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

Examination of Witness (Questions 40-59)



  40. I know this might be a bit difficult but what sort of timescale do you think we are looking at here for any or all of these SPVs coming to fruition?
  (Mr Bowker) It is difficult because by their nature they are subject to intensive negotiation which we have yet to do. Our anticipation is that during the course of the next calender year a number of these SPVs should be put in place. That should not unduly worry anybody, that does not mean that nothing is going to happen for the next 12 months, an awful lot will and is happening, but the financial closure of an SPV, as I said before, is the last thing that you do in the process to securing the deal for an upgrade.

  41. Yes. I am not sure how helpful that is in terms of the question I asked but I think I understand what you are saying. I have one more question about Special Purpose Vehicles which has concerned many of us on the Committee. Do you not think that in essence, in reality, given that whatever replaces Railtrack, now in administration, being responsible for the existing infrastructure and maintenance and development of that, and the SRA through the Special Purpose Vehicles presumably will be responsible for new infrastructure developments, and we were told that there could be as many 15 Special Purpose Vehicles, do you not think by definition, Mr Bowker, that is going to lead to more fragmentation of the industry and not less? Would you not agree that fragmentation has been one of the serious problems facing the industry since privatisation?
  (Mr Bowker) The way that we are approaching SPVs I do not believe will lead to further fragmentation because I would certainly agree with you that we need less complexity, not more. The process that we are going through on SPVs at the moment is based around what is called the DBFT model.


  42. I have allowed you to get away with SPVs for most of this but we are going to call them Special Purpose Vehicles and we are certainly going to spell out what DVDs are, which I thought were things you stuck in machines.
  (Mr Bowker) There are two main forms of this kind of project. There will either be a design, build, finance, transfer, which is called DBFT, or you can have a design, build, finance and operate. My view and the policy that we are developing is around the former, the transfer scheme. In other words, I personally believe that there is a lot of sense, and indeed a necessity, in a very coherent single network operator. I think it would give a huge amount of complexity if you had SPVs that had the infrastructure and perhaps the train operator had to run on multiple operations.

Mr Stevenson

  43. A single network operator?
  (Mr Bowker) Yes.

  44. Mrs Dunwoody will shut me up in a minute, I am sure, but what do you mean by that? Do you mean that we should have a network in the country or in a region or in parts of the country where we would have one operator?
  (Mr Bowker) No. I think Railtrack at the moment is the single network operator and I think that model in terms of operational complexity is the least operationally complex. To go back to your question about SPVs, I see SPVs as being the vehicles through which the project finance and the risk management of the construction of assets can be delivered but when they are complete they are passed back to the network operator to manage and maintain as part of a national infrastructure and in that way you do not get increased fragmentation. The final point I would just make because it is pertinent is that we are doing these SPV discussions in partnership with Railtrack, not in exclusion from.


  45. Well, are we saying that, because what you are proposing is a form of vertical integration, is it not?
  (Mr Bowker) No, Madam Chairman. This is purely down to the upgrade of the infrastructure.

  46. But the upgrades you are talking about are quite large, are they not?
  (Mr Bowker) Some of these infrastructure upgrades are, indeed, large.

  47. And therefore a Special Purpose Vehicle that transfers the control of that upgrade from Railtrack to the operator is quite an important and massive change, is it not?
  (Mr Bowker) Forgive me, I may have misled you. Let us take the East Coast as an example. The idea would be that an SPV would be set up to design and manage and complete the upgrade of the infrastructure, and it would have to interface with Railtrack, or whoever comes after. When the upgrade is completed then it would pass the infrastructure, as completed, back to the network operator. So this is not about train operations: it is purely about managing the project of infrastructure upgrade.

  Chairman: I think we are going to come on to that again in the future.

Chris Grayling

  48. To some extent immediately. What I wanted to ask you, probing on the financial side, is this: we have, after you take into account rolling stock investment, something like £23 billion of private financing designated under the 10 Year Plan for infrastructure investment. We know that you are planning to take on debt of £9 billion pounds. By definition, if you adopt the model you are talking about, over the course of the next ten years Networkrail would have to make approximately £23 billion worth of acquisitions of new infrastructure in order to complete the model you have discussed which again, by definition, would mean it would end up with debt of £32 billion. This is a company that will have a turnover of £3, £4, £5 billion—something of that region—and that does not work on any commercial model that exists anywhere in the world short of those companies that go spectacularly bankrupt. So it could only work with Government guarantees, is that correct?
  (Mr Bowker) No. A lot of the projects in the 10 Year Plan are towards the back end of the 10 Year Plan anyway in terms of their completion. Thameslink 2000 is a good example. So the financing of that and the take-out financing of that is quite back-ended. In terms of the way in which it would be financed, we have assumed in the Strategic Plan that it will use the same fundamental financing model that Railtrack used which is that when the asset is completed it becomes part of the regulated asset base and it is remunerated through the track access charges. It is the same model. That is the model in the plan, and it is that model that I have referred to.

  49. But if Balfour Beatty builds an upgraded East Coast Main Line and then passes control of it back to Railtrack or Networkrail, they are going to want to be paid for what they have done which means that at some point Railtrack has either got to write a cheque from its own resources or take on finance in order to pay back Balfour Beatty for what they have done, so there is either payment or security of debt. One way or another that debt has to end up on somebody's balance sheet at the end of ten years. So why am I wrong in saying that at the end of the ten years there is a liability of £23 billion plus the debt that Networkrail has already got? That has to sit somewhere and has eventually to be repaid. How is it dealt with? It may come back with charges, but there is a debt that has to sit on somebody's balance sheet.
  (Mr Bowker) I accept that at the point at which the asset is constructed it has to be financed—I completely accept that—but the model that underpins the Strategic Plan is the same model that Railtrack use which is that a company with an investment grade credit rating is able to go and secure finance off the back of the fact that it will be getting track access charges within a regulated regime, and that is the model that we have assumed to underpin the Strategic Plan, and that model does not assume Government guarantees any different to the model we currently have.

  50. But it is correct to say that this company will end up with a balance sheet debt of £30 odd billion?
  (Mr Bowker) It is correct to say that whoever ends up constructing these assets in terms of the projects in the Strategic Plan will need to raise the necessary finance on their balance sheet, or somebody else's, in order to finance them, yes.

  51. But in numeric terms you are talking about a company taking on debt that is nearly ten times its revenues. I just do not understand how any financial institution, looking at that equation, could say with confidence that that debt is secure over what would have to be a substantial period of time?
  (Mr Bowker) I go back to the fact that the model that we have used in our plans is one where we are comfortable with the financial mechanics and the relationships within it and is the one that underpins that analysis, and demonstrates that we can raise the necessary private finance that we need to create these assets and then remunerate the investors in those assets over a period of time off the back of an investment grade credit rating supported by the regulatory matrix we currently have under the Transport Act 2000.

  52. When you published the Strategic Plan in January you had a very clear timetable for the enhancement over the ten year period. Do you still stand by those timetables?
  (Mr Bowker) I think some of those timetables, like any project, are complex: they are substantially complex projects. We review them all the time. I am still comfortable with the broad time scales that were set out there and I am still comfortable that, as long as we do not shirk on delivery, we are able to deliver the outputs of the Strategic Plan within the timeframe that is set for it.

  53. Would it be wrong to say that a number of those projects are privately estimated within the industry as being likely to be up to three years later than the plan says?
  (Mr Bowker) I am not aware of any major infrastructure project that is that late.

  54. Looking at the extensions to South West Trains platforms which are scheduled for the end of 2004, can you state publicly that they will be open by the end of 2004?
  (Mr Bowker) No, I cannot do that, but I can certainly state that we are working quite hard with South West Trains at the moment in fairly detailed negotiations to secure the basis of a long term 20 year franchise agreement which will deal with those matters.

  55. Lastly, you have been working closely with the Networkrail team. Why do they need £9 billion of debt where Railtrack previously only had about £6 billion?
  (Mr Bowker) The amount of debt that Networkrail requires is clearly a matter for them but it is legacy debt plus working capital arrangements that they need. But that is a matter you have to address to them.

  56. But you are guaranteeing it?
  (Mr Bowker) We are providing a last resort position which is an in extremis resort position if the bridge financing is not able to be successful.

  57. So you must have asked them in detail why they need that much? You are saying it is a matter for them but it is a matter for you because you are providing ultimately in extremis financing for them, so you must know in some detail why they need £9 billion and not £6 billion?
  (Mr Bowker) The £9 billion is made up of legacy debt that they are inheriting, money that they require for project completion and working capital arrangements.

  58. It is 50 per cent more than was needed six months ago.
  (Mr Bowker) I can only tell you the numbers I am aware of.

Dr Pugh

  59. What involvement did you have in the discussions to give £300 million via the Strategic Rail Authority to the company limited by guarantee?
  (Mr Bowker) The £300 million is purely in relation to the benefits that can be secured.

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