Examination of Witnesses (Questions 20
WEDNESDAY 5 JULY 2000
20. Last question, if I might. Again in your
evidence you are basically calling for a partnership with Railtrack,
the Government, the Regulator, the train operating companies,
and so on, and you then go on to say: "We have proposed that
the SRA invest in preference shares in Railtrack as being the
most efficient way to lever public money into the railway."
Indeed you say: "We have made good progress in developing
proposals for project development boards for major schemes with
the SRA." So presumably the SRA taking a shareholding in
Railtrack is one that has been agreed between yourselves and the
SRA in principle and a lot of work has been done on the detail
as to how that might come about?
(Mr Corbett) No, that is not quite right. What is
agreed between us and the SRA is working together, is the partnership,
is the project development board, that whole approach to enhancement.
What is not agreed is the most efficient way of investing the
money we hope the SRA is going to get as a result of the transport
plan. The SRA have talked about things called "special purpose
vehicles", and that is one option. Another option is our
access charges. Other option is indeed a preference share in Railtrack.
A further option is securitising Railtrack's access charges. There
is a series of options we are busy evaluating and we are sharing
those numbers with the SRA and with the Department. I hope in
the autumn when the SRA plan comes out some conclusions might
be drawn on the most efficient way of investing public money.
21. For clarification, it is a fact that Railtrack
proposed to the SRA that they should invest in preference shares
in Railtrack as the most efficient way to lever public money into
(Mr Corbett) That is a fact.
22. What has been their reaction?
(Mr Corbett) Their reaction was thoughtful.
23. Thoughtful? How nice!
(Mr Corbett) You will have to ask them but they could
see certain other advantages, non-financial, in various other
approaches. At the moment I would say it is just one of a series
of options. All of us are busy trying to think of the best way
to do these things, tabling the options, the bright ideas and
we will see where we get to in the autumn.
24. We are saying, in effect, they listened
but they did not say yea and they did not say nay. Is that what
we are saying?
(Mr Corbett) I think that is right. There was a discussion
and certain pros and cons were tabled. Financial efficiency is
only one part.
25. You told them what you thought they ought
to do and they did not say yes or no?
(Mr Corbett) I would not say that we told them what
we thought they ought to do. We outlined a series of proposals
and ranked them in order of financial efficiency.
Chairman: I would have thought if you made a
proposal that was a proposal. Mr O'Brien.
26. Why are Railtrack's relationships with its
dependent customers so poor that it is suggested there should
be this Code of Practice to govern the relationship?
(Mr Corbett) You have some of our major customers
appearing after us and I hope they will confirm what I am about
to say. In the early days post-privatisation I do not think the
relationships were good. The railway was fragmented into 90 different
bits and we were all sitting behind adversarial contracts. Everybody
retreated back to their own patch and it was all pretty hopeless.
In the last year and a half I think you have seen a sea change
and we feel that we are working much more closely than ever before
with the train operators. We have the National Performance Task
Force which meets monthly with them. We now have the National
Safety Task Force which meets monthly with them. A 25-year-experienced
railway man is in charge of those relationships and we think on
the whole although they are not perfect and there is a lot of
work to do they are a lot better than they were.
27. When did you last discuss the question of
the relationship with the Regulator?
(Mr Corbett) I hope that when you talk to the Regulator
he also will be able to confirm that relationships are better.
28. When did you discuss it? You said the relationship
has improved considerably but we have still got the Regulator
saying perhaps we should have a Code. If the relationship has
improved why do we need a Code?
(Mr Middleton) We proposed the Code of Practice for
customers because within the railway industry there are a number
of quite complex contractual relationships to manage between the
train operating companies and ourselves. In order to make those
relationships effective, both parties need to have a clear understanding
of what is required and by when in order to ensure things happen
like producing a timetable. We produced a Code of Practice which
places obligations on Railtrack and on the train operating companies
to ensure the industry processes do work. It is mainly designed
to clarify who is responsible for what and by when.
29. Will that improve the relationship? Bringing
in a timetable may show some improvement there but will it improve
the key relationship with customers?
(Mr Middleton) If it brings clarity into the way in
which Railtrack and the train operating companies work together,
it will help improve the relationship, yes.
30. Why were they so poor in the beginning?
(Mr Middleton) They were poor in the beginning because,
as Mr Corbett has said, British Rail was an integrated organisation
where many of the people had known each other for years and suddenly
were working either side of the contractual framework. Most people
in the railway industry had little experience of working in a
contractual environment and their first thought was to use the
contract as a means of beating up the other party, so it became
adversarial. I liken it to a divorce. When you go through a divorce
initially you dislike each other intensely but over time you realise
you have got to work together if you are going to make sure that
your children are properly provided for and you generally get
a better relationship after a few years. That is what has happened
in the railway industry.
31. What is the attitude of investors and customers
to the code that you are suggesting?
(Mr Middleton) I think the train operating companies
are supportive of the code. We discussed it at the Regulator's
workshops on the model clauses for the relationship between Railtrack
and the train operating companies and I think they are generally
supportive of what is being planned.
32. Is that to improve time keeping, to improve
the fact that there will be less hold ups by maintenance? Briefly,
what does the code involve?
(Mr Middleton) The code covers a number of things.
It is to ensure that train operating companies have a clear process
for getting their requirements and expectations into Railtrack's
forward plans. It is to ensure that when we produce the timetable
and specification for the timetable we get their bids in at the
appropriate time and respond to them in the appropriate time.
It is designed to ensure that generally within the industry there
are clear working arrangements to make the whole industry work
better in the long term.
33. Can I just ask what is the attitude of Railtrack
to the change in the leasing of stations to some of the regional
operators, is that included in the code?
(Mr Middleton) At the moment we directly manage 14
major stations, generally the big London terminals and the big
city stations. The train operators lease the remainder and operate
them themselves. Because we have a number of retailers who want
to get a bigger number of outlets on stations there is some advantage
in Railtrack managing the retailing on more stations than it currently
does. That is something that we are prepared to discuss quite
openly with the train operators. It is not something that we are
going to impose upon them, we will do it through dialogue and
discussion. There could be benefit to the rest of the railway
industry because if we increase the income from retailing it actually
reduces overall the call on the taxpayer before track access charges
because any money we earn through retailing is netted off against
the total access charges paid on the network.
34. So there will be no direction on taking
the leases from the regional railways they have at the present
(Mr Middleton) No. We have made it quite clear it
is not something we seek to impose, it is something we wish to
discuss and agree.
35. Mr Middleton, you make it sound like a divorce
between equals. Would you recognise the description that Railtrack
as the senior partner has all the cards and it has been using
its muscle against a lot of the train operating companies and
that is why you are seen as unco-operative, unhelpful and dictatorial,
to put it mildly?
(Mr Middleton) It does not feel like that from where
I sit. I think one of the biggest problems we have had in the
first four years of privatisation has been the lack of clarity
in the regulatory regime.
36. Come now, Mr Middleton, that is the second
or third time you have said that. If I have a straight forward
contract, a legal contract, with someone who is undertaking a
particular job then what it says in the contract is sufficiently
clear for me to know how I am going to earn my money, is that
not the case?
(Mr Middleton) That is true, but the industry has
changed since 1996 when those contracts were put in place.
37. I see, so it is the fault of the original
negotiation of the contract.
(Mr Middleton) No, I think it is because of the way
the industry has grown which was not foreseen at the time the
contracts were put together. In order to allow for it to grow
38. So the contracts were signed on the basis
that the industry was in decline, is that what you are telling
me, and therefore it was not intended that the relationship between
you and either your suppliers or you and those who use your services
(Mr Middleton) The contracts were signed predicated
on maximising the income to the Treasury and on the declining
rate of public subsidy, not on a growing rail network. Railtrack
has a largely fixed access charge and thereby has little incentive
to grow the number of trains on the network. We have done so even
without that incentive.
39. You do not have the incentive for running
a good service?
(Mr Middleton) We do because under the performance
regime we were incentivised to improve our performance, as Mr
Corbett said earlier, and we have done that.