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


Examination of Witnesses (Questions 220 - 239)

WEDNESDAY 12 JULY 2000

SIR ALASTAIR MORTON, MR M GRANT AND MR T JENNER

  220. Would it be possible that the same trend which has operated by virtue of the sell-off of the bus industry, which has led to a situation where you now have three operators, is likely to be mirrored in rail in that you will only have three operators or three owners within the rail system?
  (Sir Alastair Morton) There is a safeguard in the Rail Regulator and the OFT. If it is a purely rail matter, where a market dominant position is being established and abused, it will be dealt with by the Regulator and perhaps you should put that to him.

Chairman

  221. May I ask you what response you have had to that map? You put out your idea of your franchise map. What response did you get?
  (Sir Alastair Morton) On the whole favourable, in fact very largely favourable; not stunned delight, but favourable.

Mr Donohoe

  222. What were the main concerns about the proposals?
  (Sir Alastair Morton) That it did not go far enough in reshaping the existing map. People who wanted more radical solutions. On the whole those are counterbalanced in Britain, as I am sure you would agree, by people who say total change all the time is not necessarily a good thing. At the end of the day we said there is no good reason here for throwing the whole thing up and starting again, let us evolve.

  223. What is the potential there, what protection is there for you to safeguard the idea that there would only be three companies owning all of the 22?
  (Sir Alastair Morton) No takeover of a train operator is possible without the Franchising Director's permission at present or the SRA's in future.

  224. When they come to refranchise, as is the case with the East Coast Main Line, you could have a company which owns the West Coast line running the East Coast as well and that in real terms is a tremendous proportion of the total earnings within the railway system.
  (Sir Alastair Morton) Of the total rail system, but what of the total north/south transport system? The question of what is the market is a question for the Regulator and the OFT, not for us.

Chairman

  225. Let us ask you a simpler one then. In your franchise replacement discussions, are the proposals which have commercial benefits being given greater priority than those which offer social benefits?
  (Sir Alastair Morton) No; they are all being given due weight.

  226. As to that, we shall have to think about it.
  (Sir Alastair Morton) At the end of the day it is a judgement. There is no formula which says so many ounces of socio-economic equals so many pounds of commerce.

Mr Stevenson

  227. It may be a judgement but we understand that Railtrack have submitted to the Government and to your goodselves their estimation of what may be commercial investment and what may be social investment. Would you just confirm that?
  (Sir Alastair Morton) Yes. Railtrack in their latest network management statement have withdrawn any reference to commercial. They no longer submit that they will do something as a commercial investment at their own risk, which is the way they undertook the West Coast Main Line, which has come unglued.

  228. Railtrack is going ahead with phase one and they are talking about £1.2 billion. Phase two includes their decision to move away from moving block signalling to the alternative, which they claim has been the main reason why the costs have increased from just over £2 billion to in excess of £5 billion. We are talking about phase two and the West Coast, by definition, is strategic. Were you consulted about the decision by Railtrack which has more than doubled the cost of the West Coast Main Line improvements?
  (Sir Alastair Morton) I think you were given a shorthand description of the reasons for the cost increase.

  229. I am simply referring to the reasons we were given.
  (Sir Alastair Morton) Yes. As I say, I think you were given a shorthand description which we will let rest there. Railtrack, through phase one and phase two has contractual obligations to Virgin on which I will not comment; they must deliver them. Their contract with Virgin is the basis of Virgin's franchise obligations to us. That is a contract which must be delivered. As to being consulted, yes, we were kept very well informed by Railtrack as their thinking evolved.

  230. Just to confirm this, you were specifically consulted as an organisation on the decision that Railtrack took on their moving block signalling which has more than doubled the cost of improvements on this strategic line.
  (Sir Alastair Morton) No, Sir. We were well informed, I said. We were not asked to decide or to advise.

  231. Did you know about their decision?
  (Sir Alastair Morton) We knew they were working through their options. They called it preparing for black diamond day on 9 December last year and I should think we knew about it by the early/mid summer, that they had a programme of work which would give them an attitude but it was their work, their responsibility, their advisers at their expense. It was not our advice in a consultation.

Chairman

  232. So they told you. That is very interesting. Are they wrong to say that the use of special purpose vehicles to raise additional investment would be expensive and impracticable?
  (Sir Alastair Morton) It is certainly possible to make it expensive if you go about it in a resistant way.

  233. Is that a no?
  (Sir Alastair Morton) It could be expensive, it does not have to be expensive, is the answer.

  234. So you do not agree then.
  (Sir Alastair Morton) No.

  235. What types of enhancements do you think could be financed by special purpose vehicles?
  (Sir Alastair Morton) Let us try to backtrack a bit, if we may. Special purpose vehicle, SPV, is a term of art in project finance. It has an almost infinite range of meaning. I am sorry to be like this, but it does. I have been in this business for a very long time. It is simply an entity which may be corporate, limited by shares, or may not be. I can give you examples of not. It is put in place to undertake initially a financing.

  236. Mr Corbett is not aware of the different forms.
  (Sir Alastair Morton) Having a vehicle, as they are called, which is just an entity and does not necessarily have wheels on it or anything, then gives you something which can employ management, can employ contractors, can place contracts, can take risk or need not. What it exactly costs and how you exactly employ it is almost infinitely extendable.

  237. So there is no point in me asking you what protection investors would seek to maintain their expected returns because you are saying to me that it could be anything under any shape, any form.
  (Sir Alastair Morton) I would approach it from the end where Mr Corbett and I are in complete agreement.

  238. Yes, that would be an interesting point.
  (Sir Alastair Morton) Railtrack is the operator and controller of the network.

  239. Yes, I think we are agreed on that.
  (Sir Alastair Morton) In order for Railtrack to do that efficiently, which is what the Regulator demands very noisily of Railtrack, that they be efficient and more so every year, and in order to be safe, which all of us demand of Railtrack, they have to be unfettered and wholly responsible in their control of the operation of the network. There we start with an agreement. If you take off into the middle distance on the basis that you are going to set up these famous special purpose vehicles on a basis that transfers the ownership and control and operation of the ground on which the tracks stand, you can make a case quite quickly that you are introducing confusion to the network. If you take off in the other direction at a fork and say we are talking about funding and operating under the control of and on sub-contract and so on to Railtrack, you do not arrive at that confusion. Once again, we start where we agree, we have an infinite number of paths ahead of us, we are moving to choose a central one.



 
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