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Case study on Eurotunnel

Introduction
The Euro Tunnel, also known as 'Channel-tunnel', is a series of three tunnels linking the southern coast of England near Folkestone to the northern coast of France outside Calais.

The tunnels are 50km long, with an undersea section of 39 km, making it the longest undersea tunnel system in the world.

The idea of a Channel Tunnel was first explored by French mining engineer, Albert Mathieu, who formulated early designs for Napoleon in 1802.

Following announcements in 1981 by the French and British governments that a cross-channel link would be explored, private companies were asked to tender for contracts to construct and operate the tunnel link. In early 1986, Margaret Thatcher and Francois Mitterrand announced that contracts had been finalized and work finally began in mid 1986.

Problem-1: Do Eurotunnels shareholders deserve to be compensated for their losses?


Solution-1: Eurotunnels shareholder deserves to be compensated for their losses.

Any shareholder who bought at the time of the original Offer for sale or early 1988 and then sold in the first half of 1989 would have realized substantial capital gains. But the vast majority of shareholders have undoubtedly incurred substantial losses on their investment.

If the November 1987 Offer for sale document had reported the estimated project cost for each of the year construction, shareholders might have been in a better position to compare estimated and actual construction costs.

Problem-2: Discuss the proposition that agents have an incentive to be optimistic when proposing large capital projects.
Solution-2: Management was arguably successful in achieving completion of the project and therefore maintaining their employment.

The history of large capital projects suggests that almost invariably, agents tend to underestimate capital cost and overestimate revenues.

Management incentives were determined at the beginning of the project and turned out to be inappropriate, given the high construction costs.

Problem-3: Which stakeholders were most adversely affected by Eurotunnels financial difficulties?
Solution-3: Among all the stakeholders, the shareholders potentially have the most to loss.

Shareholders were noticeably unsuccessful in terms of preventing the substantial declines in net present value of their investments.

High construction costs did not provide sufficient incentives to protect the interests of the shareholders.

Until the project opened a major uncertainty involved initial traffic volumes plus growth rates. After operation had started the area of uncertainty reduced to growth rates.

Eurotunnel is unable to service debt. If the banks convert the debt into equity in a relatively large amount, interest charges will be lower but profit available for dividend will be distributed over a large number of shares.

Problem-4: Briefly outline the causes of Eurotunnels financial problems. Could, or should, these problems have been foreseen?
Solution-4: Construction of the tunnel started in 1988, the project took approximately 20% longer than planned (at 6 years vs. 5 years) and came in 80% over budget (at 4.6 billion pounds vs. a 2.6 billion pound forecast).

Changed specifications for the tunnel, there were needs for air conditioning systems to improve safety that were not included the initial design.
When the tunnel was built it was assumed that traffic levels would have grown rapidly enough to generate a healthy income for Eurotunnel. 2003's 6.3 million rail passengers, though, fell far short of original predictions of 16 million a year. The 1.7 million tonnes of freight carried in 2003 can be set against an initial forecast of an annual 7 million.

It should be noted that a great deal of the financial problems with the Channel Tunnel were caused by overly optimistic revenue projections. It was very difficult to predict accurately and complete the project in due time based on initial estimates.

In fact, subsequently, the Channel Tunnel has been listed as one of the engineering wonders of the world, which emphasizes its uniqueness.

Problem-5: Eurotunnel has been both a success and a disaster. Discuss.


Solution-5:

Euro Tunnel is the finest engineering achievement of the 20th century as well as one of the most expensive white elephants in the history.
Construction of the Eurotunnel was the realization of a centuries-old dream to connect England and France. In 1996 the American Society of Civil Engineers identified the tunnel as one of the Seven Wonders of the Modern World. In 1999, Channel Tunnel was awarded first prize amongst the top 10 construction projects of the 20th century by an international construction panel in the United States. The Channel Tunnel promotes the trading connection between UK and France and improves living conditions by cheaper and faster transport for both sides.

But if we focus on the financial performances, we cannot express the same opinion.

The project took approximately 20% longer than and came in 80% over budget.
The volume of traffic is a fraction of what projected. Duty free sales running at zero, stuck with debts it could not afford to service and the capital cost of construction running at two times that projected, the tunnel is an unmitigated financial disaster.