CHRISTIAN WOLMAR

Transport Correspondent

A fraud inquiry has been launched at Union Railways, the government-owned company which designed the pounds 3bn Channel tunnel rail link.

Price Waterhouse, Union Railways' auditor, has been asked to investigate purchasing procedures at the Croydon-based company after John Armitt, the managing director, learnt of "improper processes".

The investigation casts doubts over whether next week's scheduled announcement of the allocation of the contract to build the 68-mile line linking London's St Pancras station with the Channel tunnel can go ahead.

Union Railways' chairman, Jim Butler, refused to say how long the investigation would take but its timing, just days before the announcement of what will be Britain's largest civil-engineering project since the Channel tunnel itself, could not be worse.

Mr Butler said in a statement that Sir George Young, the Secretary of State for Transport, was being kept informed about the situation.

The revelation of the inquiry is yet another embarrassment to the Government in its rail privatisation programme following the fraud inquiry which halted the handover of the London, Tilbury and Southend line to its management buy-out team only hours before the transfer was due to take place on Sunday morning.

The investigation into that affair continued yesterday following the suspension of five staff and the resignation of the company's commercial director.

Union Railways was taken out of British Rail's hands a year ago and is now a government company being prepared for privatisation. It will be sold to the private sector as part of the contract to build the link.

Two consortia are bidding for the link: Eurorail, whose chairman until recently was Lord Parkinson, and London & Continental, which includes Richard Branson's Virgin group, and is favourite to win the pounds 3bn contract.

The winning bidder will also be given European Passenger Services, the British part of the Eurostar cross-Channel train company as well as about pounds l.5bn government subsidy to build the line. More than 400 people are currently working at Union Railways and are due to be transferred to the successful bidder to build the link as soon as the announcement is made.

Although Union Railways attempted to play down the affair, saying that only small amounts of money were involved, the decision to call in the auditors and the fact that Sir George is being kept apprised of the situation suggests that the matter is being taken very seriously.

A source close to Union Railways said: "They are involved in a lot of purchasing. They're buying land and houses, and they are putting contracts out for a lot of preliminary works."

The source added that the firm made extensive use of consultants and "it is very difficult to tender out contracts for consultants because they are very difficult to compare with one another".