The Rt Hon David MILIBAND Secretary of State for Foreign Affairs Foreign and Commonwealth Office King Charles Street London SW1A 2AH United Kingdom
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EUROPEAN COMMISSION Brussels, 13.05.2009 C (2009)3571 final Subject: State aid N 420/2008 – United Kingdom Restructuring of London & Continental Railways and Eurostar (UK) Limited. Sir, 1. PROCEDURE 1. By letter of 26 August 2008, registered on that day, the United Kingdom notified an operation (hereinafter referred to as "the operation") aiming at financially re-organising London & Continental Railways Limited (hereinafter also referred to as "LCR") and at restructuring Eurostar (UK) Limited (hereinafter referred to as "EUKL"). 2. By email dated 11 September 2008, registered on that day, the United Kingdom provided some additional information regarding the notified restructuring. 3. The Commission requested additional information by letter of 29 September 2008. By letter of 10 October 2008, registered on the same day, the United Kingdom provided additional information concerning the restructuring plan. By letter of 2 December 2008, registered on the same day, the United Kingdom amended its notification and provided additional information accordingly. On 20 April 2009, the United Kingdom supplemented the notification with additional elements. The Rt Hon David MILIBAND Secretary of State for Foreign Affairs Foreign and Commonwealth Office King Charles Street London SW1A 2AH United Kingdom Commission européenne, B-1049 Bruxelles – Belgique - Europese Commissie, B-1049 Brussel – België Tel.: 00- 32 (0) 2 299.11.11. 2. DESCRIPTION OF LONDON & CONTINENTAL RAILWAYS 4. The operation presented by the United Kingdom as a restructuring of LCR and its subsidiary EUKL. LCR is the developer of High Speed 1 (HS1), the high speed rail link between London and the Channel Tunnel and the owner of Eurostar (UK) Limited, which is the UK arm of Eurostar. 5. The United Kingdom considered that this operation has become necessary due to two majors elements: on the one hand, there is a new context characterised by both the successful delivery of HS1 in November 2007 and the forthcoming opening to competition of international rail passenger transport; on the other hand, there is an operational need to now separate train and infrastructure operations, which have been up to now managed by LCR. 2.1. General presentation 6. In March 1994, the UK Government launched a public works concession procurement for the Channel Tunnel Rail Link (CTRL) project, now called High Speed 1 (HS1). 7. LCR is the consortium company formed to bid for the CTRL project. LCR won the competition and, in February 1996, received the concession for the CTRL (signature of the Development Agreement). 8. The shareholders of LCR are the following: Shareholding Bechtel 22.41% UBS (previously S.G. Warburg) 22.41% National Express 20.94% SNCF 13.60% EDF Energy (previously London Electricity) 13.18% Arups 2.76% Halcrow 2.43% Systra 2.27% Total 100.00% 2.2. London & Continental Railways' businesses 2.2.1. Construction of High Speed 1 9. High Speed 1 (HS1) between London St Pancras and the Channel Tunnel was the first new railway to be constructed in the UK for more than 100 years. It was built in two sections: 2 - Section 1 linked the Channel Tunnel to North Kent and opened in September 2003; - Section 2 completed the railway to St Pancras International via new stations at Ebbsfleet and Stratford and was opened for Eurostar international services on 14 November 2007. 10. HS1 links London with the capital cities of France and Belgium and is the UK leg of the Paris-Brussels-Köln-Amsterdam-London (PBKAL) EU trans- European network (TEN) priority project. HS1 is 108 km long and can support train operations at line speeds of up to 300 km/h. It is the physical connection between the UK rail network and the fast-expanding European inter-operable high-speed rail network. 11. Since the completion of HS1, the traffic has increased and the number of international passengers in the first half of 2008 is […]*% ahead of the corresponding period a year earlier. 12. The new line and associated services deliver a wide range of economic and policy benefits: - journey time improvements on the international and domestic routes; - free up of capacity on the existing network, when the demand on the UK railway market is growing fast; - a critical component of London's delivery of the 2012 Olympic Games; - an important contribution to economic regeneration; - a modest but useful environmental benefit, with a result of modal shift from air to rail. 13. Since 14 November 2007, the new railway HS1 is fully completed. It was completed on time and within budget. Following the completion and opening of HS1, LCR's project construction activities have been wound down. This leaves LCR with three operating businesses as shown in the diagram below: HS1 railway infrastructure Participation in Development land interests at and stations Eurostar (EUKL) Stratford and King’s Cross 2.2.2. HS1 infrastructure and stations 14. The UK government1 is the owner of the whole of the HS1 route, which includes the HS1 track, station and depot infrastructure. The UK government has agreed to grant a lease to HS1 Limited (formerly URN2) and CTRL * Covered by the obligation of professional secrecy 1 In the present decision, the Secretary of State is referred as the UK government. 2 Union Railways (North) Limited, now renamed HS1 Limited (HS1 section 2). 3 (UK)3 of the entirety of the HS1 track, station and depot infrastructure apart from certain electrification assets which the two companies lease from EDF. 15. The HS1 railway is operated under contract by NR (CTRL), a wholly-owned subsidiary of Network Rail Infrastructure Limited, which owns and operates the UK domestic rail network. Under the terms of the operator contract, NR (CTRL) manages the operations, maintenance and renewal (OMR) of the HS1 railway and is reimbursed its costs for so doing, together with fees and performance incentives. These costs are then passed on to users of HS1 as an element of HS1’s access charges. 16. The principal sources of income for the infrastructure activities of LCR are access fees charged to the users of the infrastructure in respect of both international and domestic train services on HS1. 17. At present, the only operator of international passenger services on HS1 is Eurostar. However, the liberalisation of the EU rail passenger market from 2010 will make it possible for other operators to apply for access to operate international passenger services on HS1. 18. Through EUKL, Eurostar has agreements for access to HS1 entitling it to operate up to 8 train services an hour in each direction on the railway. In practice Eurostar will operate just over 330 services a week in its first year of operations on the completed railway. 19. Apart from access charges, LCR’s other principal sources of revenue via HS1 are expected to be rental income from retail outlets and the sale of advertising space at St. Pancras station, and car-parking income at Ebbsfleet station. 2.2.3. Eurostar UK Limited (EUKL) 20. LCR wholly owns EUKL which conducts LCR's participation in the delivery of the Eurostar service ("Eurostar"). 21. Eurostar is operated as an unincorporated international railway grouping of EUKL, SNCF and SNCB. In 1998, LCR contracted the management of EUKL to ICRR, a consortium company consisting of: - National Express (40%); - SNCF (35%); - SNCB (15%); - British Airways (10%). 22. The creation of ICRR was approved as a merger by the Commission4. The management contract between EUKL and ICRR expires in December 2010. 23. Of the 330 services operated each week by Eurostar, just over half are services between London and Paris, which account for just over 70% of Eurostar’s revenues, and around a third are services between London and Brussels accounting for just over 20% of Eurostar’s revenues. The remainder 3 Channel Tunnel Rail Link (UK) Limited (HS1 section 1) 4 Case No. IV/M:1305 - Eurostar 4 are services to Lille, Marne-la-Vallée (Disneyland) and other destinations such as Avignon and Bourg St. Maurice. 24. Eurostar revenues and certain costs are shared between EUKL, SNCF and SNCB under so-called ‘revenue sharing protocols’. There are two protocols: - A “Bipartite Protocol” between the British Railways Board (BRB) and SNCF covering the London-Paris route. Although BRB, which is wholly-owned by the UK Government, remains the UK counter-party to the protocols, it has entered into a Back-to-Back Agreement with EUKL under which EUKL assumes all of BRB’s rights and obligations (other than those relating to freight, which were assumed by English Welsh and Scottish Railways Limited). EUKL is therefore the effective counter-party to the protocols; - A “Tripartite Protocol” between BRB (effectively EUKL through the back-to-back arrangements), SNCF and SNCB for the London- Brussels route. 25. EUKL sells about […]*% of Eurostar ticket revenues and, under the protocols, retains around […]*% of the proceeds5. As well as covering the sharing of revenues, the protocols cover the division of the direct operating costs incurred in operating the Eurostar service (including payments for access to the Channel Tunnel) and capital expenditure on rolling stock. The principles of the cost sharing are that: - Each partner railway covers the costs specific to operations within its country (for example track and station access charges and station operation costs); - Train maintenance costs are shared according to the proportion of journey minutes and train kilometres on each network and the capital cost of the rolling stock is shared in proportion to the journey minutes on each network; - Eurotunnel costs (Channel Tunnel usage charges and contribution to operating costs) are shared equally between SNCF and EUKL. 26. In 2007, Eurostar revenue from passengers travelling on inter-capital services was £550m, of which EUKL’s share was approximately £[…]*m.