Channel Tunnel hindsight - TunnelTalk
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Channel Tunnel hindsight Feb 1993
Shani Wallis, TunnelTalk
As can be expected, the Channel Tunnel now provides a role model for the innovative planning, organization and funding of future mega infrastructure projects. Its outstanding successes and its well documented problems, for there have been many, stand as benchmarks against which others will avoid similar mistakes and develop positive ideas.

Mechanical erector of the precast lining segment

From a technical point of view, the Channel Tunnel was not a difficult project. The chosen scheme comprises two 7.6m internal diameter rail running tunnels and a 4.8m internal diameter central service tunnel excavated in the Chalk Marl stratum. This is generally an impermeable, weak, homogeneous rock highly suitable for rapid tunneling although fractured zones with high water inflows were to be anticipated. Following the Chalk Marl stratum takes the tunnels to a maximum 115m below sea level and 75m beneath the sea bed. Tunneling systems highly suited to working in this type of rock were well tried and readily available. What had changed remarkably was the technological advances which allowed record breaking high speed tunneling on the UK side of a maximum 428m/week (24h/day, 7 days/week with a maximum 8h downtime maintenance shift/week) building a fully non-bolted concrete segmentally lined undersea tunnel of 8,036m outside diameter. The best overall average was 179m/week on the UK marine running tunnel south.
On the French side, modern slurry and earth pressure balance (EPB) pressurised tunnelling systems were introduced from Japan to tunnel through the very wet fissured conditions of the upper chalk at the start of their undersea and landward headings. These systems were not readily available to European contractors for the early 1970s attempt and the French would have had great difficulty passing through the wet fractured conditions with the equipment chosen at that time.
Two other notable achievements are:
• Excavation of the large 55m diameter x 66m deep access shaft sunk on the French side as the principal working access for its three undersea and three 3km long under land tunnel headings. All muck was transported to a large sump in the bottom of the shaft where it was slurried with water and pumped out for disposal in a large 4.5 million m3 dammed settling pond about 1km distance.
• And application of the NATM on the UK side. NATM was used initially for rapid excavation of the complex chambers and tunnels of the underground marshaling area at Shakespeare Cliff. This formed the principal working station and launch site of the six TBMs used to complete by far the majority of the total 38km undersea section of the project (22km service tunnel, 17.36km and 18.77km each running tunnel) and the 8km long UK landward tunnels. NATM was then used in spectacular fashion for excavation of the 164km long x 21.2m wide x 15.4m high (252m2 section) UK undersea crossover chamber and again for excavation of short 500m long land tunnels under Castle Hill en-route to the UK terminal site. These tunnels were excavated in gault clay, a soft ground material.
Worthy of special mention also is:
• The logistical accomplishment of running the necessary service train systems underground particularly the three long UK undersea tunnels. These continued while at the same time access from the advancing service tunnel allowed concurrent excavation of the cross over chamber which had to be almost complete before arrival of the two tunnel machines.
• The hand mining work which accomplished the many lateral cross passages and pressure relief ducts linking the three main bored tunnels.
• The advanced surveying techniques and guidance systems employed to ensure that the six undersea tunnel heading did actually meet under the sea. In fact junction of the UK and the French service tunnel headings was within 350mm on line and 60mm on level.
• The establishments of the marine lagoons on the UK side which created a disposal site for some 3.75 million m3 of muck in what is an extremely confined working site.
• The segment casting factories in both countries where thousands of high precision tunnel lining segments were produced at high rats. The UK factory on the Isle of Grain had a potential output of 1,152 segments per day and produced the required 4,42,755 segments within 3½ years.
• The installation now going on of the many thousands of units and lengths of electrical cabling, track and other fixed equipment required to operate a safe and efficient rail system. There are many published papers which describe in detail the technical and engineering accomplishments of the Channel Tunnel work and give credit to the Channel Tunnel work and give credit to the designers, consulting engineers, machine manufacturers and others involved in various aspects of the project (1, 2).
However, very little is said about the actual cost of the engineering accomplishment. When awarded the concession in 1986, the winning group proposed to design, build, fully equip and commission the fixed rail link after 4½ years of construction work in May 1993, and at an estimated total cost of £4.87 billion. It was on this basis that the group raised nearly £1,000 million equity from individual shareholders and £5,000 million in loans from more than 40 international banking and financing institutions. Of the nearly £5 billion cost, construction was estimated at £3,000 million, with £650 million for corporate costs, £450 million as an inflation contingency, and £1,000 million for net financing costs. The most recent predictions of April 1992 put the cost at the time of opening (now tentatively rescheduled to December 1993) at £8.1 billion excluding on-going interest payments.

Fit-out of the NATM excavation of the UK crossover cavern

Claims
It is very difficult to pin point exactly where and how such an enormous overrun has occurred and perhaps the calls for its justification will get buried and (some may say hopefully) forgotten with the passage of time. However, as Sir Miur Wood states at a meeting about the project in London in February for the Institution of Civil Engineers(2), the cost of building a structure is as much a part of the engineering as design and construction. While some specific over runs are identifiable, others are less obvious and more a cause of circumstance. For example, criticism can be levied against the method and the speed by which the concession was awarded. From invitation in April 1985 to close of tender in October 1985, promoters had only seven months in which to prepare their design, construction and financial proposals. The governments then gave themselves only three months to assess each proposal and announce the winner in late January 1986. Some say that the speed was essential to preserve momentum and secure a positive go-ahead. Many now accept that more time spent in th early planning stages would have avoided many costly problems to come.
The winning concession was awarded to a consortium of ten large construction companies (five UK and five French) with five national banks (three French and two UK) which were interested principally the contracting and banking opportunities presented rather than with the prospect of owning and operating a transport system. The ten contracting partners therefore funded the establishment of Eurotunnel, a small organization which would act initially as a financial institution to raise the necessary working capital during the construction phase and gradually grow into a owner and operator of the completed system. The ten contractors then formed Trans-Manche Link which wrote and agreed seven year design-and-construct contract to build and commission the full system by May 1993 for a contract price of £2.66 billion (in 1985 prices).
This was based on:
• A £1,286 million of target cost element for the tunnels and associated civil works with ET and TML sharing the cost-over-or-under runs;
• A £1,070 million lump sum for the terminals and the fixed mechanical and electrical equipment for the terminals and tunnels; and
• A £245 million as a procurement fee and cost reimbursement for the system's rolling stock and locomotives.
The establishment of a Maitre d'Oeuvre was a requirement of the governments to provide project management and contract administration and to protect the interests of banks and other third parties to the contract between TML and its 'client' Eurotunnel.
However, the significance of an independent and strongly identifiable 'client' became obvious in October 1986 when financial commitment by up to 40 investment institutions controlling a syndicate of up to 200 banks worldwide (Equity 2), was made conditional on the promoters giving up control of Eurotunnel. Nine months after award of the concession Eurotunnel "acquired a mind of its own" according to Sir Alastair Morton, appointed co-chairman in April 1987 with André Bénard of France, but in doing so, inherited a construction contract and a term sheet for a credit agreement which it had not negotiated. Again according to Morton, Eurotunnel is still living with the consequences of its delayed birth.
With its independence, Eurotunnel took over of the daily project management and commercial responsibilities from the Maitre d'Oeuvre, including the staff. This strengthened Eurotunnel as the owner and client and left the Maitre d'Oeuvre responsible for overall monitoring and audit of the project and expert advisers to Eurotunnel. Equity 2 also effectively reduced the holding of the 10 founding shareholders to a minority of a combined £50 million. Today this is about a 2-3% shareholding in Eurotunnel.
Through this evolution, the original promoters were relegated to working for a client strengthened further by the appointment of experienced financiers and a management team from Bechtel of the USA. Thus were sown the seeds for a confrontational and contractual attitude toward the construction work. The well-publicized contractual posturing between TML and Eurotunnel has led to many management and organizational restructures and the many claims and counterclaims between the two have kept the project's disputes panel of experts and its arbitrators busy.
Many of the claims and increases in cost can be directly related to the fast-track approach adopted to complete the 'turnkey' project as quickly as possible. While this does improve financing arrangements, it also has major financial disadvantages. When detailed design and construction are progressing simultaneously it is very difficult to estimate costs and keep a tight control on budgets. There is no argument about having to pay the price when new design directives are specified during the construction phase.
A major cause of delays and cost overruns are relates directly to design changes imposed by the inter-governmental commission (IGC), the project's impartial regulatory body and safety watchdog. Major design changes have been demanded by the IGC to improve the fire safety aspect of the car and freight wagons of Eurotunnel's Shuttle service. Many were imposed after award of procurement orders with suppliers. The IGC also ordered a wider gap between the opened doors in the cross over chambers which allow trains to pass from one track to the other for maintenance purposes. During normal operation the heavy steel doors are closed to separate the two tunnels for both safety and ventilation reasons.
TML has lodged large claims for such design changes many of which remain unresolved. In return, Eurotunnel has indicated that it may lodge claims against the IGC for changes legally outside the criteria of the original concession requirements or beyond the agreed concession's specifications. This could also include claims against IGC for the notorious delays and mismanagement by the UK government to provide a dedicated high speed rail link between the Channel Tunnel and London. The provision of national infrastructure is central to acquiring for the nation and its people the greatest benefit from the fixed link. This has been recognized and acted upon by the French government. The UK government appears not to share the same commitment or vision.
The most recent breakdown of Eurotunnel's project capital costs were published in the prospectus for the 1990 rights issue. Since then, the high number of unresolved issues and uncertainties about the exact opening dates as well as the phased introduction of a full service due to late delivery of rolling stock, make forecasting for the general public unwise. At that time, forecasts for TML's final contract price had risen from £2,660 million to £3,897 million with an additional £239 million set aside as a claims contingency fund.
£13,000 per meter of tunnel
In the forecast, the target cost tunnelling element had increased from the 1985 £1,286 million contract price to £2,009 million and represents largest portion (54%) of the total forecast increase. Given three tunnels of 50.5km long from portal to portal, and given the complexity of the project and the different tunnelling techniques employed, this gives a very tough tunnelling cost of £13,000 per linear meter. This does include design costs and client management costs but compared to other current tunnelling costs, most European tunnelling contractors consider this high and hard to justify. The reimbursable cost forecast for the rolling stock had risen from £245 million to £583 million and lump sum forecast had risen from £1,070 million to £1,305 million (£491 million for the terminals and £814 million for the fixed mechanical and electrical equipment). By August 1992 and assisted by disputes panel rulings, all issue in the target cost works and two terminals had been settled. It is the increases in the fixed equipment and the rolling stock which remains the most contested dispute between ET and TML.
In spring 1992, the disputes panel of experts ordered Eurotunnel to pay some £50 million per month as 'interim funding' to TML without limit until either both agreed otherwise, or both agreed prices for the work or both asked the panel to set them. Eurotunnel disagreed with the ruling and took the issue to arbitration. In the meantime it offered TML a conditional cash sum as part settlement which increased the accepted cost of the fixed equipment and rolling stock to £980 million, 60% more, in 1985 money, than the original £620 million. TML rejected the offer and asked the panel to set the price.
Then in September, the arbitrators found that the disputes panel was wrong in law to order the 'interim funding' and the £200 million paid by Eurotunnel to TML by August 1992 is held on account toward ultimate settlement sums. Reference to the principles of pricing the disputed work is still on going. Accountability to its more than 600 000 private individual shareholders commits Eurotunnel to regular blow-by-blow accounts of these battles, albeit from a biased Eurotunnel point of view having effectively banned TML from speaking to the media. It is a pity the drama of the claims and the confrontational relationship between ET and TML is overshadowing the actual positive litigation and could well lead to protracted litigation tasting years after completion of the contract.
Financing
However, all the capital costs and the claims both settled and outstanding pale into insignificance when stacked up against the cost of borrowing the necessary working capital and servicing interest payments. Envisaging a maximum 5:1 debt: equity ratio at the start. The ration now is about £7.3 billion debt against an equity of just £1.6 billion!
According to the last interim report, published in October 1992 for the half year to 30 June 1992. Eurotunnel had a loan facility of £7276 million and had spent £3701 million on financing costs and net interest expenses for and £842 million on corporate costs. A letter to shareholder in October 1992 state that settlement of claims associated with the civil costs of the tunnels and the terminals added only £million in 1985 values to the forecast £8 million or less than 0.1% to the total cost to project to completion in late 1993, including inflation and interest .
Some of the borrowed money is on fixed interest rate but much is floating and therefore subject to the vagaries of interest rate change .At present, ET is benefiting from the general trend toward lower interest rates but the responsibility of following the markets and making decisions about how best to profit from these trends consumes the full time efforts of ET's extensive finance department.
That Eurotunnel has survived despite zero financial support from the governments, could well stand as a negative point. Other major infrastructure projects, such as the Storebaelt fixed link project in Denmark, have adopted the Eurotunnel model of raising venture capital on the open international money markets, however, while the basically autonomous clients is responsible for raising and managing its own finances, it does enjoy the support of government guarantees on borrowed money. This gives it a major advantage when negotiating loan agreements as well as an average 4% interest rate advantage paying, for example, 8% against Eurotunnel's comparable 12%. The question of commissions charged by banks also fit into this category and requires constant scrutiny as does the robustness of Eurotunnel's traffic forecasts. These forecasts are the sensitive blue prints against which Eurotunnel's potential income and commercial viability is judged and are constantly under examination. Current economic statistics do not support optimistic predictions about traffic flows particularly in the first two or three years of operation.
In the meantime, while Eurotunnel's financial managers juggle with fantastic sums of money, individual shareholders must continue to believe in the ideal of contributing to one of the greatest engineering fetes of our time since they will not see a return on their investments for many years. The joint chairmen of Eurotunnel in their letter of October 1992 admitted to shareholders that after opening, virtually all Eurotunnel's income for several years will be for bank debt service. Given current revenue forecasts, cash flow after interest rates is not expected to turn positive until 1996-97 and the first dividends are expected to be paid - hopefully - by the end of the Century. They go on to say that they will "have to seek further funds from various sources, including our shareholders, in 1994 or 1995" to help it through its most vulnerable infant years. We shall have to wait and see if the sense being part of something really big and visionary will encourage private shareholders to part with more cash to support this wayward child.

           

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