholders were asked to put their money in the tunnel, they were told that the full line to London would be in operation in 1998. When was it opened? In 2007, almost ten years later, and that makes a big difference in passenger numbers. The same happened with the Perpignan-Figueras tunnel: it was opened on due time by the TP Ferro consortium, but the completion of the section between Barcelona and the tunnel was delayed. In such a situation, there is no plan B to get traffic on your new infrastructure. In a road system, customers will always find a way to reach your infrastructure, even if all planned road works have not been completed. This is indeed a much less rigid system.
7As a result, you have to pay a lot of attention to the way the system is governed and organized. The reliability of the traffic forecast, as well as the commercial success of the services which run on the infrastructure depend on the system because there is a lot of interdependence between traffic and infrastructure.
8Paying attention to the way the system is organized and governed, as well as to the incentives of each of the players in the system, is the key to an accurate assessment of the financial risk taken by private investors.
9I will focus on the risks related to governance and organization in the design phase of a project as well as in the operating phase, leaving aside the construction phase, for which risks are not, in my view, specific to the rail sector.
10The design stage is actually the same at the decision stage or at the restructuring stage, because usually you make assessment several times –as told before about the project of the Torino to Lyon tunnel–, but you look at these assessments several times because it takes a very long time to develop such a project. At the design stage, when the assessment is made of the economic interest, financial sustainability, traffic revenues of the project, one should have a look at the governance, because governance plays a key role in reducing or increasing the risk of introducing optimism as a bias, through overoptimistic forecasts. I won’t spend much time on this issue because Julien Dehornoy’s paper does it fully through a complete review of most of the rail projects in the last two decades, but I think I should stress on for lessons I have learned from my past experience.
11First lesson: one should never take for granted the traffic advisors’ forecasts, without analysing the governance structure for the project, both at grantor and concessionaire level, and where does the traffic advisor sit. In other terms, who pays him? I think if you don’t look at that, if you don’t understand that, you’d better not get involved in financing a rail project.
12The second lesson I’ve learned is that one should heavily discount government traffic projections if traffic revenue expectations do have a direct impact on the level of public spending deemed necessary. If the project depends –and I said that this is the case in most of rail projects– on public subsidies, there will be a very strong bias within the governmental bodies to push up the traffic forecast and so revenues expectations, because doing so reduces the upfront need for subsidies and makes the project possible. The comment was made earlier in the day, that if we had been realistic in the forecast for the Channel tunnel –or for HS1–, we would not be here today, because we would have thought that it was too much of a hassle to come to London by plane. That is something you need to be over conscious of, when you invest your money in rail infrastructure.
13Third lesson, one should as well discount seriously a private consortium’s traffic forecast if the consortium’s governance does not prevent conflicts of interest or biased analyses. And on that specific point, I would like to share a bit of my personal experience in ICRRL and LCR.
14As you may remember, the Channel tunnel rail link (CTRL), now called HS1, was awarded to a consortium named London and Continental Railways (LCR) and formed of Warburg (now UBS), Halcrow, Arup, Systra, London Electricity, National Express, Virgin, SNCF and Bechtel. Out of these nine players, only two could be considered as having limited interest in building the project: National Express and Virgin. Every other were providing service to the consortium and they had, by definition, a vested interest in getting that done. This is clear for all the suppliers in various magnitudes, but it’s also clear for SNCF, which was not a supplier of LCR, but had to see the line built so that Eurostar’s performance would increase, because they had by far the highest stake in the Eurostar’s operation. That was one clear and objective a reason for not challenging the figures which were supporting the case for the CTRL concession. Even if those consortium’s members had skin in the game through the equity subscribed, this equity amount was not large enough for each party to match its other interests.
15The other reason why SNCF had interest in supporting the traffic figures which underpinned the CTRL case was that those figures justified initially other investments on the French territory, strongly sponsored by SNCF development teams. Since they foresaw X million passengers between Paris and London to justify for a high speed line to be built between Paris and Lille, and then to justify a line to be built between Lille and the tunnel, it became very difficult to say, once dealing with the other side of the tunnel, that the number of passengers expected on the French side of the Tunnel would not appear on the British side. I witnessed that phenomenon when I started being involved, at the very beginning of 1997, in LCR operations, as its SNCF shareholder. When I was talking to Systra about the realism of traffic forecast they were the most conservative, and protective of the initial figures they had provided at the beginning of the Channel Tunnel project. When I was talking to the “Mission Eurostar”, the SNCF guys who had worked with their British and Belgian colleagues to plan for the Eurostar service, they had much less optimistic forecast and did not feel bound by the figures used to justify for building the line. However they were still overoptimistic since they were unable to look at the reality of traffic two years after opening and were still bound to their initial estimates, because it’s very difficult for an organisation to do a U-turn on what it planned and developed for months and years. So, before putting your money at risk in a consortium you’d better understand what are the incentives and bias of the other members.
16The last lesson to be learned from the design phase is that –and that will bridge to the next point of my presentation– one needs to take into consideration not only models but the practical ability of the operator to actually deliver the service at the right level and with the appropriate marketing and distribution tools which will really bring to you –or your client, i.e. the operator– the customers paying the anticipated price and thus generating the anticipated revenue. And the big lesson from Eurotunnel (regarding Eurostar traffic), or HS1 is that this risk has been utterly left aside. It may strike you that nobody learned from that experience, because when investors chose to invest in the Perpignan-Figueras concession, nobody seemed to care about the fact that no one was prepared to operate any service in this tunnel, that the trains were not ordered, that they were not commissioned, and that you could not have a single train in this tunnel if the section between Barcelona and the tunnel would not have been opened on time. The constraints on the effective delivery of the service are too often left aside when models are made, because it is not so important for air or road traffic. How is it going to be practically working? Who is going to work with whom? What are going to be the incentives to develop the traffic? Will they be successful? Are they properly made? Do they have the competences? Do they have the tools? That is always left aside because everybody is obsessed by the major financial figures, the models, the engineering challenges which are already a lot of work, but very often the last mile is forgotten.
17I want to come back on that last mile, the opening of the service, which is the second phase, after design, where the governance and organization risk, which is much higher in the rail business, materialises. As I said before, ability to deliver is a key and, in order to deliver, you need the appropriate governance. Eurostar provides a good example. When Eurostar service started everybody thought it was operated by somebody somewhere, and actually it was not. It was operated through a cooperation of independent railways, nobody being accountable for the delivery of the service or the performance of the Eurostar business as a whole. The investors who invested in LCR at that time may have thought that they were given, as a counterpart to their investment, the control of the operation of Eurostar, but they actually had control only over EUKL (Eurostar UK Ltd), the former Eurostar division of British Rail, responsible only for the UK territory. EUKL was unable to manage by itself a service which was interdependent from the Belgian and the French and on which LCR investors had no grip. That shows that the investors have probably –but historians could tell– not done the due diligences about how it was going to work. Had they, they would have flown away. The Eurostar performance was depending on: in France, after the 1997 rail reform, RFF operating the line, SNCF operating the trains, Eurotunnel in the tunnel, Railtrack for the UK part because the new line was not built and Eurostar had to run on its lines, and of course LCR and EUKL inside, operating the trains and building the future line. Let alone Connex, which was completely outside of the Eurostar cooperation which had their trains running on the same line as the Eurostar, Eurostar becoming highly dependent on the quality of the operations of Connex to deliver its own service, and not mentioning the Belgian side, etc. How can you make a proper, high quality service, and ask for high fares in such a context, especially if you don’t have anybody in charge of the whole service, and if most of the interfaces are not contractually defined without alignment of interests?
18This was the Eurostar governance situation, back in 1998, when the British government, seeing that LCR would not succeed in raising funds given the drop in traffic against forecast, decided to completely restructure the whole scheme and award a management contract for EUKL, the UK operator of the Eurostar service. There was a tender: on one side Virgin, on the other side the Belgian and the French railways teamed with National Express and British Airways in the ICRRL consortium. I don’t know whether this has been a key selling point for the ICRRL winning offer, but on the top of the guaranteed –almost guaranteed– revenue that the consortium proposed if they were to manage EUKL, ICRRL added that it wanted to create a single operator for Eurostar. That governance reshuffle has really changed things, giving an answerable team the ability to drive progress, both on the commercial side and on the operational side, and you know that in rail the two are running together.
19This is for me a very important point, and I must say, I’m really grateful to the Department of Transport and to LCR, not only to have understood that a change in governance would be of very significant importance for the turnaround of the service, but also to have allowed the organization to live in a de facto integration mode for more than 10 years between the moment this Eurostar Group structure –a very light structure– was created in 1999 until the full integration of Eurostar into a single full-fledged company, Eurostar International, in 2010.
20As a conclusion, four points:
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Rail infrastructure’s private financing cannot be considered without taking into account the whole rail system needed to deliver the service to passengers.
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In this regard, cross-border is always more risky because the system is even more complex and it is a paradox that most of rail PPPs projects have been cross-border. The reason for using PPPs in cross border projects is that national administrations cannot get together to deliver the project and need to use a third party…
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Traffic forecasts are very often biased; always investigate the possible bias of the players before investing.
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And last but not least: traffic forecasts and financial modelling are not enough, do your homework, do your due diligences on how the service will be delivered once the line is open and assess the risk attached to it.
21And maybe one more: one never learns from history…
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David Azéma, « Lessons learned on rail infrastructure privately financed projects », Revue d’histoire des chemins de fer, 48-49 | 2018, 133-141.
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David Azéma, « Lessons learned on rail infrastructure privately financed projects », Revue d’histoire des chemins de fer [En ligne], 48-49 | 2018, mis en ligne le 01 avril 2022, consulté le 16 juillet 2025. URL : http://journals.openedition.org/rhcf/2875 ; DOI : https://doi.org/10.4000/rhcf.2875
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