Examination of Witnesses (Questions 420
WEDNESDAY 31 OCTOBER 2001
420. Who are your discussions taking place with?
(Mr Rollings) At this moment we are working through
the information that is available within Railtrack. Clearly to
the extent that we need to go to third parties, such as the contractors
and so forth, we will be doing that.
421. Are you confident in the estimates that
you have discovered within Railtrack?
(Mr Rollings) It is a little early to say on a line
by line basis.
422. Well, in a general sense are you confident,
if not on a line by line basis?
(Mr Rollings) I think it is fair to say that it depends
where you look at these things on the development levels.
(Mr Rollings) So that an estimate that is at a very
early stage in the process is
424. As we have heard can differ by something
like three or four times by the time it gets through.
(Mr Rollings) Yes.
Chairman: We can understand your caution, Mr
425. Mr Bloom, can I start by just clarifying
a couple of factual points which I think there has been some confusion
over. Your involvement in the project, can you give us a sense
of the dates when you first had discussions with the Department
and when you first got a fairly clear indication from the Secretary
of State that the project was likely to go ahead?
(Mr Bloom) The first discussions that we had with
the Department were late afternoon 23rd August and we were not
notified that it was going to go into administration until the
evening of Friday 5th October.
426. In that intervening time were you involved
in pre-work on what you were going to do?
(Mr Bloom) It essentially fell into two phases. In
the first phase, immediately following 23rd August, we were asked
to look from a desk top, that is to say without going to see the
company, at the sort of issues that would be faced in relation
to the hypothetical administration of Railtrack, especially as
this would be the first use of the Railway Administration Procedures
under the legislation. That phase lasted through until about two
weeks before the 5th October. During the two weeks or so before
the 5th Octoberand there was no specific date at which
it changed but broadly the two weeks beforewe were actually
specifically getting ourselves more familiar and more geared up
with the real prospect of it being in administration. We were
doing that as we understood, and I still understand, in the context
of a number of different options that were being looked at but
we were only looking at this one option, I understand others were
looking at different options.
427. Now that you are special administrators,
we have heard already from the SRA that they have not had an involvement
in the preparation for administration . You have said also that
you are not involved in planning the future structure of Railtrack,
even though you are clearly working with the Government closely
on current management of the organisation. To the best of your
knowledge who actually from within the industry is working with
the Government to shape the future structure of the successor
(Mr Bloom) There are two elements to this. The first
element is that clearly the Government is working on its proposed
solution, and I read about it. Obviously we do have a dialogue
with them but not in terms of
428. Your opinion is not being asked for?
(Mr Bloom) helping to prepare that. In parallel,
we are working and I have to say, given that we are only three
weeks in, we have only just started this phase of the work, the
transfer element of the work, getting together a group of professional
advisers and others and critical people within Railtrack to help
us to formulate an alternative and, indeed, to help us to react
to any proposal that the Government makes. As to who precisely
is advising them, I am not really in a position to respond that.
429. Even though the Government has asked you
to come in and take over the administration of the company, you
are not being asked to advise the Government in any way on shaping
the future structure of the industry, to recommend to it what
the best approach would be given the insight that you are gaining?
(Mr Bloom) It would not be our position to advise
anybody on the future shape of the industry. It would, however,
be our position to help the Government understand the issues that
interested parties may have in relation to the future of the industry
in order to enable them to formulate an investment or a bid.
430. Can I ask, beyond the routine that would
always be there, what investment programmes are currently taking
place? You have mentioned the West Coast Main Line, what other
investment programmes are currently taking place under administration?
(Mr Marshall) Yes. All of the core renewal programmes
and, indeed, maintenance programmes that were underway will continue.
431. I think Mr Grayling said actually new projects,
not maintenance, not renewal.
(Mr Marshall) Okay, purely new projects. We will continue
with all projects that are currently under way. That will include,
as we have already covered in this discussion, Leeds First, Newcastle,
Tyne and Wear upgrade. We have got Channel Tunnel Rail Link, which
is an unregulated activity so not part of Railtrack plc, clearly
continuing as well. The West Coast Phase One, which we are speeding
forward with. TPWS, which is a £500 million scheme, is continuing.
We have just tripled our rate of commissioning this year on that
so that is going well. Thameslink 2000, where we have a commitment
to spend up to £150 million in the development of that project,
we are proceeding with that and, indeed, are just about to let
a significant contract on it.
432. Is there any reason for speculation that
Thameslink 2000 will not happen? Indeed, it has disappeared from
written responses from the Government about projects which will
definitely happen over the next few years.
(Mr Marshall) Whether Thameslink 2000, Railtrack having
spent the £150 million commitment it has, goes forward is
really entirely a matter that the Government will make a decision
on. As I understand it, it requires a Special Purpose Vehiclethat
is the current thinkingto be created. That suggests that
a point of commitment on Thameslink 2000 is some way away.
433. Based on your experienceand this
question I direct to both groups, if I canif you look to
the Government's ten year plan for the industry, the investment
that needs to take place on that both in significant new projects
but also to underpin some of the franchise renewals which are
currently going through, can you both give me your professional
assessment of the consequences of the process that is being gone
through at the moment for those investment programmes both in
terms of likelihood to actually happen and also timeframe? Have
we actually got an investment hiatus for the next generation of
projects as a result of what is happening at the moment?
(Mr Bloom) I do not see any hiatus at all. The dialogue
that was there before the company went into administration continues.
The contact and the communication with the Strategic Rail Authority,
with various other parties, the Office of Rail Regulator, continues.
If there was a hiatus it was a few days at the beginning but everything
else continues as usual. I do not think that the administration
has had that impact.
(Mr Marshall) If I may, I would take a different view,
not in any way to disagree with the effect of administration over
a matter of weeks, that is not in itself a material matter but
I do believe there will be a hiatus or that there is a risk of
it, for several reasons. Firstly, as I set out in my brief opening
comment, £34 billion of private sector investment was assumed,
half of that was assumed to be leveraged by Railtrack, by accessing
the financial markets. Railtrack, as it was, is no more and it
is very hard in an environment where effectively 100 per cent
of all risk for the foreseeable future is with the Treasury, it
is very hard to see that the Treasury, if it is on risk in all
respects, is not going to be wanting to seek control in all respects.
In those circumstances it is very hard to see how projects that
currently are not coming off the runway are going to come forward
quickly. I think it is a difficult situation. There will not be
a Special Purpose Vehicle up and running because South Central
was the franchise with which we were putting a lot of effort to
take it forward. Financial close on any Special Purpose Vehicle
before the end of 2002 is looking quite a challenge. For those
reasons I see a hiatus rather than the practical implications
of administrations coming in the door three weeks ago.
434. Can I just ask one final question on the
setting up of the successor organisation. One of the issues will
inevitably be the investment rating that Railtrack debt currently
has with the agencies and how that debt rating can be restored
to a level which enables the successor organisation to pull in
the investment that will be needed. I have been told by at least
one of the agencies that is a process that can take up to two
years. You have referred to the process of administration being
challenging within the six months' time frame. In your view and
professional judgment, Mr Bloom, how long will it take to restore
a successor organisation to the position where it can fully function
within the investment community to raise the funds that will be
needed to complete the ten year plan?
(Mr Bloom) This is not a precise science, the rating
of companies. You can see the imprecision in the science by virtue
of the fact that there are two rating agencies which are both
rating it at different rates. One is rating it as a double B rating
at the moment, the other is a double C rating at the moment. That
gives you an indication as to the imprecision of the science.
Therefore, there has to be imprecision as to how long it takes.
It is not just a question, however, of time, it is a question
perhaps more than time of the structure of the new entity, its
ability to generate the returns that are required by those investing
in it and their confidence in the organisation and the structure
that has been set up. That is the thing that will determine it
and it is the time that it takes to do that as opposed to how
long they have been doing it for. That is going to be a question,
back to the way in which this thing is funded, the new entity
is funded, whether it is a company limited by guarantee or whatever
the future entity is, and how much Government funding, to be frank,
there is in support of it.
435. How long do you think it will take?
(Mr Bloom) I have said in answer to probably the very
first question that I think it is possible this could be achieved
inside the six months but I think that is tight.
436. Mr Marshall, we have been pressing the
people who ran the East Coast Main Line and the North of England
to ease the bottlenecks, speed up the trains and to add more capacity
and to improve the facilities. We were advised that there were
four phases, Leeds was the first one, what has happened to the
(Mr Marshall) The original intention was to link those
phases, two, three and four, to the refranchising of the East
Coast Main Line which was, as you know, going to be let on a 20
year franchise linked to the upgrade. For a whole variety of reasons
which I am more than happy to go into the shorthand was that the
upgrade of the infrastructure and pricing of it was decoupled
from the negotiation and also because there were two separate
contenders with different solutions, for a whole variety of reasons
that did not come off. The decision was taken by Government to
give a short term extension.
437. Would it be fair to say that in October
2000 you advised Sir Alastair Morton of the factand I quote"There
was no doubt in Railtrack's mind that they would be the developer
of the East Coast Main Line upgrade in its four phases, of which
phase one is Leeds". Then they suddenly said "We cannot
handle this" and pulled out.
(Mr Marshall) No, I would not agree with that characterisation.
One important matter which changed over the time that you are
talking about, of course, was that the SRA did take overall responsibility
for steering where resources were put into upgrades and who was
going to do them.
438. Do you say that you did not say to Sir
Alastair that you could not handle it?
(Mr Marshall) No, we did not say that at all. What
we certainly were clear on, and it got an awful lot of press coverage,
I guess, in February or March of this year, was that the pricing
assumptions, back to projects being assumed to be priced at an
incredibly early stage, were plain wrong.
439. Who was responsible for those pricing assumptions?
(Mr Marshall) They were being developed internally
within Railtrack but they were being shared with the SRA on a
real time basis.