Government Incentive Contracts with Private Enterprise: Some Lessons from the Channel Tunnel

Some of the dangers of the sub-optimisation which may arise when governments and private companies enter into joint ventures are illustrated in this study of the financial arrangements for construction and operation of the Channel tunnel (the project abandoned in 1975). The governments wanted the tunnel to be operated as a commercial (profit-motivated) venture, but gave the private company partners financial incentives to adopt policies in conflict with this target. The paper analyses this conflict and suggests a form of contract which retains desirable incentives but avoids the conflict of interest.