New route charted to fund TENs initiatives

Date: 16/01/1997

By Tim Jones

TRANS-European Networks no longer make the headlines.

As a rule, infrastructure projects, however grand, are hardly the stuff of political cut and thrust. It took a top-level row over whether they should be granted extra EU funds, or even allowed to issue bonds, to get them on to the front pages.

But now the dispute is over, just as much work is going on behind the scenes on alternative methods for managing as well as financing these 90-billion-ecu projects.

Indeed, four months after finance ministers gave the last rites to the billion-ecu budgetary TENs top-up called for by the European Commission, it is working on radical new models commonly known as public/private partnerships (PPPs) to fill the cash gaps.

As is happening increasingly often, governments' single-minded pursuit of cost-savings to qualify for economic and monetary union has led to a change of policy in another area.

“The cost of these projects is huge,” says Sir Alastair Morton, former chairman of Eurotunnel. “Government ability to think straight about heavy expenditure in the coming years is very limited because of the Maastricht constraints. There is not nearly enough concerted action to ensure that they are run as public/private partnerships there is not enough 'oomph'.”

This is a conclusion that would certainly be disputed by Transport Commissioner Neil Kinnock. After finance ministers refused to allocate extra cash from the Union budget for the 14 projects entitled to EU funding, Kinnock decided not to sulk.

Instead, he opted for a practical response and set up a high-level group of transport ministry officials, infrastructure managers, rail operators and financing experts to look into the effectiveness of PPPs.

“Although he was very disappointed that the top-up was not approved, in a way the refusal helped to clarify the issues,” said an official, adding: “Some clarity on this issue is long overdue.”

At the Essen summit in December 1994, heads of government called on the Commission to develop partnerships between the public and private sectors to finance the TENs. Not only would such an approach bring in the necessary capital but, prime ministers hoped, it would inject private-sector efficiency into the provision of infrastructure services.

“In a public/private partnership, the private sector should be involved in a project from day one,” says Harry Cowie, a researcher at the Federal Trust think-tank and author of a recent book on PPPs. “They should be there from the start helping to design the whole project, unlike what happened at Eurotunnel.”

The French and British governments decided they wanted the tunnel built, then brought in the construction companies and the bankers before they established the management/client Eurotunnel itself.

Ironically, it is the much-maligned Conservative government in the UK which has something to teach fellow member states about the use of so-called 'design-build-finance-operate' (DBFO) schemes.

“One of the best around is the UK rail link to the tunnel,” says Cowie. “The work was awarded to a new company whose partners all have expertise in certain areas financing, building, transportation and so on and even Virgin has come in to work on the marketing.”

When it awarded the contract to London & Continental Railway (LCR), the UK government provided sweeteners in return for taking on a costly project where the financial returns would be long in coming.

A large government subsidy has already been given to European Passenger Services the UK's Eurostar operator to provide an early revenue stream, and detailed work has been done on the possible extra costs as work gets under way.

After a difficult start, the UK government's programme for combining the needs of the state and the skills of business the private finance initiative now appears to be finding its feet. The foundations of the scheme are that any spending by the state must demonstrate value for money and that the private sector must assume significant risk.

The UK is by no means the only country to set a good example. France has been running toll operations on highway projects for the past 40 years, while the Americans have a pot-pourri of schemes aimed at encouraging the involvement of local communities in designing infrastructure.

With his group of 15 personal representatives of transport ministers and 14 top executives from financial institutions and the construction and transport sectors, Kinnock aims to emulate this kind of success story.

Since it was set up, the group has met three times and has identified the need for subcommittees to look into the special problems of the TGV-Est link through France, Germany and Luxembourg, and the TGV-Sud from Madrid to Montpellier.

The eastern link in particular has serious problems and Santer had claimed that it would be delayed indefinitely on the French side by the refusal of EU member states to come up with the extra billion ecu he requested.

Although the financing of the TGV Est is now being rethought as a PPP initiative, the Commission is disappointed that more of the high-speed rail links have not been put on the table.

In particular, the Belgian government was reluctant to reconsider how to manage and finance its part of the 16-billion-ecu 'PBKAL' network linking Paris, Brussels, Cologne, Amsterdam and London. After many years of dithering, the Belgian authorities only managed to come up with a plan to find nearly 800 million ecu to fund this rail link which they know will benefit the Netherlands, Germany and the UK more than Belgium last year.

By taking the costs of the high-speed links 'off balance sheet' and into a new vehicle company, TGV Financière, the government achieved a delicate balancing act between the demands of EMU and political realities within the centre-left coalition.

“They do not want to do anything that threatens TGV Financière,” said a Commission official.

Given that most of the financing problems for TENs are to be found on the rail tracks, former Economics Commissioner Henning Christophersen has been asked to chair a special group looking into how private-sector investment can be attracted into rail construction.

“There are many areas where a lot of work has to be done to make it more attractive for the private sector to step in,” he says. “We are looking at many of the financial issues such as arrangements for financing feasibility studies, seeing whether there are lessons to be learnt from the US and finally how the rail sector can compete better with other modes of transport.”

A first draft report from his group will be presented to a meeting on 11 February, but final proposals are not expected until April.

The most radical proposal of all has come from Cowie, whose report advocates the creation of an independent EU infrastructure agency to draw on the expertise in all the related institutions.

“This would give some much-needed impetus,” says Cowie. “Nobody wakes up in the morning and thinks about the Brenner Pass. There are so many interest groups involved that it needs someone to accelerate it, which we think this agency could bring about.”

In time, this could turn into an agency with limited executive powers able to arbitrate between the share-out of national public sectors, calculating the benefits arising from cross-border schemes.

Obviously, Union member states will be highly suspicious about the idea of yet another agency, particularly one which will have dispute-resolution powers. More likely this year is an agreement to promote PPPs on as many of the links as possible, and detailed plans for the eastern and southern TGV lines.

Even if this is all he manages, Kinnock would be justified in boasting that he had come up with a practical solution to the TENs' problems without having recourse to supplementary cash from fretful treasuries.