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Lord Falconer of Thoroton: My Lords, that is a ridiculous suggestion, if I may say so. I have made clear that during the course of the afternoon the Secretary of State reviewed the papers, made up his mind and called immediately for the chairman of the board of the company--which is precisely the right course--who came at 5 p.m. and was told what the Secretary of State had in mind. The idea that that created a false market is, with respect to the noble Lord, ridiculous.

It is important now to ensure that we do not waste this opportunity to create a better railway system. Noble Lords on all sides of the House have urged us to take that opportunity, and we agree that it is an opportunity that we must take. We all agree that change is required.

We are developing what we regard as an attractive successor vehicle, and we will put a proposal to the administrator for a company limited by guarantee--a "CLG", as I shall call it as time goes on--to take over Railtrack plc's railway assets and its role as a network operator.

As recent press coverage has made clear--the noble Viscount, Lord Astor, referred to this--there is every possibility that there may be more than one transfer proposal before the administrator. We welcome this. It is the administrator's duty to consider all reasonable proposals put to him and, under Schedule 7 to the Railways Act 1993, to make a recommendation to my right honourable friend the Secretary of State for his consideration and approval.

To assist potential proposals, guidelines on the principal issues that will need to be satisfied to obtain the approval of the Secretary of State are to be outlined today in response to a Written Question in another place. That Written Question was answered at 3.30 p.m. and set out the principles in relation to other bids.

We remain confident, however, that our proposals for a CLG--to be developed and put to the administrator by a separate bid team--will offer the best solution. Our proposals were outlined in a little more detail last week in response to a Written Question in another place. Some noble Lords may find it helpful if I reiterate the main aspects.

A company limited by guarantee would be a private sector company. The noble Baroness, Lady Noakes, raised the question of whether it would be really a private sector company. The Office of National Statistics, an independent body, has to make the decision about that. It has made the decision that it is.

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It would not have shareholders and consequently would not have the need to pay dividends in return for equity funding.

Baroness Noakes: My Lords, can the noble and learned Lord explain how the Office of National Statistics can make a decision in the absence of a fully worked-out set of proposals being put to the administrators?

Lord Falconer of Thoroton: My Lords, obviously it will have to look at the matter again, but, on the basis of the proposals that have already been outlined, it believes the position would be that the CLG would not be in the public sector; it would be in the private sector.

The CLG would be a private sector company without shareholders and consequently without the need to pay dividends in return for equity funding. Its management would be incentivised on a commercial basis to deliver efficiency and performance improvements. Operating surpluses from the company would be reinvested in the network.

The noble Lord, Lord Marsh, asked what would be the management structure and whether it would be sufficiently stable to deliver. The noble Lord, Lord MacGregor, raised the same point. The board, which we anticipate would comprise between 12 and 15 executive and non-executive directors, would be highly professional. It would be tightly focused on delivering a quality rail network fit for the 21st-century and would be remunerated and incentivised accordingly. Corporate governance structures would be comparable to those of a traditional plc.

As noble Lords know, instead of shareholders, a CLG has members. Those are the people that the noble Baroness, Lady Noakes, rightly described as the guarantors. The guarantee in a company limited by guarantee is a nominal guarantee, similar to a nominal share value.

The Strategic Rail Authority would be founder member of the CLG and we anticipate that the majority of the other members would come from the private sector. Individuals drawn from private sector companies with a direct stake in the railways, other interests including passenger groups and employees and the SRA or its successor could all be possible members.

The members would have a governance role equivalent to that of shareholders but would have no additional powers. They would be well placed to ensure the high performance and full accountability of the board. In answer to the point raised by the noble Baroness, Lady Scott of Needham Market, the company structure would certainly comply with all EU directives.

For funding purposes, the CLG would have the same sources of revenue as Railtrack--property income, track access charges and grant. Some 90 per cent of the company's income would be covered by stable long-term contracts. Revisions to these contracts, for example to reflect any changes to the

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regulatory regime, would be subject to independent regulation in respect of the fair price to be paid for the outputs that the Government wish to purchase.

The CLG would be structured to ensure that it was sufficiently financially robust to contribute towards the delivery of our 10-year plan targets for rail, for which we have committed some £30 billion of public expenditure on the railways, with much improved value for money. It would be designed to ensure that it could play its role in levering in the matching £34 billion of private sector investment identified in the plan.

A number of speakers raised this issue. I believe that they have all accepted that a company limited by guarantee could not raise equity; it would have to raise debt finance. It would not need equity to raise debt finance. The company would have the existing debt from Railtrack transferred to it, and it would be able to borrow further from the debt market to the extent necessary.

The Government are confident that the CLG would be able to raise funds--

Lord Berkeley: My Lords, can my noble and learned friend help the House? I believe it to be the case that in the 10-year plan the £34 billion of investment from the private sector includes investment in rolling stock, both passenger and freight. But that has little to do with the CLG; it is investment by the rolling stock leasing companies and other such bodies. That is unaffected by the present change.

Lord Falconer of Thoroton: My Lords, it is unaffected by it. Indeed, much of the major infrastructure investment will come from special purpose vehicles. The new body will be focused on the maintenance and engineering job that Railtrack has had to undertake. One point is very clear from what happened to Railtrack. I am sure that the noble Lord, Lord Bradshaw, will agree. One of the things that seemed to happen was that the rail engineering abilities of Railtrack--whatever else British Rail's faults were--were not as good as British Rail's had been. The new company will focus on the delivery of that particular function.

The cost of the borrowing would, as speakers on all sides of the House have said, depend on the company's credit rating. Under the proposals that we are currently developing, we should expect it to have a solid investment grade--that is, at least BBB, and potentially higher.

The noble Lord, Lord Oakeshott, in a slightly contradictory sequence in his speech, appeared to say on the one hand that the market would regard the standby facility as being something akin to a guarantee, and on the other that nevertheless it would charge high rates of interest. We anticipated that in practice lenders would view the company as a very low credit risk and a sound basis for their investment. The "cushion" between the risk of poor financial performance and debt providers that equity would provide under the standard PLC model would come from two main sources.

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First, we should expect to put in place an arrangement by which the company could access a standby, subordinated loan facility. This facility would be enshrined in a contract, providing explicit support in specific circumstances up to a predetermined limit. It would be capped. It would not amount to a government guarantee of debt, but the repayment of this facility would be "last in the queue" as regards creditors for repayment. The possible value of this facility would be determined once the administrator had a better understanding of Railtrack plc's true financial position. So we are talking about a subordinated loan up to a specified amount. That is the first point on which the market will have to judge the proposal. Although I understand people raising issues about this, the ability to judge what credit rating there will be will very much depend, to start with, on the market's view of that facility. So it might be sensible to wait until the market has had an opportunity to make a judgment about that.

Secondly, although the company would not be distributing profits in the form of dividends, it would earn a surplus over direct costs. This would be sufficient over time to build up a significant reserve. So it would be a company with a subordinated loan facility, building up reserves. Can such a company get to a moderately high-level investment grade in the market? Yes, it can. Whether it does so depends on the detail and the view taken by the market. Together, the company's reserves and the explicit loan facility would mean that the CLG would have access to sufficient funds to cover foreseeable circumstances.

Under the CLG structure revenues would go further than they would have done with Railtrack. The cost of capital would be lower, there would be no dividends and the company would be able to prioritise cashflows in favour of lenders.

In addition, the company would operate with much lower risks than Railtrack, concentrating on operating and maintaining the infrastructure as well as undertaking small-scale renewals. The CLG would not undertake major new projects with all their attendant risks of cost overrun.

As we announced in April this year, we anticipate that projects such as these, like the East Coast Main Line upgrade, will henceforward be undertaken by special purpose vehicles. These are likely to be bespoke joint venture companies financed through a partnership of government support and private sector investment.

A CLG would continue to undertake maintenance and small-scale renewals through contracts with the private sector infrastructure companies. However, it would improve the definition of these contracts, with greater clarity over the allocation of risk, and improve the management and monitoring of the outputs that are delivered.

A CLG company structure could be combined with a different, more streamlined, regulatory regime from the one under which the industry has had to labour to date and this would help to underpin its credit rating. Transparent independent economic regulation would

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continue to be an element in the regulatory regime. This will be a key part of our forthcoming consultation process.

In the light of my remarks, I ask the noble Lord, Lord Palmer, the noble Baroness, Lady Noakes, the noble Viscount, Lord Goschen, and the noble Lords, Lord MacGregor, Lord Freeman and Lord Oakeshott, to pause before they start to say that it will not be possible to raise debt in the market. Once the scheme is described in more detail, it will be seen as much easier than noble Lords are suggesting.

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