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


Examination of Witnesses (Questions 560 - 579)

WEDNESDAY 22 NOVEMBER 2000

SIR PHILIP BECK, MR STEVEN MARSHALL AND MR RICHARD MIDDLETON

  560. So how many more engineers now are there within the structure than there were before? It is very nice that you have changed your job description and it is terribly important to have people at that level who do know about engineering, but how many more engineers have we got now at that level?
  (Mr Middleton) We now have a Chief Engineer in the company, that is the most recent appointment we have made, and we will be recruiting more engineers over the course of the next few weeks and months.

  Chairman: I have to suspend the Committee, and I am going to ask Members to be back in 15 minutes, if they will.

  The Committee suspended from 4.46 pm to 4.58 pm for a division in the House

  Chairman: I think it is a notional 5 o'clock. We shall now follow the new railways scheme and say that we are not on time but we are almost.

Mr Donohoe

  561. Is it true that Sir Alastair Morton, reported in the weekend's press as such, is conducting a `root-and-branch' review of Railtrack's management?
  (Mr Marshall) No, it is not. I am very grateful for the opportunity to comment on it, because obviously we have seen a lot of press speculation. It is not true at all. Sir Alastair met both with the Chairman and then separately with myself yesterday, he is making entirely reasonable enquiries, as a result of the change of management, as to what our agenda is, what plans we have in place to fulfil the recovery plan, and also to be clear that, in terms of a longer-term arrangement, we have what we need to deliver the enhancement programme for the railway, and all the rest of it. That is the extent of his interest, and I think it is an entirely legitimate interest, given the public funding that is going into the railway.

  562. So there has been no meeting between him and Railtrack on this issue of a review?
  (Mr Marshall) No; but, as I say, we had a meeting yesterday, it was a very productive meeting, and indeed I understand the SRA has issued a press release this afternoon confirming precisely what their objectives are, and they described the meeting as positive, and we will go forward and continue to talk about our plans. But it is certainly not a root-and-branch review of Railtrack, and I think that is clear from the press release.

  563. Going back to the earlier questioning of you, Sir Philip, what are your opinions about the share price of Railtrack at present?
  (Sir Philip Beck) The share price of Railtrack, obviously, is affected by comments in the press, but I do not really have any comment to make about the specific level of the share price at this moment.
  (Mr Marshall) No; clearly it has suffered over the last day or two in response to the press speculation. The reaction following our interim results was fairly restrained. The market, at this stage, I would suggest to you, is looking to see the regulatory review being concluded and, like the travelling public and everybody else, also looking to see evidence that the recovery plan is completed on a timely basis.

Chairman

  564. Have you talked to your shareholders, your large shareholders?
  (Mr Marshall) Yes, of course.

  565. And what was their reaction to your appointment, if they are really genuinely worried about the sort of publicity that the company is getting?
  (Mr Marshall) The principal concern at this stage was precisely Mr Donohoe's early question, which is to what extent the Government, or the SRA, were indeed rumoured to be reviewing Railtrack; that is the concern.

Mr Donohoe

  566. What would be the option, Mr Marshall, that the Government could take, I am sure, that when making this massive investment over the next ten years they take some interest in your company? What is Railtrack's opinion of that; do you believe that that would be legitimate for the Government to consider?
  (Mr Marshall) It is legitimate for the Government to consider any financing alternatives that it wishes to. But if I could respond to your question in another way, at the end of the day, we need to step back and think about what is happening in terms of the financing arrangements for Railtrack. The reality is that the Regulator has moved considerably in the current periodic review, but Railtrack is investing the totality of what the Regulator is providing us and also has to borrow to invest a great deal more; that is the reality. So Railtrack is investing the funds it is getting from the state, and needs in public markets to add to that a great deal more to do what is required to upgrade the network.

  567. But the difference is that the private money that you key in comes in on the basis of a return; what is it, in your opinion, that the Government gets in return?
  (Mr Marshall) What the Government gets is transfer of risk, because at the end of the day the risk, on the enhancement programme, and in raising the extra money that Railtrack has to raise on its balance sheet, is borne by the private investors, both debt and equity. That does relieve the state of the need to provide all of the financing that Railtrack requires.

  568. But it would not make any difference at all if the Government were to suggest that they were giving money on the basis of a bond, or on the basis of some form of interest, would it; they could do that?
  (Mr Marshall) It certainly could propose that, but it would be a matter for the Government, and the Government would also need to take into account the risk it might be taking in such a position; because nothing comes risk-free, and the model that Railtrack was set up on, for good or for ill, it is where we are today, is on the basis that private sector capital is brought in to bear some of that risk.

Chairman

  569. Are you having to raise a lot of extra capital on the private markets because, in fact, in the last three years you have not kept up with the level of investment that you promised originally?
  (Mr Marshall) Actually, the reverse, Madam Chair. In practice, Railtrack has invested a great deal more over the last three years than ever it was set up to do, and that has been recognised to an extent by the current Regulator; but we have borrowed, we have invested £2.5 billion this year alone and we will therefore have debt at the end of this year in excess of £3 billion.

Mr Stevenson

  570. Can I ask, Mr Marshall, would the West Coast Main Line modernisation go ahead if the Government did not provide the £4 billion in direct grant?
  (Mr Marshall) The regulatory review has indeed recognised the need to finance and go ahead with the West Coast route—

  571. Would it go ahead if it did not, which is a direct grant? My question was, would the West Coast modernisation go ahead if Government, through the Regulator, did not provide £4 billion worth of direct grant; will it go ahead?
  (Mr Marshall) That would be very difficult, if not impossible, for us to finance without it.

  572. It would not go ahead?
  (Mr Marshall) It would not go ahead.

  573. I see; thank you. And the £4 billion, can I ask, as ex-Finance Director, now Chief Executive, if the Government did not provide that £4 billion, how much would it cost, could you assess for us, for Railtrack to raise that £4 billion on the capital market?
  (Mr Marshall) I will respond directly to your question, but could I make a clarification before I do so. The £4 billion that is being provided directly through the Strategic Rail Authority, in effect a Government grant, as you rightly say, is not actually for West Coast, it is a grant towards the extra cost of renewing the whole network.

  574. Why did you not say that when you responded to my first question then, with respect, when I asked directly about the West Coast, you said it would not go ahead without the £4 billion?
  (Mr Marshall) Because, Mr Stevenson, that is so, because if Railtrack were £4 billion worse off it would be such a stretch for us it simply could not go ahead.

  575. Let us not mince words over that. Could you give me some idea then of what it would cost Railtrack to raise the £4 billion on the capital markets?
  (Mr Marshall) To raise an additional £4 billion, let us say, the first thing Railtrack would have to do in those circumstances, if it did not have that grant, to be frank with you, is to do a rights issue; we would probably need an additional £1 billion of equity and we would then be able to borrow bank loans to bridge the extra three.

  576. So, at a minimum, that grant being available removes the requirement for you to raise £1 billion worth of equity, which you would have to honour sooner or later?
  (Mr Marshall) Broadly speaking, that would be the impact of the debt, yes.

  577. Could I then go on to your supplementary memorandum, Mr Marshall, please, and this whole issue of public/private involvement, and public money levering in private money. In the document, you seem to have some doubts about just how successful this might be, and if I can quote, about the ten-year plan and investment, the document says: "At present it is not clear the extent to which investment will be funded through refranchising with funding passing through TOCs, or more directly through capital grants . . ." Are you clearer now on that, given the Rail Regulator's announcements?
  (Mr Marshall) We are precisely clear on the intent in the periodic review, and I have no doubt further questions are coming on the periodic review so I will not dwell on it now, unless you wish me to, but I would make an additional point, which is that the Government's ten-year plan makes provision for a £7 billion railway maintenance fund, development fund, for the Strategic Rail Authority. It remains at this stage, and we understand why, unclear as to how that funding might be channelled into the railway industry. That matter, we anticipate, will be clarified in the Strategic Rail Authority's plan, which I understand is due sometime in January of next year.

  578. Finally, on that issue, if I might, Mrs Dunwoody, whereas the situation appears to be clear about the relationship between Railtrack investment and public resources, there are still significant doubts that need to be clarified, obviously, in terms of what you have said in your document. But that is not what your predecessor told the Committee, on 5 July this year, on this whole issue of the public interest and how that should be protected. He said that Railtrack had 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 agree with that?
  (Mr Marshall) I think it could be an efficient way, but it is not necessarily the only way.

  579. It says: "as being the most efficient way . . ." Do you agree with that?
  (Mr Marshall) No, I think it is overstating it, if you are asking my opinion.



 
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