Examination of Witnesses (Question Number
WEDNESDAY 17 OCTOBER 2001
1. Good afternoon, gentlemen. I am delighted
to have you with us this afternoon. I am going to ask you please
to identify yourselves for the record.
(Mr Linnard) My name is Bob Linnard, I am the Director
of Railways in DTLR.
(Mr Coulshed) My name is Mark Coulshed, I am head
of the Railways Sponsorship Division in DTLR.
2. Thank you very much. I realise this is a
rather fraught moment for you both and therefore we are very grateful
to you, but you will understand the Committee feels this is a
moment of great importance and your evidence is going to be of
very considerable interest not only to us but many people outside.
May I ask you, Mr Linnard, was the change in franchising policy
prompted by Railtrack's worsening financial position and the intention
to place the company in administration?
(Mr Linnard) No, it was not. The review of franchising
policy goes back quite a time before the decision on Railtrack's
future was taken on 5 October and communicated to Railtrack on
5 October, which resulted in the company going into administration
on 7 October. The decisions on Railtrack's future were not taken
until that time, whereas the review of franchising policy, as
is evident I think from the published documents which have been
put out for consultation, preceded that by some time.
3. When are we going to know what debt and income
Railtrack's successor is going to have available?
(Mr Linnard) The first issue is to construct and identify
Railtrack's successor. Railtrack is in administration and decisions
on the vehicle into which Railtrack's assets and operations go,
when it comes out of administration, are in the first instance
for the administrator though the relevant transfer scheme will
have to be approved by the Secretary of State.
4. Forgive me, you are not suggesting that the
Secretary of State is not going to have an input into that before
the administrator? Presumably it will be a partnership effort.
(Mr Linnard) It will be, yes. Obviously we are talking
to the administrator about the funding and operation of Railtrack
while it is in administration. Ministers have made clear what
sort of future company they see taking on Railtrack's business
and assets; a company limited by guarantee. They have made clear
they will put a proposal for such a vehicle to the administrator.
All I am saying is that this is not totally within the Secretary
of State's control, though obviously as the ultimate funder of
Railtrack's business ministers will have a big influence on the
5. Can you give some clarity to their creditors
as to what risks the Government will bear on behalf of Railtrack's
(Mr Linnard) What we have said is that creditors will
be kept whole, that is that the debt that Railtrack has at the
moment can be transferred into a successor body on the same terms,
in all important respectsinterest rates, principal, couponas
the debt which is currently within Railtrack. So there is an option
available for creditors for their debt to transfer into the new
body on the same terms. That commercial borrowing will provide
an important part of the core funding.
6. How does that affect the relationship with
other companies? Are you going to allow the Railtrack assets to
remain, particularly property assets, in another company at the
same time as a successor company takes on existing debt?
(Mr Linnard) All the assets which are needed for the
operation of Railtrack's licensed business, Railtrack plc's licensed
business, are in Railtrack plc, the company which is in administration.
There are other parts in Railtrack Group which is not in administration.
7. So what are we talking about? Forgive me,
I want to be quite clear, you are saying that things like the
property assets, like the stations and the land, are in a separate
company and you would not regard them as part of the assets of
Railtrack in administration?
(Mr Linnard) No, the stations are in plc. There is
some non-core property, a very small amount, which is in Railtrack
Group, but that is not the property which is central to the operation
of the business. Everything that is necessary for the operation
of Railtrack plc's network business is in Railtrack plc.
8. They have completed the record of assets
they were asked to do?
(Mr Linnard) I do not know whether they have actually
completed it, but certainly they are under an enforceable licence
obligation from the regulator to complete the asset register by
a specified time.
9. Yes, but you will know that has been the
case for some time. There has been a request to them, framed in,
shall we say, "more definite terms" as time has gone
on, but it does not seem to have produced a result.
(Mr Linnard) Yes. One of the things Railtrack agreed
to do on 2 April when the Government agreed to advance £1.5
billion was effectively that they would sign up to the licence
obligation to produce and maintain an asset register.
10. Was that timetabled?
(Mr Linnard) Well, it was an agreement with the regulator.
I cannot offhand remember what the regulator's deadline is for
Chairman: We will be taking evidence from the
11. You talk about the transfer of debt, obviously
there is an issue in terms of the credit rating and the Railtrack
debt as of today. It has been downgraded significantly by the
ratings agencies. Potentially that has an impact on the actual
repayment levels, and you might perhaps address that, but equally,
as you transfer the debt into the new vehicle, there will be a
fairly imperative need to get the rating of that debt back up
again to a level which will attract new investment. What actions
are you taking to address that issue?
(Mr Linnard) Clearly, the debt in the new vehicle
has to have a good investment grade rating. One of the things
that we have done, and will continue to do, is to maintain a dialogue
with the ratings agency and with the major lenders to explain
to them how, if Railtrack's business goes into a company limited
by guarantee, that will provide basically a good proposition for
lenders. What we will be able to say to them is that in important
respects this will be a safenot risk-free, this is going
to be a private companya relatively safe proposition to
lend to. I think probably there are three things to bring out.
First of all, it will have lower risks than Railtrack has or has
had in the past, because the major projects, and this goes back
to the agreement with Railtrack in April, will be handled through
special purpose vehicles with third party finance project management
being brought in. Secondly, there will be adequate revenue to
meet the cost of servicing the debt. The new company's income
will come largely, as Railtrack's does at the moment, from track
access charges and from direct government grants which have a
considerable certainty attached to them. While there will be risks,
quite rightly, on the performance of the new company in terms
of operating, maintaining and renewing the network, these will
be in proportion to the scale of the company's income and to the
reserves it will be able to build up, because although it is a
not-for-profit distribution company, it can still accumulate profits
to act as a buffer.
12. And the cost of the repayment of debt today
with the drop in rating?
(Mr Linnard) What we want to do is to ensure the lenders
accept what is known as a standstill arrangement under which the
debt will transfer into the new company, and we do not believe
it will be necessary to make major repayments.
13. Why should the income to the new vehicle
be any more guaranteed than the income to the old vehicle?
(Mr Linnard) The income to the old vehicle was guaranteed.
The track access charges, the direct government grants, were not
100 per cent guaranteed but there was considerable certainty about
the level and timing of grants. The problem with the old vehicle
was not the level of the income, it was the level of the costs
and the fact those were rising too fast and too regularly and
that the income was not keeping pace with that.
14. Why will that change with the new vehicle?
(Mr Linnard) Partly because some of the major projects
will be handled outside the company limited by guarantee, but
also because we believe that a company limited by guarantee without
shareholders, without duties on directors to make returns to shareholders,
will have more incentive to control costs, particularly if key
stakeholders, particularly the train operators, are members of
the body that owns the company limited by guarantee, because they
will all be working in the same direction, to the same agenda.
So we think there will be more incentive to control costs and
less incentive on the new company than there has been on Railtrack
to look for higher regulatory settlements, one-off exceptional
grants from Government, some of which then get passed on to shareholders.
15. Have you any information about any large
sale of shares by anyone connected with Railtrack since the spring?
(Mr Linnard) I have not, no.
16. Would you know if there had been any significant
selling of Railtrack shares?
(Mr Linnard) No, I would not.
17. Would you expect the Government to take
an interest in that?
(Mr Linnard) The position was that as soon as the
Government had taken a decision, we had to communicate to the
company, and that was done. So far as I am aware, there were not
any major movements in Railtrack shares in the period leading
up to the Secretary of State's decision, but as I say the responsibility
for communicating decisions about Railtrack's financial position
rests with the directors of Railtrack, not with the Government.
18. You referred earlier to the involvement
of the train operators in a possible new company, in view of the
sharp turn on franchising which was announced by the Secretary
of State, do you think that will encourage train operators to
invest in the industry?
(Mr Linnard) There is certainly a question about franchising
and perhaps I could dealt with it in that order, first franchising
and then train operator involvement in the new company and how
the two things might relate. We are saying on the duration of
franchises really it is horses for courses. In some cases there
will be a need for investment and a certainty about the cost of
the investment that would make it sensible to sign up to long
franchises, probablyand this is very much the SRA's territorywith
review points every five to seven years as has been suggested.
That is certainly not ruled out. There is no question of saying
there will never be any long franchises, but equally where there
is not a need for major investment, or where the investment can
be secured without the need for a long franchise, frankly there
will be no need to enter into a 20-year commitment. So refranchising
is going on at the moment and, as I dare say we will come to later,
we are looking with the SRA at a policy which is very much horses
for courses. There are a substantial number, more than half the
franchises, the original seven year franchises, which will be
expiring within the next two to 2½ years, but I do not think
that will in any way weaken the desire of the train operators
to be part of a successor body to Railtrack which can work in
the interests of the train operators more than, arguably, Railtrack
in its old form did previously.
19. Will the new franchises then improve service?
The service I know best is the East Coast Mainline, GNER, and
they are wanting to investor at least I am given to understand
they are wanting to investin new rolling stock but, because
of the short franchises, it is a risky business; they do not know
whether they should be investing because there could be difficulties
in extending the franchise. Do you consider these short franchises
will improve services?
(Mr Coulshed) The intention is that when franchises
are replaced, in every case there will be some improvement secured
as a result of that, whether it is done early or at the due time
or after an extension, whether the replacement franchise is for
a shorter or a longer period. There is a particular point about
rolling stock which is that rolling stock investment itself is
made by rolling stock companies, so by and large it is not a fundamental
point that train operators need to participate in long franchises
in order to secure that investment.