Examination of Witnesses (Questions 120-139)
DEPARTMENT FOR
TRANSPORT, STRATEGIC
RAIL AUTHORITY
AND NETWORK
RAIL
26 MAY 2004
Q120 Mr Bacon: Would it be correct to
say that it would be cheaper than what you are doing at the moment?
Mr Rowlands: Well, you can see
in this Report—
Q121 Mr Bacon: Is that a "yes"
or "no".
Mr Rowlands: . . . that the figure
is £25 million cheaper across the piece for its entire network—
Q122 Mr Bacon: I do not really understand
the answer to Mr McAllister's question earlier. What is the taxpayer
getting for this £20 million to £35 million of extra
expense for borrowing?
Mr Rowlands: It is getting a company
in the private sector subject to market discipline with the kind
of management you would find difficult to attract to a state owned
railway.
Q123 Mr Bacon: What is the long-term
financing cost for Network Rail?
Mr Rowlands: Let us go back to
the Regulator's interim review determination. Its OMR costs will
be £22 billion over a five-year period to be met by—
Q124 Mr Bacon: That is medium term; I
am talking about long term. Mr Colman, is it correct that the
Report basically says that the long-term funding costs are unknown?
Mr Colman: They are unknown because
long-term funding has not been put in place.
Q125 Mr Bacon: That is what I thought.
So, therefore they are unknown. That was the answer I was looking
for. They are unknown, are they not, Mr Rowlands?
Mr Rowlands: Yes because they
have not been put in place but we do have—
Q126 Mr Bacon: Why, two years after Network
Rail was created, have you still not put in place long-term funding?
It is over two years since it was created. When was it created?
Mr Rowlands: It was created in
October 2002, some 18 months ago.
Q127 Mr Bacon: I thought it was in March
2002.
Mr Rowlands: No, it came out of
administration in October 2002.
Q128 Mr Bacon: But it went into administration
in October 2001?
Mr Rowlands: Yes.
Q129 Mr Bacon: So, the work was going
on two-and-a-half years ago and then, 18 months ago, it was finally
set up as Network Rail; is that correct?
Mr Rowlands: It came out of administration
into Network Rail.
Q130 Mr Bacon: Surely, if there were
a period of 12 months for it coming out of administration, was
not part of the purpose of it being in administration that, when
it came out of administration, you would have its long-term future
put in place and you would know what its long-term financing arrangements
were?
Mr Rowlands: No. To go back to
a point I made earlier, this is unfinished business. It came out
of administration as a company with scant idea of its cost base
and with no asset register. The first and immediate issue was
to stabilise its short-term financing position which you see with
the £21 billion facility and the £9 billion bridge facility
for example. The next step was to put in place a medium-term programme
and £6.5 billion of that went into place in recent weeks.
The next step is to move to a long-term securitised stable long-term
funding position. We cannot tell you the cost of that because
it is not in place. We do know from the medium-term loan programme
and the short-term borrowing, that it is about 20 to 35 basis
points above LIBOR, from memory, currently costing in excess of
£20 to £30 million a year more than if it were direct
Government funds.
Q131 Mr Bacon: Is the £9 billion
bridge facility you referred to being put in place first?
Mr Rowlands: It was put in place
at the point, if I remember rightly, where Network Rail came out
of administration.
Q132 Mr Bacon: Is it correct that the
Department was warned in 2001-02 that its proposals for a long-term
funding strategy were undeliverable?
Mr Rowlands: No, it is not.
Q133 Mr Bacon: Could you turn to page
29 where figure 13 talks about proposed adjustments to the regulatory
asset base and, in 2003-04, it looks like only £303 million
of these adjustments to the regulatory asset base were actually
due to network enhancements. Why were costs that were not for
productive investment added in?
Mr Rowlands: This is an adjustment
which the Regulator has made to the regulated asset base in respect
of expenditures which were not provided for in his original five-year
periodic review determination but which he has regarded subsequently
as legitimate. So, there is, for 2003-04, £303 million of
enhancement expenditure which was not included in his original
determination but is now included in the regulated asset base.
Q134 Mr Bacon: Can I ask you to turn
to page 11 where, in paragraph 1.23, and I am quoting from the
bottom of that paragraph, the NAO says, "In our opinion,
the SRA could have taken a different, and more restrictive, stance
for 2003-04 spending on the basis that, by then, Network Rail
would have had a significant degree of control." I suppose
this is a question for you, Mr Bowker. You let them go ahead anyway
on the old basis. Did this not expose the taxpayer to an undue
level of risk?
Mr Bowker: We do not actually
think we could have taken a different and more restrictive stance
and the reason is very, very clear: because we had to get the
company out of administration. Had the Department made an application
to the Court to do that without the Court being clear that Network
Rail would have remained solvent coming out of administration,
they would not have discharged the administration order. So, it
was extremely important that we could demonstrate ongoing solvency.
Network Rail was created, as David said, with very little information
and very little knowledge about its assets, but it was essentially
to demonstrate to the Court that the company would remain solvent.
That is why we did what we did.
Q135 Mr Bacon: Mr Rowlands, according
to paragraph 3.21 on page 31, it says that, ". . . Network
Rail, the Department and the SRA are confident that a debt insurance
programme will go ahead in 2004" but it goes on to say that
there a number of things which need to happen, "The outcome
of the access charges review, statements by the Government and
Network Rail, and the structure of the borrowing arrangements
will need to satisfy rating agencies" etc "that Network
Rail will be able to meet its debts service obligations . . .
" This was published only a couple of weeks ago; you are
not yet in a position to confirm that all these things have been
put in place, are you?
Mr Rowlands: We can confirm the
track access charge regime from the interim review did take place
and—
Q136 Mr Bacon: Mr Rowlands, I really
want you to answer "yes" or "no". I was asking,
you are not yet in a position to confirm that all these things
are done and in place, are you?
Mr Rowlands: I can confirm that
that the first is in place—
Q137 Mr Bacon: I am sorry, I was not
asking you to confirm what you can do. This list is not yet complete,
is it?
Mr Rowlands: No.
Q138 Mr Bacon: That is all I was asking.
In what circumstances would you be prepared to put Network Rail
into administration?
Mr Rowlands: I do not think I
can answer that question. The position is that the Railways Act
1993 provides for a special administration regime for the network
licence holder who is unable or likely to be unable to pay their
debts. That is the position. I cannot say and I certainly do not
expect Network Rail ever to be in that position.
Q139 Mr Bacon: Mr Molan, Mr Rowlands
said that the Department did not receive a warning that the financing
strategy that was proposed was undeliverable, did the Treasury?
Mr Molan: I am not aware of that,
no.
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