Select Committee on Transport, Local Government and the Regions First Report



14. However, Railtrack's administration and its immediate aftermath has been handled badly and has distracted attention from the fact that the company faced serious problems that needed to be addressed. In spite of the ramifications of the decision for the rest of the industry, neither the Strategic Rail Authority[136] nor the Rail Regulator[137] were consulted by the Government on its decision to place Railtrack in administration or the consequences that that would have. We are also dismayed that, once again, senior Ministers are unable to unassailably defend their account of events against other variants.[138]

15. While Railtrack's record was appalling and many have supported the Secretary of State's decision,[139] the present situation is fraught with problems. Not knowing either the shape of Railtrack's successor or when it will emerge from administration has created considerable confusion and uncertainty in the industry. Concerns have been expressed that, during administration, Railtrack's employees' morale would be eroded and that the company would struggle to recruit and retain staff, which could adversely affect train service and safety performance.[140] Furthermore, enhancement projects will be delayed[141] and additional costs will be imposed by the administrators' fees.[142] An overwhelming desire was therefore expressed for Railtrack to be brought out of administration quickly, in order to restore stability to the industry.[143] A balance needs to be struck, however, between resolving the matter swiftly and the need for considered, decisive action that will ensure Railtrack's failings are not recreated in the new company. As Great North Eastern Railway warned: "we must not...rush to get the wrong solution....We are not going to get a second chance".[144]

16. It was initially anticipated that it might take between three and six months before Railtrack emerged from administration. The joint special railway administrators, who are responsible for assessing and making recommendations to the Secretary of State on how Railtrack's assets should be transferred out of administration[145] thought that that would be "a tight timetable".[146] The schedule was considered optimistic by many; for example, Great North Eastern Railway feared that two years would be lost while the uncertainty caused by the administration process was resolved.[147] The Secretary of State, however, did not believe that time would be lost as a consequence of Railtrack's administration—on the contrary, he thought that the railway industry was now almost in a stronger position to meet the objectives set for it in the 10 Year Plan.[148] He accepted, however, that he was working on "borrowed time" to improve the railways and that it would be a few months before the outstanding questions regarding the future development of the industry were resolved.[149]

17. We are astonished, therefore, that no contingency plan to cover for Railtrack's failure to perform and its eventual administration had been proposed. Ministers were apparently surprised at how quickly Railtrack's position had deteriorated. We do not think that Railtrack's successor can be established within six months of the company being placed in administration even though this is urgent. While it is not clear what the precise implications will be for its successor, the controversy over Railtrack's administration has added to the uncertainty and dented confidence in the industry at least in the short term. The harm done to the day-to-day running of the railway must be limited, as must the potential hiatus in investment. The Government must restore stability to the industry with the minimum of delay. It is imperative that the process of administration be completed as soon as possible, and a new more unified structure be established. No plans for improving the railways will come to fruition if the core services provided by the infrastructure operator do not work properly. We are also concerned that the administrators' fees could consume large sums of money without bringing any direct benefits to the travelling public.


18. Competing bids may be submitted to the administrators from the Government and the private sector for Railtrack's assets. The German investment bank, West LB, and the American asset-finance firm, Babcock & Brown, have been reported as preparing bids.[150] The Government's preferred option, however, is for a company limited by guarantee, which has been compared with the not-for-profit structure adopted for Welsh Water.[151] Although a private-sector commercial undertaking, the company limited by guarantee would have members rather than shareholders,[152] and any operating surpluses would be held in reserves or reinvested directly into the network, rather than being used to pay dividends. That is an important difference, according to the Secretary of State, since it would remove "the conflict between the need to increase shareholder value and the interests of rail passengers".[153] The serious problems of fragmentation of the industry will remain. In line with the agreement made with Railtrack in April, the new company will concentrate on the operation, maintenance and renewal of the existing network, with third parties or Special Purpose Vehicles undertaking major projects and their associated risk of cost overruns.[154] Railtrack's successor will be similar to its predecessor, however, in as much as it will be the single network provider, which owns and operates the network's assets and, initially at least, it will have the same licence obligations.[155] Private sector contractors will continue to be used to undertake the maintenance and renewal work, although this will be in accordance with a new form of contract.[156]

19. There is some concern about the effectiveness of the company limited by guarantee which the Government has proposed should replace Railtrack and that it might be compromised by having been put together in haste. A key problem is whether it will be able to raise sufficient funds to meet its needs. However, the chairman of the Royal Bank of Canada in London, Mr Adrian Bell, told the Sub-Committee that although Railtrack's administration may have shocked investors, he did not think that it would take long to rebuild confidence as investors have "very short memories".[157] He was also confident of the ability of correctly structured not-for-profit organisations to raise "very substantial sums of money".[158] According to the Government, the company would have the same sources of revenue as Railtrack and would be able to borrow from the debt markets.[159] By not engaging in major infrastructure projects, the new company is expected to bear less risk than Railtrack, and 90 per cent of its income—derived from track access charges—would be covered by stable, long-term contracts.[160] As a consequence, the Government expects investors to view the company limited by guarantee as "a sound basis for their investment".[161]

20. On the other hand, the Government has not made it clear how the new company will raise funds. Initially, the new company will have to obtain at least a triple-B credit rating,[162] however, in the longer term, a rating of 'A/A2' or better will be necessary to support the company's likely financing requirements.[163] Concern has been expressed about whether the Government's aspirations will be met, especially in light of the downgrading of Railtrack's credit rating following administration.[164] It is difficult to predict the company limited by guarantee's credit rating in the absence of a fully developed proposal,[165] and key requirements, such as the regulatory regime for the financial structure of the company,[166] will have to be clarified. The Secretary of State has said that the period of administration will be used to address any remaining areas of uncertainty.[167] It is essential that Railtrack's successor has access to sufficient funds to operate, maintain and renew the rail network adequately. It will, therefore, require a credit rating of single-A or higher. The Government has not explained how this credit rating will be secured. It must do so without delay.

21. Although the Government's preferred option is for Railtrack to be replaced by a not-for-profit company limited by guarantee, alternative bids may come from the private sector. We are concerned that if Railtrack were to be succeeded by another private-sector company with the same responsibilities and objectives, the profoundly damaging conflict between profit, shareholder interests, investment and the development of rail infrastructure would resurface. The infrastructure operator's probable continued dependence on public sector funds also raises questions about how accountable a not-for-profit company would be for the public funds that it receives. If the company that emerges from the débâcle of administration is not to repeat its predecessor's failings, it should be manifestly different from Railtrack in the following ways. It must:

  • focus on the operation, maintenance and renewal of the network;
  • have direct responsibility for inspecting the network and for directly employing those who are responsible for the maintenance and renewal of the network; and
  • place much greater emphasis on the engineering skills and experience of its staff.


22. The uncertainty caused by the continuing absence of comprehensive information about the railway's infrastructure will present Railtrack's successor with considerable problems. As the state of the nation's rail infrastructure remains unknown, it will be very difficult to establish quickly and accurately the cost of the works that will be needed to restore the network to acceptable standards and hence the funding that the new company will require. In evidence to the Transport Sub-Committee, Railtrack said that it expected its asset register to be "fully populated"[168] with data by the end of 2001, however that, in itself, will be of little benefit.[169] It is the condition of the assets that is important, and it will take two to three years before that information can be used to inform future spending plans.[170] As the Secretary of State said, inadequate knowledge of the condition of its assets was "a fundamental weakness" of Railtrack.[171] It is extraordinary, given the recommendations made by this Committee's predecessor, that work on Railtrack's asset register is still not complete.[172] We recommend that details about the condition of the railway infrastructure be added to Railtrack's asset register urgently, as this information is of fundamental importance, not least in determining a programme of essential investment.


23. The Government also sees Railtrack's administration as an opportunity to address the difficulties caused by the fragmentation of the railways at the time of privatisation, when British Rail was divided into approximately 100 different undertakings.[173] There are many different aspects to fragmentation:

  • The separation of train and infrastructure operation (see paragraph 56);
  • The use of maintenance and renewal contractors and sub-contractors — considerable concern has been expressed about Railtrack's management of its maintenance and renewal contractors[174] and the inadequate communication between the different parties;[175]
  • The division of passenger services into 25 franchises - concerns about the loss of a coherent rail network with franchisees failing to cooperate with each other to the disadvantage of passengers was one of the factors behind the establishment of the Strategic Rail Authority.[176] More recently, the Authority has proposed a reduction in the number of franchises in order to make better use of scarce track capacity;[177]
  • The division of regulatory responsibilities between the Strategic Rail Authority and the Rail Regulator (see paragraph 65); and
  • The separation of maintenance and renewal of the existing network, from development projects.

24. However, while the Secretary of State has talked of creating a railway system that is "united and not fragmented", with Railtrack's successor being able "to promote collaboration and cooperation around the wheel and track interface";[178] changes at Railtrack could lead to greater complications as more organisations become involved in the railways. It has been proposed, for example, that "a slimmed down" Railtrack should be divided into six regional subsidiaries in which train operating companies should be encouraged to take an equity stake.[179] Concern has also been expressed that the railways could be further fragmented by the use of special purpose vehicles to implement major infrastructure enhancements[180] and we look at this below. The Government's current proposals for Railtrack to be replaced by a company limited by guarantee will not resolve the problems caused by the large number of different organisations involved in the railway industry. The fragmentation brought about by privatisation contributed to the chaos and delay that paralysed the industry. It is essential that the fragmentation of the industry is significantly reduced. We therefore strongly recommend that the Government should consider the role and responsibility of the Strategic Rail Authority in relation to maintenance, renewal and development of rail network.

25. Other suggestions for dealing with the problems of fragmentation have been put forward which we consider later.


26. The re-creation of a vertically integrated railway, with train operators taking responsibility for the operation and maintenance of track and signals, has been advocated by some as a way of addressing problems caused by the separation of the operation of trains from that of the infrastructure.[181] It has also been suggested that consortia of funding, construction, maintenance and operating interests should be established that would lease infrastructure from Railtrack's successor, so that trains, track and signalling are controlled by the same organisation.[182] Many in the industry, however, are opposed to the proposals. Train operating companies, for example, are not certain that restoring vertical integration would be beneficial, although there might be a case for undertaking a trial in one region.[183] Although interested in exploring vertical integration, the Go-Ahead Group said that there were issues to do with the allocation of risk that would have to be addressed beforehand, not least who would be liable for the cost of restoring the condition of infrastructure assets to acceptable standards.[184] While vertical integration might be suitable for comparatively self-contained regional franchises, such as South West Trains and ScotRail, it would not suit all parts of the rail network. It would not be appropriate for Virgin CrossCountry, for instance, whose services cross six Railtrack zones.[185] Freight operators would be in a similar position and they have expressed their opposition to proposals for vertical integration. The Rail Freight Group has stated that, by comparison with the way the railways are presently structured, vertical integration is "more contractually complex, provides more opportunities for discrimination and disputes, and will require more intensive regulation".[186] Moreover, as the Go-Ahead Group said, the industry's problems are a consequence of Railtrack's management shortcomings, rather than a failure of the wheel-rail interface.[187] Furthermore, we were told that, from a funding point of view, it is important that Railtrack's successor remains a single entity.[188] The difficulties that vertical integration would present have also been acknowledged by the Secretary of State, although he has said that he will consider such proposals.[189] There is no evidence that vertical integration would work.


27. It became increasingly apparent that Railtrack lacked the necessary financial and project management resources to develop the network as originally expected. As a consequence of this, in April 2001, it was agreed that Railtrack should concentrate its efforts on maintaining the existing network, work has been under way on a new procurement and funding framework for major enhancement projects. In future, improvements to the network will be developed by enhancement companies—joint ventures between the Strategic Rail Authority and a project management contractor—and implemented by 'special purpose vehicles'—comprising consortia that would fund, design and build specific schemes—with schemes transferred to the infrastructure operator on completion.[190]

28. It is envisaged that the use of special purpose vehicles will be crucial for the development of the railway.[191] Some witnesses, such as Great North Eastern Railway, did not consider it inevitable that special purpose vehicles, would create fragmentation as they are simply a way of funding infrastructure upgrades.[192] Others were more cautious or critical. The Strategic Rail Authority noted that the approach had yet to be used and that it was dependent on the infrastructure operator providing information and assuming responsibility for the scheme on completion.[193] Railtrack foresaw a number of problems with that approach when applied to the upgrading of the existing network including the allocation of risks relating to safety and train performance, and did not think that special purpose vehicles would be seen in practice before 2003/04.[194] The Rail Regulator thought that fragmentation might be increased, at least for the duration of a project, depending on the type of special purpose vehicle adopted. Once the project had been completed, the enhanced assets would have to be transferred to the infrastructure operator to ensure safety and economic efficiency were not jeopardised.[195]

29. A particular concern is that special purpose vehicles should give better value for taxpayers' money than direct funding of enhancements by the Strategic Rail Authority. This will only be achieved if the basis for dealing with any cost or time over-runs is properly defined at the outset, and if the results can be measured, so that the special purpose vehicle has strong incentives to hand over the completed project on cost and to time. If the special purpose vehicle contract is unclear on any of these issues, risk might be transferred back to the public sector, resulting in poor value for money. It is difficult to see how the necessary clarity in the contracts can be achieved without adequate knowledge of the condition and performance of existing assets.[196]

30. There is no simple solution to the conundrum of how to upgrade railway infrastructure: Railtrack was not up to the task and there is no evidence that special purpose vehicles will be successful as they have yet to be used to enhance the existing network. The fundamental problem is that the modernisation work requires continuing large sums of public money over a period of many years, which cannot be funded from the farebox alone. The Treasury must accept this reality and provide the money needed to pay for these projects. A full assessment should be carried out before using the special purpose vehicle approach, taking account of the risks involved, to ensure that it represents better value for money than conventional public sector funding through the Strategic Rail Authority.

31. If a special purpose vehicle is to be used to take forward an enhancement scheme on the existing network, clarity will be required in:

  • the allocation of risks between the Strategic Rail Authority, Railtrack's successor and those undertaking the work;
  • the arrangements for minimising disruption to the existing network; and
  • the arrangements for transferring the enhanced asset to Railtrack's successor on completion.

32. In spite of the benefits of this form of operation, only a relatively small proportion of Britain's railways have been electrified compared with many other European countries.[197] We recommend that the Strategic Rail Authority implement a programme of electrification without delay.

33. The upgrading of existing lines is a complicated and time-consuming process and causes considerable disruption to services using while the work is carried out. The work is also extremely costly and may be at least as expensive as constructing new lines.[198] The Government should examine the costs and benefits of building new railway lines alongside existing routes to reduce the disruption to passengers and freight users when existing lines are being upgraded. Ways of reducing the time that it takes to open new lines should also be investigated.

34. Although the upgrading of the East Coast Main Line is expected to be taken forward by a special purpose vehicle,[199] the modernisation of the West Coast route from London to Glasgow is unlikely to adopt that model.[200] In view of the continuing delays and dramatically rising costs, which have increased from £2.5 billion to £6.3 billion,[201] Railtrack had been discussing changes to the West Coast scheme with Virgin Trains before the former went into administration.[202] As a result, some of the benefits of the modernisation project might be postponed or lost and Virgin reportedly might receive compensation of at least £300 million.[203] The Strategic Rail Authority is now involved in discussions on the future of the project, and it was expected that it would be two or three months before a decision is reached. The Secretary of State warned, however, that it may be impossible to retain all the original project's features because of the cost overruns caused by Railtrack's failings.[204] It is extraordinary that the future of the West Coast Main Line, a major strategic route, is again in doubt and that the date for the completion of the upgrade remains unclear. We recommend that the Government establish how and at what cost the West Coast modernisation project can best be salvaged from Railtrack's mismanagement and it sets a firm timetable for the completion of the work. The scheme should be the priority and it will be seen as an important test of the Government's commitment to implementing major enhancement projects.

136   Q 98. Back

137   Q 759. Back

138   During negotiations over the disposal by BMW of the Rover car plant at Longbridge, a dispute arose over the content of a note of a conversation between Mr Stephen Byers, who was then Secretary of State for Trade and Chairman of BMW (Eighth Report of the Trade and Industry Committee, BMW, Rover and Longbridge, HC (1999-2000) 383, para. 87). Back

139   For example, the Strategic Rail Authority ('SRA welcomes Government action on Railtrack', SRA News Release, 8 October 2001); railway trades unions such as ASLEF (Q 283); and the Rail Passengers Council (Q 317). Back

140   Q 345. It has been reported that in the two months since Railtrack was placed in administration the number of track and signal failures recorded rose by 45 per cent ('Byers told that rail punctuality is getting worse', Independent, 6 December 2001). The Policy Director of Railway Safety, Mr Aidan Nelson, has been quoted as saying that there is "a danger that safety will suffer if the current confusion surrounding the future of the industry is prolonged", ('Byers denies that he misled MP s over Railtrack', Daily Telegraph, 10 November 2001).  Back

141   Railtrack warned that it would be unlikely that enhancements that had not already been started would now be taken forward very quickly (Q 433). Back

142   One of the four special railway administrators from Ernst & Young, Mr Alan Bloom, told us that his hourly rate was £450 (Q 362). The cost of the administrators from their appointment to 2 November 2001 was just under £2 million (HC Deb, 20 November 2001, col. 173). Back

143   See, for example, the comments by Mr Mike Grant, the then Chief Executive of the Strategic Rail Authority (Q 652) Back

144   Q 485. Back

145   The joint special railway administrators are responsible for: effecting a transfer, as a going concern, of so much of the undertaking of Railtrack PLC as it is necessary to transfer in order to ensure that the management of the rail network may be properly carried on; and managing the rail network in the interim period (PRF 49, section 3).  Back

146   Q 357. Back

147   Q 545. It was subsequently reported that Ernst & Young expected administration to last between 9 and 12 months ('Department rules out vertical integration', Modern Railways, January 2002, p.5). Senior Railtrack managers are said to believe, however, that the company may not be ready for transfer until February 2003 ('Old Guard returns in Rail Shake-up', Guardian, 10 December 2001). Back

148   Q 920. Back

149   QQ 930-32. Back

150   'Rail salvation plan stuck in a siding', Sunday Times, 2 December 2001. West LB has formed a consortium called SwiftRail UK. It has also been reported that the Bank of America was considering a bid ('New US bid for Railtrack', Observer, 2 December 2001). The Secretary of State issued guidelines identifying the issues that should be addressed by any proposals for transferring Railtrack out of administration. These are concerned with efficiency and viability; safety; key relationships; and financial viability and value for money (H C Deb, 31 October 2001, cols. 670 and 671W). Back

151   PRF 50. Back

152   It is expected that the board of the Company limited by guarantee would comprise 12 to 15 executive and non-executive directors including representatives from train operators. Members would have a governance role equivalent to shareholders and would be drawn from companies with a direct stake in the railways and other interests including passenger groups and employees (H C Deb, 23 October 2001, cols. 195W and 196W).  Back

153   H C Deb, 15 October 2001, col. 955. Back

154   H C Deb, 15 October 2001, col. 955 and 23 October 2001, col. 197W. Back

155   Q 32. Back

156   The Government's Response to the Environment, Transport and Regional Affairs Committee Report - Rail Investment: Renewal, Maintenance and Development of the National Rail Network, Cm 5283, October 2001, para. 18. The Committee had recommended that, as the previous means of managing maintenance and renewal contractors had failed, Railtrack should take direct responsibility for inspecting the network and for employing those who carry out its maintenance and renewal work (Rail Investment: Renewal, Maintenance and Development of the National Rail Network, para. 51).  Back

157   Q 596. Back

158   Q 567. Back

159   HC Deb, 23 October 2001, col. 196W. Back

160   PRF 35A, para. 8. In addition, a reserve fund built-up from retained surpluses and access to a subordinated loan would provide "a cushion" between the risk of poor financial management and debt providers paras. 12 and 13). Back

161   H C Deb, 23 October 2001, col 196W. Back

162   Ibid. Back

163   PRF 35D, para. 9. Back

164   Sir Alastair Morton has been reported as questioning the Government's assumptions about the Company limited by guarantee's credit rating and the company's ability to raise funds ('Morton hits at plan for son of Railtrack', Daily Telegraph, 17 October 2001). Credit rating agency, Standard & Poor's, reduced Railtrack's long-term corporate credit rating from single-A to double-C after the company entered administration (PRF 57), although this was later raised to double-B plus ('Railtrack PLC ratings raised to "BB+/B"', Standard & Poor's Press Release, 2 November 2001).  Back

165   PRF 57. Back

166   PRF 46, section 2.3. Back

167   Q 901. Back

168   That is completing the task of adding the information to the database. Back

169   QQ 473-76. Back

170   QQ 478-80. Back

171   Q 913. Back

172   See Rail Investment: Renewal, Maintenance and Development of the National Rail Network, para. 78. After three abortive attempts, an obligation to complete the task was placed on Railtrack by the Rail Regulator (Q 801). Railtrack first started work on the register in 1999 (2000 Network Management Statement for Great Britain, Vol. 1, Railtrack, March 2000, p.40). Back

173   Institute for Public Policy Research (PRF 50). See also memorandum from the Transport Salaried Staffs Association (PRF 04), and Rail Investment: Renewal, Maintenance and Development of the National Rail Network regarding the consequences of fragmentation for infrastructure maintenance. Back

174   See Rail Investment: Renewal, Maintenance and Development of the National Rail Network, para. 41 onwards. Back

175   See Recent Events on the Railway, para. 10.  Back

176   A New Deal for Transport, para. 4.12. Back

177   'Building a better railway: new franchising plan to bring forward benefits for passengers', SRA News Release, 19 December 2001. Back

178   H C Deb, 15 October 2001, col. 956. Back

179   Sir Alastair Morton (QQ 136, 147 and 150). He envisages Railtrack's successor as an operations and maintenance manager.  Back

180   See comments by Transport for London (Q 225) and the Rail Regulator (Q 739). The DTLR said that it did not expect the number of Special purpose vehicles to reach double figures (Q 48).  Back

181   A Platform for Change: the Potential for Vertical Integration on Britain's Railways, Stagecoach Group, November 2001. Back

182   See Grant Transport Strategy (PRF 41). Back

183   Great North Eastern Railway (Q 530). Back

184   Go-Ahead Group (QQ 242-45). Back

185   Virgin Trains (QQ 488-91). Back

186   Vertical integration means more fragmentation!, Rail Freight Group Briefing No. 2, October 2001. The TSSA concurred that there would probably be conflicts between operators (Q 288).  Back

187   Q 239. Back

188   Royal Bank of Canada (Q 593). Back

189   QQ 883-85. Back

190   PRF 39, paras. 18 and 19. Back

191   Q 605. Back

192   Great North Eastern Railway (Q 531).  Back

193   PRF 39, para. 18. Back

194   PRF 38A. Back

195   The Rail Regulator, (Q 739). Back

196   Information about condition has yet to be added to Railtrack's asset register (Q 478).  Back

197   Transport Statistics Great Britain, 2001 Edition, Table 8.2. Transport 2000 said that the Strategic Rail Authority had been uninterested in further electrification. It thought that this policy should be reconsidered in the light of the Government's energy policy review (PRF 11). Back

198   The cost per mile of the West Coast modernisation scheme, at £15.75 million, is approximately the same as the TGV Mediterranee, a 155 mile high-speed line which was recently opened in France. The cost of the West Coast scheme is expected to rise since the analysis was completed ('Railtrack "investment" - money into a black hole?', Modern Railways, July 2001, pp.19-21).  Back

199   A project development group led by the Strategic Rail Authority is now responsible for taking forward work on the further stages of this upgrade. It may take two years to finalise the project and its costs ('East Coast Main Line franchise', DTLR News Release, 18 July 2001). To ensure that the project did not lose momentum, £17 million was allocated to development work on phase two of the upgrading by the Strategic Rail Authority in September 2001 (Q 916). Back

200   Q 50. Back

201   QQ 388 and 389. It has been reported that the cost of the full project may rise to £10 billion ('Virgin Trains attacked over move to raise fares', Financial Times, 5 November 2001).  Back

202   See PRF 45A. Back

203   'Branson to win £300 million for hold-ups', Guardian, 27 November 2001. Back

204   QQ 891 and 892. Back

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