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

Examination of Witnesses (Question Number 40-59)



Mrs Ellman

  40. What will the relationship be between the Strategic Rail Authority and Railtrack taking these improvements forward?
  (Mr Linnard) There has already been quite a close dialogue between Railtrack and the Strategic Rail Authority in the context of specific special purpose vehicles, and indeed the whole notion of special purpose vehicles arguably originates with Sir Alastair Morton.


  41. Doubtless he will tell us, Mr Linnard, please do not secondguess him.
  (Mr Linnard) So the Strategic Rail Authority has already been talking to Railtrack and will talk to Railtrack and its successor body about special purpose vehicles. Because all these infrastructure up-grades depend on public funding, it will go in through the Strategic Rail Authority, and it is the SRA which will have a big say in what it wants to buy in the way of extra line capacity, for passengers or freight, and all the other things which are part of it.

Mr Stevenson

  42. That is very helpful, we will come back to that. Could I ask for clarification please? It has been reported that banks and other consortia in other European countries may be interested in buying Railtrack or its successor. Could you rule that out or rule it in, or are you not ruling anything out?
  (Mr Linnard) In the first place, if we are talking about Railtrack plc, the company which is in administration—

  43. Or its successor.
  (Mr Linnard) In the first place, while Railtrack is in administration it is a matter for the administrator. No doubt because any successor body to Railtrack will need substantial government funding, then a party which wanted to make an approach would want to talk to the Government. We would naturally have to consider any realistic proposal which was put to us. The scheme that ministers have outlined for a company limited by guarantee would take on all Railtrack's current and future liabilities, and all I can say is that an alternative would at least need to take on those liabilities if it were to be viable. So the Government has a very big influence on whether Railtrack comes out of administration as a company limited by guarantee, which is their preferred option, or some other vehicle. They cannot absolutely rule out of consideration anything, but a company limited by guarantee is the preference.

  44. So we could be faced with a situation that if a bid was made to the administrators in the next six months which they thought was a viable bid from a private consortium in another country, the Secretary of State could well be faced with a decision to either approve that or not? Is that what you are saying?
  (Mr Linnard) He would have to sign the transfer scheme which takes Railtrack out of administration. Arguably that gives him a veto over the successor body to Railtrack. What I am saying is that as a matter of public law, that veto could not be exercised unreasonably or irrationally.

  45. You did say earlier on that ministers will have a big influence on the successor body, I wrote it down although I paraphrase slightly. Would the Secretary of State have a veto or would he not? What sort of influence would the Secretary of State have, and how would that influence be exercised on a successor body?
  (Mr Linnard) What he will do is construct a company limited by guarantee and discuss with the administrator the terms on which Railtrack plc's assets and business would be taken out of administration into that. He would also have to make and approve a transfer scheme which implemented that transfer into the new vehicle. Those are the levers.

  Mr Stevenson: But it is after that my question is directed to, in terms of a potential non-UK private buyer. The suggestion you have made is that ministers would have a big influence over the successor body. What you have described is a mechanism for bringing that successor body into being.


  46. Mr Linnard, if SNCF and the other groups, including at least one other nationalised railway, want to buy up this new company, will they be able to do so?
  (Mr Linnard) There will be a power of veto for the Government, either directly by ministers or by the Strategic Rail Authority in terms of the on-sale of the assets out of the CLG.

Mr Stevenson

  47. I wanted to ask a question about this vertical integration, which seems to be the flavour of this month, whether it will be the flavour of next month remains to be seen. As you have said, there are some companies which are enthusiastic and some which are rather more tepid in their approach. If I can refer you to the continuous problem of fragmentation in the industry, how would the emergence of what could be numerous special purpose vehicles throughout the country reduce that blight of fragmentation?
  (Mr Linnard) I do not think we are looking at numerous special purpose vehicles.

  48. How many?
  (Mr Linnard) We are looking at them being used where there are major enhancement projects of the sort we are seeing in South Central, which we will see on the East Coast Mainline. I would be surprised if we get into double figures.

  49. Twelve? 15?
  (Mr Linnard) I would be surprised if it goes that far.

  50. Directly on the West Coast Mainline, which you have referred to, and some of us around the table have a particular interest in this, who is going to pay for the up-grade of the West Coast Mainline once the costs have been identified to your satisfaction? Is it going to be the Government? Is it going to be the special purpose vehicle with the Government? Is it going to be the special purpose vehicle with the SRA and the Government? Who is going to pay for it?
  (Mr Linnard) We are not going to suggest that the West Coast up-grade goes into a special purpose vehicle. It is too far advanced, it is too complicated in terms of the number of operators who use the line, the number of trains which use the line, and it is too much an integral part of Railtrack's business to be disentangled at this stage. So the West Coast Mainline, the up-grade, will stay within Railtrack, the core business as it is now, because it is essentially a maintenance and renewal programme rather than an enhancement programme. What is clear though is that for the successor body to Railtrack there needs to be much more clarity on the cost of the West Coast up-grade. We have to get to the bottom of the true cost and specification of particularly phase two of the up-grade.


  51. Are you saying it is such a mess no one else will want to take it on and you will jolly well have to sort it out yourselves using the new company? I paraphrase.
  (Mr Linnard) That is one way of interpreting it. It would also be practically very, very difficult at this stage with a project which is well-advanced—

  52. What makes you think you can bring the costs down if Railtrack were not capable of bringing them down themselves?
  (Mr Linnard) This is one of the things which needs to be addressed in Railtrack, both in administration and going out of administration.

  Chairman: Yes, Mr Linnard, it will have to be addressed.

Dr Pugh

  53. Can I direct my questions back to Mr Coulshed, because in answer to the Chairman earlier I did not feel I had reached total parity about what it was he was saying. You were talking about a mixture of franchises, short and long, and the fear of many of us is that when you have a short franchise you will have significant under-investment because it never pays to invest if you only have something for a limited period of time. What you seemed to say was, regardless of whether a franchise is short or long, you envisage a situation where whoever took on the franchise would have to inherit any investment made by the previous organisation. Is that what you said?
  (Mr Coulshed) I do not think I said it in quite such the stark way as you have put it.

  54. I wanted to say it in a stark way.
  (Mr Coulshed) I understand that but I think the picture is a bit more—confused, I was going to say, but it is more subtle than that.


  55. Obtuse? I would not want to put words in your mouth.
  (Mr Coulshed) Thank you very much. It is clear that of the major forms of investment in the railway, rolling stock can be dealt with in the way I was describing. Infrastructure by and large falls to Railtrack or its successors in the way which has been discussed. It is not so obvious then that there are other major forms of investment which it is necessary for train operators to participate in. That is not to say it is not desirable or they may not themselves want to do so in particular cases, but it is not necessary to do that. Particularly in the case of rolling stock companies—and I do not think this is so true for other forms of investment—they have made it pretty clear they are looking for some kind of guarantee that if they invest money on trains for a franchise which does not have very long to go, they want to be sure that investment will not then be wasted when the franchise ends.

  Chairman: I think that was the recommendation of this Committee some time ago.

Dr Pugh

  56. So you envisage in the future any successor company to any franchise will have a prior condition, a basic fundamental condition, that there will be definite investment—and I speak coming from an area like Merseyside where we have not seen a new carriage in about 30 years really—they should buy new rolling stock or lease new rolling stock?
  (Mr Coulshed) No, that is not what I said. If a preceding franchisee wishes to purchase new rolling stock and the rolling stock company seeks a guarantee that their rolling stock will continue to be used by a successor franchisee, such a guarantee will be—

  Dr Pugh: That is quite an important point. In your previous response to the Chairman you indicated the situations you will create will bring out a preparedness on behalf of coach companies to produce something but not a readiness on behalf of the existing franchisees to buy. That is the point. If you are the current franchisee for many networks and you have a few years to run, and you are looking for a two year renewal after that, you have little reason to go to the coach companies and insist on new carriages.


  57. Is it going to be part of the new franchising demands?
  (Mr Coulshed) It certainly could be. One of the things which could be included in the terms of a replacement franchise or an extension to an existing franchise, might be some commitment to existing rolling stock.

  58. So there has not been a change in direction from the Secretary of State from previous statements about what he wanted to see in the new franchises?
  (Mr Linnard) Correct.

Chris Grayling

  59. You referred to s.54 earlier but am I right in thinking that s.54 has only been used two or three times in the existence of a private railway industry? Therefore, are you suggesting there is going to be a change of policy now from the Treasury and the Department towards s.54?
  (Mr Coulshed) It has not been used frequently in the past and there is a greater readiness than there was in the past, yes.

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