Project financing is one of the ways that nations and companies can come together to initiate an enormous project with huge capital intensive. The Eurotunnel project was a very expensive transport project that would connect Britain and France. The infrastructure required so much capital that it attracted so many banks and private investors.
In 1984, the Eurotunnel project started with much anticipation to complete the task (Merna and Njiru 360). The time to complete the project was scheduled to be in 1993. At around the same time, there were plans in the European region to ratify important laws that would enhance a united economic growth.
The project planning encouraged the private sector to own the entire work on the rail system. They were to finance and manage the infrastructure according to the signed agreements. The kind of initiative was still new with no previous references even in the world capital markets (Merna and Njiru 360).
The two governments worked together to get a report for the sanctioning of the project. It recommended the construction of a rail link between France and Britain (Merna and Njiru 360). Several banks, together with the Arranging Banks came up with a report that the project’s financing would be purely private capital (Thumann and Woodroof 270). The Arranging Banks also joined with the leading construction companies in both countries to form the Channel Tunnel Group in the UK and France-Manche S.A. in France. It would later become the CTG-FM Eurotunnel system (Merna and Njiru 360).
The consortium provided £50 million as the starting capital or Equity Offering. The concession allowed the CTG-FM to construct and operate the European tunnel system for fifty-five years, together with the mandate to set policies and tariffs (Fabozzi and De Nahlik 285).
The project ownership was a dual-bodied transnational hybrid (Merna and Njiru 360). It had companies and shareholders from both countries and other interested parties all over the world. The two main groups had complied and registered in their respective countries, France and Britain, and had come together in this project as The Eurotunnel (Gatti 289). They also formed the Eurotunnel Finance Limited and the Eurotunnel Finance S.A to manage the group’s finances. The construction companies formed a consortium they called the Transmanche Link. They had an obligation to do all the required steps in construction including designing, testing and commissioning.
The construction contract had three main segments that included the target works, the lump-sum works, and the procurement items (Finnerty 350). The agreement also had penalties charged to Transmanche Link in case there are damages or delays.
The project would cost about £4.8 billion. It includes the construction costs of £2.8 billion, Corporate and other costs £0.5 billion, provision for inflation £0.5 billion, and the net financing cost £1 billion. But to cater for the costs and cover the miscellaneous costs or overruns, the project intended to raise £6 billion (Gourvish and Anson 189). From this £1 billion would be equity, and the £5 billion would come from loans. The governments would not offer guarantees because it was purely a private equity (Gourvish and Anson 189). Therefore, Eurotunnel planned to raise the funds in six stages. The two countries also owned railway companies that would be major customers to the Eurotunnel System (Finnerty 350).
The Eurotunnel System would be faster and more convenient for customers and goods. It would also cause the market to reduce transportation charges. The other public transport systems would lose many customers. It would collect revenue from the shuttles, railway charges and tolls, and ancillary revenues. The projections indicated success to the shareholders and the stakeholders.
Works Cited
Fabozzi, Frank J, and Carmel F De Nahlik. Project Financing, London: Euromoney Institutional Investor PLC, 2012. Print.
Finnerty, John D. Project Financing, Hoboken, New Jersey: John Wiley & Sons, 2007. Print.
Gatti, Stefano. Project Finance in Theory and Practice, London: Elsevier/Academic Press, 2008. Print.
Gourvish, T. R, and Mike Anson. The Official History of Britain and the Channel Tunnel, London: Routledge, 2006. Print.
Merna, Tony, and Cyrus Njiru. Financing Infrastructure Projects, London: Thomas Telford, 2002. Print.
Thumann, Albert, and Eric Woodroof. Energy Project Financing, Lilburn, Georgia: Fairmont Press, 2009. Print.