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


Examination of Witnesses (Questions 120 - 139)

WEDNESDAY 5 JULY 2000

MR GILES FEARNLEY, MR CHRIS GREEN AND MR ALEC MCTAVISH

Mr Stevenson

  120. That is an interesting concept but I am not sure whether it would stand up to scrutiny. We have not got time to scrutinise it here today. It was interesting that when I asked the same question of Mr Corbett—you were in the room—he did not qualify his statement. If you are not going to answer me directly I will put to you that Mr Corbett said it was about one billion. For the moment, without completely dismissing your assertions, on these figures there is something like £300 million more in Government subsidy than there was before privatisation. That is just on these figures. In your document as well you say ". . . little investment in new capacity; and revenue increases being taken by the Treasury, is at the heart of the investment and funding challenge currently facing the industry." You do not mention profits that have been taken since privatisation by Railtrack in particular. Have they not had their slice of the success? If so, could you tell me how much that might be in terms of their profits and their shareholder dividends?
  (Mr Fearnley) If I may, yes. Railtrack have taken profits in this time. Our evidence, and the point we made, related to our position as train operating companies where our total income, subsidy and farebox, has moved by a mere £53 million on a £7.48 billion turnover in that time. We have only the same pot of money available to us, yet we are desperately wanting to increase the level of investment that we can make.

  121. Again, we have not got time to discuss that in detail but I think I recognise the point you are making. Nevertheless, out of the amount available in the industry what is not mentioned in your figures, or Railtrack's figures for that matter, is the million pound per day profit they have been making over the last few years. That had to come out of the pot somewhere.
  (Mr Fearnley) That is coming out of the industry.

  122. My next question is in term of figures on government support and income and so on at which you say the Treasury is at the heart. What level of government support should it be? What level are you looking for so you can have the confidence to get on with your business successfully?
  (Mr Fearnley) The answer does very much depend on what the SSRA, indeed the passengers, are wanting from the railway of the future. At the moment most of ATOC's members are beginning to put in franchise replacement proposals which are far-reaching 20-year visions for the railway to develop and there are cost figures attached to those proposals. We still are awaiting the SSRA determining what level of output it is requiring and until we see that, it is very difficult to answer. What we do have is experience on the West Coast, which Mr Green is heavily involved with, and the costs there of upgrading that particular part of the network are very substantial.

  123. One of the points Railtrack raised with us was that if they cannot get this partnership going between government, train operating companies and Railtrack, which means money, they will not be able to fulfil their part of the bargain. They were very clear about that. Are you saying the same thing?
  (Mr Fearnley) It clearly needs to be a partnership. The money cannot all come from TOCs or Railtrack. We are very positive about the option of special purpose vehicles as a mechanism for bringing new investment in.

  124. I want to come to that finally because you put in your document here special purpose vehicles as the basis for investment in the railways. You welcome that and it broadens the base and gives more diversity and so on. But Railtrack will not have it though, will they, because in their evidence they say SPVs will pose considerable practical problems and it would be the most expensive form of finance. Impractical, too costly. You say they are a good thing because they will broaden the base. Railtrack will not have it. Why is that?
  (Mr Fearnley) We certainly believe they are good because they offer the opportunity of bringing in further investment and it is so clear that Railtrack cannot deliver all the money that is now required of it. We have to find a mechanism to broaden that base. Clearly Railtrack need to be involved in special purpose vehicles. It is absolutely essential that the network remains as one and it is not a case of parts of the rail network that Railtrack wants to be involved in. It has to be a mechanism to bring all parties together and we want to find a way to do just that.

  Mr Stevenson: Railtrack are pretty damning because they go on to say that this will mean a further fragmentation. "This is consistent with the situation with other network utilities, where gas and electricity competition has been introduced in the provision of local connections but the core network is provided by a single provider. It is important to stress that further fragmentation of the industry must not compromise the safety and integrity of the network."

  Chairman: Have a moment's pity for our recorders.

  Mr Stevenson: I apologise to our recorders. In a nutshell they are saying this has not happened elsewhere because the core network has remained with a single provider. It is going to be too expensive, it is impractical, and it will further fragment the industry which could compromise the safety and integrity of the railway. That is pretty damning to me.

  Chairman: That is which paragraph?

Mr Stevenson

  125. It is page 11 of Railtrack's evidence.
  (Mr Fearnley) If I could pick up two specific points from that. Firstly, yes, if we are going to bring in more investment we must ensure it is not more expensive. It must therefore attract a pretty similar risk profile to any investment that Railtrack are directly inputting into the network and therefore the investor coming from outside must have the same level of guarantee of return on that investment. We see that as quite possible because railways are here forever. There can be guaranteed revenue streams perhaps underwritten by the SSRA or government which would give the ability for the funding to be at a similar level to that that Railtrack can procure. Secondly, in terms of fragmentation we do not believe that that is necessarily the case. Some of our members in their early franchise replacement bids have already in put in proposals which involve Railtrack, do not exclude them, but also involve other parties coming in as well to give some seed funding to a project which might otherwise be low on Railtrack's priority list. We see any asset on the railway as being an integral part of the railway with ultimately Railtrack controlling the operation and the safety considerations of that asset, whatever it is.

Chairman

  126. I am a bit worried about this because in fact all the money in the system is the taxpayers' money, is it not, really. I am glad we are looking at it in such a way we think we can attract something else as well.
  (Mr Fearnley) It is taxpayers' money except where we can attract additional passengers as a result of that investment. We have demonstrated over the past few years that we are able to do that where we have improved the quality of the train service.

Mr Donohoe

  127. Gentlemen, the EWS claim that the effect of speed restrictions imposed as a consequence of deteriorating Railtrack infrastructure is costing the company up to £8 million annually. Are your members experiencing similar problems?
  (Mr Fearnley) We do have concerns about track speed. I wonder if Mr Green might take us forward.
  (Mr Green) If we want to take an example, on the West Coast, 50 per cent of all lost minutes are due to the condition of the infrastructure so there is a huge cost to us in terms of performance which Railtrack fully recognise and it is going to cost them over £2 billion to put that right in their core investment programme.

  128. £2 billion to put right?
  (Mr Green) For basic renewal of the signalling and track, all the things that should have been happening over the last ten years are now being put right in one rush.

  129. Can you give us an indication of what the cost to your company is?
  (Mr Green) It is always difficult to put a price on poor performance but just the taxis for passengers who failed to make their connections is costing £1 million a year.

  130. Does that imply that you are not able to fully recover those additional costs from Railtrack?
  (Mr Green) You can never recover lost income. If someone is so fed up on one of those experiences they do not travel again, that is lost income.

  131. Are you able claim back those additional costs from Railtrack?
  (Mr Green) No, but there is a formula where if they perform badly they pay us on a performance regime.

  132. Would you argue there is a shortfall between what it actually costs you and what you are able to recover?
  (Mr Green) Yes, without doubt.

  133. Would you like that to change?
  (Mr Green) I would like the infrastructure to work. I would much rather they put their energy into making the infrastructure work, which is now happening.

  134. Do you welcome the Regulator's proposals to strengthen Railtrack's direct accountability to your members?
  (Mr Fearnley) We heard Mr Corbett and Mr Middleton speak of the Code of Conduct earlier and clearly we welcomed that, but we see that as a fall-back. What we want are good constructive relationships at a senior level and at a junior level within Railtrack. A lot of progress has been made over the last 12 to 18 months and I do echo what Mr Corbett said earlier when he talked about a sea change in that relationship. It has further to go but there is a much strengthened dialogue than there ever was. The Code of Conduct will be a fall-back, but strive to have a better relationship than anything that might be put down as a base case.

  135. When you say it has further to go, would you like to expand on that? What would you like to see happening?
  (Mr Fearnley) At a senior level we have made a lot of progress through the National Performance Task Force and other bodies in exchanging views and working together and indeed in pulling round the training performance of the network as a whole. At local level what matters to get the trains running as they should is a very good relationship between the train operator at a local level and the Railtrack zone at local level. In some cases that is stronger than in others but where it is weak we are confident it is improving. The Code of Conduct will ensure that there is a fall-back position where problems occur but what matters is there is dialogue and there are common objectives. We now believe that there are common objectives shared between our side of the table and theirs in operating a punctual, safe railway, which is what it is all about.
  (Mr McTavish) We also need good contracts. I think codes of practice have a role to play but better contracts are the bedrock of this relationship and that harks back to comments we made earlier.

  136. And through better contracts, improved accountability?
  (Mr McTavish) Indeed, sir. Absolutely right.

Mr Donohoe

  137. Do you honestly believe that the public gets best value for its investment in the railway structure on the basis of the operating companies, including Railtrack in that, taking out a profit?
  (Mr Fearnley) Any business has to make a profit to survive and it has to make a profit in order to be able to invest. The level of investment that any company can make, whether it is Railtrack or one of our members, is very much dependent on the confidence that city institutions, finance houses, banks and so forth place in it. Whether we like it or not that is a direct factor of the level of profitability that business can make and can sustain going forward. What is important and what we are demonstrating is that industry players are prepared to put that profit back in to longer term investment.

  138. In terms of what has been asked as earlier questions by Mr Stevenson and others, it seems before privatisation investment was dropping by the Government and now after privatisation it is increasing. Indeed, if one is to believe speculation about what is likely to be in the Chancellor's statement very soon it has been suggested there is going to be an enormous amount of public money going into the private sector to make you a profit.
  (Mr Fearnley) The regulatory review as it affects Railtrack will clearly take a very close watching brief over Railtrack's ability to earn profit going forward. On our side through the franchise replacement process that has now started we know that one of the objectives of the SSRA is to put a profit control, profit cap—we have yet to see the substance of that—on train operating companies. What is absolutely vital is that all parts of the industry are able to make a profit so that we can have the confidence of investors to minimise the call on Government to maximise the private sector investment into the railway.

  139. One of the aspects of what Railtrack has said to us in terms of how they get money from you is access charges. They also indicate that they are going to increase substantially. Do you support the fact that access charges should increase and increase substantially?
  (Mr Fearnley) May I ask Mr McTavish to answer?
  (Mr McTavish) If Railtrack do more they should be paid more is our start point. In setting the access charges the Regulator has to consider not only the more that Railtrack does but also the efficiency he expects them to achieve over the period. He must strike that right balance between those two things. We are firmly of the view that Railtrack should earn a reasonable rate of return on its investment and if it does more it should earn more.



 
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