Select Committee on Transport, Local Government and the Regions Minutes of Evidence

Examination of Witnesses (Questions 580 - 599)



Mr Donohoe

  580. The ten-year plan assumes that there is going to be something like £34 billion coming in from the private sector. Do you think that is a possible proposition?
  (Mr Bell) I think it is an entirely fundable proposition.

  581. Why do you say that?
  (Mr Bell) Again, if I go back to the social housing sector, and I just repeat the figure, in the last five years rather than ten, somewhere between £15 billion and £18 billion of long-term money has been provided to social housing. I do not think the figure of itself is frightening, particularly given the fact that, as you will see, people are tending to move out of equities at the moment into fixed income debt, and the Government is not at the moment a heavy borrower through the gilt markets. I would hardly call it a deficit of investments for people, but certainly there is a large opportunity for the Government to issue through this way.

  582. So you do not believe then that the Government decision to put Railtrack into administration will frighten investors away?
  (Mr Bell) No, although I do think there is an issue there that the existing lenders to Railtrack, who are currently in a slightly confused position, undoubtedly need to be thought about when this new structure is set up because they are going to be the same lenders who you are going to be relying on to put private money into Railtrack II. To the extent that their debt is subordinated in the new structure, as indeed there have been suggestions it might be, then I think two things would follow. First of all, it would not interfere with the raising of the new funding but it would certainly impact on the value of their existing debt. Secondly, I think it could cause them to look at all utility sectors across the country and worry about the nature of their debt into those existing utilities and the correct price for them.


  583. You are saying that would be addressed by the structure of the new company. Your proviso in each case is not that it cannot be done but that it should be done within the structure of setting up the new company?
  (Mr Bell) That is right.

  Chris Grayling

  584. Can I pick up on the issue of debt. In the example of Welsh Water, my understanding is that the process of reconstructing the debt rating of the Welsh Water organisation in the new company limited by guarantee took up to two years. Given the fact that the Government has suggested the administration of Railtrack will only last between three and six months, what do you think is a realistic timeframe for creating a financial structure for the new organisation which will enable it to go to the markets having assured an investment grade rating?
  (Mr Bell) I think it is entirely practical to talk about a three to six-month period to discuss the structure of a new not-for-profit company.

  585. Can I ask my namesake Mr Grayling about the ability of a company limited by guarantee to attract key people. You have cited a number of examples of organisations where this model has been used and has worked. One of the questions there has to be in an industry that is going to be divided between pure private sector listed companies and a company limited by guarantee, to what degree will the company limited by guarantee be able to offer the financial and other incentives to bring the best people into that financial environment?
  (Mr Grayling) I think it is very important that they do provide the correct financial incentives to attract very professional people to run the railways. This is something that the Welsh Water company faced when it was established as a company. In fact, I think they have managed to align management incentives with the service interests of its customers better than they did when it was a shareholding company. They have done that by paying market rates for wages, but also by relating bonuses to the service level performance of the company and to the financial performance of the company, rather than to shareholder value because they do not have any shareholders, they have instead members to hold them to account. I think it is perfectly possible to construct a remuneration package that better meets the needs of a public service as a not-for-profit company than it is as a shareholder company, where your first duty is always to shareholders.

  586. You said that you felt the ten-year plan needed to be radically rethought. Can you elaborate on what you believe will need to be done to achieve the overall targets of that plan?
  (Mr Grayling) I think it is quite clear that there will need to be higher levels of public investment in the railways than were set out in July 2000 if we are going to achieve the 50 per cent passenger growth and 80 per cent freight growth which we want to see. Even since then, in the Periodic Review in October of that year nearly £900 million was added and another £1.5 billion was promised after Hatfield to help bail Railtrack out and another £500 million has been put in to compensate Railtrack for the halving of freight access charges. So already quite a lot more public money has been put into the railways than was promised at the time of the ten-year plan. If you look at the profile of the ten-year plan, it is also quite heavily front-loaded, particularly with respect to public investment, so it accelerates markedly over the next three to four years and the public investment element of it thereafter declines in real terms significantly. I think that we will need to see it sustained at the level that it reaches after three or four years, at least, if we are going to see a decent European standard railway in Britain.

  587. Finally, can I ask you what your estimation is of the consequence of the Government's decision to award franchises of only two years in length to a number of operators on the likely investment process on the railways?
  (Mr Grayling) I believe that the focus at the minute on two-year extensions to existing franchises is a holding position which recognises the parlous state that Railtrack was in and the inability to make new investment commitments. Clearly the new network operator is going to have to be a partner in major enhancements. I think that we will need to return over the next year or so, I hope, to starting to negotiate longer-term franchises because I think they are necessary to bring stability to investment.


  588. Do you want to comment on that Mr Grant?
  (Mr Grant) I agree with much of what has been said. I certainly think that longer franchises are needed if the train operators are to play a part in delivering the infrastructure upgrade, and it is my personal view that they should.

Chris Grayling

  589. We have just heard from GNER that the decision to award the two-year franchise has made it impossible for them to invest in new rolling stock in the period of that time-frame. What you are saying about investment in infrastructure may be true but in terms of investment in ordering of new rolling stock, do you think that is retarded by the awarding of two-year franchises?
  (Mr Grayling) There is more than one view on that subject. After all, Chiltern Railways, who have a short franchise, managed to invest in new infrastructure and of course the investment is made by the rolling stock leasing company and some people would say that is not a sunk cost of the franchise. Nevertheless, in the case of rolling stock I do not think that necessarily is the issue. As Mr Grant says, in the case of train operating companies being involved in major infrastructure projects, that is an issue.

Mrs Ellman

  590. Mr Grant, you advocate setting up railway companies with a number of different parties in them. How is that going to come out as representing the public interest? How is it going to work?
  (Mr Grant) I think the important thing to do is to bring together the elements of the business plan that a franchise train operating company has to give. I certainly do not think the train operating companies themselves can step into the role of Railtrack. I think we are looking at something which is bigger, rather in the way that light rail projects get built—there is an operator, there is a builder, there is a funder and, above all, there is a project manager that can make sure that the enhancement is delivered. These are essentially enhancements that are being paid for out of the public purse and, therefore, we have to be very, very clear that they will be delivered to time and to budget and to specification.

  591. Why would that work better than the present system?
  (Mr Grant) The present Railtrack system—perhaps we should say the past system—suffered from the fact that Railtrack was essentially a monopoly. As I found when bidding for South Central on behalf of Connex, we could take the best advice that was available to us from consulting engineers and so on about the cost of things, we would then go to Railtrack who would simply say, "No, no it is three or four times that cost". It was never obvious where their figures came from and because they were a monopoly they were never required to justify them.

  592. It has been suggested to us that Railtrack in its new form should have regional subsidiaries and train operating companies should have a stake in those. What are the witnesses' views on that?
  (Mr Grant) I believe that splitting up Railtrack into several regional Railtracks would work fairly well because, for one thing, it would give the regulator clear comparators to see what efficiency and best practice is and to see where again the public purse is being asked to subsidise inefficiency. I believe that they can be used as the basis of a consortia approach to operating and developing the railways in those regions but, as Mr Green said earlier, it does not fit all types of railway operation and there has to be provision for cross-country and for freight and other operators that cross these boundaries to be able to get fair and equitable access.


  593. Would you have a view on that Mr Bell?
  (Mr Bell) I think it is quite important that Railtrack remains a single organisation from a funding point of view. It would have an impact on the price of the debt that is raised that is going into a single entity with a cross-country exposure and the debt has been raised in large volumes and is therefore going to be liquid and highly tradeable in the market.

  594. Mr Grayling?
  (Mr Grayling) I think Mr Grant and Mr Bell have adequately answered the question.

Mr O'Brien

  595. Mr Bell, in the evidence that you submitted to the Committee in the conclusion you say: "To meet Her Majesty's Government's ambition for a modern, safe railway network, the public and private sector must rebuild that which was put in jeopardy by the failure of Railtrack." How deep is that jeopardy?
  (Mr Bell) I think that certainly damage has been done. I think that there was a very comfortable and confident assumption amongst lenders into all manner of public/private sector operations that, in one way or another, government would always move to protect them, and I think the arbitrary nature or the speed with which the crisis came upon them came as a very unpleasant shock. Having said that, out of problems come benefits, and, as I see it, what we will see going forward is a far greater scrutiny by investors on the structures of the companies they are lending to, on covenants that protect them, and as long as Railtrack II is developed on a robust model in the medium term, I see it as becoming wholly beneficial that we have gone through this rather difficult transition process.

  596. What timescale are you thinking to rebuild?
  (Mr Bell) Investors always have very short memories. I am talking six months to a year.


  597. Mr Bell, can I ask you something as a devil's advocate: do you not think there is a responsibility on investors to check what is happening to the shares that they control?
  (Mr Bell) There is a responsibility on shareholders to check what is happening to the shares and a responsibility on lenders to check what is happening to the loan. The assumption even in a private unquoted company is that the shareholders in defending their own interests will defend the interests of the bondholders because, after all, they stand to lose the money first. In many ways, a not-for-profit structure is safer for lenders than it is for shareholders because, as we have discovered in the last few years, shareholders can happily sell out at inflated prices to people who are coming in basically to gear up the business or run it into the ground, and the person who is left with the valueless asset at the end of this process is the same man who put up 30-year money to begin with on fixed terms.

  598. That is very helpful. Is it going to be difficult to get decisions out of a group which will, almost by definition, be fairly disparate, and will that constitute a hazard for anyone dealing with them financially?
  (Mr Bell) A group in what sense?

  599. In the sense of the new company. Is the new company going to suffer? What is the basic difference between what happens now with the Housing Corporation and what would happen with a new structure for something like Railtrack II?
  (Mr Bell) I do not think generally there is a problem with any of the housing associations in running a unified board that is capable of making rapid commercial decisions.

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