Examination of Witnesses (Questions 220
WEDNESDAY 12 JULY 2000
M GRANT AND
MR T JENNER
220. Would it be possible that the same trend
which has operated by virtue of the sell-off of the bus industry,
which has led to a situation where you now have three operators,
is likely to be mirrored in rail in that you will only have three
operators or three owners within the rail system?
(Sir Alastair Morton) There is a safeguard in the
Rail Regulator and the OFT. If it is a purely rail matter, where
a market dominant position is being established and abused, it
will be dealt with by the Regulator and perhaps you should put
that to him.
221. May I ask you what response you have had
to that map? You put out your idea of your franchise map. What
response did you get?
(Sir Alastair Morton) On the whole favourable, in
fact very largely favourable; not stunned delight, but favourable.
222. What were the main concerns about the proposals?
(Sir Alastair Morton) That it did not go far enough
in reshaping the existing map. People who wanted more radical
solutions. On the whole those are counterbalanced in Britain,
as I am sure you would agree, by people who say total change all
the time is not necessarily a good thing. At the end of the day
we said there is no good reason here for throwing the whole thing
up and starting again, let us evolve.
223. What is the potential there, what protection
is there for you to safeguard the idea that there would only be
three companies owning all of the 22?
(Sir Alastair Morton) No takeover of a train operator
is possible without the Franchising Director's permission at present
or the SRA's in future.
224. When they come to refranchise, as is the
case with the East Coast Main Line, you could have a company which
owns the West Coast line running the East Coast as well and that
in real terms is a tremendous proportion of the total earnings
within the railway system.
(Sir Alastair Morton) Of the total rail system, but
what of the total north/south transport system? The question of
what is the market is a question for the Regulator and the OFT,
not for us.
225. Let us ask you a simpler one then. In your
franchise replacement discussions, are the proposals which have
commercial benefits being given greater priority than those which
offer social benefits?
(Sir Alastair Morton) No; they are all being given
226. As to that, we shall have to think about
(Sir Alastair Morton) At the end of the day it is
a judgement. There is no formula which says so many ounces of
socio-economic equals so many pounds of commerce.
227. It may be a judgement but we understand
that Railtrack have submitted to the Government and to your goodselves
their estimation of what may be commercial investment and what
may be social investment. Would you just confirm that?
(Sir Alastair Morton) Yes. Railtrack in their latest
network management statement have withdrawn any reference to commercial.
They no longer submit that they will do something as a commercial
investment at their own risk, which is the way they undertook
the West Coast Main Line, which has come unglued.
228. Railtrack is going ahead with phase one
and they are talking about £1.2 billion. Phase two includes
their decision to move away from moving block signalling to the
alternative, which they claim has been the main reason why the
costs have increased from just over £2 billion to in excess
of £5 billion. We are talking about phase two and the West
Coast, by definition, is strategic. Were you consulted about the
decision by Railtrack which has more than doubled the cost of
the West Coast Main Line improvements?
(Sir Alastair Morton) I think you were given a shorthand
description of the reasons for the cost increase.
229. I am simply referring to the reasons we
(Sir Alastair Morton) Yes. As I say, I think you were
given a shorthand description which we will let rest there. Railtrack,
through phase one and phase two has contractual obligations to
Virgin on which I will not comment; they must deliver them. Their
contract with Virgin is the basis of Virgin's franchise obligations
to us. That is a contract which must be delivered. As to being
consulted, yes, we were kept very well informed by Railtrack as
their thinking evolved.
230. Just to confirm this, you were specifically
consulted as an organisation on the decision that Railtrack took
on their moving block signalling which has more than doubled the
cost of improvements on this strategic line.
(Sir Alastair Morton) No, Sir. We were well informed,
I said. We were not asked to decide or to advise.
231. Did you know about their decision?
(Sir Alastair Morton) We knew they were working through
their options. They called it preparing for black diamond day
on 9 December last year and I should think we knew about it by
the early/mid summer, that they had a programme of work which
would give them an attitude but it was their work, their responsibility,
their advisers at their expense. It was not our advice in a consultation.
232. So they told you. That is very interesting.
Are they wrong to say that the use of special purpose vehicles
to raise additional investment would be expensive and impracticable?
(Sir Alastair Morton) It is certainly possible to
make it expensive if you go about it in a resistant way.
233. Is that a no?
(Sir Alastair Morton) It could be expensive, it does
not have to be expensive, is the answer.
234. So you do not agree then.
(Sir Alastair Morton) No.
235. What types of enhancements do you think
could be financed by special purpose vehicles?
(Sir Alastair Morton) Let us try to backtrack a bit,
if we may. Special purpose vehicle, SPV, is a term of art in project
finance. It has an almost infinite range of meaning. I am sorry
to be like this, but it does. I have been in this business for
a very long time. It is simply an entity which may be corporate,
limited by shares, or may not be. I can give you examples of not.
It is put in place to undertake initially a financing.
236. Mr Corbett is not aware of the different
(Sir Alastair Morton) Having a vehicle, as they are
called, which is just an entity and does not necessarily have
wheels on it or anything, then gives you something which can employ
management, can employ contractors, can place contracts, can take
risk or need not. What it exactly costs and how you exactly employ
it is almost infinitely extendable.
237. So there is no point in me asking you what
protection investors would seek to maintain their expected returns
because you are saying to me that it could be anything under any
shape, any form.
(Sir Alastair Morton) I would approach it from the
end where Mr Corbett and I are in complete agreement.
238. Yes, that would be an interesting point.
(Sir Alastair Morton) Railtrack is the operator and
controller of the network.
239. Yes, I think we are agreed on that.
(Sir Alastair Morton) In order for Railtrack to do
that efficiently, which is what the Regulator demands very noisily
of Railtrack, that they be efficient and more so every year, and
in order to be safe, which all of us demand of Railtrack, they
have to be unfettered and wholly responsible in their control
of the operation of the network. There we start with an agreement.
If you take off into the middle distance on the basis that you
are going to set up these famous special purpose vehicles on a
basis that transfers the ownership and control and operation of
the ground on which the tracks stand, you can make a case quite
quickly that you are introducing confusion to the network. If
you take off in the other direction at a fork and say we are talking
about funding and operating under the control of and on sub-contract
and so on to Railtrack, you do not arrive at that confusion. Once
again, we start where we agree, we have an infinite number of
paths ahead of us, we are moving to choose a central one.