Although the November 1987 Offer for Sale showed relatively detailed projections of income and expenditure over the life of the Concession, a surprising omission was any phasing of capital expenditure during the con-struction period. Projected information on an annual basis over the construction period would be relevant in assisting potential investors in the Offer for Sale to monitor the size and implications of any cost over-runs, yet this information was not provided. The principals (shareholders) were in a weak position vis-à-vis the agent (management) in that no benchmark was available ex-ante against which to measure the growth of capital expenditure.
What is curious in the early years of the project is how the share price managed to rise so sharply. It reached a peak of £11.64 in June 1989, yet it is not clear what favourable information in the meantime could have been responsible for this major shift in market sentiment. Given that rights issues took place in November 1990 and May 1994, share prices in Figure 5 have been adjusted (downwards) in the earlier years to enable a fair com-parison with share prices after 1994. Therefore the peak in June 1989 was equivalent to £7.92 when restated in terms of the current share price.
Delays in the construction programme carried four adverse implications for the eventual cost of the project: financing costs would accumulate to a larger extent; labour costs would increase; unforeseen problems in the works programme would require costly modifications to equipment; and there would be a delayed start to operations and therefore a delay in rev-enues coming on stream. Could the market have predicted at an early stage that all was not well with the progress of construction? Not from the 1988 accounts it appears. The 1988 annual report and accounts, which were published in April 1989, gave little indication that anything was amiss after the first year of construction.
However, the following year, the 1989 Directors’ Report of Eurotunnel plc (published in April 1990) contained a much longer and more informative section. Amongst other aspects, it referred to the fact that in late 1988 relations between Eurotunnel and its contractor (TML) had been ‘highly strained’. Clearly, problems with the progress of the project
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01/01/1988 01/07/1988 01/01/1989 01/07/1989 01/01/1990 01/07/1990 01/01/1991 01/07/1991 01/01/1992 01/07/1992 01/01/1993 01/07/1993 01/01/1994 01/07/1994 01/01/1995 01/07/1995 01/01/1996 01/07/1996 01/01/1997 01/07/1997 01/01/1998 01/07/1998 01/01/1999 01/07/1999 01/01/2000 01/07/2000 01/01/2001 01/07/2001 01/01/2002 01/07/2002 01/01/2003 01/07/2003 01/01/2004 01/07/2004
Figure 5 Eurotunnel share price, January 1988 to June 2004 Source: Datastream
had been appreciated within the company since late 1988, but this infor-mation did not reach the market until many months later.
Did the management of Eurotunnel have an obligation to make these matters known more widely at an earlier date? Presumably the manage-ment hoped that the problems were temporary. Publicizing these difficulties would only alarm the market and thereby endanger any future financing.
On the other hand, an escalating share price carried with it the danger that new shareholders would be attracted to the project and invest at an inflated share price. These issues highlight the potential conflicts in an agency rela-tionship where the agent could have an incentive to maintain the momentum of the project regardless of cost, whereas the principals were keen to minimize costs.
Anecdotal evidence indicates that a number of private investors were attracted to the project in 1988 and early 1989 and subsequently lost con-siderable sums of money.5 Several years later they formed a vociferous shareholder association, Adacte, which attempted to take legal action against the directors. At that time, Adacte failed to gain any redress against the directors, an example perhaps of the difficulties faced by a fragmented share ownership in trying to exert its will over management. Some were undoubtedly naïve in their understanding of the workings of the stock market and in their belief that the French and UK governments would make good any shortfall. The Financial Times in 1997 quoted one French shareholder as saying, ‘I didn’t know what shares were. I thought they were safe like loans. I believed the French and British governments were more or less behind the project’.6
Given the inherent uncertainties attached to the project, especially in the early years, and the consequent share price volatility, share purchases rep-resented a fairly speculative investment. If it is accepted that a major goal of the agent was to ensure that the project was ultimately completed (cost being a secondary consideration) then this goal would be assisted by opti-mistic public announcements. On the other hand, optimism on the part of the agent was inconsistent with the main objective of the principals (which was likely to be that of maximizing the net present value of their investment).
The construction problems facing Eurotunnel involved three technical areas: tunnelling, rolling stock and design changes.
Tunnelling
Tunnelling started more slowly than expected. The November 1987 Offer for Sale declared that 90 per cent of the undersea section was expected to be bored in the ‘most favourable geological layer, consisting of chalk marl, which is virtually impermeable and generally considered ideal for tun-nelling’ (Eurotunnel, 1987: 20). The only significant area of difficult conditions was thought to be near the French coast, where specially
designed tunnelling machines would be used. In fact, the ground conditions under the British side proved much worse than had been thought,7with salt water in the rock affecting the performance of the tunnel boring machines.
This caused delays and required expensive modifications to the machinery.
In the November 1987 Offer for Sale it was stated that ‘The contract provides financial incentives for the Contractor [TML] to complete the tun-nels under budget and financial penalties if they are completed over budget or late. It also provides financial penalties if the Contractor completes the System late. This arrangement is designed to encourage the cost-effective completion of the System on time’ (Eurotunnel, 1987: 21). It later tran-spired that TML’s contribution to cost over-runs was limited to a relatively favourable 6 per cent, although a revised agreement later re-apportioned cost over-runs between Eurotunnel (70 per cent) and TML (30 per cent).8