Examination of witnesses (Questions 134
WEDNESDAY 16 DECEMBER 1998
CHILD and MR
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
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.
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
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.
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
(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
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
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.
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
(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
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.
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
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.
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