Examination of Witnesses (Questions 580
WEDNESDAY 31 OCTOBER 2001
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
(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.
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
(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.
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.
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 builtthere
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
(Mr Grant) The present Railtrack systemperhaps
we should say the past systemsuffered 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
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.
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
(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
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.