Examination of Witness (Question Number
WEDNESDAY 17 OCTOBER 2001
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?
(Sir Alastair Morton) Yes.
122. Surely in these circumstances you should
know how much private money you had been successfully able to
(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
123. Could you give us a note on that?
(Sir Alastair Morton) Yes, I can try and do that.
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
125. Your auditors submitted a report as detailed
(Sir Alastair Morton) PriceWaterhouse are our auditors.
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 pointgo
back to the ancient past when the ten-year plan was written 15
months ago before all the change happenedapproximately
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 silenceand
I mean silenceon 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 businessand
I hope you would agree with this statementto 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 atbecause
he always brought it to mehis 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.
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.
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 roomand
I was not here at the beginningwhen 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
133. Newtrackwe 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 infirst thing. What different?
I believe the opportunity now exists for a successor to Railtracklet's
call it Newtrack, so we do not waste timethat 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
Aprilwhich 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
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 thinkI only think thisthe
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.