Examination of Witnesses (Questions 100-119)
DEPARTMENT FOR
TRANSPORT, STRATEGIC
RAIL AUTHORITY
AND NETWORK
RAIL
26 MAY 2004
Q100 Mr Jenkins: We are not opposed to
levels of investment. What we are trying to do is establish whether
we do get value for money out of that investment and it is your
job to convince us that we do get value for money out of that
investment. The one thing that surprised me is when Mr Bowker,
in reply to one of Mrs Browning's questions, said that this is
a relatively new industry. Explain what you mean, please. I think
that trains have been around for a few years. Why is it a new
industry?
Mr Bowker: Because, in private
sector terms, it has only been since 1994 that any part of this
industry was in the private sector.
Q101 Mr Jenkins: Like a ballpark, we
start at year zero—there is no history, no facts, no skills
and no base on which to run a railway system.
Mr Bowker: I never said that.
Q102 Mr Jenkins: So, it is not a new
industry. It might be a new administration to run the industry
but it is a fairly old industry albeit that it ran aground and
was destroyed by the management at the time.
Mr Bowker: No. I was very specific
in the answer to Mrs Browning's question that I was talking about
private sector involvement since 1994. Since then, this industry
has had a great deal of it in the private sector, it has been
privatised. I accept that it is an old industry; it celebrates
its 200th anniversary this year.
Q103 Mr Jenkins: Both Mr Rowlands and
Mr McAllister said that what we have is a private sector company.
Can you tell me of anywhere else where a private sector company
is set up and its bid and arrangements are funded by the state
in this way?
Mr Rowlands: I know of no parallel
example to Network Rail but then I know of no example of a railway
being put into administration and the Government needing to ensure
that there was at least a viable proposition in front of the administrator
to bring it back out of administration. So, in that sense, no,
I do not.
Q104 Mr Jenkins: In other areas, we call
it arm's reach management or arm's length companies. In other
words, they pretend they are not a part of us but we actually
do still control them.
Mr Rowlands: No. The Companies
Act actually provides two kinds of private sector company: one
the well known and traditional equity based private company but
it also provides under the Companies Act for something called
"company limited by guarantee". The Report acknowledges
that Glas Cymru, for example, in the water industry, transformed
itself into a company limited by guarantee and there other companies
around, not many but there are some of substance, which do not
have private sector shareholders: BUPA is another example. So,
it is not as if something like this has never existed. It is certainly
the case that something like this is uncommon, certainly on this
scale in the United Kingdom and, as I say, in one sense, it is
perhaps a consequence of something happening which had not happened
before which was that a railway went into administration and had
to come back out.
Q105 Mr Jenkins: This company can borrow
money in the market and it is underwritten or supported by Mr
Bowker with large pockets which in effect is supported by you
and your Department. This is a nice arrangement, is it not? What
incentive is there for you in your Department to ensure that the
risks that you are now exposing us to in this, namely the taxpayer,
are closely monitored?
Mr Rowlands: The SRA monitors
on a quarterly basis the financial position with Network Rail.
We in turn monitor the SRA's financial position. You asked what
incentive we have. The incentive we have is basically to get out
of as much of this £21 billion arrangement as we can and
the route out is for Network Rail to securitise its forward income
stream off the back of which it will be able to issue its own
bonds and as a result of which, if that is successfully undertaken,
the £21 billion progressively disappears. What will be left,
for the moment at least, would be, if we look at the diagram setting
out the detail of the £21 billion on page 30, you will see
down the bottom there is something called "Opco facility
Tranche A" with an expiry of transfer date of 2052. That
is a 50-year facility. The Network Rail securitisation should
progressively take out all the elements of this package other
than the £4 billion which is a long-term safety cushion should
there be some serious financial position arising in Network Rail,
and the incentive for them not to dip into that facility is that
if they touch more than 5% of it, then either the SRA Board or
the Network Rail Board can dismiss Mr McAllister and Mr Armitt
and, if they get so far as to eat up 80% of it, the SRA can actually
remove all the other membership.
Q106 Mr Jenkins: When I started, I had
a two-minute warning on my time and you have used those two minutes
up! I was asking Mr Armitt about cost standards of work in comparison
with different industries, different companies and if you have
a change of culture in your organisation and with your staff,
as was mentioned before, you really have to work on your staff
development. It is asset maintenance I want to ask my last question
on. Yesterday morning, I was at my local railway station and my
local railway station is the most rundown depleted part of my
town. As an interface between the railways and their customers,
it is an absolute disgrace. It is litter strewn and its dirty,
dingy and filthy and no money has been spent on it and across
on one platform we have a bus shelter and that is what I have
to walk on to get the train to London because I get the train
a lot and, when I get back at night, the station is actually shut
and I get off the train and I walk in a hole in the concrete fence
to the car park and walk around it! If I were alone, even I would
be a bit wary. It is not a welcoming sight. I know it is difficult
and I know we have little money, but remember that this is the
interface between the public, your customers, and the system itself
and when I see all the work done on the tracks, I think, why do
they not spend a little more money on the stations? What can you
do to give us a guarantee that money is going to be spent in these
stations to bring them into the 20th century let alone the 21st?
Mr Armitt: Certainly in the allocation
of funds going forward in the next five years, there is in fact—I
speak from memory—I think about £670 million which
is allocated to stations and that will be prioritised across 2,500
stations across the network. I believe the important thing is
the very point you have made, that in fact the stations to a large
degree are the shop window of the railways, they are the first
thing that people encounter. I am sure that I get as irritated
and frustrated as you do at times by the litter and other things
which accumulate around them. We can always do better and we are
determined to do better in that regard. The day-to-day cleaning
of the station is actually the responsibility of the train operators
who operate that particular station and we look after the trackside,
the embankments and so on. We are guilty as charged to a certain
extent. We could always do better, we are determined to make it
better and we allocate funds to it, but I do recognise that it
is very often not good enough and is an areas which I think we
have to focus on and where we have to do better.
Chairman: I will say to Mr Jenkins and
the other members that, if they feel that witnesses are taking
too long in answering and eating into their time, members are
perfectly entitled to interrupt witnesses.
Q107 Mr Bacon: Mr Bowker, is Network
Rail a subsidiary of the Strategic Rail Authority?
Mr Bowker: Network Rail is a company
limited by guarantee for accounting purposes because the Opco
facility Tranche A that we just discussed is consolidated on to
the SRA balance sheet. So, for accounting purposes, yes.
Q108 Mr Bacon: So, the answer to my question
is "yes", Network Rail is a subsidiary of the Strategic
Rail Authority?
Mr Bowker: Excuse me, Mr Bacon.
Q109 Mr Bacon: Is the answer "no"?
Mr Bowker: For the purposes of
accounting because of the fact that we provide—
Q110 Mr Bacon: Mr Bowker, I am sorry
to interrupt, but, taking the Chairman's lead, I will stop you
there. Are you familiar with the accounts of public limited companies
where annual reports get sent to shareholders and, at the back—and
there are varying words that are said—you find accounts
and the accounts describe the company? You can see whom the major
shareholders are, you can go to the list of shareholders, look
them up and find out things about it. If, for accounting purposes,
Network Rail is a subsidiary of the Strategic Rail Authority,
then is that not it? Surely, the answer to my question is, "Yes,
Network Rail is a subsidiary of the Strategic Rail Authority",
full stop.
Mr Bowker: As long as you apply
the caveat "for accounting purposes", yes.
Q111 Mr Bacon: You referred to Opco Tranche
A and Opco Tranche B on page 30, but it says in the final column
headed "Function" across from "Opco facility Tranche
A", "Network Rail can borrow direct from the SRA under
this facility . . . " So, they can come to you, Mr Bowker,
and borrow money; is that correct? That is what it says.
Mr Bowker: They can.
Q112 Mr Bacon: They have not done yet
but they could?
Mr Bowker: Yes.
Q113 Mr Bacon: If they did, where would
you get the money to lend it?
Mr Bowker: We have support from
the Department that, if those funds were called—
Q114 Mr Bacon: You say "support";
what do you mean?
Mr Bowker: We have support from
the Department. They have said to us that, if that ever happened—and
it is important to remember the remoteness of that event ever
happening and the purpose that equity buffer actually provides—then
we would be kept in funds.
Q115 Mr Bacon: So, the Department would
give you the money?
Mr Bowker: Yes, but I—
Q116 Mr Bacon: That is if that were to
happen. Mr Rowlands, if this happened and you had to give Mr Bowker
some money in order that he could lend it to Network Rail, where
would you get it from?
Mr Rowlands: In the event that
we needed funds, the first call would be on the Department's existing
provision and, if that were insufficient, then no doubt we would
need to talk to Her Majesty's Treasury, but that is equally true
of any other financial pressures that may happen in the Department.
Q117 Mr Bacon: Where would the Treasury
get it from?
Mr Rowlands: The Treasury would
get it presumably—
Q118 Mr Bacon: Where would you get your
existing provision from?
Mr Rowlands: Voted by Parliament.
Q119 Mr Bacon: What would be the cost
of this money if you had to go and get it?
Mr Rowlands: It would be presumably—
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