Examination of Witnesses (Questions 180
WEDNESDAY 12 JULY 2000
M GRANT AND
MR T JENNER
180. May I ask about Railtrack's £8 billion
enhancement programme over the next five years, to which they
have committed £3 billion, which clearly leaves a shortfall?
What is your view about that shortfall? How do you think the best
way might be to accommodate that shortfall?
(Sir Alastair Morton) I should start by saying neither
the £8 billion nor the £3 billion is enough. First point.
I have said that quite often. Second I should say that I am not
sure it is a satisfactory situationI do not believe it
isfor Railtrack to list a few rather large projects with
a catch-all clause at the end for the small ones and say these
are the ones we feel ready to do, so these are the ones you perhaps
can have as long as somebody else feels like paying for the ones
we think you can perhaps have. The process is not right. They
may be the right projects but in my view it has not been worked
through with all the parties.
181. Of course you have begged the question.
If it is not enough, perhaps you might indicate to the Committee
what in your view might be sufficient in this context.
(Sir Alastair Morton) The most important point to
start withand I am going to answer youis that it
is pointless to look at five years; it is meaningless in railway
terms. It is immensely long in semi-conductor terms, but it is
meaningless in railway investment terms. What will be the situation
at the end of the five years? Only the smallest projects will
have been finished; the medium-sized projects may be more or less
finished and in commissioning and the big ones will still be in
progress. Others will have got to the starting line or should
have got to the starting line which are not listed inside that
£8 billion and are commitments in that contracts have been
let. So if the real question is what money is going to be required,
start looking today ten or 12 years forward. That is the real
question and that is a much bigger number. What number is that?
It is very, very difficult for anyone to say but Railtrack produced
a menu which, since we are talking enhancement here in this number,
after you take out the maintenance and renewals from their big
number of £52 billion, you are left with something of the
order of £30 billion. But they said it was a menu and I agree
it was a menu. The number likely to be necessary out of that?
Somewhere between £18 and £22 billion; it is a guess
at this stage. We would hope to prioritise more of it by the time
we produce a strategic plan in the autumn, but we still shall
not have finished listing it. Then there is rolling stock and
there are ancillary investments in information systems, station,
retail, car parks and so on, still to flow on after that. The
number that the system, the collectivity, the public/private partnership
between the state purse and private sector capital markets has
to try to fund over the next decade is north of £30 billion
in our opinion.
182. In your written evidence you indicate where
you consider the main areas of investment sources may be. In Railtrack's
evidence they 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". Do you accept
that there will have to be significant public money in this investment
programme? You have given some idea about that. Secondly, do you
agree with Railtrack that SRA investing in preference shares in
that company is the best way to lever in public money?
(Sir Alastair Morton) To the first question, yes,
I do believe that there has to be substantial public money and
in essence it is because the need is much greater than it was
at the time of privatisation. Railtrack was not designed to carry
the burden we foresee. Secondly, do I agree with Gerald Corbett
that certain forms of taxpayers' money structured into patient
capital are an important part of levering inand levering
in is a very important terminvestment capital into the
industry? Yes, I do. But whether that should be preference shares
in Railtrack is another question. That is a very political question.
There are many people, understandably, some of them even perhaps
reasonably financially sophisticated, who think that if you have
a minority shareholding you have actually in some ways negative
control or some control over the company. It is very, very difficult.
I was on the board of nationalised industries in the past, British
Steel for one example, observing the high priest of capitalism,
Keith Joseph, struggling to answer questions on the floor of the
House about why he did not control every move made by British
Steel. It does not actually clarify the relationship. It can confuse
it terribly and it is a very political question. There are other
ways of producing the desired effect.
183. What I am seeking your assessment of is
that it may well be a political question, and you are entitled
to that view, but Gerald Corbett does not see it that way because
he has said to us very clearly in his evidence, because I asked
him the question, ". . . 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 Railtrack",
the most efficient way. Their view is clear. Mr Corbett said,
"That is a fact". I asked, "What has been their
reaction?", "Their reaction was thoughtful".
(Sir Alastair Morton) No, my reaction was explicit.
I said to him that that was a very political question. It would
bring all kinds of baggage about who is in control here direct
to his doorstep and actually he could produce exactly the same
effectexactly the same effectin other ways using
public sector funds which are willing to take a back seat. We
use the term "patient capital". That means it ranks
behind, it waits for its return, it gets repaid later, it is subordinated
as to risk of either servicing or repayment. This is how you lever
in several pounds of market money for every £1 of taxpayer's
money, which is something which I think ought to be a priority.
184. Would you agree or otherwise with another
statement by Mr Corbett which I thought was very important, talking
about the short-term investment £8 billion and the shortfall
in whatever timescale it might be? When asked a question by my
colleague Miss McIntosh, "Can we conclude from that that
if there is no substantial increase", in resources, "you
cannot carry on investing to the same extent that you have been?",
"That is correct". He went on to say that unless they
get this they will be in breach of their banking covenants. Quite
serious stuff. What is your reaction to that sort of statement?
(Sir Alastair Morton) My reaction is to agree with
you that if they are in breach of their banking covenants it is
serious. The question of when their cash and income flows will
put them in breach is a question which the Regulator addresses
in his five-yearly review. I am sure you will be putting the question
to him. It will be serious if the outcome is that they are in
breach. It is very necessary that Railtrack does invest. Railtrack
has quite substantial borrowing capability. They learn how much
money they are likely to have by extrapolation from the regulatory
settlement in a few weeks' time. There is no possibility in my
view of a regulatory settlementand this is me expressing
my opinionwhich will be big enough for Railtrack to foot
every bill for a very large investment programme of the scale
I was talking about. They have to be helped. I have been saying
that in public since June last year.
185. A great deal of research and a great deal
of discussion has taken place on the passenger rail service and
the future of the passenger rail service. The English Welsh and
Scottish group are worried about the franchise replacement process
and the result that will have on the passenger service enhancements.
Are EWS's concerns well-founded that the franchise replacement
process may lead to passenger operators absorbing scarce capacity
on the network and leaving few opportunities for rail freight
(Sir Alastair Morton) Yes, it is a concern. The increase
in traffic which is very substantial since privatisation inevitably
occupies network capacity, therefore there is more pressure at
the crowded points, the choke points. In so far as freight goes
through those it comes under pressure. Traditionally that would
have had a simple answer: British Rail would have put freight
in the park and let the passengers go through. Freight is concerned
to get an equal shout and the lobbyists for freight have been
putting the case very forcefully. We are required by a statute
which has been through this House to promote the movement of freight
onto rail. We therefore do support the view that freight must
have its share of capacity. If the two are competing for scarce
capacity, there is only one answer: build more capacity at the
narrow points, as it were.
186. Having noted the point you make, how are
you going to balance the conflict between the two in the immediate
and mid-term future? If we are talking of putting in more capacity,
that is long-term. Are we going to balance it in the medium and
(Sir Alastair Morton) It can only be done operationally
and by working as fast as possible to solve it with investment.
I shall give you an example. I do not have an exact number but
last year the passenger traffic on the North London line from
Willesden Junction across to Stratford increased by a quite remarkable
percentagetens of percentage points. That happens to be
the principal freight route from Felixstowe, our major sea port,
to West Midlands, our major freight destination. Hard to believe,
but it is, because it comes down and goes up; it does not go across.
Putting freight across from Felixstowe across the East Coast Main
Line or onto it, across the Midland Main Line or onto it, across
the West Coast Main Line or onto it and into the West Midlands
would take that traffic off the North London line and resolve
that particular crunch. I give you that only as an example.
187. Can you give us some indication as to how
the SSRA are looking at this? Would it be possible to build something
into the negotiations on the franchises for passenger transport
to include freight transport also, to make sure they have a place
in the negotiations?
(Mr Grant) In the documentation we have produced for
franchise replacement, we have a number of criteria which we have
listed. One of the criteria is the provision of enabling infrastructure
to allow expansion of freight services on a national and increasingly
an international basis. We are asking the proposer to say how
they could incorporate more freight at the same time as looking
at their proposal. If we give an example of the East Coast Main
Line where we have started to work quite closely with Railtrack,
we have conducted a number of meetings where all the users14
users on the East Coast Main Linecome along and say what
their capacity needs are in the medium term and the long term.
Of course there is a balance and that is how we are taking freight
into account in the franchise replacement process.
Mr O'Brien: Can you give us any indication what
you mean by the balance? How will it operate?
188. How seriously are you going to take that?
(Mr Grant) We are taking it very seriously because
our position is that we have to push freight forward. We shall
be putting forward a freight strategy as part of our overall strategy.
189. Will that be included in the passenger
(Mr Grant) There is an element of asking people who
put forward franchise proposals to outline how we can enhance
freight capacity at the same time.
190. You did say you have a programme for helping
the freight. Will that be included in the negotiations?
(Sir Alastair Morton) How do we negotiate that with
the passenger franchisees is the puzzlement?
191. I would imagine that some reference will
be made to capacity on the lines for freight.
(Sir Alastair Morton) That is right.
192. Should that not be included at the same
time we are talking about the passenger franchises?
(Sir Alastair Morton) It does depend which line you
are on. You probably know that over 40 per cent of current rail
freight goes up the West Coast Main Line. When you are talking
to the franchisees or potential franchisees who are going to use
the West Coast Main Line, you certainly do talk a lot about freight.
There are other lines where even in prospect there is very likely
to be little freight and what there is will perhaps be quarry
traffic which only goes at a slow speed and then travels at certain
hours or something. In other words, it is not a global answer.
We shall be seeking to ensure that there is growth in freight
traffic, that there is investment in infrastructure to permit
the growth in freight traffic, that there are improvements in
efficiencies of freight operating companies so they do not get
in the way. The new locomotives and rolling stock brought in by
EWS are a very substantial aid to that end, and so on. It does
depend where you are looking and which the franchise will be as
to how you discuss the interaction of freight and passenger.
193. Do you have some sort of formula in which
you say so many tonnes of freight equals 20 passengers or that
each can make a profit and the one who makes most profit? There
must be some crunch thing or is it just a question of feeling
which is the more desirable?
(Sir Alastair Morton) In our book it is a question
of how you promote growth. We are looking for outputs.
194. You are going to have to make choices,
are you not?
(Sir Alastair Morton) Yes, we are.
195. You cannot do both.
(Sir Alastair Morton) So why should we make the choice
according to the single formula? That is perhaps the question
back to you?
Mr Bennett: Are you offering us several formulae?
Just give us one example of your formulae.
196. We are not suggesting you do; we are asking
how you do it. Mr Grant has been very straightforward: he says
this is one of the criteria. What we are really asking is how
you prioritise your criteria.
(Sir Alastair Morton) It depends which franchise and
(Mr Grant) It does. There is an overall growth figure.
As we tackle each upgradeand I gave the East Coast as an
examplewe shall be looking to EWS, the freight users, to
say what their growth potential is for that particular line. We
shall then have to make an assessment of whether we believe that
growth, whether it is reasonable, whether it is a reasonable assumption
and make sure that the upgrade on that line has the capacity for
what we think the growth will be. There may be diversionary routes
if it is the East Coast Main Line. It may be that it is on the
East Coast Main Line if it is fast freight traffic, because not
all freight traffic is slow. There will be an assessment of what
we think is needed on a particular line and as part of the upgrade
of that line, we shall ensure that there is capacity to meet what
we think will be that growth on that line.
197. Let me give you an example from Greater
Manchester. We have a lot of trains carrying limestone which come
down from the Peak District, they come down through Dukinfield
and Audenshaw, they come round through Stockport and then they
run for about one mile on the West Coast Main Line from Manchester
towards Crewe, then they go off again onto a line which is little
used. There is huge pressure on that little bit through Stockport
from commuter trains, London-bound trains and the freight. How
would you balance the rights of those three sets of people?
(Sir Alastair Morton) You start operationally: timing.
You think about traction power. You look at signalling. You investigate
the passing, space that there is if any; it is a crowded part
of the world. In the end you say we are going to have to find
a different answer because we are absolutely full up. Then you
may take them the other way round Manchester; you may do things
which I cannot sit here and recite to you. I am afraid I am not
that close to it.
198. I want some sort of formula rather than
just a hope and a prayer that you can find some solution to it.
(Sir Alastair Morton) We are not a Stalinist planning
organisation which uses formulae to fit any situation on the network.
We have said again and again that we will talk to the customers,
we shall talk to those who need the service, we shall talk to
providers of the service and we shall look to the providers of
the service to be the best people to guide us initially on what
they would like to have because they are the people seeking to
make a business out of it. At the end of that process, if we have
a head to head dead-end between opposing point of views you have
to find a solution which will be a matter of analysis, discussion,
solution, one hopes. But that it will be perfectly right for the
next five, 10, 20, 50 years thereafter is an impossibility to
assure people. That it can be done by a formula of so many tonnes
equals so many five-year-old children we have not yet even thought
of, I must say.
Chairman: You must not put yourself down, Sir
Alastair. I am sure you are quite as efficient as Stalin.
199. Following Mr Grant's statement that the
capacity will be measured and then a formula will be introduced,
under the negotiations which are taking place on the passenger
franchise, people will be looking for more capacity, more passenger
trains, taking up greater capacity on the track, which means that
someone has to be squeezed and in this case it could be freight.
Is that the right way forward? I was asking how you are balancing
the fact that we need freight to grow in addition to passengers.
(Sir Alastair Morton) In this hypothetical line we
are discussing or maybe the actual one are there a lot of two-car
rush hour passenger trains? Perhaps they could be three-car or
four-car or five-car; perhaps, maybe not. There is a question
to answer there for whoever is looking at this. We are getting
into some serious operational detail here which none of us is
actually qualified for. The point we are trying to make is that
you analyse your problem and you use your judgement in solving
it. You do not use formulae.
Chairman: It would be helpful if we could differentiate
what would be operational matters and what would be your theory
and balance of principles in relation to your criteria. We are
not actually discussing how many cars we are going to put on any
particular line, because we could all have fun like that. It would
be helpful to the Committee to know the difference between operational
and administrative, particularly in relation to your own criteria.
Miss McIntosh: May I just remind colleagues
of my interests which I have declared?
Chairman: We all have interests in this. I should
also declare that I am a longstanding member of the Rail, Maritime
and Transport Trade Union which is not likely to influence my
judgement any more than it has for the last heaven know's how