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

Examination of Witnesses (Questions 520 - 539)



  520. Where do you think the public interest should be considered?
  (Mr Green) I think it is the Regulator.

  521. Mr Garnett, you said at the beginning that you felt that, most of all, the rail industry needed a period of stability, yet you have spelt out some of the failures of the current system. Why does stability mean no change in a system that is inherently unworkable and wrong?
  (Mr Garnett) I do not accept the point that it is unworkable and wrong. We as a company have moved from getting a subsidy of £70 million from government to now paying the government subsidy because of the massive increase in passengers in spite of the two terrible accidents. The problem we have all collectively got is that Railtrack has not performed in the way we all wanted it to. We have that uncertainty and earlier on we had the hiatus of where we are at on franchising. At the moment it is incredibly difficult to plan our businesses. We do not know how far forward we are going. We are discussing a two-year extension and who knows what happens after that. At the same time we have this massive uncertainty with our principal supplier who delivers 75 per cent of our performance because 75 per cent of our performance relates to Railtrack as to whether we get our trains in on time or not. There is this real worry of what is going to happen to that supplier, and is that supplier going to be adequately funded to provide us with a good, safe railway and are they going to have the skilled workforce and the motivated workforce, both workforce and managers, who will stay in Railtrack at the present time, because on the one hand we need to get Railtrack into a proper home and properly set up and on the other hand it is this difficult balance. We have got to keep the good people they have got there because we are dependent on them for delivering the railway to the UK. If Railtrack starts to go wrong in this present environment because of not delivering a good service, we are going to be in terrible trouble.


  522. You mean worse than it is now?
  (Mr Garnett) At the moment I can only talk about our routes. I bore everybody to death on the 3 hr 59 min train from Edinburgh to London. I gave it a plug on the Today programme this morning, thank God it got in on time! So it is getting better. The railways are running out, in my view, better than they were pre-Hatfield.

  Chairman: We will not get into that. I do not want the Committee to get distracted. Dr Pugh?

Dr Pugh

  523. Going back to Mr Green's remarks, if you do not secure the compensation you hope to secure, what consequence is that going to have for the fare paying passengers on Virgin Trains?
  (Mr Green) It is the other way round. We would have to hold Railtrack to its contract and they would have to find the money and, presumably, it could not go out of administration until it did, and then you have a stalemate.

  524. So there is no consequence?
  (Mr Green) At the end of the day we have a contract and we are being asked to renegotiate it.

Mr Stevenson

  525. Mr Garnett, you did say in your introduction that both of your companies want to work with government on special purpose vehicles, for example, and the like, and future organisations that may emerge. The Chairman asked you what that organisation might be and we listened with interest to your response. My question is do you draw a distinction and, if so, what is it, between your interest or otherwise in special purpose vehicles and vertical integration?
  (Mr Garnett) Special purpose vehicles are there to fund infrastructure investment in railways. Vertical integration is about running today's railways. It is what is referred to as the OMR, the operation, maintenance and renewal of today's railway. That could be done by Railtrack in such a practice or it could be done by the train operator getting involved. Separately over here you have upgrades and Railtrack are definitely outside that. They do not have the money, they did not have money before they went under. The Government has made it clear that the new Railtrack will not do that so upgrades are going to be done between train operating companies with long franchises, with the SRA, and with funders.

  526. So any special purpose vehicle in which your companies may or may not be involved, and if you were involved dependent on to what extent you were involved financially, are you saying that a) that financial commitment would have to be reflected in the length of a franchise before you go ahead?
  (Mr Garnett) It has to be reflected because that is the only way we are guaranteed to get our money back.

  527. On a major project such as the East Coast Main Line, for example, would it be a 20- or 30-year franchise you would be looking for?
  (Mr Garnett) I do not think it is necessary to go to 20 years. It could be less than 20 years, it could be 15, but it is going to be the size of each one that you have got to look at.

  528. That would be the way in which you would get your return on it?
  (Mr Garnett) Yes.

  529. What I do not understand—and you are going to have to help me here—is if I turn to vertical integration, which you could be involved in, you talk about having a trial, you talk about there being scope for experimenting—I wrote down what you said—but you also plead for stability. My question is two-fold therefore: would you agree that one of the major blights on the railway industry has been fragmentation?
  (Mr Garnett) Yes.

  530. Both of you yes? I think you will probably guess my second question then. How is scope for experimenting and trials—and we have heard from the officials of the Department that we could be looking at 15 special purpose vehicles- in heaven's name, going to meet stability and address the blight of fragmentation?
  (Mr Garnett) Special purpose vehicles are simply another way of funding upgrades and therefore that is not going to lead to fragmentation per se. Vertical integration is a different thing, that is the day-to-day running of the railways. We as the train companies do not know whether if we had vertical integration it would be cheaper, it would be better, it would be more efficient. Therefore we are saying we think there could well be the case for having a trial in one region to see whether it works, and some of the points raised by other members of the Committee on the risks of doing that all have to be looked at.

  531. So another 15 special purpose vehicles on top of 20 train operating companies, on top of the fragmentation that has occurred in the industry is something you consider could be absorbed by the shape of the new industry without leading to more fragmentation? I do not understand that.
  (Mr Garnett) I do not see the creation of a special purpose vehicle as necessarily creating fragmentation because it is dealing with a specific investment to upgrade a route or whatever. It is simply a way of funding it. As I understand the West Coast Main Line, you have Railtrack at the moment doing the upgrade, and instead of being Railtrack it would be the special purpose vehicle.

  532. But we have the taxpayer paying for it. Do you agree with that?
  (Mr Green) If I could come in, an example of a special purpose vehicle we are looking at would be to upgrade all our car parks and stations, which will cost £100 million. I do not see any problem in my shareholders getting on organising that special purpose vehicle whilst I am running the railway. I do agree with your point that the more you fragment the railway, the harder it is to run.

  533. It is enormously important for us to try and understand this point. You are talking about special purpose vehicles to tarmac your car parks and put vending machines in the first class lounge at Stoke station. You are talking, Mr Garnett, about major infrastructure upgrades. We need to know just exactly what the industry is talking about here because there is a world of difference here. So what is the industry talking about?
  (Mr Garnett) We want them both. I do not believe that the Government, the Treasury is going to pay for infrastructure investment to enhance the railway on a large scale. The Government wants this to be done through some form of special purpose vehicle. That is the way we are now trying to progress the work we have got to do on the East Coast Main Line so that we can dramatically improve the service to Leeds.

  534. Mr Marshall, the present Chief Executive of Railtrack, said in his evidence, I think I only paraphrase him slightly, that major infrastructure projects are not commercially viable and the new organisation that replaces Railtrack will face that reality. Do you agree with him?
  (Mr Green) I think he is getting at the point that if the railway is two-thirds subsidised, any project you touch has got some subsidy and some public money

  535. Whatever SPV or vertical integration is going to be phased in, your joint very experienced opinion, is that something like 75 per cent or more of the costs of doing it —
  (Mr Green)—Depending on the company.

  536. Could I ask my last question to Mr Green. You talked about possible compensation vis-a"-vis the West Coast Main Line, and we listened to your evidence with great interest. One of the special purpose vehicles that is often given to us as an example of how very successful they can be is National Express and Midland Main Line, but last week in answer to a question from the Committee I think it was the Chief Executive of National Express who said that as part of that deal premium payments to the Treasury had been removed. When asked how much benefit that was to the company he could not be specific but he said about £20 million, about ten per cent of the cost of the project. If the West Coast Main Line situation does not develop as it should have done by contract, and it is not going to, will your company be seeking as well as compensation from Railtrack an agreement with the Government that you do not pay your premium payments, which I understand you are due to start paying in 2003?
  (Mr Green) No. We have an agreement that we must pay our premium payments as agreed in the franchise agreement.

  537. Very clearly, irrespective of what happens, your company will pay those premium payments?
  (Mr Green) That is exactly what we are agreeing. Just to add to that, any compensation would not be in cash, it would be in reduced track access charges.

Chris Grayling

  538. Gentlemen, is it your view that the new form of Railtrack in the form of a company limited by guarantee will be better able to deliver investment that will enable you to meet your objectives as passenger train operating companies?
  (Mr Garnett) Going back to the point that the Regulator has got to come and undertake economic regulation of that company, it does not matter if it is a CLG or something else, we have got to know what it is going to cost to run Railtrack and the money has got to be available for Railtrack to fulfil that. We have contracts with the SRA and we have got to know that Railtrack are going to deliver to us. That is the first point. Whether the CLG can then raise funds better than going into a private sector company, I do not know the answer to that.

  539. Mr Green?
  (Mr Green) Nothing to add, I would agree.

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