Select Committee on Transport, Local Government and the Regions Minutes of Evidence


Examination of Witnesses (Question Number 1-19)

WEDNESDAY 17 OCTOBER 2001

MR BOB LINNARD AND MR MARK COULSHED

Chairman

  1. Good afternoon, gentlemen. I am delighted to have you with us this afternoon. I am going to ask you please to identify yourselves for the record.
  (Mr Linnard) My name is Bob Linnard, I am the Director of Railways in DTLR.
  (Mr Coulshed) My name is Mark Coulshed, I am head of the Railways Sponsorship Division in DTLR.

  2. Thank you very much. I realise this is a rather fraught moment for you both and therefore we are very grateful to you, but you will understand the Committee feels this is a moment of great importance and your evidence is going to be of very considerable interest not only to us but many people outside. May I ask you, Mr Linnard, was the change in franchising policy prompted by Railtrack's worsening financial position and the intention to place the company in administration?
  (Mr Linnard) No, it was not. The review of franchising policy goes back quite a time before the decision on Railtrack's future was taken on 5 October and communicated to Railtrack on 5 October, which resulted in the company going into administration on 7 October. The decisions on Railtrack's future were not taken until that time, whereas the review of franchising policy, as is evident I think from the published documents which have been put out for consultation, preceded that by some time.

  3. When are we going to know what debt and income Railtrack's successor is going to have available?
  (Mr Linnard) The first issue is to construct and identify Railtrack's successor. Railtrack is in administration and decisions on the vehicle into which Railtrack's assets and operations go, when it comes out of administration, are in the first instance for the administrator though the relevant transfer scheme will have to be approved by the Secretary of State.

  4. Forgive me, you are not suggesting that the Secretary of State is not going to have an input into that before the administrator? Presumably it will be a partnership effort.
  (Mr Linnard) It will be, yes. Obviously we are talking to the administrator about the funding and operation of Railtrack while it is in administration. Ministers have made clear what sort of future company they see taking on Railtrack's business and assets; a company limited by guarantee. They have made clear they will put a proposal for such a vehicle to the administrator. All I am saying is that this is not totally within the Secretary of State's control, though obviously as the ultimate funder of Railtrack's business ministers will have a big influence on the successor body.

  5. Can you give some clarity to their creditors as to what risks the Government will bear on behalf of Railtrack's successor?
  (Mr Linnard) What we have said is that creditors will be kept whole, that is that the debt that Railtrack has at the moment can be transferred into a successor body on the same terms, in all important respects—interest rates, principal, coupon—as the debt which is currently within Railtrack. So there is an option available for creditors for their debt to transfer into the new body on the same terms. That commercial borrowing will provide an important part of the core funding.

  6. How does that affect the relationship with other companies? Are you going to allow the Railtrack assets to remain, particularly property assets, in another company at the same time as a successor company takes on existing debt?
  (Mr Linnard) All the assets which are needed for the operation of Railtrack's licensed business, Railtrack plc's licensed business, are in Railtrack plc, the company which is in administration. There are other parts in Railtrack Group which is not in administration.

  7. So what are we talking about? Forgive me, I want to be quite clear, you are saying that things like the property assets, like the stations and the land, are in a separate company and you would not regard them as part of the assets of Railtrack in administration?
  (Mr Linnard) No, the stations are in plc. There is some non-core property, a very small amount, which is in Railtrack Group, but that is not the property which is central to the operation of the business. Everything that is necessary for the operation of Railtrack plc's network business is in Railtrack plc.

  8. They have completed the record of assets they were asked to do?
  (Mr Linnard) I do not know whether they have actually completed it, but certainly they are under an enforceable licence obligation from the regulator to complete the asset register by a specified time.

  9. Yes, but you will know that has been the case for some time. There has been a request to them, framed in, shall we say, "more definite terms" as time has gone on, but it does not seem to have produced a result.
  (Mr Linnard) Yes. One of the things Railtrack agreed to do on 2 April when the Government agreed to advance £1.5 billion was effectively that they would sign up to the licence obligation to produce and maintain an asset register.

  10. Was that timetabled?
  (Mr Linnard) Well, it was an agreement with the regulator. I cannot offhand remember what the regulator's deadline is for doing it.

  Chairman: We will be taking evidence from the regulator.

Chris Grayling

  11. You talk about the transfer of debt, obviously there is an issue in terms of the credit rating and the Railtrack debt as of today. It has been downgraded significantly by the ratings agencies. Potentially that has an impact on the actual repayment levels, and you might perhaps address that, but equally, as you transfer the debt into the new vehicle, there will be a fairly imperative need to get the rating of that debt back up again to a level which will attract new investment. What actions are you taking to address that issue?
  (Mr Linnard) Clearly, the debt in the new vehicle has to have a good investment grade rating. One of the things that we have done, and will continue to do, is to maintain a dialogue with the ratings agency and with the major lenders to explain to them how, if Railtrack's business goes into a company limited by guarantee, that will provide basically a good proposition for lenders. What we will be able to say to them is that in important respects this will be a safe—not risk-free, this is going to be a private company—a relatively safe proposition to lend to. I think probably there are three things to bring out. First of all, it will have lower risks than Railtrack has or has had in the past, because the major projects, and this goes back to the agreement with Railtrack in April, will be handled through special purpose vehicles with third party finance project management being brought in. Secondly, there will be adequate revenue to meet the cost of servicing the debt. The new company's income will come largely, as Railtrack's does at the moment, from track access charges and from direct government grants which have a considerable certainty attached to them. While there will be risks, quite rightly, on the performance of the new company in terms of operating, maintaining and renewing the network, these will be in proportion to the scale of the company's income and to the reserves it will be able to build up, because although it is a not-for-profit distribution company, it can still accumulate profits to act as a buffer.

  12. And the cost of the repayment of debt today with the drop in rating?
  (Mr Linnard) What we want to do is to ensure the lenders accept what is known as a standstill arrangement under which the debt will transfer into the new company, and we do not believe it will be necessary to make major repayments.

Miss McIntosh

  13. Why should the income to the new vehicle be any more guaranteed than the income to the old vehicle?
  (Mr Linnard) The income to the old vehicle was guaranteed. The track access charges, the direct government grants, were not 100 per cent guaranteed but there was considerable certainty about the level and timing of grants. The problem with the old vehicle was not the level of the income, it was the level of the costs and the fact those were rising too fast and too regularly and that the income was not keeping pace with that.

  14. Why will that change with the new vehicle?
  (Mr Linnard) Partly because some of the major projects will be handled outside the company limited by guarantee, but also because we believe that a company limited by guarantee without shareholders, without duties on directors to make returns to shareholders, will have more incentive to control costs, particularly if key stakeholders, particularly the train operators, are members of the body that owns the company limited by guarantee, because they will all be working in the same direction, to the same agenda. So we think there will be more incentive to control costs and less incentive on the new company than there has been on Railtrack to look for higher regulatory settlements, one-off exceptional grants from Government, some of which then get passed on to shareholders.

Chairman

  15. Have you any information about any large sale of shares by anyone connected with Railtrack since the spring?
  (Mr Linnard) I have not, no.

  16. Would you know if there had been any significant selling of Railtrack shares?
  (Mr Linnard) No, I would not.

  17. Would you expect the Government to take an interest in that?
  (Mr Linnard) The position was that as soon as the Government had taken a decision, we had to communicate to the company, and that was done. So far as I am aware, there were not any major movements in Railtrack shares in the period leading up to the Secretary of State's decision, but as I say the responsibility for communicating decisions about Railtrack's financial position rests with the directors of Railtrack, not with the Government.

Mr O'Brien

  18. You referred earlier to the involvement of the train operators in a possible new company, in view of the sharp turn on franchising which was announced by the Secretary of State, do you think that will encourage train operators to invest in the industry?
  (Mr Linnard) There is certainly a question about franchising and perhaps I could dealt with it in that order, first franchising and then train operator involvement in the new company and how the two things might relate. We are saying on the duration of franchises really it is horses for courses. In some cases there will be a need for investment and a certainty about the cost of the investment that would make it sensible to sign up to long franchises, probably—and this is very much the SRA's territory—with review points every five to seven years as has been suggested. That is certainly not ruled out. There is no question of saying there will never be any long franchises, but equally where there is not a need for major investment, or where the investment can be secured without the need for a long franchise, frankly there will be no need to enter into a 20-year commitment. So refranchising is going on at the moment and, as I dare say we will come to later, we are looking with the SRA at a policy which is very much horses for courses. There are a substantial number, more than half the franchises, the original seven year franchises, which will be expiring within the next two to 2½ years, but I do not think that will in any way weaken the desire of the train operators to be part of a successor body to Railtrack which can work in the interests of the train operators more than, arguably, Railtrack in its old form did previously.

  19. Will the new franchises then improve service? The service I know best is the East Coast Mainline, GNER, and they are wanting to invest—or at least I am given to understand they are wanting to invest—in new rolling stock but, because of the short franchises, it is a risky business; they do not know whether they should be investing because there could be difficulties in extending the franchise. Do you consider these short franchises will improve services?
  (Mr Coulshed) The intention is that when franchises are replaced, in every case there will be some improvement secured as a result of that, whether it is done early or at the due time or after an extension, whether the replacement franchise is for a shorter or a longer period. There is a particular point about rolling stock which is that rolling stock investment itself is made by rolling stock companies, so by and large it is not a fundamental point that train operators need to participate in long franchises in order to secure that investment.


 
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