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

Examination of Witness (Question Number 96-119)




  96. Before you begin, Sir Alastair, while you are impressing us with your collation of vital information which you do not already carry in 15 volumes in your head, could I beg your indulgence to make a short statement. The Sub-Committee has agreed to extend the scope of the current inquiry which will consider the Government's proposals for the successor to Railtrack and the implications of those proposals on railway franchising policy. I thought I should make that clear because most people have come here to consider one set of terms of reference and we are just making it every so slightly wider. Ever so slightly! Could I welcome you, Sir Alastair. You are always a most useful and impressive witness to this Committee and this seems to be a most exciting and interesting time. As the Chinese say, "May you live in many interesting times". May we ask you first to identify yourself.

  (Sir Alastair Morton) Alastair Morton, Chairman of the Strategic Rail Authority.

  97. Do you have something you would like to say to us first?
  (Sir Alastair Morton) May I, just briefly. I know time is tightly scheduled so there are just three things—

  98. Sir Alastair, we always have time for you and doubtless we can make more.
  (Sir Alastair Morton) I was about to use the same Chinese saying as you have just used, I think we have "lived in interesting times". I find it hard to think of any significant period of strategic stability that would have allowed reliable forward planning in the rail industry at any time since October 1999, and least of all this month. That coupled with the powerless status of the SRA has been very frustrating and has a lot to do with why I am leaving. The second point I would like to open with is to say it is not useful, I am afraid, to ask me how the project to put Railtrack into administration developed or climaxed because I simply was not there. Despite the expertise available to me at the SRA on rail and, if I may say so, despite the expertise inside the SRA on insolvency in capital intensive industries, we were not involved. However, we are where we are and we should concentrate, as far as I am concerned, if I may, on how we go forward from here rather than how we got these last couple of steps here. It so happens, in my opinion, that railway administration is a state of affairs that is fairly flexible and you can hope to go forward towards restructuring the industry with greater ease from that state than perhaps from other states. It is very necessary to focus on the restructuring of this troubled industry and to focus on design and, if we get it right, and that is the imperative first point, we have to ask how it will all be funded. My third point is just a piece of information. My resignation from the SRA chair will take effect after the contractual three months' notice on Friday 14 December but I withdrew some time ago from the preparation of the Strategic Plan and informed the Secretary of State and cleared it with my Board; and a Committee of the Board is now in charge of that in my place.

  99. The Committee of the Board?
  (Sir Alastair Morton) I would have been chairing the Committee; it is a way of involving the Board. I am spending, however, my last few weeks—and I do not know how many there will be because I do not know how they are getting on with choosing my successor—trying to complete a set of what I might call personal recommendations on the restructuring we should go for because, as I say, that is the central move required. We have to be able to get there from here. It has to be an achievable restructuring. I can, if you like, as we go on, try and describe to you how I think the industry should try to look in a year, say in mid-2002, when the famous Spending Round may make clearer what money is going to be available. Even if you get the structure right, you have then still got to get the money right. There is no point getting the money if you have not got the right structure. I will leave those three thoughts with you, Chairman, and I am now at your disposal.

  100. I think some of those things will come up as we go along but before I call anybody else in, tell me, what do you think are priorities for the SRA?
  (Sir Alastair Morton) The priorities for the SRA are those set out in the instructions and guidance that came from the Secretary of State in draft form in July. Unless and until the consultation process that he launched then results in revision of those instructions and guidance, those will be the priorities. The first one in there is a strategic plan in November. If you do not know what kind of an animal Railtrack or its successor is going to be, and you have heard that the SRA is going to mutate in some way that you do not know, and you have a new Chairman arriving in November perhaps but perhaps appointed but not arrived yet, I find it quite an onerous task that I have left behind me to my colleagues to produce a strategic plan in that time. It is also onerous for a particular, and I think, noxious reason that the instructions and guidance of July, which have been reiterated countless times by senior officials, require the SRA to prepare their plan within the resources currently available. As I said to you in the Committee room in May, those resources are wrongly structured and inadequate in amount, so there are quite a few handicaps in the way of producing a strategic plan.

  101. Is that the basis of the difficulties that have occurred between you and Ministers?
  (Sir Alastair Morton) It obviously accelerated the difficulties. I think I said to you that I began to find life difficult with Ministers in the autumn of last year. That was when things began to develop, like the Regulator's hand getting into the SRA's pocket to remove money that it has not been predicted he would remove in order to give it to Railtrack. We got into one debate after another in which differences were emerging. The long drawn out delay in trying to award the East Coast franchise was a major source of difficulty. Cumulatively these difficulties built up.

  102. What you are really saying is that it was a question of quite fundamental differences on funding, on direction, on clarity of instruction. Is that what you are telling us?
  (Sir Alastair Morton) I was jotting these down as a note which is not going anywhere in particular at the moment. I will not read through them but I will jog through them. I have told the Secretary of State in my letter of resignation that the instructions and guidance as drafted and issued in July—and it is only a draft I accept—are unworkable first because they place the SRA under the repeated and detailed direction of Mr Linnard who you have just been avoiding—interviewing.

  103. I never seek to avoid the Department. The Department frequently seek to avoid me!
  (Sir Alastair Morton) It may have been a Freudian slip. They have been placing the SRA, which is supposed to be a specialist agency, expert in its subject, under the total direction of an inexpert—by definition—generalist Civil Service directorate in which the people change from time to time, quite frequently. That denies the SRA the ability to pursue the objectives given to it by Parliament in the Transport Act 2000. Second, the question of being restricted by the existing inadequate allocation of resources. How do you go forward? The "do nothing" option is one, the "do minimum" option is the second. I am afraid, you are over the budget already at "do minimum". If you do nothing you may squeeze in under budget. The third point I would mention is that the officials have required that the SRA's plan be prepared on the basis of only three of the objectives set in the Government's ten-year plan. Those are 50, 80, PIXC. That means 50 per cent more passengers in ten years' time, 80 per cent more tonne miles of freight, and no significant over-crowding of London commuters. So 50, 80, PIXC. PIXC is the acronym for the measurement of over-crowding. Those are only three objectives among a number that I think a plan ought to address, so there is a difference there. The preference you were addressing with Mr Linnard and Mr Coulshed for short-term extensions (which, I frankly believe and have publicly said, serve very little purpose if any) and the question of addressing the Railtrack issue, which even though we were not communicating well on that I do accept has been addressed, but not in a way that I was involved in.

  104. So you do not accept that you had an input because it had been going on for months and you had been telling them what the problems were and about your particular areas of concern?
  (Sir Alastair Morton) I put a memorandum on the new Secretary of State's desk to greet him on arrival on June 7. I wrote it before I knew his identity. It was, I have been assured by his officials, on his desk as he walked into his office, no doubt with their comments. In it I said you have to address the Railtrack situation. I put three points down but that was a big one. We did not talk about it between then and the night of Saturday October 6th. Not that I talked to him that night either.

  105. You have not been talking to a lot of people, Sir Alastair.
  (Sir Alastair Morton) I see more than I wish to of quite a lot of people but not of the Secretary of State.

  106. Do you see the role of the Treasury as being very important in the new franchise strategy and in the changes that are being brought about?
  (Sir Alastair Morton) I think the role of the Treasury is always important, as I have said variously in public. It is extremely frustrating to be unable to engage the Treasury in a serious dialogue about highly technical subjects, such as project and structured financing. I addressed the issue of SPVs and project finance in a memorandum to the Managing Director of Public Expenditure.

  107. Was that also part of the information you gave to the Secretary of State?
  (Sir Alastair Morton) He would have been told that on the first day. I addressed that to the Treasury in October 1999. I would not rate the quality of dialogue following that memo and since then as being of great value. There has been some dialogue between lower level officials but no real engagement in how is this thing going to work and what exactly are we responsible for and how much money do you think we can raise if we address ourselves to it?

  Chairman: I am sure there will be lots of questions about that. Miss McIntosh and then Mr Grayling?

Miss McIntosh

  108. May I remind the Committee of my shareholdings in Railtrack and Euro Tunnel. Can I place my own personal thanks to Sir Alastair on the record for being so helpful to the Committee in the past. Sir Alastair, I understand that the Secretary of State has admitted that the Strategic Rail Authority did make a firm recommendation of one particular company for a 20-year franchise to be awarded on the East Coast route. Are you in a position to share with us this afternoon which company it was?
  (Sir Alastair Morton) I do not think it is a secret. We recommended GNER in December and never changed our opinion once. We certainly did not talk about it while it was in front of Ministers but these things seem to get known in the end.

  109. Were you surprised, against the background of that recommendation for a 20-year period, that only a two-year period was awarded when in fact in its own Departmental press release of 18 July the Department set out four specific phases that they would like to see before 2003?
  (Sir Alastair Morton) Yes, I was very surprised in that, to put it politely and mildly, we had been badgering Ministers since January. The normal process is they should have replied in three weeks; and it was not, as they publicly said to everybody, their business to second-guess us. We had been badgering them to give us permission to go ahead with the preferred bidder since January. We had allowed Christmas to go by and then we got going in January. In the time between January and the publication of their announcement, the dialogue about "on the one hand, on the other, why not this, why not that, should we do it this way, should we do it that way", would have fitted on the back of a postage stamp.

  110. In your introductory remarks, Sir Alastair, you said two things. One was the structure of what you believe the new arrangement should be, and I gather you have drawn short of suggesting that the Rail Regulator should be abolished. But would you say that the Rail Regulator should go, and there should be a new, more streamlined structure than we have at the moment?
  (Sir Alastair Morton) Just by way of an opening paragraph, I believe that there are three black holes in the industry at the moment. One is clearly Railtrack, the second is regulation—in total, not just the Office of the Rail Regulator—and the third is funding. So addressing the regulation one that you have asked about, I suspect I may not be too far from Mr Byers on this one, if I understand what Mr Linnard is saying (because that is the only information I have). I agree with the train operators in ATOC that there has to be somewhere they can go if they are being bullied or maltreated. There are monopolies and dominant players in this industry and I do think there has to be an appellate body or tribunal that really ought to be expert in railways rather than just the Competition Office, as it were. That I think has to continue in existence. I regard that as a third to a half of the existing ORR but the other part, the larger part of the Regulator's function, as practised by Tom Winsor in any case in my time, is what I would call performance and pricing and access. I put it very simply: I think he who pays the piper should call the tune. Government funding through the SRA or whatever successor body pays for what is done under regulation and it should say,"I want you to do the following and I am going, after negotiation, to pay you the following to do it. If we disagree on the amount per unit of work let's go to this tribunal perhaps or let's reason it out." Therefore I think the SRA should take over this function of pricing and performance and access regulation. And then you make the obvious remark- and I cannot be accused of empire building because I have no intention of being there to receive it—that it is not the only thing that needs to go into the reshaping of the SRA. So there are two movements here, one is what goes out and the other is what from where comes into the SRA. Maybe one day we will call it something else to show it is a mark II edition.

Andrew Bennett

  111. Are you actually saying that Mr Winsor has been bullying you? You suggested that the Rail Regulator could bully. I am asking you if —
  (Sir Alastair Morton) No I think the party that might get accused of bullying is the SRA because it pays and says, "I will not pay for that" and where do you go to appeal? I meant bullying by monopolies and dominant players, and to ensure that there are not monopoly practices and abuse of dominant positions. For example, in the West Coast Main Line, which I have talked about before, the fact that the freight companies and some other TOCs could not be sure of getting access to a sufficient number of paths after Railtrack/Virgin negotiated a deal was taken to the Regulator. I think properly so. I think that is absolutely right.


  112. Some of those problems would remain. If you absorbed some of the major functions of the ORR into the SRA, there will always be the accusation that it is judge, jury and executioner.
  (Sir Alastair Morton) That is exactly why I think this part of the ORR should remain separate as a tribunal for that kind of thing.

Miss McIntosh

  113. On the financing, which is another point you raised, would you accept that there has to be quite a large proportion of private investment into rail projects in the future? How do you think the Government should attract such private investment and do you think recent events might have damaged its possibility of doing so?
  (Sir Alastair Morton) Yes I do think so. The single most important reason not to renationalise Railtrack in the recent past was to avoid putting it back 100 per cent under the Treasury. Therefore very obviously and very publicly, and I suppose rather loudly, I have been saying (and I will go on saying) you have got to get private sector capital in. I talked about, in the past, the largest public/private partnership in Europe. I know "PPP" a bit of a dirty word in London these days—find another description—but I am talking about a partnership between the public purse and private enterprise capital and management. Therefore, yes, you have got to have a situation, a structure, a market-place that private capital is going to flow into. You want a market-place to supply funding, skills, project management, you want it to supply technology. Unless people believe there is a market-place where private enterprise business can flourish, no such market-place will develop and then we are in a mess. We have not got enough resources and we are back under the Treasury for all the money.

Chris Grayling

  114. Can I start by talking about the ten-year year plan. There is obviously potentially a hiatus in investment now. We are into the second year of the ten-year plan. Is it your view that the ten-year plan is still achievable in any way shape or form? Indeed, is it your view that it is possible within the ten-year plan period, as I say is just under nine years, for any major enhancements, expansions of capacity on the rail network to take place?
  (Sir Alastair Morton) A very small correction, if I may. The ten-year plan was started on the 1st April this year, so we are in the first year, but it does not change the point. I think there is lots of chance, given structure, given management, given determination and given money, to get the objectives of the ten-year plan very largely done. I think the case for seeking to do so has grown stronger and stronger. I simply never have believed the Government remark in the ten-year plan that, as a result of all this transport investment, that congestion will be less at the end of the tenth year. The Commission for Integrated Transport, of which I am an ex officio member, does not believe it either, so I am not alone in my view. The case is strengthening and there are still nine and a half years to go. How much will be done by then I do not regard as important. I think we have a programme to pursue and if it takes in the end 11 years to be done, not least because of the incredibly archaic planning processes that are necessary, I do not think that is a bad thing. What is essential is to reformulate in the industry now and in the recycling of Railtrack, an absolute government commitment to go on contributing financially and supportively and administratively to the creation of a market-place in project investment and corporate investment in railway operation and railway supply and so on that will cause a rising flow of investment and project achievement as the years advance. It is in the nature of big projects, particularly when they are done on a "hot" railway where trains are whizzing by underneath as it were, that it takes a long time and is very costly. It has to be very carefully planned indeed and trying to hustle it into a very short time, trying to adopt the usual Treasury attitude" if it can't be spent in the next two years you cannot have the money" and "you are not to prepare a ten-year plan that pays any attention to the first day of the 11th year", I regard as nonsense.

  115. Do you have a sense of what you now believe to be necessary in financial terms to meet the goals in the ten-year plan? Does it require additional funds beyond what was originally envisaged and do you think the Treasury will need to guarantee investment in order to secure it?
  (Sir Alastair Morton) If I may answer the last point first. I cannot answer what will need to be guaranteed or not until I know what forms of relationship for Railtrack and other relationships are emerging. I just do not know. I said when I last came in front of the Committee that the slightly over £30 billion that was notionally allocated but not formally allocated to the SRA in the ten-year plan was wrongly structured and not sufficient in amount. Wrongly structured in the division between revenue and capital and between the first five years and second five years. Those are the divides they put into the plan. And they are also insufficient, both because the total is going to be over the £65 billion that was in the plan, 34 from the private sector and what became 31 through the SRA and Government. I think the total is going to be bigger than that. Even more importantly, nobody can tell—I certainly cannot—whether the number that will emerge from the private sector is 55 per cent of the total, 45 per cent of the total, 30 per cent of total, or 70 per cent of the total. So the risk exists that more will have to come from the public purse. In particular, if the expenditure in question is support of private sector capital and long-term involvement and you have raised the price of private capital by what has just happened in the last two weeks and you need more, and if the cost of franchises goes up, you have just raised the revenue requirement of the SRA's funding. So it is a thing that can move around a lot, but as set up and structured it was not going to do the job.

  116. On the debt front—something I mentioned to officials previously—with your perspective on the industry and knowledge of the City, what steps do you think the Government could take, what weapons does it have in its armoury to secure a return of the Railtrack debt grading from triple C back up a to a level which would enable it to secure future investment?
  (Sir Alastair Morton) I am not in a position to comment because I simply do not know on what basis you construct that hypothesis. The Government announced the other day the Railtrack's future debt grading after emerging from administration was going to be BBB, which is the bottom end of investment grade. I do not know what the basis for that is. If the Government is guaranteeing it, it is triple A. If the Government is saying there is no guarantee whatsoever, it may well be triple C. I do not know on what basis you construct the hypothesis it is going to be any particular place in the grading.

Mr Donohoe

  117. How much private money was introduced into the operations by Railtrack by April of this year
  (Sir Alastair Morton) I am afraid I do not know the answer to that question. They were certainly discussing a jointly owned SPV for South Central capital projects. They were discussing it with two partners, one was GoVia, the future franchisee and the other was Bechtel, but the amounts of money and splits between them I am afraid I do not know. There may have been other examples beside.

  118. How much private money has there been put into the railway industry as far as the Railtrack part of the operations is concerned?
  (Sir Alastair Morton) The infrastructure?

  119. In your period as Chairman.
  (Sir Alastair Morton) I cannot give you a number.

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