Select Committee on Environment, Transport and Regional Affairs Minutes of Evidence


Examination of Witnesses (Questions 20 - 39)

WEDNESDAY 5 JULY 2000

MR GERALD CORBETT, MR RICHARD MIDDLETON AND MR JOHN SMITH

  20. Last question, if I might. Again in your evidence you are basically calling for a partnership with Railtrack, the Government, the Regulator, the train operating companies, and so on, and you then go on to say: "We have proposed that the SRA invest in preference shares in Railtrack as being the most efficient way to lever public money into the railway." Indeed you say: "We have made good progress in developing proposals for project development boards for major schemes with the SRA." So presumably the SRA taking a shareholding in Railtrack is one that has been agreed between yourselves and the SRA in principle and a lot of work has been done on the detail as to how that might come about?
  (Mr Corbett) No, that is not quite right. What is agreed between us and the SRA is working together, is the partnership, is the project development board, that whole approach to enhancement. What is not agreed is the most efficient way of investing the money we hope the SRA is going to get as a result of the transport plan. The SRA have talked about things called "special purpose vehicles", and that is one option. Another option is our access charges. Other option is indeed a preference share in Railtrack. A further option is securitising Railtrack's access charges. There is a series of options we are busy evaluating and we are sharing those numbers with the SRA and with the Department. I hope in the autumn when the SRA plan comes out some conclusions might be drawn on the most efficient way of investing public money.

  21. For clarification, it is a fact that Railtrack proposed to the SRA that they should invest in preference shares in Railtrack as the most efficient way to lever public money into Railtrack?
  (Mr Corbett) That is a fact.

  22. What has been their reaction?
  (Mr Corbett) Their reaction was thoughtful.

Chairman

  23. Thoughtful? How nice!
  (Mr Corbett) You will have to ask them but they could see certain other advantages, non-financial, in various other approaches. At the moment I would say it is just one of a series of options. All of us are busy trying to think of the best way to do these things, tabling the options, the bright ideas and we will see where we get to in the autumn.

  24. We are saying, in effect, they listened but they did not say yea and they did not say nay. Is that what we are saying?
  (Mr Corbett) I think that is right. There was a discussion and certain pros and cons were tabled. Financial efficiency is only one part.

  25. You told them what you thought they ought to do and they did not say yes or no?
  (Mr Corbett) I would not say that we told them what we thought they ought to do. We outlined a series of proposals and ranked them in order of financial efficiency.

  Chairman: I would have thought if you made a proposal that was a proposal. Mr O'Brien.

Mr O'Brien

  26. Why are Railtrack's relationships with its dependent customers so poor that it is suggested there should be this Code of Practice to govern the relationship?
  (Mr Corbett) You have some of our major customers appearing after us and I hope they will confirm what I am about to say. In the early days post-privatisation I do not think the relationships were good. The railway was fragmented into 90 different bits and we were all sitting behind adversarial contracts. Everybody retreated back to their own patch and it was all pretty hopeless. In the last year and a half I think you have seen a sea change and we feel that we are working much more closely than ever before with the train operators. We have the National Performance Task Force which meets monthly with them. We now have the National Safety Task Force which meets monthly with them. A 25-year-experienced railway man is in charge of those relationships and we think on the whole although they are not perfect and there is a lot of work to do they are a lot better than they were.

  27. When did you last discuss the question of the relationship with the Regulator?
  (Mr Corbett) I hope that when you talk to the Regulator he also will be able to confirm that relationships are better.

  28. When did you discuss it? You said the relationship has improved considerably but we have still got the Regulator saying perhaps we should have a Code. If the relationship has improved why do we need a Code?
  (Mr Middleton) We proposed the Code of Practice for customers because within the railway industry there are a number of quite complex contractual relationships to manage between the train operating companies and ourselves. In order to make those relationships effective, both parties need to have a clear understanding of what is required and by when in order to ensure things happen like producing a timetable. We produced a Code of Practice which places obligations on Railtrack and on the train operating companies to ensure the industry processes do work. It is mainly designed to clarify who is responsible for what and by when.

  29. Will that improve the relationship? Bringing in a timetable may show some improvement there but will it improve the key relationship with customers?
  (Mr Middleton) If it brings clarity into the way in which Railtrack and the train operating companies work together, it will help improve the relationship, yes.

  30. Why were they so poor in the beginning?
  (Mr Middleton) They were poor in the beginning because, as Mr Corbett has said, British Rail was an integrated organisation where many of the people had known each other for years and suddenly were working either side of the contractual framework. Most people in the railway industry had little experience of working in a contractual environment and their first thought was to use the contract as a means of beating up the other party, so it became adversarial. I liken it to a divorce. When you go through a divorce initially you dislike each other intensely but over time you realise you have got to work together if you are going to make sure that your children are properly provided for and you generally get a better relationship after a few years. That is what has happened in the railway industry.

  31. What is the attitude of investors and customers to the code that you are suggesting?
  (Mr Middleton) I think the train operating companies are supportive of the code. We discussed it at the Regulator's workshops on the model clauses for the relationship between Railtrack and the train operating companies and I think they are generally supportive of what is being planned.

  32. Is that to improve time keeping, to improve the fact that there will be less hold ups by maintenance? Briefly, what does the code involve?
  (Mr Middleton) The code covers a number of things. It is to ensure that train operating companies have a clear process for getting their requirements and expectations into Railtrack's forward plans. It is to ensure that when we produce the timetable and specification for the timetable we get their bids in at the appropriate time and respond to them in the appropriate time. It is designed to ensure that generally within the industry there are clear working arrangements to make the whole industry work better in the long term.

  33. Can I just ask what is the attitude of Railtrack to the change in the leasing of stations to some of the regional operators, is that included in the code?
  (Mr Middleton) At the moment we directly manage 14 major stations, generally the big London terminals and the big city stations. The train operators lease the remainder and operate them themselves. Because we have a number of retailers who want to get a bigger number of outlets on stations there is some advantage in Railtrack managing the retailing on more stations than it currently does. That is something that we are prepared to discuss quite openly with the train operators. It is not something that we are going to impose upon them, we will do it through dialogue and discussion. There could be benefit to the rest of the railway industry because if we increase the income from retailing it actually reduces overall the call on the taxpayer before track access charges because any money we earn through retailing is netted off against the total access charges paid on the network.

  34. So there will be no direction on taking the leases from the regional railways they have at the present time?
  (Mr Middleton) No. We have made it quite clear it is not something we seek to impose, it is something we wish to discuss and agree.

Chairman

  35. Mr Middleton, you make it sound like a divorce between equals. Would you recognise the description that Railtrack as the senior partner has all the cards and it has been using its muscle against a lot of the train operating companies and that is why you are seen as unco-operative, unhelpful and dictatorial, to put it mildly?
  (Mr Middleton) It does not feel like that from where I sit. I think one of the biggest problems we have had in the first four years of privatisation has been the lack of clarity in the regulatory regime.

  36. Come now, Mr Middleton, that is the second or third time you have said that. If I have a straight forward contract, a legal contract, with someone who is undertaking a particular job then what it says in the contract is sufficiently clear for me to know how I am going to earn my money, is that not the case?
  (Mr Middleton) That is true, but the industry has changed since 1996 when those contracts were put in place.

  37. I see, so it is the fault of the original negotiation of the contract.
  (Mr Middleton) No, I think it is because of the way the industry has grown which was not foreseen at the time the contracts were put together. In order to allow for it to grow—

  38. So the contracts were signed on the basis that the industry was in decline, is that what you are telling me, and therefore it was not intended that the relationship between you and either your suppliers or you and those who use your services would extend?
  (Mr Middleton) The contracts were signed predicated on maximising the income to the Treasury and on the declining rate of public subsidy, not on a growing rail network. Railtrack has a largely fixed access charge and thereby has little incentive to grow the number of trains on the network. We have done so even without that incentive.

  39. You do not have the incentive for running a good service?
  (Mr Middleton) We do because under the performance regime we were incentivised to improve our performance, as Mr Corbett said earlier, and we have done that.



 
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