WEDNESDAY 10 APRIL 2002

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Members present:

Mrs Gwyneth Dunwoody, in the Chair
Andrew Bennett
Mr Gregory Campbell
Mr Brian H Donohoe
Chris Grayling
Mrs Louise Ellman
Helen Jackson
Miss Anne McIntosh
Mr Bill O'Brien
Dr John Pugh
Mr George Stevenson

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RT HON STEPHEN BYERS, a Member of the House, Secretary of State for Transport, Local Government and the Regions, examined.

Chairman

Good afternoon to you, Secretary of State. Could I ask you to give us your name?

(Mr Byers) I am Stephen Byers, the Secretary of State for Transport, Local Government and the Regions.

Thank you for coming. Do you have something you would like to say to the Committee before you begin?

(Mr Byers) This is a very pleasant, modern, committee room, Chairman!

We commissioned it especially for you. It is not only built with public money but it is maintained on a long term basis.

(Mr Byers) I know the financing of this building very well, Chairman, because when I was Chief Secretary at the Treasury I asked a number of questions about it.

So you are responsible. I should have known!

(Mr Byers) No. The answer I got was I was not responsible because it was a "House matter".

Let us proceed. Do you have something to say, Secretary of State?

(Mr Byers) No, I do not.

Can I ask you about your response to GNER's concern about rolling stock replacement in short term franchises?

(Mr Byers) I can understand their concerns and it is something we have looked at. It relates to the operation of section 54 of the Act. I think the Committee will know that GNER tendered for the long term franchise for the East Coast Main Line; I took the decision that, in the circumstances, it would not be appropriate to award a long term franchise because of the difficulties working out the details of the upgrade that was needed for the East Coast Main Line so a two-year extension was awarded to GNER. They have expressed concerns about procuring new rolling stock as a result of that, and we have obviously drawn their attention to section 54 and the way in which that process would work, particularly in supporting the costs of refurbishment of trains to part of the franchise extension. The Strategic Rail Authority will continue to work with GNER on this particular aspect, but there is a difficulty which will be there until the detailed specification for the East Coast Main Line upgrade is agreed and is clear. This goes back to the problem I had when it came to whether or not we could award a long term franchise. The sooner we can get the detail of the upgrade worked out and agreed, then we can make progress and bring certainty and GNER can proceed accordingly.

So you are really saying in effect that they were right to say that rolling stock companies would not be too happy, even with the section 54 of the Railways Act guarantee to allow them to go ahead?

(Mr Byers) No. What I am saying is that section 54 has operated well in all other situations. There is a particular problem with the GNER two-year extension which has nothing to do with the two-year extension and has everything to do with the fact that the detail of the upgrade on the East Coast Main Line has not yet been agreed. We know there is a legacy from Railtrack, and what they did and did not do. One of the things they failed to do was work up in detail the upgrade that was needed on the East Coast Main Line. In tackling that, Railtrack in administration with the new leadership is looking in detail at the upgrade with the Strategic Rail Authority and, as soon as we can get the details of the upgrade in place, then the problem that GNER has at the present time will be overcome.

You did say all short term franchises would be replaced or extended before their expiry in 2003/4. What is the minimum franchise period you would be expecting the Strategic Rail Authority to negotiate?

(Mr Byers) I said it should be - and I think I used the phrase - "horses for courses" and I think you have to judge the circumstances for each individual franchise, but I have to say the proposal which has come forward from Richard Bowker which is looking at five year periods up to a maximum of 15 years is one which I think is worthy of a very detailed consideration, because we can offer the possibility of a lengthy franchise for 15 years but with five year breaks which does provide the opportunity of reviewing the situation on a regular basis.

What would you expect to be written in for that termination if, for any reason, the core facilities were not being provided? What kind of sanctions would you expect in that five year break clause?

(Mr Byers) I think we need sanctions throughout the period of the franchise, not just at a review period.

But you would expect the Strategic Rail Authority to write in sufficient sanctions so that if the company concerned were not delivering they could use that five year break clause to end the franchise? Is that what you are saying, so we can get it clear?

(Mr Byers) It would be for the Strategic Rail Authority --

I am not suggesting you would want to do it but would you expect the Strategic Rail Authority to put down very firm sanctions at the five year break point?

(Mr Byers) I think I have said in evidence to this Committee before that I see, and the Government sees, the franchise process as being one of the most significant levers in improving the quality of the railway system. I do not believe it has been used as effectively in the past as it could have been to drive up benefits to passengers and improve quality of service. I do believe that with a new franchising regime there will be that opportunity and yes, the implication of that, or the natural consequence, will be that robust penalties and measures will need to be introduced so that if there is not delivery on the terms of the franchise then the appropriate steps can be taken at whatever time is relevant.

Chris Grayling

When you took the decision a couple of weeks ago about providing the grant to Networkrail's bid for Railtrack assets, my understanding of the situation was that you had been told by both Swiftrail and Networkrail that administration was likely to last at least another 18 months; that European law prevented the Government continuing to provide state aid to Railtrack beyond the 12 month period - there is no provision in European law to extend that state aid; and that you were facing a difficult legal position because the shareholders would have had a much stronger legal case had the administration gone to the Regulator and secured a successful interim review. That was the backdrop against which you took that decision. Is any of that inaccurate?

(Mr Byers) Yes, it is. I was not told by Swiftrail or Networkrail that administration could take up to 18 months. I think there was a general concern that I know members of this Committee had and I had as well that administration would last longer than anybody would have wanted and I think the Select Committee in its own report said that the sooner Railtrack could come out of administration so much to the good, and I happen to agree with that. You are right to say that state aid has been approved up until September. There is nothing to stop the Government reapplying for an extension of that, if that is necessary. The legal position is amazingly robust as far as the Government is concerned, and if people want to bring a legal action they will be perfectly entitled to do so but certainly all of the legal advice I have received is that the basis on which this legal action has been threatened just does not stack up; it is falsely based - and we have said that very clearly - and most of those reasons are inaccurate. The reason why we were prepared to support a grant of £300 million was because there are real benefits from an early exit from administration.

So you are not aware that the European Commission has said publicly that there is no provision in European law to extend the state-owned provision beyond 12 months?

(Mr Byers) They have not said it to me.

They have said it publicly.

(Mr Byers) Well, they have not said it to me.

Did you offer the same terms to Swiftrail as you did to Networkrail, the offer of a £300 million grant and the offer through the Strategic Rail Authority to provide loans of last resort to raise and finance the new business?

(Mr Byers) The situation was that we were prepared to be even handed with any organisation that had an interest in being a successor to Railtrack. As far as Swiftrail was concerned, and I think it is worth me saying this very clearly to the Committee because there was some confusion in the House when I made the statement about the Government support for an early exit, there seemed to be an implication that there was an alternative proposal that had been tabled - the implication being that that was from Swiftrail. I have to say no such proposal has been tabled by Swiftrail. Swiftrail did have discussions with my officials: I think they also met the administrator and they may also have met the CLG as well at some stage, but they never got to a situation where they had a detailed proposal which they put forward to my officials which we could then respond to in terms of the level of financial support that might be available.

Did Networkrail then specifically come to you and ask for that support, or did you offer it to them?

(Mr Byers) We said, and I said this in the House, that we want to treat all interested parties equally. Just to repeat the point I made a minute ago, Swiftrail did not come to my Department with a worked up proposal which would have allowed us to respond about the level of support available from the Government. Had they done so, we would have wanted to have treated them in the same way provided they offered the same benefits as we believe Networkrail do.

So did Networkrail come to you and ask for the £300 million, or did you offer it to them?

(Mr Byers) Networkrail came to Strategic Rail Authority with a detailed proposition: we believed it had merits, as we have said: we do believe a company limited by guarantee under which any operating surplus is invested back into the railway network is a model which is attractive: we believe it is a viable successor to Railtrack and it was on that basis that we were prepared to support a grant of £300 million provided it achieves an early exit from administration. If we do not achieve an early exit from administration, then the savings we would get from that will not be accrued and, therefore, the money will not be available.

Let us be clear because it is important: Networkrail asked you for financial support for their bid. Swiftrail did not, but you would have offered it to either?

(Mr Byers) Well, we did not get to a situation where Swiftrail came forward with a detailed proposal that would have allowed us to have the discussion about the level of financial support. We are not prepared to give £300 million to anybody who might come along with any proposal.

Chairman

That is comforting!

(Mr Byers) I thought you would be pleased to hear that, Chairman. What we were prepared to do with Networkrail is to support a proposition that we feel has merit because it does achieve an early exit from administration; Swiftrail never got to the situation where they were tabling detailed proposals that would have allowed the Government to respond.

Mr Donohoe

Which budget is this £300 million coming out from?

(Mr Byers) It will come out of the 10 Year Plan, but we do believe that the money will be self-financing. We do not expect this money to be taken away from my budget because it will be financed by other savings which will accrue to my budget. I can take the Committee through in some detail the savings that we will expect to get --

Chairman

Please do. I think we are fascinated.

(Mr Byers) I will, Madam.

Just give us a flavour.

(Mr Byers) As always. I think the Committee will be aware that the Regulator had set Railtrack a profile of efficiency improvements in control period 2, beginning with net efficiency targets of 2 per cent in 2001-2 and 3 per cent in 2002-3. Railtrack had made no progress in achieving those efficiency targets. If those first two targets alone were matched, then it would save around £50 million for every £1 billion of expenditure so that would be a saving. The Committee will be aware that performance penalty payments for Railtrack are running at about £370 million a year --

Aha! And this is regarded as a saving so, if the Strategic Rail Authority wanted to use it for specific passenger enhancements, you would not be too happy about it?

(Mr Byers) I would be more than willing to support the Strategic Rail Authority's investment of money for passenger enhancements - as always.

Mr Donohoe

But you are never going to get a saving of one hundred per cent on that?

(Mr Byers) No, but if I can go through the four areas where there will be clear savings, I hope the Committee will realise that £300 million in this context is not an unreasonable amount to put forward.

Chairman

So we have efficiency savings?

(Mr Byers) A reduction in penalty payments; if I can draw the Committee's attention to the cost of debt as opposed to the equity model, and if I can pray in aid the Rail Regulator's October 2000 periodic review, when he determined the 8 per cent real cost of capital return for control period 2, he estimated that the real cost of debt for Railtrack was of the range of 4.5 to 4.75 per cent, while the real cost of its equity was the range of 9.3 to 11.7 per cent, and to illustrate that, using the midpoint of both ranges, each £1 billion of finance raised through debt would be around £58 million cheaper in real cost of capital annually than raising the equivalent £1 billion through equity.

We are firmly convinced and we would like it all in writing.

(Mr Byers) I will do that. The other point to make is that, throughout the period of its five years, as an equity company Railtrack paid out dividends of £709 million, roughly £140 million a year. Networkrail is not an equity model but a model which will re-invest any savings -

Chris Grayling

That is not a saving from your budget.

(Mr Byers) No, but it will re-invest money into the railway network, and I think when members look at the detail and the savings which will accrue to my budget - and I will put this in writing - they will see that the £300 million is a sum which, in a year's time when you look at the annual figures, has not been lost from my budget but will be financed by savings we will make. That is an illustration of the sorts of savings we believe will be made as a result of an early exit. But I will repeat that, if we do not achieve an early exit, then that finance will not be available because it is not compensation for shareholders but is a sum we will get from other savings.

But you are also providing £9 million of loan guarantees?

(Mr Byers) There is a separate issue which is to do with the £9 million bridging finance. This is a very standard for governments to do. I know there has been interest that there is a contingent liability and people say this is a very large sum of money to have as a contingent liability, but if I can just give four illustrations of the sorts of contingent liabilities that the Government has signed up to, the Export Credit Guarantees Department, a Department of Trade & Industry responsibility, has a contingent liability of over £32 billion in credit insurance guarantees; the Department of Trade and Industry has a contingency liability of over £25 billion for British Nuclear Fuels liabilities; the Treasury has a £10 billion contingency liability in capital subscriptions for the European Investment Bank; and the Treasury also has a contingency liability of over £13 billion for the difference between notes and coins in circulation and the value of assets at the issuing department of the Bank of England. Now the £9 billion contingency is exactly that - it is a contingent liability. We believe - and more importantly Networkrail believe - that that is money they will be able to raise on the markets but there has to be a fallback position which is that a credit facility will be provided by the Strategic Rail Authority but the reason why Networkrail are confident that they will be able to raise that is they have two very secure streams of funding. They have nearly £7 billion of network grants and around £10 billion of passenger track access charges which are available in control period 2 alone. It is because of that security that they have no reservation that they will be able to raise the £9 billion.

Andrew Bennett

On the question of this saving, or the way in which you justify the £300 million, you are saying basically that Railtrack's successor can be financed by bonds, yet you were saying as far as the Underground is concerned, that that is rubbish. It does seem a bit of a flip flop.

(Mr Byers) No, because you will be aware, if you read the evidence I gave to this Select Committee before the Easter break, that we looked very carefully as part of the value for money exercise at the costs of bonds and we compared them to the proposal being put forward by the infrastructure companies and, on the basis of that value for money test, we believe that the modernisation proposals are the best way forward and do achieve value for money, but we looked at it compared to the bond approach.

So have you looked at the financing of Railtrack's successor in the two ways?

(Mr Byers) What we have looked at is the proposals coming from Networkrail, and we do believe that the proposals they put forward offer a real return. Most significantly - and this seems to have been lost in the argument about the £300 million - we now have the opportunity of the network operator, the company responsible for the licence, having one objective which is the travelling public and improving the quality of service to the train companies. No longer do we have this division of responsibilities of having to maximise returns for shareholders --

I understand that but your argument --

(Mr Byers) Well, it is a very significant development.

But you are saying this is the cheaper way of doing it. In other words, you justify that figure of £300 million because it is cheaper?

(Mr Byers) I am saying these are the Regulator's figures which he produced in the October 2000 periodic review, so they are there for everybody to see.

Chairman

Are you expecting any change in the regulatory regime after the company comes out of administration?

(Mr Byers) It depends very much on whether or not Networkrail are successful in their proposal, and that will be a decision for the shareholders of Railtrack to determine, and I think the Regulator will then want to look at the regime in the light of that outcome but it will be a matter for the Regulator.

So you have not calculated that as part of your figures?

(Mr Byers) I have not.

It will be a specific change in the regulatory regime?

(Mr Byers) That will be a matter for the Regulator.

Mrs Ellman

Have you made any requests for more grant funding to railways in the comprehensive spending review?

(Mr Byers) There has been much correspondence between myself as the Secretary of State and the Chancellor on the whole issue of the spending review, as there is between all Secretaries of State and spending departments with the Chancellor at this particular phase, but I am not sure it would be appropriate to go into the details of the case that I have put forward to the Chancellor at the moment. I think we will have to wait until July to see how successful we might have been.

Does that mean you have made a request for more money?

(Mr Byers) It means what I said, I think, Mrs Ellman, so you can draw your own conclusions. The Committee are aware that I have said that in July we will publish our review of the progress so far on the 10 Year Plan for transport. Within that will be the question of rail, and there are pressures which have developed as far as rail is concerned, and they will need to be reflected upon. It is one of the reasons why the 10 Year Plan is such an important development and why it is important that we do not see it as being in tablets of stone but that we do recognise pressures when they develop and are able to respond to them. Sometimes that will mean re-directing resources within the 10 Year Plan: sometimes it might mean seeking to achieve additional funding. I think it is worth reminding the Committee, in relation to the funding of rail, that we have seen a £4.5 billion increase since the 10 Year Plan was first published. Rail to begin with was going to receive £60.4 billion: it is now projected to receive £64.9 billion - an increase of some £4.5 billion - and, most importantly, the total envelope within which we are operating in the 10 Year Plan has been extended to incorporate some additional funding for rail. So we have seen some change already as far as funding for rail is concerned.

So how much more change do you want?

(Mr Byers) I want to make sure that we can deliver improvements, first of all, with the money we already have. These are the largest sums of money we will see, public and private, being invested together in the railway system and I want to make sure we achieve real benefits and real improvements for the investment we will see.

You told the Committee on a previous occasion that you want to see more funding for infrastructure "frontloaded". What do you mean by that?

(Mr Byers) I think the profile of spending within the 10 Year Plan is very important. I am not sure I have provided the Committee with this information - we should have done if we have not - which is to look at the profile within the 10 Year Plan period. What we have done, certainly for rail, is to bring forward some of the major funding aspects of that into the first period of the 10 Year Plan because there are obviously needs and pressures within the railway system at the moment which we need to respond to. So rather than it being in the years 7, 8, 9 and 10 of the 10 Year Plan, spending has been brought forward into the earlier part of the 10 Year Plan so we have re-profiled spending.

Chris Grayling

That does not stack up with what Mr Bowker said an hour ago when he said that most of the infrastructure was in the later period.

(Mr Byers) Well, if I can show the Committee the profile of the overall spend, that may be helpful.

Mrs Ellman

How do you think you should relate to the Strategic Rail Authority? Should it be a different relationship to that held by your predecessors?

(Mr Byers) I have to say I am not aware of the nature of the relationship between my predecessors and the Strategic Rail Authority. What I do know is that I think we have a very good leader of the Strategic Rail Authority in Richard Bowker. I think he commands the confidence of the industry: I think he has set the Strategic Rail Authority in a new direction: it is giving genuine leadership to the industry: and certainly I think there is a very positive relationship now. I am also aware of that placing a challenge for myself as Secretary of State and also for the Department because what it means is we have to be confident enough to give Richard Bowker and the Strategic Rail Authority the freedom to get on with the job. It is not my responsibility or my Department's responsibility to be micro managing the Strategic Rail Authority and, if that means that we have to give up some of the levers we have at the moment and some of the restrictions which stand in the way of positive development, we have to be prepared to do that but I think it will lead to a far better and more constructive relationship with the Strategic Rail Authority. That is certainly what I want to see and when we publish the new guidance and directions I hope people will be able to see that we are giving effect to that.

Would you ever direct the Strategic Rail Authority to include projects that it left out of the 10 Year Plan because you thought they were important?

(Mr Byers) I do not think that would fit into micro managing the work of the Strategic Rail Authority, and I think there would obviously need to be a discussion.

Chairman

It is macro managing?

(Mr Byers) Absolutely, because it would be, and if there is a major project which is not in the 10 Year Plan which this Committee felt strongly about and which Parliamentary colleagues felt strongly about, I would be failing in my responsibilities as Secretary of State and, as you know, Chairman, I would never want to do that, and you would be the first to criticise me if I were to do that.

I know how pleased you are when I criticise you.

(Mr Byers) Well, that would make me pleased every day, Chairman! But there is an important point here which is that there is a distinction between - and I will not call them "macro" but those major issues where the Secretary of State will have a responsibility and micro managing the role of the Strategic Rail Authority, and I think there has been a criticism in the past where the Department and maybe Secretaries of State have tried to manage the work of the Strategic Rail Authority. That is certainly not my approach and it will not be the approach of the future.

Mrs Ellman

Have you got any macro-management projects in mind at the moment?

(Mr Byers) I have a horrible feeling you have, Mrs Ellman, and you are about to let me know about them!

Would you like to suggest any?

(Mr Byers) I think those are probably discussions I should have with the chairman of the Strategic Rail Authority, but we are aware of a number of issues which are important and which perhaps did not get reflected in the strategic plan.

Chairman

Could you tell us exactly how much public money you expect will be available for the whole of the 10 Year Plan?

(Mr Byers) How much public money for the 10 Year Plan for rail?

Yes.

(Mr Byers) £331/2 billion.

And you still expect that sum of money?

(Mr Byers) Yes.

And you still expect the private sector to come up with matching finance to the extent you have written in?

(Mr Byers) We do. For the sake of the record, we have made it clear that the total of £64.9 billion is made up of £331/2 billion from the public sector and £34.3 billion from the private sector, but we need to take from that £34.3 billion £3 billion of public sector funding, because that is public sector funding to lever in private finance, and there is a danger we will be accused of double-counting if we were to leave that there, and we do not want to be accused of that, so although we think there is £331/2 billion public and £34.3 billion private, we need to take off £3 billion to give us the total of £64.9.

We will come back to you on that. By the way, we have not had your note, so I am sure you would like to ask the Department when they are going to give us the note.

(Mr Byers) You should have had it, and I apologise.

Chairman: We have not had anything in by today.

Miss McIntosh

Secretary of State, do you stand by your rail freight targets as set out in the 10 Year Plan?

(Mr Byers) Yes, indeed.

What allowance have you made for the closure of the rail freight facility by Eurotunnel through the Channel Tunnel since approximately November last year?

(Mr Byers) The target is an 80 per cent increase at the end of the 10 Year Plan, and there is no doubt that what has been happening with the Channel Tunnel has made it very difficult for freight to go through, and the French authorities have failed to secure the Channel Tunnel facility. There has been dialogue at the highest level from our Government to the French Government about the steps they need to take. We are told today that with effect from Monday 15 April SNCF hope to run an average of 72 trains a week through the Tunnel, so that is starting next Monday. The week ending 7 April, they managed to get 42 trains through, and that compares to the situation for the week ending 17 March when it had dropped to 21 trains a week. So they have begun to put in stronger security measures and we are beginning to see the benefits of that. As soon as we get a return to normal working as far as the Channel Tunnel is concerned, and we have not had that now for far too many months, that will make a real improvement. The reason why it is crucial that the Channel Tunnel operates normally as far as freight is concerned is that one of the key areas of growth for freight will be intercontinental across Europe, coming from way over towards Turkey and Eastern Europe across to the United Kingdom. That is a huge growth area as far as rail freight is concerned and that is where the Channel Tunnel does become very important.

But you are not prepared to adjust your figures for the six month loss we have taken evidence on at this Committee?

(Mr Byers) My own view is that we have time in which we can make that up.

Can I share with you some evidence this Committee has received, which appears not to coincide with the evidence you are giving this afternoon. GNER told us that it was manufacturers and bankers who were reluctant to become involved in a deal on infrastructure investment where there was no certainty that the franchisee ordering the new rolling stock would be in place to take delivery, and that was why it was difficult for them to make this investment which had been agreed over the two year period. Equally, we heard from the Freight Transport Association that their members were only prepared to invest where they could see certainty and that they do feel, and I am paraphrasing, handicapped where there are insufficiently clear details on the financing of individual projects given. Would you like to comment on those two pieces of evidence which we have received?

(Mr Byers) On the GNER point, section 54 is very clear, which is that the liability for financial institutions or banks will effectively be covered ----

Chairman

I do not want to go back over that, Secretary of State, if you do not mind. Would you deal with the other point?

(Mr Byers) It was a question which was put by Miss McIntosh.

Yes, I understand that, but we have gone into that in some detail.

(Mr Byers) I was not clear on the second point about what sort of projects were being referred to by the freight companies. Could I have an illustration?

Miss McIntosh

The split. For example, more specific detail of how the division of the private sector contribution is expected to be made between train operators, rolling stock, leasing companies and infrastructure investment.

(Mr Byers) I think it would depend on the details of each individual contract. You mentioned rolling stock, in terms of the recent GOVia-South Central rolling stock deal, there will be something like £600 million private sector finance, and in total since the turn of the year we have had about £1 billion of private sector finance. If you look at the Chiltern franchise, GNER and the GOVia rolling stock deal, we have had over £1 billion of private finance invested in the railways. So some people may say that, but we have very strong proof of the private sector being more than willing to be involved.

Are you not disappointed, because you should have by this stage £3 billion if you are going to get annual amounts to reach your sum of £34.3 billion from the private sector? Are you not disappointed you have only got £1 billion to date from the private sector?

(Mr Byers) No, because it would be odd if we were in a situation where it was done on an annual basis. If the Committee looks at when the bulk of the franchises will be awarded, it is 2003, 2004, and I think then we will see large sums of private finance coming into the rail industry. So I think it would be a mistake to try and look at it on an annual basis, saying we should get £3 billion every year to get to our total. That is not the way it will work in practice. The way it will work in practice is when the re-franchises take place, and that is when the private sector will make their investment.

You do not see it as a warning signal that the Freight Transport Association have told us that their members are saying they want more financial certainty, more legal certainty in the contracts? You do not see that as saying this private investment may not come forward?

(Mr Byers) Let us have details of individual projects which they are walking away from. All I am saying is, if there is uncertainty, we have taken steps to introduce certainty. If there are worries about the Channel Tunnel, we have taken steps with the French authorities to address that. No, I am confident we will see the private sector investment in freight and we will see our freight targets met at the end of the 10 year period.

Chairman

If they cannot get their 72 trains, Secretary of State, what are you going to do? They have suffered now over many months, and all sorts of firms are involved, it is not just the straight EWS involvement, there are lots of small firms providing jobs in the railway industry who are really suffering because of this.

(Mr Byers) I appreciate that, and up and down the country you are right to say it has a consequence, not just for EWS, which is obviously the main company involved, but many other companies.

So what are you going to do if they do not get their 72 trains?

(Mr Byers) We have put pressure on the French authorities and we are beginning to see benefits from that. As I said, the figures are very clear: in the week ending 17 March, 21 trains were coming through; the week ending 7 April, 42 trains were coming through, so we have doubled the amount there. The French are now saying that with effect from Monday of next week they hope to run an average of 72 trains a week. Now we have to hold them to that. They have to put in place the appropriate security measures. They have put more police there, which is beginning to make a difference. We obviously need to investigate the incident which happened yesterday where something like, so we hear, 100 asylum seekers came in on one train. We think they boarded in Milan but it clearly was not checked properly in France, and that needs to be properly investigated. The French authorities know the importance we attach to this. As I say, it has been raised with them at the highest level. I have written just this morning to my French counterpart on exactly this issue in the light of what happened yesterday, and we do expect the French authorities to take the necessary steps.

With the greatest of respect, we have been expecting them to take the necessary steps for some months now. We are talking about 8,000 job losses, we are talking about an enormous amount of investment and, with the greatest respect, the arrival of a small group of Gendarmerie is nothing like that expense for the French Government.

(Mr Byers) No, there has to be a political will by the French Government to meet their obligations.

So I ask you again, what will you do if they do not get their 72 trains through? Another letter, frankly, is not enough. I could provide you with a letter if you would like some help in drafting it.

(Mr Byers) I have an army of civil servants for that.

True - all very well paid - but we need to know, what is the next step?

(Mr Byers) I think there are two things. One is, we need to keep up the pressure as far as the UK Government is concerned. Secondly, we need to ensure that there is free movement of goods within the European Union, that the European Commission makes sure that those obligations under the European Treaty are backed by the French authorities.

Chairman: You will have noted the fact that the Commission has just pointed out that France is one of the worst offenders against European Directives and regulations, I am sure.

Chris Grayling

What does "keep up the pressure" actually mean from your point of view?

(Mr Byers) It means government to government. It means talking to the French Transport Minister.

How often do you actually do that?

(Mr Byers) On a regular basis. As I said to the Committee, I have written to him today in fact, in the light of what happened yesterday, because there are two issues here. One is the question of people coming into the country illegally, which we cannot tolerate, and we need to make sure that does not happen. Secondly, there is the issue of freight being able to travel through the Tunnel. We shall continue to do that and we shall enlist the support of the European Commission to make sure that the French authorities and the French Government meet their obligations within the Treaties.

Dr Pugh

I have two quick questions. One is speaking in respect of the £300 million. Have you had confirmation from the Treasury - because without it there is absolutely no point at all, it is a futile endeavour - that the £300 million will not count as a deficit in the public accounts?

(Mr Byers) The £300 million, as I say, we expect will not be a cost to the 10 Year Transport Plan.

So they have told you it will not feature in public accounts?

(Mr Byers) As I said, it will not be a part of the 10 Year Transport Plan.

My second question is very straightforward. The freight operators have said that Virgin's £400 million compensation claim would be far better spent in upgrading freight paths. What is the view of your Department on this proposition?

(Mr Byers) This is in relation to the West Coast Mainline?

Yes.

(Mr Byers) That is a matter for the Regulator.

You have no view on that?

(Mr Byers) It is a matter for him.

Mr O'Brien

Fares, Secretary of State. Have you set any limit within which the review of the rail fares must fall?

(Mr Byers) No, but we will obviously await with interest the review which the Strategic Rail Authority has now begun. It is timely that a system of fares is now given proper consideration.

Is it accepted that fares will have to rise to pay for the increased investment by the Train Operating Companies?

(Mr Byers) I do not think that has to follow, but, as I say, I think it would be better for all of us to await the work that is now going to be carried out by the Strategic Rail Authority.

You use the East Coast mainline, as I do. It is very expensive for my constituents to travel from Wakefield to London, therefore I consider that the fare situation has to be a part of the strategic planning for the East Coast mainline. You did refer earlier to detailed specifications to be worked out before the long-term proposals can proceed on the East Coast mainline. Have you any timescale for that?

(Mr Byers) I spoke to Richard Bowker of the Strategic Rail Authority about this just last week. We clearly do need to move it with due speed. It is one of the reasons why the sooner we can get Railtrack out of administration, that will be a benefit. It also means that we need to look very carefully at exactly what the improvements are that we need on the East Coast mainline for the upgrade. That work does need to be done and it needs to be done urgently. It needs to be done in a way which is realistic and hard-headed, because one of the problems with the West Coast mainline is that the details were not properly worked out, work began which had not been properly costed and not properly time-tabled, the engineering resources were not put in place. What we must do is to ensure that we do not have a repeat of what has happened on the West Coast mainline on the East Coast mainline.

That is the point I was making, but I think I would be failing in my duty if I did not press you on this particular issue, because of the passenger and freight services that we have there, that we have a reasonable service on the East Coast mainline from the north into the south. If the infrastructure is not maintained, if the specifications referred to are not brought forward urgently, we are going to see a deterioration in the East Coast mainline which would not be acceptable to people from the north. So have you any further guidance as to when we can expect some of the capital to be invested in the East Coast mainline to make sure that we can maintain that good service?

(Mr Byers) The thing about the East Coast mainline upgrade is that it is going to be carried through, I believe, in four separate stages. The first two of those I think have now been broadly agreed. It is the details about stages three and four which have not yet been finalised and worked through. I think it may help the Committee if I put in writing the stages and the timing of them. The difficulty we have with the franchise being awarded over a lengthy period is that that will fall very much into stages three and four of the upgrade because the details are simply not there. It is the problem we have on the section 54 issue which I know you do not want to go back into, Chairman. Those are issues to which we need to give proper consideration. For the benefit of the Committee, I can put in writing the situation that we expect. It is probably better coming from the SRA, because they are actually involved in the detail on this, but I do think it is important that we provide for the record details and the timing by which we expect decisions to be taken. I share Mr O'Brien's view that the sooner we can get this clarified and agreed, then the better, because we can then move to the re-franchising of the East Coast mainline.

You did say that there had been a legacy inherited from Railtrack regarding the upgrading of the East Coast mainline. I put the question to you again. Will that include the development of Wakefield station?

(Mr Byers) I honestly cannot remember offhand.

Will you include it in the letter?

(Mr Byers) I certainly will.

Chairman

Before we move away from fares, are you aware that there is a dispute between the Rail Passengers Council and the Association of Train Operators, on fares?

(Mr Byers) In terms of fares, there is a debate going on, shall I say.

That is a nice way of putting it, but they are giving us evidence that in fact the network card is going to become useless on Mondays to Fridays within roughly a 35-mile radius of central London, and that the average fare increase is going to be 33 per cent. As you know, we have already been told that the really important part of the rail system is not those of us who inhabit the outer regions but those who have the honour of living within the great wen, so if we are talking about 28 per cent increases, 58 per cent increases, 43 per cent increases, in things like the network railcard, this Committee would wonder whether you would think this was sufficiently important to raise it with the SRA?

(Mr Byers) We certainly keep the whole question of fares under constant review, both regulated and unregulated, and will continue to do so.

Yes, one would hope so, but I ask you again, would you think increases of that size, which are going to come into operation in June, would be worthy of close examination?

(Mr Byers) I think we are all aware of the decision in relation to the network railcard. I do think that this should be looked at in the round by the Strategic Rail Authority, which they are, I think, doing, and I do think we will then need, in the light of their proposals, to give it detailed consideration, but I would much rather look at the whole question of fares in total and also the benefits that can come from certain -----

So we can take it that fares are going to be a major consideration for you?

(Mr Byers) I think they have to be, Chairman, because if we are going to achieve a target of a 15 per cent increase in rail passengers at the end of the 10 Year Plan, then obviously fares are going to play a clear part in that, because you can price people off the trains, which I think is the point you are making.

Chairman: That is something which has occurred to one or two of us, Secretary of State.

Mr Donohoe

Have you seen the report that was, I understand, presented to you in the last week on the whole question of the installation of the Automatic Train Protection system and its delay?

(Mr Byers) I will be receiving a report but I have not received a report yet.

So you are not in a position to make any comment on it?

(Mr Byers) No.

You talked earlier about the positive relationship between yourself and the SRA, what is the relationship between the SRA and the Regulator?

(Mr Byers) I think the fact they agreed the concordat recently is a positive development. Both Tom Winsor and Richard Bowker agreed that, and that is to be welcomed. It reflects the responsibilities they both have but also I think is a recognition that they will achieve far more, when they can, by working together.

Do you think the need for the Regulator has increased or decreased since the setting up of the almost new Strategic Rail Authority?

(Mr Byers) I think there is going to be a need for independent economic regulation and that will remain the case while we have a licensed structure. What I do welcome is the fact that clearly the relationship - whether it is a personal thing between Richard Bowker and Tom Winsor or whatever - between the SRA and the Office of the Rail Regulator is now a very positive, very constructive and very co-operative one, and that can only be good for the industry.

Mr Campbell

Secretary of State, given the public perception which exists in relation to the SRA and the Regulator, and in a wider sense, is quite low, at what point in the 10 Year Plan might you expect to see public perception much more greatly improved in terms of its analysis?

(Mr Byers) Of both the SRA and the Office of the Rail Regulator?

Yes.

(Mr Byers) My view on all of this is that people will judge on whether or not there have been improvements in the quality of rail travel, in punctuality, reliability, safety, the quality of the rolling stock, all those will be key issues. It will not be until we see genuine improvements on those factors that people will say, "Yes, we think the SRA is doing a good job or the Rail Regulator is doing a good job" or it may even be that they think the Secretary of State is doing a good job.

Mr Donohoe

I do not know about that!

(Mr Byers) Maybe not!

Mr Campbell

Given your confidence about the private sector as well as the public sector investment, at what point in the 10 Year Plan might we be expected to see some sort of turnround in public perception?

(Mr Byers) I honestly believe we will begin to see improvements in performance during the course of this year. The next lot of figures are coming out on, I think, 6 June, and we will see what they show. There should be improvements anyway because we are coming out of the difficulties of Hatfield, and, let's be honest about this, there should be improvements whatever you do because of Hatfield and the consequences of that. But over time, year on year, people will be able to judge whether there have been real improvements. The way people do that is from their own travelling experience. We will look at the national figures but for most people it will be whether or not you can get from Wakefield to London and rely on the train, or Liverpool across to Manchester, or Liverpool up to Newcastle. People will do it on the journey they take day in and day out. What you have to say at the moment, if you are a London commuter travelling on South West trains, is four out of ten of those trains do not turn up on time, and that is simply not good enough. So in the travelling week for two days or four journeys, you are not going to get to work or back from work on time, and that is not acceptable. People will judge whether we are improving it on whether or not their own personal experience has improved.

Andrew Bennett

On safety, you have pointed out you have not received this report on train protection but what about the rest of the recommendations which have come out of various accident inquiries? Health and Safety seem to think we are not on track to deliver most of those.

(Mr Byers) As the Committee will be aware, on the TPWS progress is being made and that is being implemented. There were specific proposals coming from Cullen-Uff, and I think those are the aspects which Mr Donohoe may have been referring to, where there has been a cross-industry working group, it has now gone to the Health and Safety Commission, and the Health and Safety Commission will report to me and they have not reported to me yet. I think they are still awaiting recommendations from the cross-industry group but they will report to me in due course. I was concerned that not enough progress had been made on the Cullen recommendations, which is why I said about six weeks ago that I would expect as a matter of urgency the recommendations contained within Cullen to be implemented. They have been around long enough, it is now for the industry to see them implemented.

But the ones which were supposed to be in place by the end of March, I think there are 23 out of the 40 which still have not been achieved.

(Mr Byers) Which is why I said ---

So when?

(Mr Byers) I said at the time to the Health and Safety Commission that I did not feel they had acted quickly enough and that I wanted them to be implemented as soon as possible.

When is "as soon as possible"?

(Mr Byers) As soon as the industry is able to implement them effectively. What they do know is we, that is myself and no doubt you as a Select Committee, will be monitoring when they are to be implemented.

In answer to Mrs Ellman you said you could not tell us what you were asking, but the multi modal studies have come up with quite a series of recommendations for rail improvements. There is no money in the 10 Year Plan for those, is there?

(Mr Byers) There is a significant amount of money in the 10 Year Plan which has not yet been allocated, something like over £8 billion, some of that for rail alone. Clearly some of that could be used for those projects contained within the multi modal study proposals.

So what about things like the up-grade from Hazelgrove into Manchester or the ones in the West Midlands? Do you see any hope for those?

(Mr Byers) I would not want to go into specific proposals here, but what I can say is that the details coming out of the multi modal studies as far as rail is concerned will be considered. The whole point of carrying out those studies was to look at transport in the round, that is what I intend to do, and there is finance there to support additional proposals.

If you are looking at it in the round and one segment of the circle is missing, it is not very good for transport, is it?

(Mr Byers) Quite, which is why I said we have to look at it in the round. If there is a combination of bids for rail under the local transport plan, under the roads programme, if that is appropriate, if that is part of the scheme, then we can have a comprehensive approach to these transport issues. I got very heavily criticised when we did not go ahead with the two by-passes at Hastings, however in my view there is an alternative to that which is based on using public transport more effectively, and that will have a cost and we need to find the resources to do that. That is the way we intend to do it.

You need to find the resources but you have not found them yet, have you?

(Mr Byers) As I say, there is within rail alone an unallocated amount of £8.1 billion, and of course we can allocate that to some of these multi modal study proposals.

Chairman

We may want to argue with you about that later on. Can I ask you about London Underground. How soon do you expect these private finance negotiations to come to a financial close?

(Mr Byers) As you know, Chairman, in the light of the concerns you expressed and also the National Audit Office, we have extended the period under which the comfort letters will be considered by Parliament, so the normal notification period will now apply. I think that was important on reflection because this is a major development and it is right that members of the House should have the opportunity to consider them in detail. That means there has been a delay of a few days to allow that to happen. We will obviously want to consider the outcome of the consultation exercise, which we are still doing in Government, and we will arrive at a conclusion about whether or not we wish to proceed with the tube modernisation proposals. We will do that as soon as it is appropriate to do so.

The tube modernisation proposals in general or in the particular scheme you are looking at?

(Mr Byers) In the particular scheme which is being consulted upon.

Have you worked out the potential value of the contingent liability that the comfort letter has given the Government?

(Mr Byers) For the reasons I explained in the letter I sent to the Chairman of the Public Accounts Committee, it is impossible to put a precise figure on that because we do not know when the liability might occur. The point about the liability is it will vary depending on what time within the 71/2 year period of the contract that liability might fall.

Mr Kiley estimated your liability would be at least £4.1 billion over the first 71/2 years, do you think that is a realistic assessment?

(Mr Byers) I would like to see the basis on which he brought forward those figures. As I say in my letter, because of the way in which the contracts are construed, it is impossible to give a precise figure because one does not know when the liability might fall.

He was suggesting that if you included the new private interest termination right, it would put that figure up to £5.2 billion, but you are not able to give that estimate at the moment?

(Mr Byers) Because one does not know when the liability might fall, if it falls at all.

Do you think the issuing of comfort letters was a sensible thing to do? Is it not a rather unsatisfactory half-way house?

(Mr Byers) Not really. It is not a guarantee but, on the other hand, it is quite clear that the Government is not going to walk away from London Underground.

Surely the banks will regard it as a guarantee, otherwise they would not ask for it, would they?

(Mr Byers) As I say, it is not a guarantee. That is the legal position. It is a comfort letter to say exactly what they expect the responsibilities of the Government will be.

Does it underwrite the payments or does it not underwrite the payments?

(Mr Byers) It outlines the situation in which the Government would underpin some of the debt which has been incurred.

Not underwrite, but underpin?

(Mr Byers) The distinction to be made is between the situation of shareholders in the infrastructure companies where all their equity is at risk. There is no government underpinning of that. As far as the financial arrangements for the bidders are concerned, though - so the third-party debt - then yes, the Government has indicated that we will take some of the responsibility for that.

Originally, Secretary of State, you will remember, even before your arrival, the Government's position was that the reason it had to go for a private finance deal was that it did not want this particular public finance to appear on their balance sheet. That was 1999. Has there been a major change in policy since then?

(Mr Byers) I think I have said to this Committee on several occasions that there were three issues that I felt were very important in relation to our proposals for the Underground. One was that safety must not be compromised; two, the fares and value for money to achieve that; thirdly, that this was not going to be a privatisation. I have made sure, in the way in which the contracts have been drawn up, that this is not a privatisation. It is not for me to judge, but if that means that our proposals fall on the government balance sheet -----

So who takes that decision - the Chancellor?

(Mr Byers) No, it is a decision taken by accountants.

Yes, but somebody employs these accountants. I do not want to push you too hard, because I do not want to be rude.

(Mr Byers) This will not be an issue which will be decided by the Chancellor or by myself. What I am very clear about is that we have accountants who will decide according to their proper procedures. However, I as Secretary of State for Transport am not motivated in this exercise by getting this off the government balance sheet. What I am motivated about is to ensure that this is not a privatisation, which is why London Underground will remain publicly owned and accountable. If the consequence of my insisting that this is not a privatisation results in this being on the government books, then so be it, that is a price that, as far as I am concerned, is worth paying.

Which would in fact be a change in the policy which was originally enunciated? You are saying that that categorisation would not be taken by anybody other than an Audit Commission or an accountancy professional; it would not be a political decision?

(Mr Byers) It would not be a political decision. The political decision is one that I have taken on behalf of the Government, which is that this is not a privatisation, that London Underground will remain publicly owned and accountable. If the consequence of that is that these modernisation proposals remain on the balance sheet, then so be it, but that is my position, my position as Secretary of State for Transport, it is the position of the Government.

Now can I ask you, who gets the proceeds of the property vial the deal for the Underground? Does that go to Transport for London or does it go to the Treasury?

(Mr Byers) My recollection is that as a result of representations made by the Mayor, we have put on hold the proposals that we were moving forward as far as property is concerned. I have to say, I need to refresh my memory about that.

So that will be another note you will send us?

(Mr Byers) It will be another note, yes. I am pretty sure, because we just took the decision two months ago, that because of the concerns expressed by the Mayor, we put all of that on hold to be determined after we have completed the transfer over to Transport for London.

Minister, let me ask you once more, at the risk of being boring, are you going to allow a substantive debate in the House of Commons on the Underground public/private finance deal before the actual financial deal is closed? You have today said something very interesting.

(Mr Byers) I hope I have said many things which are interesting!

Of course, you always say everything which is interesting! Perhaps something which is slightly more interesting than the normal interesting things which you say is that you said today that you will at that point - meaning after you have gone through all the figures - decide whether or not to go through with the modernisation scheme. Now I ask you, why should you therefore not accept that the House of Commons should debate this on a substantive motion, either just before you take that decision or at some point at which we can influence the Government over such a massive and important political and financial decision?

(Mr Byers) As you know, Chairman, the Select Committee has already made its views known to the Government on this issue. In terms of matters on the floor of the House, those are issues for the usual channels and not for myself as Secretary of State.

Chairman: Well, Secretary of State, you have as always been interesting, and we are very grateful to you. Thank you very much for your attendance.