Examination of Witnesses (Questions 520
WEDNESDAY 31 OCTOBER 2001
520. Where do you think the public interest
should be considered?
(Mr Green) I think it is the Regulator.
521. Mr Garnett, you said at the beginning that
you felt that, most of all, the rail industry needed a period
of stability, yet you have spelt out some of the failures of the
current system. Why does stability mean no change in a system
that is inherently unworkable and wrong?
(Mr Garnett) I do not accept the point that it is
unworkable and wrong. We as a company have moved from getting
a subsidy of £70 million from government to now paying the
government subsidy because of the massive increase in passengers
in spite of the two terrible accidents. The problem we have all
collectively got is that Railtrack has not performed in the way
we all wanted it to. We have that uncertainty and earlier on we
had the hiatus of where we are at on franchising. At the moment
it is incredibly difficult to plan our businesses. We do not know
how far forward we are going. We are discussing a two-year extension
and who knows what happens after that. At the same time we have
this massive uncertainty with our principal supplier who delivers
75 per cent of our performance because 75 per cent of our performance
relates to Railtrack as to whether we get our trains in on time
or not. There is this real worry of what is going to happen to
that supplier, and is that supplier going to be adequately funded
to provide us with a good, safe railway and are they going to
have the skilled workforce and the motivated workforce, both workforce
and managers, who will stay in Railtrack at the present time,
because on the one hand we need to get Railtrack into a proper
home and properly set up and on the other hand it is this difficult
balance. We have got to keep the good people they have got there
because we are dependent on them for delivering the railway to
the UK. If Railtrack starts to go wrong in this present environment
because of not delivering a good service, we are going to be in
522. You mean worse than it is now?
(Mr Garnett) At the moment I can only talk about our
routes. I bore everybody to death on the 3 hr 59 min train from
Edinburgh to London. I gave it a plug on the Today programme
this morning, thank God it got in on time! So it is getting better.
The railways are running out, in my view, better than they were
Chairman: We will not get into that. I do not
want the Committee to get distracted. Dr Pugh?
523. Going back to Mr Green's remarks, if you
do not secure the compensation you hope to secure, what consequence
is that going to have for the fare paying passengers on Virgin
(Mr Green) It is the other way round. We would have
to hold Railtrack to its contract and they would have to find
the money and, presumably, it could not go out of administration
until it did, and then you have a stalemate.
524. So there is no consequence?
(Mr Green) At the end of the day we have a contract
and we are being asked to renegotiate it.
525. Mr Garnett, you did say in your introduction
that both of your companies want to work with government on special
purpose vehicles, for example, and the like, and future organisations
that may emerge. The Chairman asked you what that organisation
might be and we listened with interest to your response. My question
is do you draw a distinction and, if so, what is it, between your
interest or otherwise in special purpose vehicles and vertical
(Mr Garnett) Special purpose vehicles are there to
fund infrastructure investment in railways. Vertical integration
is about running today's railways. It is what is referred to as
the OMR, the operation, maintenance and renewal of today's railway.
That could be done by Railtrack in such a practice or it could
be done by the train operator getting involved. Separately over
here you have upgrades and Railtrack are definitely outside that.
They do not have the money, they did not have money before they
went under. The Government has made it clear that the new Railtrack
will not do that so upgrades are going to be done between train
operating companies with long franchises, with the SRA, and with
526. So any special purpose vehicle in which
your companies may or may not be involved, and if you were involved
dependent on to what extent you were involved financially, are
you saying that a) that financial commitment would have to be
reflected in the length of a franchise before you go ahead?
(Mr Garnett) It has to be reflected because that is
the only way we are guaranteed to get our money back.
527. On a major project such as the East Coast
Main Line, for example, would it be a 20- or 30-year franchise
you would be looking for?
(Mr Garnett) I do not think it is necessary to go
to 20 years. It could be less than 20 years, it could be 15, but
it is going to be the size of each one that you have got to look
528. That would be the way in which you would
get your return on it?
(Mr Garnett) Yes.
529. What I do not understandand you
are going to have to help me hereis if I turn to vertical
integration, which you could be involved in, you talk about having
a trial, you talk about there being scope for experimentingI
wrote down what you saidbut you also plead for stability.
My question is two-fold therefore: would you agree that one of
the major blights on the railway industry has been fragmentation?
(Mr Garnett) Yes.
530. Both of you yes? I think you will probably
guess my second question then. How is scope for experimenting
and trialsand we have heard from the officials of the Department
that we could be looking at 15 special purpose vehicles- in heaven's
name, going to meet stability and address the blight of fragmentation?
(Mr Garnett) Special purpose vehicles are simply another
way of funding upgrades and therefore that is not going to lead
to fragmentation per se. Vertical integration is a different
thing, that is the day-to-day running of the railways. We as the
train companies do not know whether if we had vertical integration
it would be cheaper, it would be better, it would be more efficient.
Therefore we are saying we think there could well be the case
for having a trial in one region to see whether it works, and
some of the points raised by other members of the Committee on
the risks of doing that all have to be looked at.
531. So another 15 special purpose vehicles
on top of 20 train operating companies, on top of the fragmentation
that has occurred in the industry is something you consider could
be absorbed by the shape of the new industry without leading to
more fragmentation? I do not understand that.
(Mr Garnett) I do not see the creation of a special
purpose vehicle as necessarily creating fragmentation because
it is dealing with a specific investment to upgrade a route or
whatever. It is simply a way of funding it. As I understand the
West Coast Main Line, you have Railtrack at the moment doing the
upgrade, and instead of being Railtrack it would be the special
532. But we have the taxpayer paying for it.
Do you agree with that?
(Mr Green) If I could come in, an example of a special
purpose vehicle we are looking at would be to upgrade all our
car parks and stations, which will cost £100 million. I do
not see any problem in my shareholders getting on organising that
special purpose vehicle whilst I am running the railway. I do
agree with your point that the more you fragment the railway,
the harder it is to run.
533. It is enormously important for us to try
and understand this point. You are talking about special purpose
vehicles to tarmac your car parks and put vending machines in
the first class lounge at Stoke station. You are talking, Mr Garnett,
about major infrastructure upgrades. We need to know just exactly
what the industry is talking about here because there is a world
of difference here. So what is the industry talking about?
(Mr Garnett) We want them both. I do not believe that
the Government, the Treasury is going to pay for infrastructure
investment to enhance the railway on a large scale. The Government
wants this to be done through some form of special purpose vehicle.
That is the way we are now trying to progress the work we have
got to do on the East Coast Main Line so that we can dramatically
improve the service to Leeds.
534. Mr Marshall, the present Chief Executive
of Railtrack, said in his evidence, I think I only paraphrase
him slightly, that major infrastructure projects are not commercially
viable and the new organisation that replaces Railtrack will face
that reality. Do you agree with him?
(Mr Green) I think he is getting at the point that
if the railway is two-thirds subsidised, any project you touch
has got some subsidy and some public money
535. Whatever SPV or vertical integration is
going to be phased in, your joint very experienced opinion, is
that something like 75 per cent or more of the costs of doing
(Mr Green)Depending on the company.
536. Could I ask my last question to Mr Green.
You talked about possible compensation vis-a"-vis
the West Coast Main Line, and we listened to your evidence with
great interest. One of the special purpose vehicles that is often
given to us as an example of how very successful they can be is
National Express and Midland Main Line, but last week in answer
to a question from the Committee I think it was the Chief Executive
of National Express who said that as part of that deal premium
payments to the Treasury had been removed. When asked how much
benefit that was to the company he could not be specific but he
said about £20 million, about ten per cent of the cost of
the project. If the West Coast Main Line situation does not develop
as it should have done by contract, and it is not going to, will
your company be seeking as well as compensation from Railtrack
an agreement with the Government that you do not pay your premium
payments, which I understand you are due to start paying in 2003?
(Mr Green) No. We have an agreement that we must pay
our premium payments as agreed in the franchise agreement.
537. Very clearly, irrespective of what happens,
your company will pay those premium payments?
(Mr Green) That is exactly what we are agreeing. Just
to add to that, any compensation would not be in cash, it would
be in reduced track access charges.
538. Gentlemen, is it your view that the new
form of Railtrack in the form of a company limited by guarantee
will be better able to deliver investment that will enable you
to meet your objectives as passenger train operating companies?
(Mr Garnett) Going back to the point that the Regulator
has got to come and undertake economic regulation of that company,
it does not matter if it is a CLG or something else, we have got
to know what it is going to cost to run Railtrack and the money
has got to be available for Railtrack to fulfil that. We have
contracts with the SRA and we have got to know that Railtrack
are going to deliver to us. That is the first point. Whether the
CLG can then raise funds better than going into a private sector
company, I do not know the answer to that.
539. Mr Green?
(Mr Green) Nothing to add, I would agree.