THE DECISION TO PLACE RAILTRACK
4. The sequence of events leading up to Railtrack's
administration has been a source of controversy. The Transport
Sub-Committee received several supplementary memoranda relating
to the events leading up to the High Court's decision. That additional
information has failed to provide incontrovertible evidence of
the crucial events that led to Railtrack's demise and this Committee
is in no better position, having received that information, to
make an informed assessment of Railtrack's financial position
at the time it was placed in administration.
5. Attention has focussed on whether the company
was insolvent. The
Secretary of State has said that the Government had provided additional
funds to the company in April, only to be told at a meeting on
25 July by Railtrack's chairman that it would require a letter
of comfort from the Government if it were to continue to raise
investment funds in the market.
According to the Secretary of State, Railtrack's advisors presented,
at a subsequent meeting in August, the three options that they
considered feasiblerestructuring, renationalisation or
view of the company's financial position, Mr Byers subsequently
asked for the possibility of placing Railtrack into railway administration
to be explored on a contingency basis.
The restructuring option would have required public funding to
cover all the company's costs plus profit, and a four-year suspension
of the regulatory system. The Secretary of State concluded that
he could not give Railtrack "a blank cheque".
6. The Secretary of State was by now firmly of the
opinion that the Railtrack was "not part of the solution
for our railways" but "a major problem".
It had become clear that the company was facing "financial
and would be unable to finance its activities without further
significant financial support from the Government.
The City had also taken an increasingly pessimistic view of Railtrack's
prospects, especially following the Ladbroke Grove and Hatfield
Byers considered it time to address the root cause of the problem
and ensure that in future value for money improvements for passengers
were obtained in return for public-sector investment.
Although discussions continued until 3 October, an alternative
solution to the problem could not be found, and two days later
it was decided that a petition for a railway administration order
would be lodged with the High Court.
7. Railtrack's conduct in relation to avoiding being
placed in administration is puzzling. Mr Winsor told us that,
even though in January 2001 he had intimated to Railtrack that
if an application for an interim review were received he would
consider it, between 15 January 2001 and 5 October 2001, Railtrack
had made no application for an interim review, which could have
provided the additional funds it required.
On 5 October, the Secretary of State held meetings with the Rail
Regulator and with the chairman of Railtrack. At those meetings
the Secretary of State explained his intention to apply for Railtrack
to be placed in railway administration.
The Rail Regulator was unaware of the severity of the company's
financial difficulties before that meeting, because "the
company wrongly decided not to use the established regulatory
mechanisms for dealing with its financial position and instead
conducted direct negotiations for additional funding with the
On 6 October 2001, the chairman and chief executive of Railtrack
telephoned Mr Winsor and asked him whether "if the company
made an application [to the Rail Regulator] that night, there
was any prospect of my carrying out an immediate interim review".
Mr Winsor, said that, having asked about the grounds for the review
and the amount of money the company needed, the answers made it
clear to him that "in the time available, there was no prospect
of doing what the company said was essential to protect it from
Accordingly, having been informed of that view, Railtrack did
not make an application. We accept Mr Winsor's assertion that
although he was willing to undertake a review it could not be
concluded in the time required by the company.
8. The Rail Regulator accepted that Railtrack, on
the basis of the facts available to him on 5 October 2001, was
solvent, however, he made it clear that Railtrack had failed to
disclose its true position to him.
"it is for the court to make a determination
as to whether or not the company is insolvent and the High Court
decided, on the basis of the information given to it on Sunday
afternoon, that the company was insolvent. It is a question for
the directors as to how the company could be insolvent on the
Sunday, when it was not insolvent according to their evidence
on the Friday."
9. On 7 October 2001, the court decided that Railtrack
was insolvent and so made the order putting the company into administration.
The company did not oppose the petition for administration.
The Rail Regulator was "genuinely surprised and puzzled"
that the company had not done more to prevent insolvency and railway
administration; the company had waived the right to two days'
notice of the petition and did not oppose the petition.
The Rail Regulator's interpretation of the company's inaction
in defending itself from railway administration to stem from the
Board's view that the Secretary of State's statement that emergency
legislation would be introduced to stop an interim review was
equivalent "in all material respects to a statute already
enacted and brought into force".
The Secretary of State's decisions not to provide any money above
the regulatory settlement, and to neutralise the Regulator by
emergency legislation, had in Railtrack's view, closed the door
on any possible escape from railway administration, and having
made that assessment the company acquiesced with the process.
10. The controversy surrounding the demise of Railtrack
was, in part, related to the Government's failure to provide funds
under the RenewCo arrangements.
The RenewCo proposal, agreed in April 2001, would have enabled
Railtrack to receive £162 million on 1 October 2001. Payment
of the RenewCo arrangements was dependent on several conditions,
including a requirement that it should not be consolidated in
either Railtrack's accounts or classified as being in the public
sector. The Office
of National Statistics undertook the determination of the RenewCo's
status, and following changes to the proposals confirmed on 5
October 2001 that RenewCo would be classified in the public sector.
The Secretary of State confirmed that the conditions for the RenewCo
had not been met by the deadline and therefore the funds were
not made available to Railtrack.
The Secretary of State denied that the Department had intervened
to block the payment to Railtrack. Furthermore, a supplementary
memorandum from the Department states that while RenewCo could
not proceed because of the Office of National Statistics classification,
"Railtrack could have received £162 million on 1 October
under the October 2000 determination".
The 'October 2000 determination' refers to the Rail Regulator's
determination of Railtrack's revenues for the second control period,
from April 2001 to March 2006, under which the first £162
million instalment of capital grant was due to be paid on 1 October
2001. The Department's
supplementary memorandum states that "Railtrack made no request
for the money to be paid under the October 2000 determination".
Correspondence between the Department and Strategic Rail Authority
indicates that the Authority had discharged its responsibilities
in respect of RenewCo, although the Strategic Rail Authority criticised
the Department and the Treasury.
The Department confirmed that the final decision on the RenewCo
rested with the Government, having received advice from the Office
of National Statistics.
11. Subsequently, Railtrack argued it was not insolvent
until the Government decided to make it so,
however, placing Railtrack in railway administration was, ultimately,
a matter for the High Court to decide. In granting the Secretary
of State's petition, the High Court clearly agreed that Railtrack
was, or would be, unable to pay its creditors.
12. Doubt has been expressed about Railtrack's precise
financial position at the time of the administration order. Certainly,
if the company were solvent at the time of that the Secretary
of State applied to the High Court then the company would be justified
in its subsequent complaint. It is very surprising that Railtrack's
management were unable to provide the High Court with proof of
that financial position. Railtrack were unable to provide the
Rail Regulator, their only remaining remedy, with sufficient information
for him to undertake an interim review and were "nowhere
near being able" to make a case for a review.
13. For the purposes of this inquiry, however, the
key issue has been not the events surrounding the decision of
5 October, but whether Railtrack had performed its task effectively
and whether it was likely to do so in the future and whether the
present structure of the industry will be able to deliver Government's
objectives for the railways. The company's performance has been
woeful, and criticism of the company has been widespread and sustained.
Indeed, in December 2001, what was reportedly one of the largest
corporate fines to date was imposed on the company for failing
to meet its performance targets.
Mr Tom Winsor, the Rail Regulator, told us that the railway industry's
core problem was the competence of Railtrack's management. The
company neglected its assets, failing even to complete an asset
register, and was hostile to its customers. Moreover, Mr Winsor
described dealing with Railtrack as being "a very, very difficult
and unpromising process".
Those failings within Railtrack had direct consequences for the
franchise replacement programme. For example, the company's inability
to estimate the cost of infrastructure enhancements accurately
and in a timely manner posed considerable difficulties for train
to Mr Stephen Grant, Railtrack would inflate project costs by
three or four times, but as a monopoly supplier, it was not required
to justify its figures.
This Committee's predecessorthe Environment,
Transport and Regional Affairs Committeeexamined the maintenance,
renewal and development of the national rail network in considerable
detail and concluded that Railtrack's stewardship of the nation's
rail infrastructure was severely lacking, not least its failure
to maintain and renew the network properly, its inadequate knowledge
of its assets and its poor management and monitoring of the work
of its maintenance contractors.
On balance the Committee considers the Secretary of State's
decision to apply for railway administration was correct. It was
the failings of its own senior managers that led to Railtrack's
downfall. As the Rail Regulator has said: "Railtrack are
the authors of their own misfortune".
The Sub-Committee intends to return to this matter in the near