Supplementary memorandum by the Department
for Transport, Local Government and the Regions (PRF 35D)
1. Following the Secretary of State's appearance
before the Transport Sub-Committee on 14 November, the Clerk of
the Committee wrote to the Department's Parliamentary Clerk on
21 and 23 November seeking answers to a number of questions that
Members had not had time to raise and clarification concerning
the Secretary of State's evidence in relation to RenewCo. This
memorandum provides a response to both letters.
The SRA reviewed each of the passenger rail franchises
in the light of the Department's draft directions and guidance
and the draft franchising policy statement and made its recommendations
to the Secretary of State at the end of August. When will the
Department respond to those recommendations and announce what
the exact combination of long and short-term franchises will be?
2. We expect that the SRA will set out its
proposed way forward in relation to existing franchises, for both
the immediate and the longer term, in its Strategic Plan. It will
in particular show which franchises may be suitable for early
replacement or extension. The proposed way forward will of course
be subject to change in the light of negotiations with train operators
and other bidders for franchises, and of any other relevant change
In view of the flaws in the existing approach
to franchise replacement, how can the Department be confident
that the new, long-term contracts, where Heads of Terms have been
agreed, will be awarded to the operators that submitted the best
3. We are satisfied that the SRA has agreed
Heads of Terms for the replacement Chiltern, South Central and
South West franchises with, in each case, the operator which offered
the best bid. In each case the bidding process was competitive
and the criteria for selection reflected the requirements of affordability
and value for money; and each of the successful bids will offer
early benefits to passengers. The proposed changes in the approach
to franchise replacement will not affect the criteria on which
a successful bid is selected, though it is hoped that they will
make the process more manageable for bidders and the SRA, and
will provide additional clarity to bidders about the benefits,
which the SRA is seeking to secure.
Even with the provisions made under section 54
of the Railways Act 1993, Great North Eastern Railway says that
it will be unable to introduce new rolling stock with only a two-year
franchise extension. What action is being taken to address this
4. The aim of extending GNER's existing
franchise for two years would be to secure early additional benefits
for passengers, including in relation to rolling stock. The terms
of any extension are, however, a matter for commercial negotiation
between the SRA and GNER.
How will the doubts that remain about the ability
of Railtrack's successor to secure a BBB credit rating be addressed?
5. It is for the Administrator to put a
proposal for a transfer scheme before the Secretary of State based
on propositions he, the Administrator, has received and evaluated.
The guidelines published by the Secretary of State on 31 October
specify that any bidder should be able to demonstrate that their
proposal for a successor to Railtrack plc will have a sufficiently
high, investment grade, credit rating to raise the necessary finance
for its activities.
6. As far as the proposal for a Company
Limited by Guarantee is concerned, it is intended that this would,
if accepted, result in the transfer of the business of Railtrack
plc and its finance creditors' indebtedness to a new, financially
sound, vehicle. We anticipate that in practice lenders would view
the company as a very low credit risk and a sound basis for their
7. A CLG could operate with much lower risks
than Railtrack, concentrating on operating and maintaining the
infrastructure as well as undertaking small-scale renewals. It
could receive income from track access charges, property and grant,
of which some 90 per cent could be covered by stable long-term
contracts. In addition a "cushion" between the risk
of poor financial performance and debt providers could be provided
by using retained surpluses to build up a reserve and an arrangement
by which the company could, in specified circumstances access
a standby, subordinated loan facility up to a capped amount.
8. We have also reaffirmed our intention
that our proposal would, taken in the round, preserve the economic
rights of the current finance creditors in all material aspects.
Such proposals must, however, retain the flexibility to translate
some of the detailed terms and conditions of the debt into a form
that reflects the different structure and credit rating of a company
limited by guarantee.
How has the Government satisfied itself that a
BBB credit rating will be adequate to raise the private sector
capital that will be needed by Railtrack's successor?
9. In relation to the proposal for a Company
Limited by Guarantee, it will be targeting a long term credit
rating of A/A2 or higher, to reflect the financing capacity requirement
of the rail infrastructure business. This would secure a robust
balance sheet for the company and enable it to raise debt financing
in an efficient and cost-effective manner.
How will the regulatory structure of the railway
industry be revised in order to "reduce the burdens of day-to-day
interference" in the industry?
10. The principal objectives of reform of
the regulatory structure will include a reduction in the overlap
of interests between the SRA and the ORR, and a closer alignment
of the interests of Railtrack's successor and the train operating
companies. This will reduce the amount of conflict and confrontation,
and the need for regulatory interference.
How will the "self-defeating system of penalties
and compensation" imposed by the existing regulatory structure
11. The review of the regulatory structure
offers an opportunity to reform and rationalise the current SRA
and ORR incentive and performance regimes, allowing incentives
to be set in a clear and integrated manner, providing better alignment
of incentives across the industry.
What is the role of independent regulation given
that the independence could be removed by legislation if the regulator
proposed to act in a way which was contrary to Government policy?
How much assurance will "independence'"give to the financial
12. It is important that regulatory decisions
properly reflect public interest considerations and resource constraints
within the industry. In addition, there needs to be some form
of independent regulation to ensure that the monopolistic power
of the infrastructure manager is not abused, that the price of
access to the network is determined in a fair manner, and to arbitrate
in the event of disputes. An independent regulatory check will
assure investors that the revenues available to the infrastructure
provider will be established on a fair basis.
Reference was made during the meeting to Sir Alastair
Morton's concern at "the Rail Regulator's hand getting into
the SRA's pocket to remove money" in connection with the
former's periodic review of Railtrack's access charges (see Q828
in the transcript). Should it not be for the SRA to determine
how the overall amount of Government support for rail is used?
13. The Government has a budget for rail
and the ORR must take the capacity of the SRA to pay into account
when carrying out its periodic review. Our commitment to streamline
regulation will look at how these issues play out in practice.
The retention of an element of independent economic regulation
is necessary to ensure that the price of rail outputs and access
are determined on a fair basis, and to provide an appeal body
Has the placing of Railtrack Plc (into administration)
not diminished the prospect of the private sector investing in
the railways as anticipated in the 10 year plan?
14. The Government remains confident that
private sector investment will continue to flow into the railways
to enable us to deliver our 10 Year Plan targets. In a number
of respects the successor company to Railtrack could actually
improve the prospect of private sector investment. For example,
it could provide greater management efficiencies; and an asset
register to improve the underlying knowledge of the state of the
assets and their costs. The successor company could provide co-operation
with SPVs in the planning of investments and their integration
into the network on completion.
What proposals are there for increasing the size
and changing the timing of the funds that will be made available
to the SRA for rail investment, as has been advocated by Sir Alastair
15. The Government has committed to provide
over £30 billion of public support to the rail industry over
the next 10 years. It expects the SRA Strategic Plan to prioritise
the rail investment projects required to deliver our 10 Year Plan
rail targets and the allocation of the resources required. Of
course, neither the 10 Year Plan nor the SRA Strategic Plan are
static documents and they will be reviewed at certain points to
assess and respond to progress made against the key objectives
In its memorandum, the Department referred to
the target for increasing rail freight over the life of the 10
Year Plan as being by "up to 80 per cent" (para 25),
as did the Secretary of Sate in his oral evidence (see Q822).
Transport 2010: the 10 Year Plan, however, refers to "an
80 per cent" increase in rail freight (page 100). Does this
change represent any weakening in the Government's commitment
to increase freight traffic on the railways?
16. The relevant section of the 10 Year
Plan, on page 100 is headed "Summary of other 10 Year Plan
targets and indicators" and reads, in full:
"a significant increase in rail freight's
share of the freight market by 2010. We believe it ought to be
possible to increase market share to 10 per cent. in 2010 from
7 per cent nowan 80 per cent increase in rail freightprovided
the rail freight companies can deliver improvements in performance
17. The proviso is important. The statements
by the Secretary of State and in the Department's memorandum are
accordingly qualified, and consistent with the 10 Year Plan.
Several references (eg Q855) were made during
the Session to the RenewCo Proposals. Who took the decision not
to proceed with the RenewCo Arrangements and when was it taken?
What was the Department's precise role in the decision making
process with regard to the RenewCo proposals? What was the Department's
role in mediating between the parties to the RenewCo proposals?
Who took the decision that the conditions for the RenewCo proposals
had not been met?
18. In October 2000 the Rail Regulator made
his determination of Railtrack's revenues for the second control
period (CP2), from April 2001 to March 2006. Under this determination
the first £162 million instalment of capital grant was due
to be paid on 1 October 2001.
19. In April 2001 Railtrack and the SRA,
with the Government's agreement, undertook to use their best endeavours
to put in place the RenewCo scheme, whereby the capital grants
due to Railtrack under the October 2000 determination would be
paid instead into a new special purpose vehicle. It was agreed
that RenewCo would not go ahead if it was to be consolidated in
either Railtrack's accounts or classified as being in the public
20. By the end of September Railtrack and
the SRA had not received confirmation from the independent Office
of National Statistics on the classification of RenewCo. As a
result the payment of £162 million into RenewCo on 1 October
could not be made. However, Railtrack could have received £162
million on 1 October under the October 2000 determination. This
sum of £162 million was available on 1 October for Railtrack
and was, therefore, not blocked. In fact, Railtrack made no request
for the money to be paid under the October 2000 determination.
21. On 5 October the Office of National
Statistics determined that RenewCo would be classified in the
public sector. This meant that the conditions for proceeding had
not been met.
22. The Committee needs to draw a clear
distinction between the RenewCo scheme which was the subject of
Sir Alastair's letter and the payment of £162 million which
could be made available either under the October 2000 determination
or by payment into RenewCo had the conditions agreed to in April
2001 been metwhich as a result of the ONS classification
they were not.
Dates of meetings the Secretary of State has had
with Sir Alastair Morton, the Chairman of the Strategic Rail Authority
23. The Secretary of State had meetings
with Sir Alastair on 26 June and 24 July this year. He was also
present at the Rail Delivery Group, which the Secretary of State
chaired on 27 July.