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


Examination of Witnesses (Questions 180 - 199)

WEDNESDAY 12 JULY 2000

SIR ALASTAIR MORTON, MR M GRANT AND MR T JENNER

Mr Stevenson

  180. May I ask about Railtrack's £8 billion enhancement programme over the next five years, to which they have committed £3 billion, which clearly leaves a shortfall? What is your view about that shortfall? How do you think the best way might be to accommodate that shortfall?
  (Sir Alastair Morton) I should start by saying neither the £8 billion nor the £3 billion is enough. First point. I have said that quite often. Second I should say that I am not sure it is a satisfactory situation—I do not believe it is—for Railtrack to list a few rather large projects with a catch-all clause at the end for the small ones and say these are the ones we feel ready to do, so these are the ones you perhaps can have as long as somebody else feels like paying for the ones we think you can perhaps have. The process is not right. They may be the right projects but in my view it has not been worked through with all the parties.

  181. Of course you have begged the question. If it is not enough, perhaps you might indicate to the Committee what in your view might be sufficient in this context.
  (Sir Alastair Morton) The most important point to start with—and I am going to answer you—is that it is pointless to look at five years; it is meaningless in railway terms. It is immensely long in semi-conductor terms, but it is meaningless in railway investment terms. What will be the situation at the end of the five years? Only the smallest projects will have been finished; the medium-sized projects may be more or less finished and in commissioning and the big ones will still be in progress. Others will have got to the starting line or should have got to the starting line which are not listed inside that £8 billion and are commitments in that contracts have been let. So if the real question is what money is going to be required, start looking today ten or 12 years forward. That is the real question and that is a much bigger number. What number is that? It is very, very difficult for anyone to say but Railtrack produced a menu which, since we are talking enhancement here in this number, after you take out the maintenance and renewals from their big number of £52 billion, you are left with something of the order of £30 billion. But they said it was a menu and I agree it was a menu. The number likely to be necessary out of that? Somewhere between £18 and £22 billion; it is a guess at this stage. We would hope to prioritise more of it by the time we produce a strategic plan in the autumn, but we still shall not have finished listing it. Then there is rolling stock and there are ancillary investments in information systems, station, retail, car parks and so on, still to flow on after that. The number that the system, the collectivity, the public/private partnership between the state purse and private sector capital markets has to try to fund over the next decade is north of £30 billion in our opinion.

  182. In your written evidence you indicate where you consider the main areas of investment sources may be. In Railtrack's evidence they 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". Do you accept that there will have to be significant public money in this investment programme? You have given some idea about that. Secondly, do you agree with Railtrack that SRA investing in preference shares in that company is the best way to lever in public money?
  (Sir Alastair Morton) To the first question, yes, I do believe that there has to be substantial public money and in essence it is because the need is much greater than it was at the time of privatisation. Railtrack was not designed to carry the burden we foresee. Secondly, do I agree with Gerald Corbett that certain forms of taxpayers' money structured into patient capital are an important part of levering in—and levering in is a very important term—investment capital into the industry? Yes, I do. But whether that should be preference shares in Railtrack is another question. That is a very political question. There are many people, understandably, some of them even perhaps reasonably financially sophisticated, who think that if you have a minority shareholding you have actually in some ways negative control or some control over the company. It is very, very difficult. I was on the board of nationalised industries in the past, British Steel for one example, observing the high priest of capitalism, Keith Joseph, struggling to answer questions on the floor of the House about why he did not control every move made by British Steel. It does not actually clarify the relationship. It can confuse it terribly and it is a very political question. There are other ways of producing the desired effect.

  183. What I am seeking your assessment of is that it may well be a political question, and you are entitled to that view, but Gerald Corbett does not see it that way because he has said to us very clearly in his evidence, because I asked him the question, ". . . 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", the most efficient way. Their view is clear. Mr Corbett said, "That is a fact". I asked, "What has been their reaction?", "Their reaction was thoughtful".
  (Sir Alastair Morton) No, my reaction was explicit. I said to him that that was a very political question. It would bring all kinds of baggage about who is in control here direct to his doorstep and actually he could produce exactly the same effect—exactly the same effect—in other ways using public sector funds which are willing to take a back seat. We use the term "patient capital". That means it ranks behind, it waits for its return, it gets repaid later, it is subordinated as to risk of either servicing or repayment. This is how you lever in several pounds of market money for every £1 of taxpayer's money, which is something which I think ought to be a priority.

  184. Would you agree or otherwise with another statement by Mr Corbett which I thought was very important, talking about the short-term investment £8 billion and the shortfall in whatever timescale it might be? When asked a question by my colleague Miss McIntosh, "Can we conclude from that that if there is no substantial increase", in resources, "you cannot carry on investing to the same extent that you have been?", "That is correct". He went on to say that unless they get this they will be in breach of their banking covenants. Quite serious stuff. What is your reaction to that sort of statement?
  (Sir Alastair Morton) My reaction is to agree with you that if they are in breach of their banking covenants it is serious. The question of when their cash and income flows will put them in breach is a question which the Regulator addresses in his five-yearly review. I am sure you will be putting the question to him. It will be serious if the outcome is that they are in breach. It is very necessary that Railtrack does invest. Railtrack has quite substantial borrowing capability. They learn how much money they are likely to have by extrapolation from the regulatory settlement in a few weeks' time. There is no possibility in my view of a regulatory settlement—and this is me expressing my opinion—which will be big enough for Railtrack to foot every bill for a very large investment programme of the scale I was talking about. They have to be helped. I have been saying that in public since June last year.

Mr O'Brien

  185. A great deal of research and a great deal of discussion has taken place on the passenger rail service and the future of the passenger rail service. The English Welsh and Scottish group are worried about the franchise replacement process and the result that will have on the passenger service enhancements. Are EWS's concerns well-founded that the franchise replacement process may lead to passenger operators absorbing scarce capacity on the network and leaving few opportunities for rail freight to grow?
  (Sir Alastair Morton) Yes, it is a concern. The increase in traffic which is very substantial since privatisation inevitably occupies network capacity, therefore there is more pressure at the crowded points, the choke points. In so far as freight goes through those it comes under pressure. Traditionally that would have had a simple answer: British Rail would have put freight in the park and let the passengers go through. Freight is concerned to get an equal shout and the lobbyists for freight have been putting the case very forcefully. We are required by a statute which has been through this House to promote the movement of freight onto rail. We therefore do support the view that freight must have its share of capacity. If the two are competing for scarce capacity, there is only one answer: build more capacity at the narrow points, as it were.

  186. Having noted the point you make, how are you going to balance the conflict between the two in the immediate and mid-term future? If we are talking of putting in more capacity, that is long-term. Are we going to balance it in the medium and short term?
  (Sir Alastair Morton) It can only be done operationally and by working as fast as possible to solve it with investment. I shall give you an example. I do not have an exact number but last year the passenger traffic on the North London line from Willesden Junction across to Stratford increased by a quite remarkable percentage—tens of percentage points. That happens to be the principal freight route from Felixstowe, our major sea port, to West Midlands, our major freight destination. Hard to believe, but it is, because it comes down and goes up; it does not go across. Putting freight across from Felixstowe across the East Coast Main Line or onto it, across the Midland Main Line or onto it, across the West Coast Main Line or onto it and into the West Midlands would take that traffic off the North London line and resolve that particular crunch. I give you that only as an example.

  187. Can you give us some indication as to how the SSRA are looking at this? Would it be possible to build something into the negotiations on the franchises for passenger transport to include freight transport also, to make sure they have a place in the negotiations?
  (Mr Grant) In the documentation we have produced for franchise replacement, we have a number of criteria which we have listed. One of the criteria is the provision of enabling infrastructure to allow expansion of freight services on a national and increasingly an international basis. We are asking the proposer to say how they could incorporate more freight at the same time as looking at their proposal. If we give an example of the East Coast Main Line where we have started to work quite closely with Railtrack, we have conducted a number of meetings where all the users—14 users on the East Coast Main Line—come along and say what their capacity needs are in the medium term and the long term. Of course there is a balance and that is how we are taking freight into account in the franchise replacement process.

  Mr O'Brien: Can you give us any indication what you mean by the balance? How will it operate?

Chairman

  188. How seriously are you going to take that?
  (Mr Grant) We are taking it very seriously because our position is that we have to push freight forward. We shall be putting forward a freight strategy as part of our overall strategy.

Mr O'Brien

  189. Will that be included in the passenger franchise negotiations?
  (Mr Grant) There is an element of asking people who put forward franchise proposals to outline how we can enhance freight capacity at the same time.

  190. You did say you have a programme for helping the freight. Will that be included in the negotiations?
  (Sir Alastair Morton) How do we negotiate that with the passenger franchisees is the puzzlement?

  191. I would imagine that some reference will be made to capacity on the lines for freight.
  (Sir Alastair Morton) That is right.

  192. Should that not be included at the same time we are talking about the passenger franchises?
  (Sir Alastair Morton) It does depend which line you are on. You probably know that over 40 per cent of current rail freight goes up the West Coast Main Line. When you are talking to the franchisees or potential franchisees who are going to use the West Coast Main Line, you certainly do talk a lot about freight. There are other lines where even in prospect there is very likely to be little freight and what there is will perhaps be quarry traffic which only goes at a slow speed and then travels at certain hours or something. In other words, it is not a global answer. We shall be seeking to ensure that there is growth in freight traffic, that there is investment in infrastructure to permit the growth in freight traffic, that there are improvements in efficiencies of freight operating companies so they do not get in the way. The new locomotives and rolling stock brought in by EWS are a very substantial aid to that end, and so on. It does depend where you are looking and which the franchise will be as to how you discuss the interaction of freight and passenger.

Mr Bennett

  193. Do you have some sort of formula in which you say so many tonnes of freight equals 20 passengers or that each can make a profit and the one who makes most profit? There must be some crunch thing or is it just a question of feeling which is the more desirable?
  (Sir Alastair Morton) In our book it is a question of how you promote growth. We are looking for outputs.

  194. You are going to have to make choices, are you not?
  (Sir Alastair Morton) Yes, we are.

  195. You cannot do both.
  (Sir Alastair Morton) So why should we make the choice according to the single formula? That is perhaps the question back to you?

  Mr Bennett: Are you offering us several formulae? Just give us one example of your formulae.

Chairman

  196. We are not suggesting you do; we are asking how you do it. Mr Grant has been very straightforward: he says this is one of the criteria. What we are really asking is how you prioritise your criteria.
  (Sir Alastair Morton) It depends which franchise and which line.
  (Mr Grant) It does. There is an overall growth figure. As we tackle each upgrade—and I gave the East Coast as an example—we shall be looking to EWS, the freight users, to say what their growth potential is for that particular line. We shall then have to make an assessment of whether we believe that growth, whether it is reasonable, whether it is a reasonable assumption and make sure that the upgrade on that line has the capacity for what we think the growth will be. There may be diversionary routes if it is the East Coast Main Line. It may be that it is on the East Coast Main Line if it is fast freight traffic, because not all freight traffic is slow. There will be an assessment of what we think is needed on a particular line and as part of the upgrade of that line, we shall ensure that there is capacity to meet what we think will be that growth on that line.

Mr Bennett

  197. Let me give you an example from Greater Manchester. We have a lot of trains carrying limestone which come down from the Peak District, they come down through Dukinfield and Audenshaw, they come round through Stockport and then they run for about one mile on the West Coast Main Line from Manchester towards Crewe, then they go off again onto a line which is little used. There is huge pressure on that little bit through Stockport from commuter trains, London-bound trains and the freight. How would you balance the rights of those three sets of people?
  (Sir Alastair Morton) You start operationally: timing. You think about traction power. You look at signalling. You investigate the passing, space that there is if any; it is a crowded part of the world. In the end you say we are going to have to find a different answer because we are absolutely full up. Then you may take them the other way round Manchester; you may do things which I cannot sit here and recite to you. I am afraid I am not that close to it.

  198. I want some sort of formula rather than just a hope and a prayer that you can find some solution to it.
  (Sir Alastair Morton) We are not a Stalinist planning organisation which uses formulae to fit any situation on the network. We have said again and again that we will talk to the customers, we shall talk to those who need the service, we shall talk to providers of the service and we shall look to the providers of the service to be the best people to guide us initially on what they would like to have because they are the people seeking to make a business out of it. At the end of that process, if we have a head to head dead-end between opposing point of views you have to find a solution which will be a matter of analysis, discussion, solution, one hopes. But that it will be perfectly right for the next five, 10, 20, 50 years thereafter is an impossibility to assure people. That it can be done by a formula of so many tonnes equals so many five-year-old children we have not yet even thought of, I must say.

  Chairman: You must not put yourself down, Sir Alastair. I am sure you are quite as efficient as Stalin.

Mr O'Brien

  199. Following Mr Grant's statement that the capacity will be measured and then a formula will be introduced, under the negotiations which are taking place on the passenger franchise, people will be looking for more capacity, more passenger trains, taking up greater capacity on the track, which means that someone has to be squeezed and in this case it could be freight. Is that the right way forward? I was asking how you are balancing the fact that we need freight to grow in addition to passengers.
  (Sir Alastair Morton) In this hypothetical line we are discussing or maybe the actual one are there a lot of two-car rush hour passenger trains? Perhaps they could be three-car or four-car or five-car; perhaps, maybe not. There is a question to answer there for whoever is looking at this. We are getting into some serious operational detail here which none of us is actually qualified for. The point we are trying to make is that you analyse your problem and you use your judgement in solving it. You do not use formulae.

  Chairman: It would be helpful if we could differentiate what would be operational matters and what would be your theory and balance of principles in relation to your criteria. We are not actually discussing how many cars we are going to put on any particular line, because we could all have fun like that. It would be helpful to the Committee to know the difference between operational and administrative, particularly in relation to your own criteria.

  Miss McIntosh: May I just remind colleagues of my interests which I have declared?

  Chairman: We all have interests in this. I should also declare that I am a longstanding member of the Rail, Maritime and Transport Trade Union which is not likely to influence my judgement any more than it has for the last heaven know's how long.



 
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