Impacts of construction events on the project equity value of the Channel Tunnel project

Abstract

With the growing strains on public resources, many governments in recent years have turned to the private sector for infrastructure project financing. The special purpose vehicles (SPVs) taking on such projects usually have a two-stage business model: a construction stage followed by an operating stage. However, the project risk in stage 1 is very high, and in most cases, the impacts of specific construction events on project risk and capital cost are unobservable owing to lack of informational transparency. Eurotunnel (the Channel Tunnel project) is unique in that the share price data for the entire construction period are publicly available. Based on event study methodology, empirical tests were conducted for several well-documented Eurotunnel construction events to measure and assess the project risk and the impacts of such events on the SPV’s equity value. The test results show that: (1) during the construction stage, efforts to better manage the interests and incentives of contractors produce more significant positive impact on investors than efforts for cost containment; (2) during the construction stage, meeting the project deadline is a higher investor priority than containing construction cost; and (3) once the construction phase is complete, the investors’ priority then becomes the overall cost and the impact of construction events on the expected returns from investment. Finally, the level of risk and the potential conflicts of interest that arise during the construction phase of a mega infrastructure project are such that turning to IPOs to provide equity capital may not be appropriate.

Keywords:

• Cost of capital
• event study
• infrastructure development
• project finance
• project risk measurement