PROCEEDINGS OF THE COMMITTEE RELATING
TO THE REPORT
WEDNESDAY 23 JANUARY 2002
Mrs Gwyneth Dunwoody, in the Chair
|Andrew Bennett||Miss Anne McIntosh
|Mr Clive Betts||Mr Bill O'Brien
|Mr Brian H Donohoe||Dr John Pugh
|Mrs Louise Ellman||Christine Russell
|Chris Grayling||Mr George Stevenson
|Helen Jackson||Mr Bill Wiggin
The Committee deliberated.
Report from the Transport Sub-committee [Passenger Rail Franchising
and the Future of Rail Infrastructure] proposed by the Chairman,
brought up and read.
Draft Report [Passenger Rail Franchising and the Future of
Rail Infrastructure], proposed by Miss McIntosh, brought up
and read as follows:
1. On 7 October 2001, the Secretary of State applied to the High
Court to place Railtrack in railway administration. This Report
concentrates on that decision because it is crucial to the future
of the railways in the United Kingdom. The Secretary of State's
decision will have implications for desperately needed investment
in railway infrastructure and the quality of service provided
to the travelling public.
2. On 14 January 2002, the Strategic Rail Authority published
its Strategic Plan, which notes that there has been "much
to be proud of" on the railways since 1994-95.
Both passenger and freight volumes have increased since privatisation,
and infrastructure investment has risen to record levels. The
Strategic Plan states that since privatisation "all three
passenger rail market sectors have seen strong growth ... The
upswing has been sustained and has covered all regions of the
country. It has been a longer period of growth than any other
experienced by the rail business in the past 50 years."
The Plan notes that freight volumes have increased by 40 per cent
since 1994-95 and that freight operating companies have invested
heavily in new locomotives and wagons since privatisation.
The growth in passenger and freight volumes has contributed to
the escalating costs of maintaining and expanding the existing
3. This growth has been a key factor in creating the problems
that the rail industry now faces. There can be no doubt that very
considerable investment is needed in rail infrastructure and that
that investment has been required for some time. The Government's
plans envisage that the private sector will provide a substantial
proportion of the crucial investment required by the rail network.
The Strategic Plan notes that "the private sector was playing
a full part in financing the industry and delivering improvements".
Mr Chris Green, Chief Executive of Virgin Trains, and Mr Christopher
Garnett, Chief Executive of Great North Eastern Railway, told
the Sub-Committee that the Railtrack situation would put pressure
on the industry raising finances from the private sector. Mr Green
said that he was "very doubtful whether we are going to attract
£34 billion from the private sector without some government
guarantees behind it".
Mr Garnett said that the impact on private sector investment by
the Railtrack administration could last two years.
4. Private sector investment will only be forthcoming if there
is confidence in the policy, regulation and management of the
railways. We are extremely concerned that, following the Government's
refusal to support Railtrack and to force it into administration,
private sector confidence in the railways will evaporate and as
a consequence the industry will have to pay a much higher risk
premium to attract this finance, or the Government will have to
provide substantial guarantees to investors.
5. Given the pressures that the industry undoubtedly faces, we
were astonished to learn of the lack of co-ordination of future
strategy between the Government, the Strategic Rail Authority
and the Rail Regulator. This was exemplified by the Secretary
of State's failure to consult with the Strategic Rail Authority
or the Rail Regulator prior to taking the decision to push for
Railtrack to be put into administration. We also heard evidence
that upon taking office the Secretary of State received a memorandum
from Sir Alastair Morton about the future of the industry, but
failed to give any response to that memorandum. The poor relationship
between the Authority and Mr Byers' Department appears to have
not caused the Secretary of State alarm. If the Strategic Rail
Authority is to remain a viable force, the Government must allow
the Authority to operate independently and free from Government
interference. The Strategic Rail Authority must be held to its
responsibility to publish an annual report and update its Strategic
6. In evidence to the Transport Sub-Committee, Mr Tom Winsor,
the Rail Regulator, described the conversations he held with Railtrack
and the Secretary of State prior to the application for railway
administration. Mr Winsor's evidence was damning. He recalled,
from contemporaneous notes, the conversation he had with the Secretary
of State on the afternoon of Friday 5 October:
"I said that Mr Robinson's reaction to Mr Byers' decision
was likely to be an immediate application to me for an early interim
review to restore Railtrack's financial position if that were
feasible. Mr Byers said that they had thought of that and that
if such an application were made, he had the necessary authority
immediately to introduce emergency legislation to entitle the
Secretary of State to give instructions to the Regulator. After
pausing to consider whether I had really heard what I had just
heard, I asked whether that would be to overrule me in an interim
review or in relation to all my functions. Mr Byers said that
it would cover everything but that its first use would be in relation
to an interim review which the Government did not want to proceed."
7. Mr Winsor described his response to the Secretary of State's
statement that legislation would be introduced to quash the regulator,
"The Secretary of State said to me that if there were
an application for an interim review he had the necessary authority
to introduce immediate legislation to prevent the review taking
place. I explained that such legislation would be a card which
the Government should be extremely reluctant to play. I explained
why. I pointed out the very severe adverse effects it could and
probably would have on the financial markets and investor confidence
generally if the Government were to be seen to be taking away
the independence of an economic regulator. I said that the effect
on transport stocks would be severe, but it would go much wider
than that. It would have very serious adverse implications for
the constitutional position of independent regulators in other
industries, including but not limited to gas, water, electricity
and telecommunications, the independent position of the PPP arbiter
in the London Underground. (How can an arbitrator in a dispute
have to decide the case in favour of one party to the dispute
at the direction of that party?). I said it would have severe
adverse implications for the market perception of the stability
of the regulated privatised industries, investor confidence in
those companies and the effect on other companies in the transport
and utilities sectors. I said it was inconsistent with the Chancellor's
public position in June this year in relation to the importance
of the independence of the competition authorities, of which I
am one, and the forthcoming Enterprise Bill, and also the independence
of the Bank of England. I said that it may well constitute or
precipitate defaults under the loan arrangements for Virgin's
acquisition of the two new fleets of tilting trains for the West
Coast and Cross Country networks, so the Department could say
goodbye to the large premium payments which are due from Virgin
in the latter years of those two franchises. I added that taking
me under political control would go entirely against the grain
of the major theme of the Government's policy position in the
General Election campaign, which was about getting private sector
capital into the provision of public services. I told them that
such a step would do considerable harm to the ability of the Government
to get companies to put money into public projects. I also mentioned
the implications of the Human Rights Act 1998 because of the right
of the citizen to have his civil rights determined by an impartial
tribunal. For all those reasons, and others I can think of now,
I said, "Would the Government really be prepared to take
all those risks in order to prevent an interim review?".
Mr Byers said simply that if I were to proceed with an interim
review that is what the Government was prepared to do. He explained
that the application to put the company into railway administration
would be made on Sunday and the meeting ended at that point."
8. According to Mr Winsor, if such legislation were to be passed
by Parliament, that "clearly [his] independence would not
only be compromised it would be extinguished."
Mr Byers said that he did "believe with railways and with
other areas why as well, where it is appropriate, there should
be independent economic regulation".
When the Secretary of State appeared before the Sub-Committee
he said in relation to the Rail Regulator's evidence to this inquiry
that, "clearly he said to the Committee for him it was 'business
That is a bizarre and wholly inaccurate phrase for the Secretary
of State to use considering Mr Winsor's discussion with the Secretary
of State. We are astonished that the Secretary of State made
an application for an administration order for Railtrack without
consulting the Rail Regulator, who has had direct responsibility
for assessing Railtrack's financial requirements for Control Period
2. We note that the removal of the Government support and the
threat to introduce emergency legislation to by-pass the regulator
made Railtrack's position impossible. It is lamentable that the
company did not do more to prevent being placed in administration;
however, the company's view that the threat of legislation was
essentially the same as the legislation being in place is understandable.
9. By September 2001, Mr Byers had taken the decision not to support
Railtrack and although he has publicly acknowledged preparing
the legislation, he has refused to say when it was drafted.
Although the Department and the Secretary of State have not provided
the date when the draft legislation was initially prepared, we
find it informative that the administrators, Ernst and Young were
approached as early as 23 August 2001 to start preparing for Railtrack's
Mr Bloom, one of the joint administrators, said that "immediately
following 23rd August, we were asked to look from a desk top ...
at the sort of issues that would be faced in relation to the hypothetical
administration of Railtrack, especially as this would be the first
use of the Railway Administration Procedures under the legislation."
10. Commenting on Railtrack's financial position, Mr Winsor was
critical of the company for approaching Government rather than
invoking the regulatory mechanisms in place.
Mr Winsor said that he believed on 5 October that the company
was solvent. However,
he said the company had failed to inform him that it had not received
an expected payment from the Government on 1 October.
The Regulator was at a loss to explain what had happened between
5 October, when he believed the company to be solvent, and 7 October
when the Secretary of State successfully applied for a railway
Moreover, it is clear from Mr Winsor's evidence that not only
did the company not disclose figures to him, he said that in the
meeting on 5 October the Secretary of State did not mention figures.
He said that the company had a yawning gap in terms of the consequences
of Hatfield, West Coast and other matters, that the financial
position of the company had been very closely looked into over
a period by the Government's financial advisers and they were
satisfied that the company was insolvent. Mr Winsor said: "That
really surprised me, of course it did, but 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." 
11. The Regulator's interpretation of the documents lodged at
the High Court is illuminating. Mr Winsor stated that, in his
view "the thing which swung them from being solvent to insolvent"
was the company's view that "the Secretary of State had made
a policy decision that he was not going to provide any more money
to the company above the regulatory settlement and the
£445 million is part of the regulatory settlement
and had effectively neutralised the Regulator".
Mr Winsor said that because of Railtrack's view of the Secretary
of State's position it "could not get a bond issue away.
If it could not do that, it could not draw on its existing undrawn
and committed banking facilities, and as a result of that it was
In Mr Winsor's view, therefore, it was Railtrack's knowledge of
the fact that the Secretary of State would remove the opportunity
for the Regulator to do his job that had persuaded the Court to
accept the Government's version of the company's position. Mr
Winsor contended that the company had made an error by assuming
if the Secretary of State threatened to introduce legislation
that it would be enacted. Although, technically, that position
is correct, it is extremely naive to believe that the Government
would not have been successful in introducing such legislation.
12. In his initial statements to the House of Commons about the
Railtrack administration order, the Secretary of State indicated
that at the meeting on 25 July 2001, Mr Robinson, Chairman of
Railtrack, had asked for additional financial support from the
in his evidence to the Committee he referred to a request for
"a soft letter of comfort from the Government by the autumn
before being able to access existing banking facilities".
Railtrack's business plan involved them seeking to draw down funds
that had already been made available to them as credit facilities
from the banks and subsequently to launch a bond issue that would
assist its immediate cashflow. In its evidence to the Committee,
Railtrack had indicated that statements from the Rail Regulator
earlier in 2002 had undermined its relationships with City institutions,
and hence it needed to demonstrate that it had the Government's
13. It is clear from the evidence from the Secretary of State
that Railtrack did not ask for further funds at the meeting on
25 July 2001. In answer to a series of questions asking whether
Railtrack asked for more money from the Government at that meeting,
Mr Byers eventually conceded that: "On 25 July that was not
the detail of the conversation."
14. Railtrack's financial position would have been strengthened
if the RenewCo arrangements, discussed in April 2001, had been
successfully put in place. It is clear from the correspondence
the Sub-Committee has seen between the Department and the Strategic
Rail Authority, that, contrary to Mr Byers' assertions, his Department
took a significant role in preventing the RenewCo arrangements
being put in place.
15. The implementation of the RenewCo arrangements hinged on whether
they met the conditions set down in the April agreement. The Department
has consistently stated that the decision not to proceed with
RenewCo was based on the advice received from the independent
Office of National Statistics. It is puzzling that the ONS was
unable to provide that advice until 5 October. A letter from the
ONS, provided in response to a written question, states that:
"On 3 April 2001 provisional advice was given, based
on the provisional information provided to ONS, that RenewCo would
be classified as a private sector institution. Following the lifting
of confidentiality restrictions the case was examined by the ONS's
Public Sector Classification Committee, which on 14 June 2001
confirmed the earlier provisional advice."
It goes on to state that:
"On 26 September 2001 advice was given that, based on
new information HM Treasury had provided on changes to the contract,
the case would need to be re-examined.
On 5 October 2001 provisional advice was given, based on the provisional
information provided, that borrowing by RenewCo (now referred
to as NGCL) would be classified as public sector borrowing."
16. The Department has been concerned not to publicise the details
of its discussions with the Strategic Rail Authority about the
RenewCo, stating that such information is exempt from disclosure
due to commercial confidentiality.
We struggle to see the justification for such timorous behaviour
by the Department in relation to RenewCo, particularly since the
arrangements have fallen. We do not accept the Department's assertion
that the RenewCo arrangements were not responsible for Railtrack's
administration. We believe that the Department was unwilling to
proceed with the Renewco arrangements because it had already taken
the decision in principle to seek an administration order for
17. It seems remarkable that the ONS were given one week, from
24 September to complete an analysis known to required by 1 October,
on an agreement that was initiated with that known deadline in
It seems particularly harsh for the Secretary of State to say
of the ONS that "it will obviously take its time in reaching
any decisions on classification."
18. We heard no evidence to indicate that the Government had a
clear and achieveable strategy for the future of the industry
when it sought the administration order, beyond its core intention
of putting Railtrack onto a not-for-profit basis. In evidence
on the Departmental Annual Report the Secretary of State stated
he was confident that Railtrack would emerge from administration
this year. That
is quite different from Mr Byers initial, confident, assertions
that administration would last three to six months. We also heard
evidence about the substantial costs of administration. Mr Spellar
confirmed that the company in administration was receiving loans,
rather than grants and that these amounted to in excess of £1.2
billion at that date.
The Sub-Committee was told that the loans would be repaid by the
However, we are concerned that the only apparent way for this
money to be repaid by the Administrator will be from a substantial
asset sale to a new owner of the infrastructure Mr Byers confirmed
that he would take the decision, on the basis of the administrators'
advice about the form in which the company comes out of administration.
19. We also heard evidence from both Railtrack
and the Unions
about the likely effect of the decision to press for administration
on the morale and motivation of employees within Railtrack. Many
Railtrack employees were shareholders in the company, who lost
their investments when the company went into administration. We
note that despite this, the Government is looking to the same
workforce to deliver infrastructure improvements in the next few
20. We believe that the Government's decision to seek an administration
order for Railtrack was taken in haste and without a clear strategy
for the future of the Rail infrastructure. As a result there is
a real danger of a hiatus in the process of investment in the
railways, and at the very least the higher risk premium sought
by the private sector for investing in the industry will place
a substantial additional cost burden on the industry.
21. We are also dismayed about the variations in the Government's
account of what took place prior to October 7th. Despite
Government statements to the contrary, we have seen no concrete
evidence to support the view that Railtrack actually asked the
Government for further funds. The company's concern was for the
Government to show support for the railways by providing a letter
of comfort that would diminish the uncertainty in the City, and
allow Railtrack to access funds already committed to the company.
It is clear that the Secretary of State had decided not to support
Railtrack, and that an early date, put in place mechanisms to
close any alternative avenues for discussion of Railtrack's financial
position. The Government has failed to provide answers to questions
tabled by Members of Parliament about when legislation to sweep
aside the independent regulator was first drafted.
22. The chaos in the railways has been increased by the placing
of Railtrack in railway administration. Given that both Railtrack
and the Regulator considered the company to be solvent on the
date that the Secretary of State applied to the High Court, and
in the absence of any evidence to suggest that any other factor
apart from the withdrawal of Government support caused the insolvency
of Railtrack, we conclude that Railtrack's demise was principally
caused by the Secretary of State. This Committee is appalled
at the Secretary of State's decision to apply for railway administration.
By putting a solvent company into administration, he has robbed
the shareholders of their investment. The implications for future
investment from the private sector in transport projects, in particular
under the Government's ten year transport plan, are grave.
23. We are also concerned that there is, as yet, no clear indication
of how long Railtrack's administration will last, and that there
is no clear evidence about how the costs of the process will be
met once the loan provided by the Government has to be repaid.
24. This Committee considers the Secretary of State's decision
to have been premature and it may well have damaging consequences
for rail investment for years to come.
25. We conclude that the Secretary of State's decision to place
Railtrack in administration had no sound financial or strategic
basis, and that the direct consequence of the decision has been
the creation of an investment hiatus that may last two years.
We are concerned that it will prove to have been a huge mistake
for the future of the industry.
26. The implications of the demise of Railtrack and the failure
of the Secretary of State to agree long-term franchise renewals
are far-reaching for the whole of the railway industry.
Conclusions and Recommendations
|(a)||We are extremely concerned that, following the Government's refusal to support Railtrack and to force it into administration, private sector confidence in the railways will evaporate and as a consequence the industry will have to pay a much higher risk premium to attract this finance, or the Government will have to provide substantial guarantees to investors. (Paragraph 4).
|(b)||If the Strategic Rail Authority is to remain a viable force, the Government must allow the Authority to operate independently and free from Government interference. The Strategic Rail Authority must be held to its responsibility to publish an annual report and update its Strategic Plan. (Paragraph 5).
|(c)||We are astonished that the Secretary of State made an application for an administration order for Railtrack without consulting the Rail Regulator, who has had direct responsibility for assessing Railtrack's financial requirements for Control Period 2. We note that the removal of the Government support and the threat to introduce emergency legislation to by-pass the regulator made Railtrack's position impossible. It is lamentable that the company did not do more to prevent being placed in administration, however, the company's view that the threat of legislation was essentially the same as the legislation being in place is understandable. (Paragraph 8).
|(d)||We struggle to see the justification for such timorous behaviour by the Department in relation to RenewCo, particularly since the arrangements have fallen. We do not accept the Department's assertion that the RenewCo arrangements were not responsible for Railtrack's administration. We believe that the Department was unwilling to proceed with the Renewco arrangements because it had already taken the decision in principle to seek an administration order for Railtrack. (Paragraph 16).
|(e)||It seems remarkable that the ONS were given one week, from 24 September to complete an analysis known to required by 1 October, on an agreement that was initiated with that known deadline in April. It seems particularly harsh for the Secretary of State to say of the ONS that "it will obviously take its time in reaching any decisions on classification." (Paragraph 17)
|(f)||This Committee is appalled at the Secretary of State's decision to apply for railway administration. By putting a solvent company into administration, he has robbed the shareholders of their investment. The implications for future investment from the private sector in transport projects, in particular under the Government's ten year transport plan, are grave. (Paragraph 22).
|(g)||The implications of the demise of Railtrack and the failure of the Secretary of State to agree long-term franchise renewals are far-reaching for the whole of the railway industry. (Paragraph 26)
Motion made, and Question proposed, that the Report from the Transport
Sub-committee be read a second time, paragraph by paragraph.(The
Amendment proposed, to leave out the words "Report from the
Transport Sub-committee" and insert the words "Draft
Report proposed by Miss McIntosh".(Miss McIntosh.)
Question put, That the Amendment be made.
The Committee divided.
|Ayes, 3||Noes, 9|
|Chris Grayling||Andrew Bennett
|Miss Anne McIntosh||Mr Clive Betts
|Mr Bill Wiggin||Mr Brian Donohoe
|Mrs Louise Ellman|
|Mr Bill O'Brien|
|Dr John Pugh|
|Mr George Stevenson
Ordered, That the Report from the Transport Sub-committee
be read a second time paragraph by paragraph.
Paragraphs 1 to 42 read and agreed to.
Paragraph 43, read as follows:
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 operators.
According 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 future.
Amendment proposed, in line 21, to leave out from the word "contractors"
to the end of the paragraph, and insert the words "On balance
the Committee believes it is too early to judge whether the Secretary
of State's decision to apply for a railway administration order
was correct. That question can only be adequately answered once
it is clear how long administration will last and what form the
successor company will take. However it is clear that there were
serious management shortcomings at Railtrack which were a major
factor in causing the problems which led to the Secretary of State's
Question, That the Amendment be made, put and negatived.
Another Amendment proposed, in line 21, after the word "balance"
insert ", though there remain strong differences of opinion,".(Dr
Question put, That the Amendment be made.
The Committee divided.
|Ayes, 4||Noes, 8|
|Chris Grayling||Andrew Bennett
|Miss Anne McIntosh||Mr Clive Betts
|Dr John Pugh||Mr Brian Donohoe
|Mr Bill Wiggin||Mrs Louise Ellman
|Mr Bill O'Brien|
|Mr George Stevenson
Paragraphs 44 to 72 read and agreed to.
Annex agreed to.
Motion made, and Question, That the Report be the First Report
of the Committee to the House, put and agreed to.-(The Chairman.)
Ordered, That the Chairman do make the Report to the House.
Ordered, That the provisions of Standing Order No. 134
(Select committee (reports)) be applied to the Report.
Ordered, That the Appendices to the Minutes of Evidence
taken before the Transport Sub-committee be reported to the House.
[Adjourned till Wednesday 30 January at Ten
The Strategic Plan, Strategic Rail Authority, 14 January 2002,
para 2. Hereinafter The Strategic Plan. Back
Ibid, p 58. Back
Ibid, p 62. Back
Ibid, para 2. Back
Q 545. Back
236 Ibid. Back
Q 761. Back
Q 765. Back
Q 780. Back
Q 864. Back
Q 829. Back
QQ 867-870. Back
QQ 425-428. Back
Q 427. Back
Q 764. Back
Q 791. Back
Q 793. Back
HC Deb, 15 October 2001, Col 954. Back
Q 845. Back
QQ 846-850. Back
HC Deb, 4 December 2001, Col 207W. Back
HC Deb, 26 November 2001, Col 607W. Back
HC Deb, 11 December 2001, Col 760W. Back
Uncorrected Evidence to the Transport, Local Government and the
Regions Committee, 16 January 2002, Q 777. Back
Uncorrected evidence to the Transport, Local Government and the
Regions Committee, 16 January 2002, Q 794. Back
Uncorrected Evidence to the Transport Sub-Committee, 12 December
2001, Q 566. Back
Uncorrected Evidence to the Transport Sub-Committee, 12 December
2001, QQ 567-568. Back
QQ 895-896. Back
Q 345 Back
Q 304 Back