STRATEGIC MANAGEMENT
The project was "assembled round a hole like a Polo mint...[there was] no client driving it forward with a vision of what the operator needed to have" Sir Alastair Morton, Co-chairman, Eurotunnel (Financial Times 19/9/95).
"Le premier problème est qu'il n'existait pat de maître d'ouvrage, c'est-à-dire de client, face au constructeurs" André Bénard, co-Président, Eurotunnel (La Tribune 18/6/93)
In July 1981, Tarmac formed Channel Tunnel Developments 1981 Ltd, and was joined by Wimpey in September of that year. In February 1984, this organisation joined forces with the European Channel Tunnel Group (Costain) and the Anglo Channel Tunnel Group (Balfour Beatty and Taylor Woodrow) to form the Channel Tunnel Group Ltd. (CTG). This organisation then sought a French partner. This was France-Manche SA (FM), formed in May 1985, a consortium of 5 French construction corporations who were "non sans difficultés associés au projet" (Lemoine 1994 p 97) - Bouygues, Dumez, Spie Batignolles, Société Auxiliaire d'Entreprises, and Société Générale d'Entreprises. Henderson (1987) argues that the problems were mainly due to attempts by Bouygues to hedge their bets between the competing projects during the tender period. These two consortia provided the initial working capital of the aspiring concessionaire and began discussions with banks - CTG worked with the National Westminster and Midland banks, while FM were associated with Crédit Lyonnais, Banque Nationale de Paris, and Banque Indo-Suez. Eurotunnel SA and Eurotunnel PLC were incorporated on the 30th October and 18th November 1985 respectively. On 2nd June 1986 Eurotunnel SA acquired FM, while Eurotunnel PLC had done the same for CTG on the 30th May 1986. This rather complex arrangement allowed the holding company to circumvent, if needed, the requirement in the concession contract that the concessionaire (ie CTG/FM) be not diversified and have no other business interests (Stannard 1990). On 5th July 1985, the British contractors formed Translink JV, while the French contractors formed Transmanche GIE on 16th July. These two came together to form Transmanche-Link (TML) on October 18th 1985 (Hunt 1994 chap 6). However, the consortium members remained significant players in the concessionaire companies throughout 1986.
The original capital of Eurotunnel was provided by the promoters - the founding banks, and the original 10 construction corporations with the latter in the majority (Tabouis 1988). Thus at the time of the signing of the concession agreement in March 1986, the concessionaire was two corporations - FM and CTG - which were then acquired to form a unified corporation - Eurotunnel SA/PLC - upon being awarded the concession. However, when the contracts for construction and the MdO were signed on 13th August 1986, with TML and Atkins Setec respectively, the 10 original construction corporations were the majority shareholders. The 10 members of TML held well over half the equity of Eurotunnel, while four of the 11 members of the joint board of Eurotunnel PLC/SA were also directors of the member construction corporations of TML, and one co-chairman was a former chairman of BICC, the parent company of Balfour Beatty. In addition, the senior executives of the company included 6 secondees from the TML corporations out of 15 named in the placing prospectus. This conflict of interest was to dog the project for the next eight years. It was not until September of that year that Eurotunnel was recapitalised with £46m of equity from the original banks - known as Equity 1 - who now formed a noyau dur and the construction corporations became minority shareholders. Equity 2 went ahead in October of that year with a private placing which, after some arm twisting by the Bank of England, raised £212m from a group of institutional investors. Although some of the actors on the French side had wanted greater participation by the construction corporations in the client organisation, this was resisted by the banks on the grounds of a conflict of roles.
Eurotunnel now turned its attention to obtaining loan capital. The noyau dur banks, with the exception of Indosuez, acted as the lead banks in this task. In August 1987, 50 international banks agreed to underwrite the loan and proceeded to syndicate it worldwide. A problem here was that the lead banks were also the promoters, and hence were the object of some suspicion by the syndicate banks (Stannard 1990). In the November, a credit agreement was signed with over 200 banks for £5b, and later that month Equity 3 was launched for public subscription which, despite the stock market crash on Black Monday (19th October), raised the required £770m. A notable feature of these activities was the relative lack of participation by the British. For every two share units sold in France, only one was sold in Britain, while the British banks only contributed 9% of the loan capital against 18% from the French, 13% from the Germans, and 23% from the Japanese. In addition an agreement was reached in the September for £1bn from the European Investment Bank to be phased over 6 years, secured against letters of credit issued by the syndicate. In July 1987, the Channel Tunnel Usage Agreement was signed with SNCF and BR which gave Eurotunnel 50% of the capacity of the tunnel for through train services. Eurotunnel are reimbursed through a usage charge which is partly a fixed annual amount, and partly a variable charge per passenger or tonne of freight.
It was also at this time that the first signs of the problems in the relationship between TML and Eurotunnel began to emerge. Alastair Morton had been appointed joint chair of Eurotunnel with André Bénard in February 1987. In the run-up to the capital raising activities of that autumn, Eurotunnel was concerned to demonstrate its firmness towards TML. A letter from Eurotunnel to TML was leaked to The Sunday Times of September 20th which showed its "no-nonsense" attitude towards the contractor, and Morton became increasingly associated with a public display of toughness. The problem was that the original contract was passed "en quelque sort de gré à gré et non après une mise en compétition des entreprises par un appel d'offres" (Lemoine 1994 p 119), and the responsable of Indosuez went as far as to say that "les nouveaux actonnaires soupçonnant des entreprises d'avoir signé avec elles-mêmes lorsqu'elles étaient majoritaires un contrat léonin et les entreprises estimant être en bon foi et avoir pris les risques et des engagements précis dès le début, notamment auprès des gouvernements" (Tabouis 1988 p 62). These mutual suspicions permeated the relations between TML and Eurotunnel as things began to go wrong.
During this period, tensions started to emerge in the role of the Maître d'Oeuvre. From a British point of view, the MdO combines some of the functions of The Engineer under the construction contract and a client's project manager. It also had obligations under the concession agreement to the IGC, and provided an independent view for the investor banks under the credit agreements (Grimond and Middleton 1989). However, as relations between TML and Eurotunnel deteriorated, they increasingly communicated directly with each other, leaving the MdO in a difficult position (Byrd 1994 p 70). In order to resolve to clarify roles and to strengthen its project management capabilities as a client, Eurotunnel established the Project Implementation Division (PID) in January 1988. This was formed from some of the MdO staff, strongly supported by Bechtel staff, and augmented by new hires (Byrd 1994; Le Temps de la Finance 28/11/89; interview 5/9/95). Thereafter, Eurotunnel was able to exert a more knowledgeable influence over TML. The Atkins-SETEC team was then left in a purely audit role on the project on behalf of the IGC and the investor banks.
During 1988, it became clear that costs would significantly overrun the original budget, and there were also fears about the programme. A war of nerves developed between the two with Morton developing a reputation for aggression. Early progress on tunnelling was painfully slow. In August of 1988, Morton publicly criticised the corporate members of TML for its lack of attention to the management of the project (Hunt 1994 p 214), and in the October forthrightly declared that "we don't have a tunnelling problem. We have an equipment and management problem. Bad ground is not to blame for the delays" (cited ibid p 216). The war of attrition between the two parties continued with a series of key documents being leaked to the press by both parties, and came to a head in 1990. Although an accord on the issues in dispute between TML and Eurotunnel had been reached in January 1989, and relations appeared to have improved, the necessity for Eurotunnel to seek additional finance in late 1989 prompted an explosive row which threatened the future of the whole project. Eurotunnel argued that as the original members of CTG and FM had prepared the original cost estimates that had formed the basis of the winning bid in 1986, they should take responsibility for the cost overruns that were now threatening the project. TML countered that the main sources of cost increases were subsequent design changes, rather than the original estimates.
Eurotunnel and TML had put their dispute to the MdO for arbitration, but when it pronounced in the December largely in favour of Eurotunnel in December 1989, TML rejected its conclusions. An accord was reached on 8th January, but TML reacted angrily to the ensuing press release from Eurotunnel on 11th January which unfavourably compared the British half of TML with its French counterpart. A letter from TML's chief negotiator to Eurotunnel repudiating the statements in the press release was leaked to the press (Contract Journal 25/1/90) and further soured relations. The later announcement of the appointment of Morton as Chief Executive, a new post which had been intended to provide a buffer between Morton and TML, only compounded the situation. TML took Eurotunnel to court in pursuit of withheld progress payments of £62m, and the court found in TML's favour. However, Eurotunnel had no money with which to make the payments, as the banks were refusing to allow Eurotunnel to draw further funds until the dispute between the parties was settled.
By now, the banks had become disenchanted with Morton's aggressive style (Financial Times 16/2/90). Although relations between Bénard and the French consortium members were difficult, they never deteriorated to the depths of the British side. At the intervention of the governor of the Bank of England (Hunt p 233), Eurotunnel was persuaded to provide the desired buffer, and a revised accord was finally reached on 20th February "hours before the receivers would have needed to be called in" (Financial Times 6/5/94). John Neerhout Jnr was duly seconded from Bechtel to become Project Chief Executive, and the banks unlocked the drawing rights on March 1st. This period also displayed a split between the British and French members of TML - the latter boycotted the meeting with the governor of the Bank of England, and had to be persuaded separately to accept the deal by Bénard (Hunt 1994).
With relations patched up, and new management in place on both sides, progress on the project rapidly improved. Eurotunnel turned its attention to raising the additional funds that were required. It planned to do this in two ways. Firstly, it returned to the original bank syndicate for further funds. This was not entirely successful, as more than a third of the members banks refused to provide further funds, and the lead banks were obliged to increase their own exposure (Financial Times 9/10/90). In particular, the Japanese banks, reeling from their own stock market crash and constrained by new banking regulations were reluctant (Financial Times 17/8/90), and were only persuaded by a direct appeal by Thatcher to the Japanese prime minister, who in turn cajoled these banks (Financial Times 6/5/94). This exercise raised approximately £1.8b. On this basis, a rights issue was launched to shareholders which was surprisingly successful (Financial Times 6/12/90) in raising £577m. The European Investment Bank also provided a further £300m, and the next year £200m was raised from the European Coal and Steel Community as part of the programme of refinancing the project with long-term funds at fixed rates (Hunt 1994 p 243).
In 1990, it still looked as if the tunnel would be open in June 1993, but by 1992, it became apparent that this could not be achieved and a target of December 1993 was announced (Financial Times 6/10/92), and it became clear that Eurotunnel was, again, short of finance. Although Eurotunnel only needed a further £290m to pay for the completion of the project, its financing requirements were badly hit by the delays in the opening of the tunnel due to the lost revenue. The official opening finally took place on May 6th 1994, 12 months later than the original date which, together with the settlement of the outstanding disputes with TML and Bombardier cleared the way for a second rights issue and further requests to the banking syndicate. In May 1994, £693m from the core banks, and a further £50m from a separate syndicate was agreed. On this basis, the rights issue was underwritten for £816m (Financial Times 27/5/94). In order to tempt investors to invest in a company that was not promising to break even until 1998, the rights issue had to be heavily discounted, and a new class of senior debt on more favourable terms than the main debt had to be created (Financial Times 27/4/94). These sums increased the total funds raised by Eurotunnel to over £10b (approx 3.3:1 loan:equity), in contrast to the £6b (5:1 loan:equity) originally defined in the response to the invitation to tender.
Despite the fact that the tunnel was now officially open, there were a number of delays to the launch of revenue earning services, for reasons which are discussed below, and the full range of services (rail freight; HGV shuttle; Eurostar; tourist shuttle) was not available until 22nd December 1994. Once these services were launched they failed to meet the revenue projections due to increased competition on price from the ferries and the airlines. The most obvious manifestation of this was a marketing war that broke out between the ferries and Eurotunnel in the summer of 1995 which further damaged revenues. The turnover to Eurotunnel's year end in December 1994 was £30.6m against the projection in the May 1994 rights issue of £137m. This resulted in a loss of £386.9m, against a projected loss of £191m, coupled with predictions from the board that the relationship with the banks would have to be renegotiated (Financial Times 11/4/95). Turnover running at around half the predicted level for the first half of 1995 meant that further losses of £464.5m were accumulated. While the company easily covered its operational costs, interest payments of £60m per month were swamping the revenues generated and the debt burden had mounted to £7.8b. Negotiations with the bank consortium to resolve this situation moved slowly, and on 14th September 1995, Eurotunnel announced that it was suspending payments on all debts, except the senior debt, for up to 18 months to allow the situation to be resolved.
The future of Eurotunnel was in the balance. The suspension of interest payments was only a breathing space. Its attempts to recoup the situation by launching claims against the members of TML, and against the national governments for unfair treatment in comparison to the ferries, even if successful, would provide only partial relief. Meanwhile, a £2.5b claim against BR and SNCF aimed at a renegotiation of their agreement with Eurotunnel, was rejected by the International Chamber of Commerce (Financial Times 1/11/95). The options facing the banks (Financial Times 15/9/95) in relation to their delinquent debtor were to:
1. take possession of the asset on which they have a charge - the tunnel and its systems - but it is of little intrinsic value.
2. take over the management of the tunnel, but the effectiveness of the current management is not in question, and there is no sign that the banks could do any better themselves.
3. call in the administrators, but this would mean that they loose control of their asset, and the same problems of option 1 would emerge.
4. swap debt for equity, but this would wipe out the value of the equity currently held by investors.
A further option canvassed in France was to nationalise the tunnel (Le Monde 29/10/94). This was advocated by the Association pour l'Action Eurotunnel, which consists of individual shareholders in the scheme in France, where 79% of the shareholders are located. This was later moderated to the taking of a symbolic holding in the company by SNCF (Le Monde 3/12/94). However, this approach would, apparently, be in contradiction to Article 1 of the treaty because SNCF is owned by the French government. Following the brinkmanship that was by now commonplace for the project, an agreement was proposed in October 1996 that the banks should take an increased equity stake in Eurotunnel, raising their share to 45.5%. This would both directly reduce Eurotunnel's debt by £2b from £9.1b, and lower the interest payments on the rest (Financial Times 8/10/96). The task then started of convincing both the 225 syndicate banks and the 750k shareholders of the merits of the proposal, which relies heavily on improved turnover from operations.