Examination of Witnesses (Questions 120
WEDNESDAY 5 JULY 2000
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 Corbettyou were in the
roomhe 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
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?
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.
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.
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
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
(Mr McTavish) Indeed, sir. Absolutely right.
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 capwe have yet to see the substance of thaton
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
(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