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I do not know, because I am not an expert on these things, whether a bond issue to modernise the Underground or to build new railways would be successful, nor do I know whether, in present economic circumstances, the Government would look on such things with favour or even whether people would subscribe to them. However, it is an idea which is worth consideration, because I think that the majority of people in the country would much rather buy a decent railway than invest money in the toxic debts of banks, which have profited enormously and rewarded themselves to an extraordinary degree at the expense of the ordinary taxpayers who actually use the railway and the Underground. However, it is difficult.
The first charge that I shall give to the noble Lord, Lord Tunnicliffe, who is to reply, is that the Government review the process under which all transport investment is undertaken. It is reviewed under a system called the New Approach to Transport Appraisal, a Treasury-devised system where, theoretically, the benefits of investment in various infrastructure plans are tested against one another. Last week I had a meeting with the noble Lord, Lord Adonis, who asked me, “Why is it that all the road schemes which arrive on my desk display a cost-benefit ratio of five plus, which is very good, and the public transport schemes display a cost ratio of two or less?”. The answer to that, which I hope the Minister will go away and think about, is that road
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I could give many examples but I will deal with the question of adding an extra carriageway on the M25. You justify it—I promise the noble Lord, Lord Tunnicliffe, that this is what happens—on the basis that if you put another carriageway on the M25, everyone will speed up and everything will be a lot better. This is discounted over a number of years ahead; I think it is 20 years. But what actually happens when you put another carriageway on the M25 is that you release what is called “suppressed demand”. A great deal of extra traffic then appears and within two or three years of having spent all the money, the road is just as full as it was before and no one has benefited.
That is not the kind of investment for the future that the noble Lord, Lord Tanlaw, was describing. He mentioned that the electrification of the old Southern Railway was undertaken with a view to 40, 50 or more years of life. The modernisation of the London Underground will be undertaken with a view to it lasting at least 40 years from the time it is carried out.
I do not agree with the Chancellor’s verdict that the issue of railway bonds is an unacceptable addition to public expenditure. I also do not agree with him when he says that the Governor of the Bank of England should resign. There should be a certain amount of freedom of expression, and the Governor of the Bank of England is independent.
However, the Government have got to address the system of appraisal. I am an economist, not an econometrician, but I understand the principles. The system is perverted; it gives the wrong results and it is biased against projects such as the tram schemes to which the noble Lord, Lord Tanlaw, referred. The Liverpool tram scheme is one in which the public of Merseyside wish to invest. It would have added a new dimension to the enormous improvements which have been made in that area in several other respects as Liverpool was developed as last year’s European City of Culture.
I hope that the money that has already been promised to the railways is secure. I do not think the noble Lord, Lord Tanlaw, is right about the new intercity express trains because they cannot go at 300 kilometres per hour. They have a design speed of 125 miles per hour which we think can be stretched to 140; but they are not the trains which are going to run very fast across the country; those trains will replace the fleet of high-speed trains. When the east coast main line was electrified, the locomotives and carriages were designed for 140 miles an hour. However, since we electrified the east coast line between Edinburgh and Kings Cross 20 years ago, it now takes between 12 and 15 minutes longer to get from London to Edinburgh, and it takes 12 or 15 minutes longer to get to Bristol and South Wales. This is because so much slack was built into the system at the
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I believe in future generations and in raising money for the railway, but we have to be careful that the money that we spend on the railways is well spent. Network Rail is an awfully inefficient company, as has been displayed in the letter that the noble Lord, Lord Adonis, wrote to it this week, taking it to task over the fact that both the east coast main line and the west coast main line were closed at the same time. This is a company that is rewarding its directors with large bonuses and paying them a lot of money. That should change.
The Office of Rail Regulation is trying as hard as it can to drive efficiency in Network Rail. If more money is available, it must not be wasted on things like the PFI for London Underground, which was a crass waste of money; it was something that neither the mayor nor the professions, nor anyone else, wanted, but it was foisted on them by the Treasury. We do not want any more of that. We want investment. There can be an enormous amount of investment in the railway and it can last for a very long time. I support the general thrust of what the noble Lord has said, but I add a few words of caution.
5.21 pm
Earl Attlee: I am grateful to the noble Lord, Lord Tanlaw, for introducing his Question for Short Debate. The noble Lord, Lord Bradshaw, made some interesting observations about transport investment generally and compared investment in rail and road. It would be good to have a debate on this subject because I think it would be very interesting.
I am not at all clear that Network Rail needs help in raising finance in the way suggested by the noble Lord; its commercial debt already attracts a triple A rating. I am sure that the Minister will provide a full description of how Network Rail is financed, so I will not try to do that myself. Any changes that can be made will have only a marginal effect on the interest charges precisely because Network Rail already has such a good rating. The other difficulty with the noble Lord’s suggestion of a massive increase in investment paid for by specific bonds is that Network Rail would have to charge increased track-access charges to pay the interest on the debt. Because the amount of debt he is suggesting is so large, those charges would have to be very high.
What is more important is the outputs that are set by the Government for Network Rail—for instance, the decisions that have been made to put significant investment into Reading and Birmingham stations. All noble Lords, including the noble Lord, Lord Tanlaw, will be concerned that the investment programme remains intact despite the current economic circumstances. I know that that is one of the noble Lord’s concerns.
I am sure that the Minister would agree that it would be rather odd to cut the investment programme when it is needed to improve capacity and maintain
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Earl Attlee: I am sorry; the noble Lord, Lord Tanlaw, asked me to commit my party to expenditure. I quite enjoy being on the Front Bench so I will be careful in what I say, especially when we have not seen the books. Our aim would be to maintain or enhance investment, particularly in respect of high-speed rail.
I have one related observation: the current system of short franchises of around seven years discourages private sector investment as operators are unlikely to make an investment that cannot be reliably amortised over the lifetime of a franchise. We on these Benches would grant 15-year to 20-year franchises as the norm in order to give greater certainty and encourage investment in new capacity and facilities.
Some of these investments may well have to be undertaken in conjunction with Network Rail. I agree with some of the anxieties of the noble Lord, Lord Bradshaw, in respect of the efficiency of Network Rail. We would also look at ways to improve the provisions to enable the TOCs to retain or receive value for their investments at the end of the franchise period, if appropriate.
5.25 pm
Lord Tunnicliffe: I, too, thank the noble Lord, Lord Tanlaw, for this debate and for giving me a chance to set out the Government’s position, particularly on financing. I shall touch very briefly on the points that noble Lords made before I come on to that in detail.
I thank the noble Earl, Lord Attlee, for his confidence that I will explain rail financing and that he will approve of that explanation, which is good. I will set out why our rail financing commitments are in many ways some of the most secure financing commitments that this Government have ever made, and particularly how, being statutory and contractual, they are likely to survive the slings and arrows of outrageous political change.
I shall touch briefly on the financing of franchise length, which is a popular area of debate. One must remember that the major capital assets used by TOCs are not owned by them. In general, those assets will not have changed and, in general, Network Rail owns the infrastructure. I thank the noble Earl, Lord Attlee, finally for reminding me of the rules about surviving on the Front Bench. I shall take account of those rules when I respond on the resignation of the head of the Bank of England.
On the concerns of the noble Lord, Lord Bradshaw, the Treasury and DfT are reviewing a new approach to appraisal, which will include the elements raised by the noble Lord, Lord Bradshaw, last week with my noble friend Lord Adonis. I would quite like to have a debate on that, but I have only another 10 minutes, so we shall put that off for another time if noble Lords will forgive me.
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On Network Rail and the very unfortunate recent closure of the east coast and west coast main lines, the planning of engineering works is rightly the responsibility of Network Rail. I can assure noble Lords that the disruption caused by these closures has not gone unnoticed by the Government. Indeed, the Minister of State has written to Network Rail setting out these concerns in the strongest possible terms. Network Rail has since assured Ministers that there will be more consultation with train operators in the future to ensure that the interests of passengers and freight users of the railway are taken into account in the planning of future engineering works.
Bonuses, which were referred to, are of course a matter for the Network Rail Remuneration Committee. They are set in accordance with criteria set out in the management incentive plan, which is overseen by the ORR, the Office of Rail Regulation. This ties the levels of bonuses awarded for the company’s performance in relation to punctuality, asset condition and financial efficiency. Bonuses reward only positive achievements, not failure.
Lord Bradshaw: All right, the asset condition and punctuality may have improved, but does not the bonus culture have to reflect the failures of a company to live up to its promises of delivering, for example, a 24/7 railway, and the blocking of both main lines to the north at the same time? The conditions for bonuses may be very narrowly defined by the remuneration committee, but to the travelling public, the performance of Network Rail is plainly unacceptable. For people to go away with large bonuses for unacceptable performance is not on.
Earl Attlee: If the noble Lord, Lord Bradshaw, is going to have a pop at the Minister, I must get in there as well. I am always confused as to why executives in organisations such as Network Rail and the BBC have to be paid very large salaries and have huge bonuses, when the Chief of the Defence Staff does not get any bonus at all. He gets a very modest salary.
Lord Tunnicliffe: I always enjoy these debates, because one goes into areas where any comment would be inappropriate. I shall not go into how much the Chief of the Defence Staff should be paid, much as I admire and approve of the work that he does. It is for Network Rail, through its board and remuneration committee, to justify the bonuses and salaries. Nevertheless, one has to recognise that it is a very large organisation and the heads of such organisations are generally quite well rewarded. The overall remuneration rates should be judged in that light. The Government do not get involved directly, but the ORR is careful to ensure that there is a positive relationship between bonuses and general success. I do not know the extent to which the events of the past two weekends will be part of that formula; I do not even know whether that is in the public domain or our domain. If it is, I shall write to noble Lords on that.
I turn to the general comments of the noble Lord, Lord Tanlaw. The LUL business plan, which is being funded, is £12.8 billion between now and 2017-18. That will involve increased expenditure to increase capacity, refurbish and create new trains. There were
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Lord Tanlaw: It was John Major who constituted that committee with the two most incompetent Members of the other place whom he could find. That was meant to ensure that it was a total failure. He did not get the blame, but I think that he designed it that way.
Lord Tunnicliffe: The noble Lord may well say that, but I could not possibly comment.
On electrification, the Government are working closely with the rail industry to identify the most promising routes for electrification and estimate the cost and benefits. Indeed, the noble Lord, Lord Adonis, chairs the National Network Strategy Group, which has been tasked with considering how best to make use of the existing network. There will be studies on electrification, but the present funding is for capacity in this funding round. These studies will lead to a better informed debate to see whether it is appropriate for the period from 2014 onwards to have a significant increased swathe of electrification.
On High Speed 2, a company has been formed to develop the case for high-speed services between London and Scotland. It is targeted in the first year with a report on a route from London to the West Midlands. It will also then consider the potential for new lines to serve the north and Scotland. It has been asked as part of the work leading to a report by the end of the year to investigate financing and construction costs.
The Government do not intend to issue specific railway-related gilts in order to fund rail infrastructure. Historically, gilts with specific names referred to the corresponding purpose of their issuance, or signified how a stock had been created. However, from 2006, all new issues of gilts have been called Treasury gilts, where the capital raised can be invested in any government spending area, which includes funds raised to invest in the railway.
The Government are of course committed to funding the railway. In August 2007, the Delivering a Sustainable Railway White Paper set out what the Government expected to be delivered on the railway. This included a statement of funds available, or SOFA, which set out the amount of money that the Government intend to spend on the railway during the period from April 2009 to March 2014. It committed more than £15 billion of government expenditure to the railway in England and Wales. The Scottish Government also published a similar document, which committed £3.6 billion over the same period.
The two White Papers, with their associated SOFAs, were published as a statutory requirement of the Railways Act 2005 and are used by the independent Office of Rail Regulation to determine Network Rail’s income
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However, the Government are not opposed to bonds per se. In addition to the funding that it receives from the Government and franchise holders, Network Rail also has the ability to borrow on the capital markets by issuing bonds. These bonds are an important part of the funding of the railway as they allow the company to borrow to invest now in infrastructure that will benefit passengers for many years to come. The bonds are directly and unconditionally guaranteed by a financial indemnity from the Government, which not only enables the company to raise money cheaply on the capital markets but demonstrates the Government’s commitment to investment in the railway.
Our commitment to looking at innovative funding arrangements for the railway does not end there. The Department for Transport has committed £5.6 billion to fund the Crossrail project in London. Transport for London has committed a further £7.7 billion, with a further £2.5 billion coming from other sources, principally from Network Rail, which will finance the costs of work on its network. In addition, the Department for Transport is underwriting third-party contributions to this project from BAA and the City of London, which together should amount to £500 million.
We all know too well that the current problems in the financial markets are making it difficult for companies to raise credit in the market. The rail industry is not immune to that. The Government have recently demonstrated that they are prepared to step in where the markets have failed. As part of the fiscal stimulus package announced in the Pre-Budget Report, the Government have brought forward the procurement of 200 diesel multiple units to relieve overcrowding on the network. To get this work under way quickly, the Department for Transport has set up a government-owned company to finance and take forward the procurement. While the Government do not see themselves as a long-term owner of trains, they have done this to accelerate the building of those trains at a time when the private sector is not prepared to make funding available. It is the Government’s intention to invite the market to bid for these assets and related contracts in due course when the financial markets return to stability. I hope that noble Lords will agree that the measures that I have outlined today demonstrate that this Government are committed to funding the railway in the long term without the use of specific railway gilts.
The Deputy Chairman of Committees (Lord Brougham and Vaux): That completes the business of this Committee this afternoon. The Committee stands adjourned.
Committee adjourned at 5.40 pm.
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