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


Examination of Witness (Question Number 120-139)

WEDNESDAY 17 OCTOBER 2001

SIR ALASTAIR MORTON

  120. I understood that the Strategic Rail Authority had a responsibility to bring in private money.
  (Sir Alastair Morton) That we should try to use government funds to lever in private sector funds?

  121. Yes.
  (Sir Alastair Morton) Yes.

  122. Surely in these circumstances you should know how much private money you had been successfully able to lever in?
  (Sir Alastair Morton) It is a not unreasonable for you to say the SRA should know but that the Chairman should carry the figure I have to tell you, in practice, is not the case. If you look at the Chiltern franchise, there is quite a lot money coming in from private sector investors from that. I have mentioned the South Central franchise —

Chairman

  123. Could you give us a note on that?
  (Sir Alastair Morton) Yes, I can try and do that.

Mr Donohoe

  124. If you take the leadership of the SRA as it should be, I do not know if you have read PriceWaterhouse's response, I am sure you have.
  (Sir Alastair Morton) I have not actually. I was slightly startled that our auditors put it in without talking to us, I must say.

Chairman

  125. Your auditors submitted a report as detailed as that?
  (Sir Alastair Morton) PriceWaterhouse are our auditors.

Mr Donohoe

  126. I was coming to that, I was aware of that. They did not believe the SRA had demonstrated leadership to the rail industry. That is what they are saying in their report.
  (Sir Alastair Morton) I am not going to say nobody is allowed to criticise us. I have expressed my point about our auditors. It is also true that another firm, KPMG, were our financial advisers on franchises and there may have been a little bit of professional bitchiness there, but since I have not read it I cannot give an opinion.

  127. It states in this report: "In specific areas where the SRA assumes funding will be provided by the private sector, it needs to be clear how it expects the private sector to provide that money and how the private investors will be repaid or renumerated. That was written on 6 October. They said they were not aware of what was going to happen on the 7th.
  (Sir Alastair Morton) I do not think they could have been because I was not, no.

  128. On the basis of that there were problems, were there not, in trying to introduce private money at the rates that were going to be required. They are talking, as we know, of a figure of £34 billion being required from the private sector for the ten-year plan to be implemented.
  (Sir Alastair Morton) I think I can answer the question in the way you have now put it. I may have to come back to you for particular words in a moment. On the first point—go back to the ancient past when the ten-year plan was written 15 months ago before all the change happened—approximately half of the £34 billion was meant to come in on Railtrack's balance sheet or in partnerships led by Railtrack. Railtrack was going to bring it in. There was no specification where the other half was going to come from, but clearly we were expected, and were expecting ourselves, to be the agents and sponsors or entrepreneurs or creators or leaders that would draw it in or help to draw it in. I have said many times in public that SPVs do not just have the SRA and Railtrack and TOCs as investors. They can have project management contractors, they can have property developers, they can have a supermarket next to the commuter railway station that wants to share the car park. They can have local authorities who might qualify as private sector depending on how they went about putting the money together for the local authority interest. I have said all along that there would be money brought in from the private sector. Next point, that 34 and the 31ish from us are both revenue and capital. To the extent the private sector accepts less subsidy and pays more premium as being the risk it carries in the hope of future profit in a new franchise (not an old franchise), then that affects the money coming in, so there were a number of ways through. What is certainly true, and I accept this totally, is that we were running a long way behind schedule in achieving new franchises. I do not mean closing them off financially because banks can hold you off forever; but in reaching a deal published with a preferred bidder like we did with Midland Mainline, Chiltern and South Central. I think we were way behind schedule and I cite to you again the appallingly long silence—and I mean silence—on the East Coast franchise which did more to destroy the credibility of the SRA than any other possible move. We were going to do the Wessex franchise, the Wales and Borders, and the trans-Pennine franchise all in the time we waited for the GNER.

  129. I heard you on radio yesterday morning and you outlined very well, I thought, just exactly what you thought was wrong. Why did you not do that on your appointment? Why have you waited to be as honest about the industry when you are departing?
  (Sir Alastair Morton) I think that is a very unfair remark, if I may say so, sir. Even at my advanced age I do learn and I have learned a lot in the last two and a half years. First point. Second point, I said within three months of taking office Railtrack had not got the necessary financial or management resources to do the entire network development job itself and therefore it needed the SPVs and other private investment and so on. Railtrack's then Chief Executive, Gerald Corbett, declared himself totally opposed to that and, to my fairly substantial annoyance, fascinated Lord Macdonald, people in Number 10 Downing Street and people in the Treasury as well as people in the City with visions which I did not accept or agree with. However, it was not my business—and I hope you would agree with this statement—to take aim as if I were a gunner and he were a passing aircraft and shoot him down. If he could bring floods of private capital to take on these huge tasks far beyond the size of his balance sheet, he was obviously a cleverer guy than I was. He seemed to be making progress or at least convincing very clever people in the Treasury and Number 10 that he was making progress. I happened to look at—because he always brought it to me—his banking advice coming from advisers that I had used in Eurotunnel. It was almost identical with the advice they had given me in Eurotunnel about securitisation and so on, and there are grave difficulties in introducing securitisation. I said what the difficulties were and he did not agree with me. This went back and forth and back and forth from late 1999 until he left office in November 2000. His successor Steve Marshall, who had previously been Finance Director, instantly said,"Of course you are right, Alastair, we have got to have SPVs, we can't do the whole job," and the thing has gone downhill from that point to where they cannot do anything at all.

Chairman

  130. Sir Alastair, did you discuss the auditor's report with them?
  (Sir Alastair Morton) The PWC Report?

  131. Are you going to pay them?
  (Sir Alastair Morton) As auditors yes; not for that report I can assure you.

Mr Stevenson

  132. I want to ask a question about the new company after Railtrack. Sir Alastair, what do you make of the announcement of the Secretary of State about the suggested successor to Railtrack, the non-profit-making company limited by guarantee?
  (Sir Alastair Morton) I have to wait and see how he plans to do it. I have some idea but I do not have a complete idea of how this can happen. I was severely surprised by what Mr Linnard said in the time after I arrived at the back the room—and I was not here at the beginning—when he said that it is envisaged by the Secretary of State that Newtrack, or whatever they are going to call it, is going to emerge from administration in the same form and with the same responsibilities as Railtrack went into administration. I regard that as not a good idea at all because I think restructuring the industry has now got a possible route in front of it as it did not have when Railtrack was in the way.

  133. Newtrack—we should all live in hope! Tell me, Sir Alastair, you say that "he who pays the piper should call tune" and the Government is paying the piper. You nod in agreement.
  (Sir Alastair Morton) I nod in agreement.

  134. Therefore performance, payment and access should be under the SRA's responsibility.
  (Sir Alastair Morton) That is what I said, yes.

  135. Given that as far as many of us can see the major modernisation projects for rail in this country are either guaranteed by government or paid by government through the SRA and the track access charges are mostly coming from the public purse, and your arguments are that the SRA should take over this performance payment and access from the Regulator, what do we need a successor to Railtrack for?
  (Sir Alastair Morton) That is a good and very reasonable question. I will attempt to answer.

  136. I would be grateful for a reasonable answer.
  (Sir Alastair Morton) I will do my best. I do not believe that we need a Railtrack emerging from administration doing the same job as it went in—first thing. What different? I believe the opportunity now exists for a successor to Railtrack—let's call it Newtrack, so we do not waste time—that is an operations and maintenance manager. If you build an independent power station somewhere on the shores of Portugal, as we did when I was director of National Power, there is an operate and maintain contract which is awarded to the successful bidder for that, usually an operator, sometimes an equipment supplier. Newtrack, could be the O&M manager, part of a network. That is a management contracting job; it is not a heavily capitalised task, so you would not be in the same bind of it needing so much money any more. I could go on about that but I will not. If you say they are going to emerge with that, you then must say what are they not going to emerge with? They are not going to emerge with something they lost in April—which was the leadership of capital development projects. They are not going to emerge with control of access to the network because they cannot hand it to themselves for maintenance thereby blocking construction and development. They are not going to emerge with a couple of other lesser things. In other words, a slimmed down Railtrack —

  137. If you have your way, the Regulator is not going to have performance, payments or access as that would go to the SRA?
  (Sir Alastair Morton) I think—I only think this—the Secretary of State has in mind or his officials have in mind that there needs to be a separation of payment of what you might call the rental on the assets, which at present are owned by Railtrack (now owned by administrator), from the payment for services rendered. If you think of the water company in Wales, the ownership of the asset is separate from the management of the asset.

  138. Why can that not be done under the SRA? Why do we need another company to do that? That is an effective transfer of resources from government to a body which could be the SRA. Provided the SRA was doing its job properly and effectively and efficiently and attracting private partners, why do we need another obstacle in the way of that?
  (Sir Alastair Morton) You have to have somebody operating and maintaining the network.

  139. The SRA could do that. Why do we need another body to do it?
  (Sir Alastair Morton) I do not happen to think that way but I understand what you are saying.


 
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