Examination of Witness (Question Number
WEDNESDAY 17 OCTOBER 2001
96. Before you begin, Sir Alastair, while you
are impressing us with your collation of vital information which
you do not already carry in 15 volumes in your head, could I beg
your indulgence to make a short statement. The Sub-Committee has
agreed to extend the scope of the current inquiry which will consider
the Government's proposals for the successor to Railtrack and
the implications of those proposals on railway franchising policy.
I thought I should make that clear because most people have come
here to consider one set of terms of reference and we are just
making it every so slightly wider. Ever so slightly! Could I welcome
you, Sir Alastair. You are always a most useful and impressive
witness to this Committee and this seems to be a most exciting
and interesting time. As the Chinese say, "May you live in
many interesting times". May we ask you first to identify
(Sir Alastair Morton) Alastair Morton,
Chairman of the Strategic Rail Authority.
97. Do you have something you would like to
say to us first?
(Sir Alastair Morton) May I, just briefly. I know
time is tightly scheduled so there are just three things
98. Sir Alastair, we always have time for you
and doubtless we can make more.
(Sir Alastair Morton) I was about to use the same
Chinese saying as you have just used, I think we have "lived
in interesting times". I find it hard to think of any significant
period of strategic stability that would have allowed reliable
forward planning in the rail industry at any time since October
1999, and least of all this month. That coupled with the powerless
status of the SRA has been very frustrating and has a lot to do
with why I am leaving. The second point I would like to open with
is to say it is not useful, I am afraid, to ask me how the project
to put Railtrack into administration developed or climaxed because
I simply was not there. Despite the expertise available to me
at the SRA on rail and, if I may say so, despite the expertise
inside the SRA on insolvency in capital intensive industries,
we were not involved. However, we are where we are and we should
concentrate, as far as I am concerned, if I may, on how we go
forward from here rather than how we got these last couple of
steps here. It so happens, in my opinion, that railway administration
is a state of affairs that is fairly flexible and you can hope
to go forward towards restructuring the industry with greater
ease from that state than perhaps from other states. It is very
necessary to focus on the restructuring of this troubled industry
and to focus on design and, if we get it right, and that is the
imperative first point, we have to ask how it will all be funded.
My third point is just a piece of information. My resignation
from the SRA chair will take effect after the contractual three
months' notice on Friday 14 December but I withdrew some time
ago from the preparation of the Strategic Plan and informed the
Secretary of State and cleared it with my Board; and a Committee
of the Board is now in charge of that in my place.
99. The Committee of the Board?
(Sir Alastair Morton) I would have been chairing the
Committee; it is a way of involving the Board. I am spending,
however, my last few weeksand I do not know how many there
will be because I do not know how they are getting on with choosing
my successortrying to complete a set of what I might call
personal recommendations on the restructuring we should go for
because, as I say, that is the central move required. We have
to be able to get there from here. It has to be an achievable
restructuring. I can, if you like, as we go on, try and describe
to you how I think the industry should try to look in a year,
say in mid-2002, when the famous Spending Round may make clearer
what money is going to be available. Even if you get the structure
right, you have then still got to get the money right. There is
no point getting the money if you have not got the right structure.
I will leave those three thoughts with you, Chairman, and I am
now at your disposal.
100. I think some of those things will come
up as we go along but before I call anybody else in, tell me,
what do you think are priorities for the SRA?
(Sir Alastair Morton) The priorities for the SRA are
those set out in the instructions and guidance that came from
the Secretary of State in draft form in July. Unless and until
the consultation process that he launched then results in revision
of those instructions and guidance, those will be the priorities.
The first one in there is a strategic plan in November. If you
do not know what kind of an animal Railtrack or its successor
is going to be, and you have heard that the SRA is going to mutate
in some way that you do not know, and you have a new Chairman
arriving in November perhaps but perhaps appointed but not arrived
yet, I find it quite an onerous task that I have left behind me
to my colleagues to produce a strategic plan in that time. It
is also onerous for a particular, and I think, noxious reason
that the instructions and guidance of July, which have been reiterated
countless times by senior officials, require the SRA to prepare
their plan within the resources currently available. As I said
to you in the Committee room in May, those resources are wrongly
structured and inadequate in amount, so there are quite a few
handicaps in the way of producing a strategic plan.
101. Is that the basis of the difficulties that
have occurred between you and Ministers?
(Sir Alastair Morton) It obviously accelerated the
difficulties. I think I said to you that I began to find life
difficult with Ministers in the autumn of last year. That was
when things began to develop, like the Regulator's hand getting
into the SRA's pocket to remove money that it has not been predicted
he would remove in order to give it to Railtrack. We got into
one debate after another in which differences were emerging. The
long drawn out delay in trying to award the East Coast franchise
was a major source of difficulty. Cumulatively these difficulties
102. What you are really saying is that it was
a question of quite fundamental differences on funding, on direction,
on clarity of instruction. Is that what you are telling us?
(Sir Alastair Morton) I was jotting these down as
a note which is not going anywhere in particular at the moment.
I will not read through them but I will jog through them. I have
told the Secretary of State in my letter of resignation that the
instructions and guidance as drafted and issued in Julyand
it is only a draft I acceptare unworkable first because
they place the SRA under the repeated and detailed direction of
Mr Linnard who you have just been avoidinginterviewing.
103. I never seek to avoid the Department. The
Department frequently seek to avoid me!
(Sir Alastair Morton) It may have been a Freudian
slip. They have been placing the SRA, which is supposed to be
a specialist agency, expert in its subject, under the total direction
of an inexpertby definitiongeneralist Civil Service
directorate in which the people change from time to time, quite
frequently. That denies the SRA the ability to pursue the objectives
given to it by Parliament in the Transport Act 2000. Second, the
question of being restricted by the existing inadequate allocation
of resources. How do you go forward? The "do nothing"
option is one, the "do minimum" option is the second.
I am afraid, you are over the budget already at "do minimum".
If you do nothing you may squeeze in under budget. The third point
I would mention is that the officials have required that the SRA's
plan be prepared on the basis of only three of the objectives
set in the Government's ten-year plan. Those are 50, 80, PIXC.
That means 50 per cent more passengers in ten years' time, 80
per cent more tonne miles of freight, and no significant over-crowding
of London commuters. So 50, 80, PIXC. PIXC is the acronym for
the measurement of over-crowding. Those are only three objectives
among a number that I think a plan ought to address, so there
is a difference there. The preference you were addressing with
Mr Linnard and Mr Coulshed for short-term extensions (which, I
frankly believe and have publicly said, serve very little purpose
if any) and the question of addressing the Railtrack issue, which
even though we were not communicating well on that I do accept
has been addressed, but not in a way that I was involved in.
104. So you do not accept that you had an input
because it had been going on for months and you had been telling
them what the problems were and about your particular areas of
(Sir Alastair Morton) I put a memorandum on the new
Secretary of State's desk to greet him on arrival on June 7. I
wrote it before I knew his identity. It was, I have been assured
by his officials, on his desk as he walked into his office, no
doubt with their comments. In it I said you have to address the
Railtrack situation. I put three points down but that was a big
one. We did not talk about it between then and the night of Saturday
October 6th. Not that I talked to him that night either.
105. You have not been talking to a lot of people,
(Sir Alastair Morton) I see more than I wish to of
quite a lot of people but not of the Secretary of State.
106. Do you see the role of the Treasury as
being very important in the new franchise strategy and in the
changes that are being brought about?
(Sir Alastair Morton) I think the role of the Treasury
is always important, as I have said variously in public. It is
extremely frustrating to be unable to engage the Treasury in a
serious dialogue about highly technical subjects, such as project
and structured financing. I addressed the issue of SPVs and project
finance in a memorandum to the Managing Director of Public Expenditure.
107. Was that also part of the information you
gave to the Secretary of State?
(Sir Alastair Morton) He would have been told that
on the first day. I addressed that to the Treasury in October
1999. I would not rate the quality of dialogue following that
memo and since then as being of great value. There has been some
dialogue between lower level officials but no real engagement
in how is this thing going to work and what exactly are we responsible
for and how much money do you think we can raise if we address
ourselves to it?
Chairman: I am sure there will be lots of questions
about that. Miss McIntosh and then Mr Grayling?
108. May I remind the Committee of my shareholdings
in Railtrack and Euro Tunnel. Can I place my own personal thanks
to Sir Alastair on the record for being so helpful to the Committee
in the past. Sir Alastair, I understand that the Secretary of
State has admitted that the Strategic Rail Authority did make
a firm recommendation of one particular company for a 20-year
franchise to be awarded on the East Coast route. Are you in a
position to share with us this afternoon which company it was?
(Sir Alastair Morton) I do not think it is a secret.
We recommended GNER in December and never changed our opinion
once. We certainly did not talk about it while it was in front
of Ministers but these things seem to get known in the end.
109. Were you surprised, against the background
of that recommendation for a 20-year period, that only a two-year
period was awarded when in fact in its own Departmental press
release of 18 July the Department set out four specific phases
that they would like to see before 2003?
(Sir Alastair Morton) Yes, I was very surprised in
that, to put it politely and mildly, we had been badgering Ministers
since January. The normal process is they should have replied
in three weeks; and it was not, as they publicly said to everybody,
their business to second-guess us. We had been badgering them
to give us permission to go ahead with the preferred bidder since
January. We had allowed Christmas to go by and then we got going
in January. In the time between January and the publication of
their announcement, the dialogue about "on the one hand,
on the other, why not this, why not that, should we do it this
way, should we do it that way", would have fitted on the
back of a postage stamp.
110. In your introductory remarks, Sir Alastair,
you said two things. One was the structure of what you believe
the new arrangement should be, and I gather you have drawn short
of suggesting that the Rail Regulator should be abolished. But
would you say that the Rail Regulator should go, and there should
be a new, more streamlined structure than we have at the moment?
(Sir Alastair Morton) Just by way of an opening paragraph,
I believe that there are three black holes in the industry at
the moment. One is clearly Railtrack, the second is regulationin
total, not just the Office of the Rail Regulatorand the
third is funding. So addressing the regulation one that you have
asked about, I suspect I may not be too far from Mr Byers on this
one, if I understand what Mr Linnard is saying (because that is
the only information I have). I agree with the train operators
in ATOC that there has to be somewhere they can go if they are
being bullied or maltreated. There are monopolies and dominant
players in this industry and I do think there has to be an appellate
body or tribunal that really ought to be expert in railways rather
than just the Competition Office, as it were. That I think has
to continue in existence. I regard that as a third to a half of
the existing ORR but the other part, the larger part of the Regulator's
function, as practised by Tom Winsor in any case in my time, is
what I would call performance and pricing and access. I put it
very simply: I think he who pays the piper should call the tune.
Government funding through the SRA or whatever successor body
pays for what is done under regulation and it should say,"I
want you to do the following and I am going, after negotiation,
to pay you the following to do it. If we disagree on the amount
per unit of work let's go to this tribunal perhaps or let's reason
it out." Therefore I think the SRA should take over this
function of pricing and performance and access regulation. And
then you make the obvious remark- and I cannot be accused of empire
building because I have no intention of being there to receive
itthat it is not the only thing that needs to go into the
reshaping of the SRA. So there are two movements here, one is
what goes out and the other is what from where comes into the
SRA. Maybe one day we will call it something else to show it is
a mark II edition.
111. Are you actually saying that Mr Winsor
has been bullying you? You suggested that the Rail Regulator could
bully. I am asking you if
(Sir Alastair Morton) No I think the party that might
get accused of bullying is the SRA because it pays and says, "I
will not pay for that" and where do you go to appeal? I meant
bullying by monopolies and dominant players, and to ensure that
there are not monopoly practices and abuse of dominant positions.
For example, in the West Coast Main Line, which I have talked
about before, the fact that the freight companies and some other
TOCs could not be sure of getting access to a sufficient number
of paths after Railtrack/Virgin negotiated a deal was taken to
the Regulator. I think properly so. I think that is absolutely
112. Some of those problems would remain. If
you absorbed some of the major functions of the ORR into the SRA,
there will always be the accusation that it is judge, jury and
(Sir Alastair Morton) That is exactly why I think
this part of the ORR should remain separate as a tribunal for
that kind of thing.
113. On the financing, which is another point
you raised, would you accept that there has to be quite a large
proportion of private investment into rail projects in the future?
How do you think the Government should attract such private investment
and do you think recent events might have damaged its possibility
of doing so?
(Sir Alastair Morton) Yes I do think so. The single
most important reason not to renationalise Railtrack in the recent
past was to avoid putting it back 100 per cent under the Treasury.
Therefore very obviously and very publicly, and I suppose rather
loudly, I have been saying (and I will go on saying) you have
got to get private sector capital in. I talked about, in the past,
the largest public/private partnership in Europe. I know "PPP"
a bit of a dirty word in London these daysfind another
descriptionbut I am talking about a partnership between
the public purse and private enterprise capital and management.
Therefore, yes, you have got to have a situation, a structure,
a market-place that private capital is going to flow into. You
want a market-place to supply funding, skills, project management,
you want it to supply technology. Unless people believe there
is a market-place where private enterprise business can flourish,
no such market-place will develop and then we are in a mess. We
have not got enough resources and we are back under the Treasury
for all the money.
114. Can I start by talking about the ten-year
year plan. There is obviously potentially a hiatus in investment
now. We are into the second year of the ten-year plan. Is it your
view that the ten-year plan is still achievable in any way shape
or form? Indeed, is it your view that it is possible within the
ten-year plan period, as I say is just under nine years, for any
major enhancements, expansions of capacity on the rail network
to take place?
(Sir Alastair Morton) A very small correction, if
I may. The ten-year plan was started on the 1st April this year,
so we are in the first year, but it does not change the point.
I think there is lots of chance, given structure, given management,
given determination and given money, to get the objectives of
the ten-year plan very largely done. I think the case for seeking
to do so has grown stronger and stronger. I simply never have
believed the Government remark in the ten-year plan that, as a
result of all this transport investment, that congestion will
be less at the end of the tenth year. The Commission for Integrated
Transport, of which I am an ex officio member, does not
believe it either, so I am not alone in my view. The case is strengthening
and there are still nine and a half years to go. How much will
be done by then I do not regard as important. I think we have
a programme to pursue and if it takes in the end 11 years to be
done, not least because of the incredibly archaic planning processes
that are necessary, I do not think that is a bad thing. What is
essential is to reformulate in the industry now and in the recycling
of Railtrack, an absolute government commitment to go on contributing
financially and supportively and administratively to the creation
of a market-place in project investment and corporate investment
in railway operation and railway supply and so on that will cause
a rising flow of investment and project achievement as the years
advance. It is in the nature of big projects, particularly when
they are done on a "hot" railway where trains are whizzing
by underneath as it were, that it takes a long time and is very
costly. It has to be very carefully planned indeed and trying
to hustle it into a very short time, trying to adopt the usual
Treasury attitude" if it can't be spent in the next two years
you cannot have the money" and "you are not to prepare
a ten-year plan that pays any attention to the first day of the
11th year", I regard as nonsense.
115. Do you have a sense of what you now believe
to be necessary in financial terms to meet the goals in the ten-year
plan? Does it require additional funds beyond what was originally
envisaged and do you think the Treasury will need to guarantee
investment in order to secure it?
(Sir Alastair Morton) If I may answer the last point
first. I cannot answer what will need to be guaranteed or not
until I know what forms of relationship for Railtrack and other
relationships are emerging. I just do not know. I said when I
last came in front of the Committee that the slightly over £30
billion that was notionally allocated but not formally allocated
to the SRA in the ten-year plan was wrongly structured and not
sufficient in amount. Wrongly structured in the division between
revenue and capital and between the first five years and second
five years. Those are the divides they put into the plan. And
they are also insufficient, both because the total is going to
be over the £65 billion that was in the plan, 34 from the
private sector and what became 31 through the SRA and Government.
I think the total is going to be bigger than that. Even more importantly,
nobody can tellI certainly cannotwhether the number
that will emerge from the private sector is 55 per cent of the
total, 45 per cent of the total, 30 per cent of total, or 70 per
cent of the total. So the risk exists that more will have to come
from the public purse. In particular, if the expenditure in question
is support of private sector capital and long-term involvement
and you have raised the price of private capital by what has just
happened in the last two weeks and you need more, and if the cost
of franchises goes up, you have just raised the revenue requirement
of the SRA's funding. So it is a thing that can move around a
lot, but as set up and structured it was not going to do the job.
116. On the debt frontsomething I mentioned
to officials previouslywith your perspective on the industry
and knowledge of the City, what steps do you think the Government
could take, what weapons does it have in its armoury to secure
a return of the Railtrack debt grading from triple C back up a
to a level which would enable it to secure future investment?
(Sir Alastair Morton) I am not in a position to comment
because I simply do not know on what basis you construct that
hypothesis. The Government announced the other day the Railtrack's
future debt grading after emerging from administration was going
to be BBB, which is the bottom end of investment grade. I do not
know what the basis for that is. If the Government is guaranteeing
it, it is triple A. If the Government is saying there is no guarantee
whatsoever, it may well be triple C. I do not know on what basis
you construct the hypothesis it is going to be any particular
place in the grading.
117. How much private money was introduced into
the operations by Railtrack by April of this year
(Sir Alastair Morton) I am afraid I do not know the
answer to that question. They were certainly discussing a jointly
owned SPV for South Central capital projects. They were discussing
it with two partners, one was GoVia, the future franchisee and
the other was Bechtel, but the amounts of money and splits between
them I am afraid I do not know. There may have been other examples
118. How much private money has there been put
into the railway industry as far as the Railtrack part of the
operations is concerned?
(Sir Alastair Morton) The infrastructure?
119. In your period as Chairman.
(Sir Alastair Morton) I cannot give you a number.