Examination of Witnesses (Questions 740
WEDNESDAY 29 NOVEMBER 2000
740. A very small shareholder but a very large
(Sir Alastair Morton) This is back to the point we
were discussing over here. If we are going to put large sums of
public money into Railtrack we expect Railtrack to be fit for
741. You are one of the country's most experienced
and most successful businessmen. If you were getting your own
personal chequebook out to make some investments in a company,
what sort of mix between technical competence and business competence
would you be expecting to see on the board of that company?
(Sir Alastair Morton) I would expect Railtrack to
show that it can deliver the operating facilities, the maintenance
programme, the renewal programme, and the enhanced investment
programme that is required to meet all of the specifications we
are wanting to see in the railway we want to see.
742. You want to see all of those things before
allowing this investment to flow. Are you telling this Committee
that you do see all of those things or that you are still asking
(Sir Alastair Morton) No, still asking questions.
743. So if the answers you get back are that
they are not in a position to deliver all of these things then
you will be insisting on having an influence over board members?
(Sir Alastair Morton) There is a frontier here with
the Rail Regulator. The Rail Regulator has a duty to see that
Railtrack gets remunerated for its work supplying infrastructure
to the users at a level that is spelt out in statute. The Rail
Regulator has just done that exercise. That is meant to cover
operations, maintenance and renewal and make some provision for
financing investment. The Regulator also has a duty to see that
Railtrack does not misuse its monopoly position. If Railtrack
makes a miserable mess of everything it does, short of losing
its licence it could be said to be abusing its monopoly position
by making life unnecessarily miserable for all those out to use
it. The Regulator has powers to pursue Railtrack and, if he so
concludes, to fine Railtrack as long as he follows due process.
So there is that going on. I am talking particularly about the
investment programme which has to be put on top of the general
programme, so if you like I am talking about both. We want to
be satisfied that before we transfer money, other than by way
of subsidy through TOCs for use of the rails, we are satisfied
it is going to make good use of it, and we are still asking questions.
744. So it is possible that at some point in
the near future, if you felt it to be necessary, you could say
either direct to the Railtrack board or through Government "any
further investment is dependent upon us picking the new chairman
of the board or the new technical cirector of the board"?
It is an option that is available to you.
(Sir Alastair Morton) I have been around for quite
a long time and I have been on the boards of nationalised industries
and state corporations on a number of occasions and the Government
picking chairmen of nationalised industries is not an unblemished
745. Companies picking chairmen is not an unblemished
history. Perhaps you would like to give us a short list.
(Sir Alastair Morton) I think saying that we want
it right is always a better posture in this sort of relationship
than saying "move over, I will do it myself".
746. But will you at least be feeding a job
description into the board of Railtrack?
(Sir Alastair Morton) I think that is a perfectly
fair statement. That is not the only job description on their
minds, they have got their own, but certainly they know what I
think is necessary, yes.
747. You do have a direct responsibility, of
course, for the new franchises so presumably you apply these same
criteria to the companies that have put themselves before you
as possible franchisees?
(Sir Alastair Morton) Yes.
(Mr Grant) We have a long list of criteria on how
we are judging the franchisees, including the management.
748. When you are going through those criteria,
assuming that you are satisfied that the company is fit for the
purpose and is capable of delivering its objectives, can you just
say something about how you intend to balance economic performance
of those franchises with social issues that you have to take into
account, the need to perhaps improve services for regeneration
purposes or that you need to fulfil a social function with a railways
as well as an economic one?
(Sir Alastair Morton) By the time we get to negotiating
a new franchise, Mike Grant and his colleagues have consulted
very widely over what the parties served by that franchise would
like to see. Hopefully it will be a list fully reflecting the
concerns of lots of people. We then encourage the would-be franchisees
to canvass similarly to establish their own ideas of what they
think they would like to supply because they are there to make
money out of supplying a service that people want to buy. You
then see some rather different proposals coming in and you get
local pressure groups lining up behind one or the other because
they see their concerns being better addressed by one candidate
rather than the other. We saw that in the recent South Central
franchise competition when Connex had ideas that pleased one group
over there while GoVia had ideas that pleased another group rather
more over here. There is a "what does the market want, the
users, the customersand how will the candidates supply
it" approach to this rather than us sitting at home thinking
that we would like to see so and so on a map.
749. It has been suggested in the press recently
that you are considering some very long franchises for some companies.
(Sir Alastair Morton) Up to 20 years.
750. Up to 20 years. Does the set of targets
that you give a franchise that is going to have its contract for
20 years differ from one that is only going to have seven years,
(Mr Grant) The new franchise arrangements are very
different from the existing franchises. First of all, as far as
management is concerned, which was an earlier question, we do
an analysis, both at the strategic, the operational and the individual
level, we go in and look at that. We look at the customer focus,
the business management, value chain people and the asset management
and that gives us a picture, if you like, of what we think about
the management, whether they can make the step change that we
are actually looking for. Then, of course, you have to do the
economic evaluation, which is both the fare box and the socio-economic
benefits, and we obviously come up with an economic evaluation.
Then a crucial decision is do you believe that they can deliver
it? It is a mixture of the economic and financial evaluation and
what you think of the management that leads us to the decision.
As far as the new franchises are concerned, there are review points
and we will be looking for continuous improvement over the 20
years. There will probably be five or seven year review points
where we will be looking for continuous improvement and if that
continuous improvement is not there then we can take the franchise
751. So the review points are actually going
to be break points, it is not as if they have automatically got
it for 20 years?
(Mr Grant) There are two sets of reviews. One is to
look to the next stage of investment, because there are three
stages of investment in the new franchisescommitted outputs,
primary aspirations and secondary aspirationsthen, of course,
there are the quality improvements we are looking for. There will
be two types of review under the new franchise.
752. How will you deal with the investment issue
that I am sure a franchise company will put to you when they are
coming up to one of these reviews that they have had to front
load their investment in order to achieve your targets? They may
have fallen back on those targets slightly and, therefore, you
are looking critically at whether to continue with that franchise
and they will argue "but we have put all this money in, we
are entitled to another five years because that is when we will
be taking money in".
(Mr Grant) The basis of the investment is on the committed
outputs, what are they committed to deliver? That is the basis
of the franchise period to start with and the cash flows that
go with it. The next stage, which might be five or ten years hence
depending on the type of franchise it is, is a separate investment
decision. Clearly it is linked to the first in so far as have
they delivered what they said, but there is no obligation to continue
with the existing franchise on the new investment if they have
not delivered the first part.
753. Will all of these franchises be exclusive
rights to run rail services in a particular area?
(Mr Grant) They will be specified services over a
particular area. The two we have got to heads of terms are Chiltern
against specified routes and South Central.
754. Can I just ask you a little bit about the
investment proposals for the Channel Tunnel Rail Link and in particular
what influence you will be having over the way that investment
is flowing into perhaps the Phase 2? Are the recent problems that
Railtrack are experiencing in any way changing those plans?
(Sir Alastair Morton) Because we are still a shadow
the responsibility for that is still with the Department. I have
really nothing to tell you at this time.
755. You would tell us tomorrow, would you?
(Sir Alastair Morton) I think I would like a little
time to read the file, if I may.
756. You can always come back at the same time
(Sir Alastair Morton) I think we can leave that one
757. That is something that you would be prepared
to come back to us on in a few weeks' time?
(Mr Grant) The arrangements are that once we become
legitimate Sorry, Chairman.
Chairman: I think you became legitimate this
afternoon but we will not mention it.
758. I wish somebody knew who was running the
railway this afternoon.
(Mr Grant) There would be a hand over and it would
probably be over a few months period from the Department to ourselves
but it is not next week.
759. Sir Alastair, do you think that all this
hoo-ha after Hatfield is going to have a long-term effect on the
use of railways, passenger and freight, or do you think that the
public will return because those projections in the 10 Year Plan
are vital in calculating the potential viability of the railway
industry, are they not?
(Sir Alastair Morton) I am inclined to believe, but
obviously we will have to wait and see, that in passenger traffic
we will see the level going back up again pretty smartly. Commuting
by road is a highly uncertain occupation. I do not mean safety
so much as I mean time. Congestion on roads does drive people
on to the rails, or encourage them on to the rails perhaps I should
say. I have seen this happen before elsewhere in other sectors,
that while people get bothered they actually return to their primary
concern, which is punctuality and reasonable comfort obviously.
In the matter of freight I think the picture is more uncertain.
The Government has reduced the previously escalated fuel duty,
has allowed 44 tonne trucks under certain conditions on to the
roads, and we have had this shock in which, because we are still
somewhat in the traditional style of operation of railways where
freight is the losable option when you have got a congestion problem
or a queue of trains waiting to use the line, as it were, freight
has suffered quite a lot in this particular shock. There have
been some adverse developments in freight. Freight was always
facing quite a challenge on that 80 per cent. I am in no sense
saying it is impossible, it depends on capital investment in certain
groups, which is still to happen, so we have no way of testing
how fast it will come back. I am concerned about freight, I am
less concerned about passengers.