Select Committee on Environment, Transport and Regional Affairs Minutes of Evidence


Examination of witnesses (Questions 134 -159)

WEDNESDAY 16 DECEMBER 1998

MR COLIN CHILD and MR RICHARD GOLDSON

  Chairman

  134.  Gentlemen, may I say how grateful I am to you for coming and apologise for keeping you waiting. Could I ask you first to identify yourselves for the record and then perhaps if you want to make some opening comments.
  (Mr Child)  Thank you, Chairman. My name is Colin Child from Inter-Capital and Regional Rail Limited.

  135.  May I just remind you that the microphones in front of you are not for your use because they record what you say but in order to project your voice in this room I would be grateful if you would both of you speak up.
  (Mr Goldson)  I am Richard Goldson.

  136.  Thank you very much. Mr Child, would you wish to say anything?
  (Mr Child)  Thank you, Chairman. I am a Director of Inter-Capital and Regional Rail Limited. I am also a Director of National Express Group, one of the major investors in that company. Inter-Capital is the consortium joint venture that has been selected to operate the management contract for the Eurostar service. I am joined today by Richard Goldson who is a Director of our trains division. The two of us have been heavily involved in preparing both the submission for this Committee and indeed the report into the viability of the regional Eurostar services that the Deputy Prime Minister requested back in June of this year. I think, if I may, I would like to make three brief points before we start. Firstly, I am very pleased to advise the Committee that yesterday the final formalities associated with our management contract were completed and all of the outstanding conditions were satisfied. We are now, I am happy to say, operating the Eurostar management contract.

  137.  You are now legit.
  (Mr Child)  Thank you. Obviously we are very enthusiastic about the Eurostar product otherwise we would not be here. We believe it is a good product with a good future ahead of it. Having said that, I think the project itself has been plagued with difficulties in forecasting passenger numbers and indeed I think the Deputy Prime Minister in his statement described them as being over-optimistic. It is difficult to regard the historic forecasts as anything other than that. Clearly in looking at our review into the viability of the regional services and indeed our management bid in its own right we have tried to produce reasonable and realistic forecasts for the future passenger volumes on the Eurostar services and indeed the likely demand on the regional services. Finally, I should point out that under the terms of our management contract, as I think we have mentioned in our submission, we are required obviously to run the company in a proper, orderly and safe manner but to maximise the cash flows and the operating performance of the company as you would expect from any management contract. In doing that we are obviously very, very keen indeed to explore new services and new products and initiatives that we can bring into place and, indeed, to utilise all of the assets that the company enjoys in an efficient and effective manner.

  138.  Can I ask you what was your reaction to the decision to have an independent review of your review?
  (Mr Child)  I think a little bit disappointed in the sense that we were hoping that we were coming to the end of the process rather than seeing it continue. Having said that, I think given the level of interest from MPs and the public in the regions it is not surprising that perhaps the Government wishes to go that extra mile or take that extra step to ensure that all aspects of this potential service are covered. We have already said to the Government that we are very happy to work with them and provide them with any of the information and analysis that we have conducted if it helps speed up that review.

  139.  Do you have any reason to believe that the independent review will come up with any different figures?
  (Mr Child)  I do not think so in that we are obviously very confident in the research and the analysis that we have done otherwise we would not have put the report forward. Having said that, it really does depend on the criteria which are set for the independent advisers to follow. We have been very much focused, as you know, on the economic and financial viability of these services. If other social or economic aspects are brought into play then there may be factors there that could have an influence on their views.

Mr O'Brien

  140.  Do you consider that there is merit in developing Eurostar beyond Watford into the northern regions?
  (Mr Child)  I think right now financially it is very, very difficult indeed. Our conclusions, as you know, are that those services are not viable. I think there may well be opportunities to pursue a sort of compromise solution which is far from the perfect solution in terms of through services but as part of the work that we have done on the regional services we have identified Watford and Kensington as being interesting additions to regional services with a connection at Watford for the domestic train services. I think the fundamental issue is really the length of journey time from the regions to Paris and the relativity against air travel.

  141.  One of the reasons given in your submission is the fact that population densities north of Watford are less than they are in the south. What research did you do on that? What kind of population figures are you looking for?
  (Mr Child)  Obviously we did have regard to the sheer number of people living in some of the regions and cities that are considered within our report. It may be wrong to suggest that there is not enough population there because clearly there are some very large cities that potentially can be served by regional services but at the moment those cities are very well served by regional air services to Paris and beyond. It is interesting to think not just of the existing services but the increase in the number of services being offered by the low cost budget airlines which have made great progress over recent years in developing their market.

  142.  Would you consider views from the Regional Development Agencies who are now in being and come into operation next April as to their involvement and the need from their regions for Eurostar services? Is this part of your consideration?
  (Mr Child)  It has not been to date because our remit was to look at the financial viability of these services right now, which we have done. Clearly we would be very, very keen to sit down and discuss with these new bodies the merits of regional services and working with them. Indeed, there may be attractions to them in terms of providing some financial support. Clearly if that were to be the case it could transform the conclusions in our report.

Mr Stringer

  143.  Virgin say that the regional service is going to be commercially viable within three years. How can they say it is viable when you do not? What is wrong with their business plan?
  (Mr Child)  I have to say first of all that I do not know what is wrong with their business plan. Although we have had a number of meetings with Virgin they have not yet been able to share their analysis of the market with us. I have to speculate a little bit, indeed quite a lot, in terms of——

Chairman

  144.  You did not think it was worth listening to their evidence to this Committee?
  (Mr Child)  Yes, I attended the meeting last week and I certainly listened with some interest. In terms of the meetings prior to the evidence last week they had not shared a huge amount of information with us. That may be for very good commercial reasons as they see it. Following these Committee meetings, and indeed maybe as part of the Government's further review, that analysis may well become available to us and we can compare notes and reconcile the differences.

Mr Stringer

  145.  At the moment you have no understanding of where the differences are?
  (Mr Child)  That is absolutely the case. I think it would be rather glib of me to say that it can only be two things: either they have been more over-optimistic than we have on revenue or they have been more optimistic in cutting costs or a combination of those two factors. We do not know. I have to be a little bit careful because I am speculating, I should stress that. There may be some simplification in terms of their analysis in terms of these very complicated revenue sharing protocol arrangements in terms of both costs and revenues for the Eurostar service.

  146.  Would you care to speculate on whether there might be any non-commercial reasons why Virgin might want to run the regional Eurostar service?
  (Mr Child)  Crumbs. I think it would be wrong of me to be drawn on that, if you will bear with me, in the sense there has been clearly a competitive competition between the two parties in bidding for the management contract of Eurostar and I do not know whether if it is some hang over from that. There was a fair and open competition at that time and our consortium was selected. I can speculate on a number of things but it may well be a hang over from that.

  147.  Do you think there ever can be conflicts of interest when an airline runs a railway?
  (Mr Child)  There should not be. Indeed, as part of the process that we have been through to clear our consortium, including British Airways who, as I am sure you are aware, have a ten per cent interest in the consortium, we had to satisfy the competition authorities in Brussels that everything was in order and we have done that. I do not actually think that there is a massive conflict between the two. As part of an integrated approach to transport there may well be some real public interest benefits from doing so.

  148.  If Virgin get the right to operate the regional services will you co-operate with them fully?
  (Mr Child)  I think that is a complicated question to answer. Yes, we will accommodate and work with others if they have a better and more commercial use of these assets within the Eurostar framework than we have. Indeed, in terms of maximising the cash flows we are contractually bound to pursue those opportunities. They would have to satisfy the consortium and indeed Eurostar (UK) Limited and ultimately London & Continental, who still control the majority on that board, that their proposal was commercially viable and credible and there was adequate comfort there in terms of the security over those services for the medium term.

Mr Stevenson

  149.  I think it is that last comment that needs to be examined a little further, Mr Child. We have here your consortium and Virgin that were in competition. You have now been appointed as the management organisation. Do you find it a little strange that the Secretary of State appointed you, one of the bidders, to actually do the feasibility bearing in mind that your stated preference all the way along has been to use the Eurostar sets for a Heathrow service which some people have interpreted as the death knell of any regional Eurostar service?
  (Mr Child)  Firstly, the approach we adopted in our bid was as if it was a compliant bid. We were asked to focus on the Inter-Capital services and as part of that we did not make a commitment, as you are probably aware, to running a Heathrow service. We are required to look at all of the opportunities for these regional train services in terms of maximising the cash flows of the business. So if regional services actually were the most efficient utilisation of these assets then we would need to go down that route.

  150.  That was not my question. I understand that and I want to ask a question about the criteria you used in reaching your conclusions in the report. Do you understand the concerns of Members of Parliament when one of the bids to operate a service does not include regional Eurostar services? Your preference is to operate Heathrow, you have said that for a long long time, and to use the sets at Manchester to do so. Can you see the potential for public and political concern when one of the bidders is chosen to do a so-called independent assessment when by definition you have your own vested interest?
  (Mr Child)  Forgive me, I misunderstood the question the first time. The reality is we were asked by the Deputy Prime Minister to do this and we were happy to comply with that. I think, now that we have been through the process, it has been a very useful exercise for us to explore other opportunities for utilizing this rolling stock. Although you say we have a preference, that was just one of the ideas that we had in our bid for the utilisation of this kit for a Heathrow service, but there may well be a number of others that could be more commercial.

  151.  After reading all the documentation that has been put before us, I came away with a pretty firm conclusion that you had abandoned regional Eurostar and you wanted to use the sets at Heathrow. You are saying that is not correct, that that is one option but you are looking at others. What are the others?
  (Mr Child)  The other alternatives are we have Heathrow, we have regional services, we have the potential to lease the train sets to domestic operators pending the introduction of new capacity and new train sets on something like the West Coast Main Line or, indeed, the East Coast Main Line or they could be re-deployed on to the Brussels service.

  152.  So if there was a robust business plan produced by an operator that suggested Eurostar services to the regions could be robustly operated you would be prepared to co-operate, would you? Secondly, provided that business plan was robust you would lease, would you?
  (Mr Child)  Absolutely, and I think under the terms of our contract we have to do that.

  153.  Thank you. That is very helpful. Could I come to my next question on public observation. I am sure you appreciate that the original Channel Tunnel Act specifically required regional Eurostar services. Indeed, many many pounds of public money has been spent in acquiring the rolling stock to do that. Do you dismiss that now as wild speculation, never achievable, just simply commercially not credible at all?
  (Mr Child)  It would be wrong of me to dismiss it because clearly there was a huge amount of discussion and debate at the time in considering that investment and that was probably done in a very open and fair manner based on the forecasts that were available at that time of the projections of passenger numbers. We have moved on since that time to where we are now, which is the conclusions that we have reached in our submission and our report.

  154.  Are you able to indicate to the Committee in your assessments of "maximising revenue" what sort of profit margin you have built into that operation as you see it that does not include the regional Eurostars? Secondly, are you able to advise the Committee, as Virgin did, when you anticipate (a) breaking even and (b) making a profit?
  (Mr Child)  If I may, I find it easier to answer the question in terms of our profits for the life of the contract.

  155.  How long is that?
  (Mr Child)  It goes on until 2010. The present value of the contribution that we will receive as a result of managing the contract is something like £36 million or £37 million over that period. I have to then say that if we out-perform the projections that we have made there is a sharing arrangement on the upside and equally, on the down side, if we under-perform.

  156.  My problem with that as a non-businessman is that presumably at some stage you have got a graph that says, "Over the period £36 million is not very much, but at that point we begin to break even above that profit". Virgin were able to say that to us. Why cannot you?
  (Mr Child)  On the basis of our bid I can say that. The cash-flow projections that we have for the existing business are for a break even on a cash-flow basis at around 2004/05.

Mr Bennett

  157.  Basically what you are saying is that you cheated Parliament, is it not, because the promise when the Channel Tunnel was being constructed to persuade Members like me and others from the north of England that we should not argue for a different allocation of resources was that these regional services would be there? Do you feel comfortable with that?
  (Mr Child)  Obviously with the benefit of the hindsight I am sure all sorts of statements and comments made during the debating process that I obviously was not party to or involved in look a little bit odd and a little bit strange, but I am sure at the time they were made in good faith, or I would like to think so. As I say, I was not responsible for those comments. The simple fact of the matter is that in looking at the viability of the service we have had to look at the demand for those services right now.

  158.  But in looking at the viability surely you should honour the promise that was made. How much more of the Act do you want to tear up now? Should you be able to continually tear up promises that are made to Parliament?
  (Mr Child)  Clearly I would not want to agree with that statement. We are not interested in tearing up any part of the Act, we have to work within the legislation, but we have taken over responsibility for managing the existing business and maximising its cash-flows, as I have said a number of times, and we have to pursue that and we are contractually obliged to do so.

Chairman

  159.  The problem with that, Mr Child, is that Parliament might think that you had a contractual obligation to fulfil the terms of the original deal.
  (Mr Child)  If that is the case then clearly we would need that communicated to us and we would have to comply with that because I assume that would take precedence over our arrangements.


 
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