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


Examination of Witnesses (Questions 566 - 579)

WEDNESDAY 31 OCTOBER 2001

MR STEPHEN GRANT, MR TONY GRAYLING, MR ADRIAN BELL AND MR HUGO PARKER

Chairman

  566. Gentlemen, I apologise for keeping you waiting. As you can imagine, we have had some interesting things to learn this afternoon. Could I ask you firstly to identify yourselves for the record and then to remember when you agree we would be grateful if you did not repeat and if you disagree if you indicate to us and we shall then endeavour to try and get you in. Could you introduce yourselves in no particular order of status.

  (Mr Parker) My name is Hugo Parker and I am a Director at the Royal Bank of Canada.
  (Mr Bell) My name is Adrian Bell and I am Chairman of the Royal Bank of Canada in London.
  (Mr Grant) Stephen Grant, Grant Transport Strategy Limited.
  (Mr Grayling) Tony Grayling, Senior Research Fellow at the Institute for Public Policy Research.

  567. Thank you very much. If you have any opening remarks would you give me some indication. Mr Bell?
  (Mr Bell) There are two things that we really want to say to this Committee. The first is that we are entirely confident that not-for-profit organisations, if correctly structured, can raise very substantial sums of money under the private sector. While there has been a lot of analysis of Welsh Water, we think that the Committee should concentrate on the volumes of money that have been raised in the social housing sector which are of the order of some £15 billion over the last five years, and they should also look at the way in which that sector is regulated. The second thing I wish to say is that the price of that money depends on who looks after the interests of those lenders. The way in which the social housing sector is organised requires the Housing Corporation to look after the Government's money as lent to housing associations, and since that money is subordinated it, in turn, effectively means that the Regulator is looking after the money of the private investor. We think that is a structure that the Government should be looking at very closely in terms of the structure of Railtrack II, if I can put it like that.

  568. From your own experience, you would say there has not been a problem with that kind of structure in relation to housing?
  (Mr Bell) We have been involved with housing for 13 years and it has been an uphill struggle to convince pension funds and life assurance companies to become involved. Having said that, social housing bonds have become an asset class of their own inside the fixed income market in the United Kingdom and there is no problem with the availability of that money.

Andrew Bennett

  569. Could you really say "safe as houses","safe as railways"?
  (Mr Bell) I think that the issue for lenders in the social housing sector is not that the houses are safe or unsafe, the issue is that the cash flow is relatively well assured and the regulatory authority is a very tight regulatory authority so that they know there is someone who will intervene to put the borrower right were he ever to get into trouble. Nothing would fill a pension fund or life assurance company with more horror than the idea they would be moving into your constituencies and seizing large amounts of social housing. It is an impractical action for them to take. Security of the housing is not the issue; it is the way in which the movement is regulated and the way in which the Government is forced to protect its own interests and in the process protect the interests of the senior lenders, who are the private sector.
  (Mr Grant) Whilst I think the social housing model is useful, I am struggling to see how it translates across to railways, because although the revenue side is relatively stable, (I say only relatively stable because we do see swings of up to 20 per cent based on economic growth) the cost side of the equation is very, very difficult to predict, as the Committee has heard earlier.
  (Mr Grayling) The Institute for Public Policy Research and myself have been advocating the transfer of Railtrack to a not-for-profit trust or company for some time so we clearly welcome the Government's decision to pursue that route, but we think that is going to be only one of a number of steps that the Government will need to take in order to put the railways back on track and those other steps will include reforms to the way that the network operator is structured, reforms to regulation, a revamping of the passenger franchises, and, ultimately, a review of the ten-year Transport Plan, if the Government is to meet its targets of 50 per cent growth of passengers.

  570. Just one or two minor alterations then?
  (Mr Grayling) A major review.

  571. Am I to assume from your evidence, Mr Bell, that you do not believe there is a problem with a not-for-profit structure as long as certain safeguards are built in?
  (Mr Bell) I do not think there is a problem with a not-for-profit structure so long as there is debt that ranks below the private sector money where the Regulator has an interest in defending that debt and is looking after the interests of that debt.

  572. Ultimately, however, the Government would have to bear the risk, would it not?
  (Mr Bell) I think the problem with all interfaces between the public sector and the private sector is the degree of risk the Government is taking. People in the private sector are taking a degree of risk on government and the consistency of government decision-making in the social housing sector. In essence, we are to no lesser degree dealing with a monopoly supplier of housing in a large number of areas, and while there is supposedly an open market, the ability to pay rent depends on housing grants, and the ability to build further housing depends to some degree on capital grant coming out of government. I would say that the situation with the railways is entirely analogous because the ability of the TOCs to pay Railtrack depends to some degree on the grants that the TOCs are being given by government, and the ability to improve the track will to some degree depend on how government puts subsidy into Railtrack to enable it to fulfil that task. In the middle there is private sector money and it is at what I would regard as fairly tight rates and it assumes part of the risk of the efficient running of Railtrack.

  Mr Stevenson: I have one question only but it is broken down into a number of different elements. Given that we have eminent financial witnesses and eminent academic witnesses here, my question is, I hope, straightforward. We have evidence before the Committee that the Government is actually paying, and Railtrack have admitted that there was not a single major infrastructure project they were involved in or went forward without the Government effectively paying for it. We have heard from other witnesses that, irrespective of what structure emerges from the present situation, 75 per cent plus of the costs overall will have to be met by government. We have the Strategic Rail Authority who are effectively negotiating and talking about such innovations as special purpose vehicles, vertical integration. Behind all that, as a backdrop there seems to be general acceptance throughout the industry that one of the major problems that has led to the situation that we now face is fragmentation. Given all that, my question is this: what do we want Railtrack or a successor to Railtrack for?

Chairman

  573. Mr Grayling, your view will be different from the others, I suspect.
  (Mr Grayling) My view is that the new network operator should focus on operating, maintaining and renewing the existing infrastructure and that it is appropriate for there to be ring-fenced public/private partnerships for major enhancement projects. I take account of what you say about a lot of public funding going into the railways, but I think it is appropriate that public funding goes into the railways because the public interest in the railways is getting people out of their cars and freight out of lorries and onto trains, and we have to make a public value-for-money assessment of the money that the taxpayer is putting into the system. I also think that we can sometimes distinguish between the funding and the provision of a service, and it is not necessarily the case that a publicly-funded service has to always be provided in the public sector.

Mr Stevenson

  574. I did not say that; I did not even imply that. In fact, what I am getting at is could not the SRA do that equally as well?
  (Mr Grayling) Are you suggesting that the SRA should be the network owner and operator?

  Mr Stevenson: I am seeking your protection here, Chairman. I thought we asked the questions, or am I naive?

Chairman

  575. No, fine, we are asking the questions. Is it possible the SRA could fulfil that role? (Mr Grayling) It is possible but within the public sector there are likely to be constraints put on it by the Treasury which would be unhelpful.
  (Mr Grant) It seems to me difficult to separate out operation, maintenance and renewal from enhancement. We have been talking about the East Coast Main Line and the nature of the enhancements that we need to upgrade the existing line do stretch almost from the end of the platform at King's Cross right into Edinburgh Waverley. It is a series of separate issues and very much when you enhance an asset you avoid the need to maintain and repair and renew it.

  576. Therefore?
  (Mr Grant) Therefore, I think they are two sides of the same coin. They are also, in my view, very much driven by the business plan that is ultimately owned by the train operating company in terms of the revenue that the enhancement will generate and therefore the profitability or otherwise, and the extent of public subsidy that would be needed to deliver a particular level of railway service.
  (Mr Parker) I think the role of Railtrack is to own and manage the assets. The idea of having private sector money in there is to make the money go further. It does not obviate the need for some public sector money on the basis that there is a finite budget and if you lever more money in, you therefore get more work done quicker.

Miss McIntosh

  577. If I could focus on what Mr Bell has said about the regulatory framework. I do not know how closely you have monitored the regulatory framework under which Railtrack operated over the last three years, but could you just explain why you think the regulatory framework for social housing is preferable to the existing framework?
  (Mr Bell) The Housing Corporation are enjoined to do a number of things. One of those things—and it is an important issue for the lenders—is to protect the grant that government provides to the housing associations across the country. The regulator has powers of intervention, can fire the board of any social housing or any housing association, can force merger upon any housing association, can go to the Treasury and ask for funds to support any housing association. If the grant provided by the Housing Corporation is lost, then the Housing Corporation itself will have to appear in front of the Committee of Public Accounts and justify itself on its failure to manage that housing association or supervise it properly. All of that gives enormous protection to private lenders because private lenders can only lose money once the Government has lost theirs.

  578. If I could just ask, the thing that concerns me is that you are not really comparing like with like because the safety aspect of the rail regulatory framework has got to be supreme and I think that has to be an overriding factor compared with regulation.
  (Mr Bell) I said it was one aspect amongst many that the Housing Corporation had to protect in the same way as a rail regulator has a number of other priorities as well that he has to protect.

  579. So what changes would be proposed to the regulatory framework to ensure that the Government's proposals are successful?
  (Mr Bell) I think that there is a requirement that needs to be imposed on him under the new structure to look after the subordinated debt that I assume the Government will be putting into a not-for-profit entity. And that is exactly the same requirement that the regulator has with social housing, and mirrors, in a way, the requirement that regulators of utility sectors have to look after the fundability of those utilities within the regulatory framework.


 
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