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


PROCEEDINGS OF THE COMMITTEE RELATING TO THE REPORT

  WEDNESDAY 23 JANUARY 2002

Members present:

  Mrs Gwyneth Dunwoody, in the Chair


Andrew BennettMiss Anne McIntosh
Mr Clive BettsMr Bill O'Brien
Mr Brian H DonohoeDr John Pugh
Mrs Louise EllmanChristine Russell
Chris GraylingMr George Stevenson
Helen JacksonMr Bill Wiggin

The Committee deliberated.

Report from the Transport Sub-committee [Passenger Rail Franchising and the Future of Rail Infrastructure] proposed by the Chairman, brought up and read.

Draft Report [Passenger Rail Franchising and the Future of Rail Infrastructure], proposed by Miss McIntosh, brought up and read as follows:

1. On 7 October 2001, the Secretary of State applied to the High Court to place Railtrack in railway administration. This Report concentrates on that decision because it is crucial to the future of the railways in the United Kingdom. The Secretary of State's decision will have implications for desperately needed investment in railway infrastructure and the quality of service provided to the travelling public.

2. On 14 January 2002, the Strategic Rail Authority published its Strategic Plan, which notes that there has been "much to be proud of" on the railways since 1994-95.[231] Both passenger and freight volumes have increased since privatisation, and infrastructure investment has risen to record levels. The Strategic Plan states that since privatisation "all three passenger rail market sectors have seen strong growth ... The upswing has been sustained and has covered all regions of the country. It has been a longer period of growth than any other experienced by the rail business in the past 50 years."[232] The Plan notes that freight volumes have increased by 40 per cent since 1994-95 and that freight operating companies have invested heavily in new locomotives and wagons since privatisation.[233] The growth in passenger and freight volumes has contributed to the escalating costs of maintaining and expanding the existing rail infrastructure.

3. This growth has been a key factor in creating the problems that the rail industry now faces. There can be no doubt that very considerable investment is needed in rail infrastructure and that that investment has been required for some time. The Government's plans envisage that the private sector will provide a substantial proportion of the crucial investment required by the rail network. The Strategic Plan notes that "the private sector was playing a full part in financing the industry and delivering improvements".[234] Mr Chris Green, Chief Executive of Virgin Trains, and Mr Christopher Garnett, Chief Executive of Great North Eastern Railway, told the Sub-Committee that the Railtrack situation would put pressure on the industry raising finances from the private sector. Mr Green said that he was "very doubtful whether we are going to attract £34 billion from the private sector without some government guarantees behind it".[235] Mr Garnett said that the impact on private sector investment by the Railtrack administration could last two years.[236]

4. Private sector investment will only be forthcoming if there is confidence in the policy, regulation and management of the railways. We are extremely concerned that, following the Government's refusal to support Railtrack and to force it into administration, private sector confidence in the railways will evaporate and as a consequence the industry will have to pay a much higher risk premium to attract this finance, or the Government will have to provide substantial guarantees to investors.

5. Given the pressures that the industry undoubtedly faces, we were astonished to learn of the lack of co-ordination of future strategy between the Government, the Strategic Rail Authority and the Rail Regulator. This was exemplified by the Secretary of State's failure to consult with the Strategic Rail Authority or the Rail Regulator prior to taking the decision to push for Railtrack to be put into administration. We also heard evidence that upon taking office the Secretary of State received a memorandum from Sir Alastair Morton about the future of the industry, but failed to give any response to that memorandum. The poor relationship between the Authority and Mr Byers' Department appears to have not caused the Secretary of State alarm. If the Strategic Rail Authority is to remain a viable force, the Government must allow the Authority to operate independently and free from Government interference. The Strategic Rail Authority must be held to its responsibility to publish an annual report and update its Strategic Plan.

6. In evidence to the Transport Sub-Committee, Mr Tom Winsor, the Rail Regulator, described the conversations he held with Railtrack and the Secretary of State prior to the application for railway administration. Mr Winsor's evidence was damning. He recalled, from contemporaneous notes, the conversation he had with the Secretary of State on the afternoon of Friday 5 October:

    "I said that Mr Robinson's reaction to Mr Byers' decision was likely to be an immediate application to me for an early interim review to restore Railtrack's financial position if that were feasible. Mr Byers said that they had thought of that and that if such an application were made, he had the necessary authority immediately to introduce emergency legislation to entitle the Secretary of State to give instructions to the Regulator. After pausing to consider whether I had really heard what I had just heard, I asked whether that would be to overrule me in an interim review or in relation to all my functions. Mr Byers said that it would cover everything but that its first use would be in relation to an interim review which the Government did not want to proceed."[237]

7. Mr Winsor described his response to the Secretary of State's statement that legislation would be introduced to quash the regulator, saying:

    "The Secretary of State said to me that if there were an application for an interim review he had the necessary authority to introduce immediate legislation to prevent the review taking place. I explained that such legislation would be a card which the Government should be extremely reluctant to play. I explained why. I pointed out the very severe adverse effects it could and probably would have on the financial markets and investor confidence generally if the Government were to be seen to be taking away the independence of an economic regulator. I said that the effect on transport stocks would be severe, but it would go much wider than that. It would have very serious adverse implications for the constitutional position of independent regulators in other industries, including but not limited to gas, water, electricity and telecommunications, the independent position of the PPP arbiter in the London Underground. (How can an arbitrator in a dispute have to decide the case in favour of one party to the dispute at the direction of that party?). I said it would have severe adverse implications for the market perception of the stability of the regulated privatised industries, investor confidence in those companies and the effect on other companies in the transport and utilities sectors. I said it was inconsistent with the Chancellor's public position in June this year in relation to the importance of the independence of the competition authorities, of which I am one, and the forthcoming Enterprise Bill, and also the independence of the Bank of England. I said that it may well constitute or precipitate defaults under the loan arrangements for Virgin's acquisition of the two new fleets of tilting trains for the West Coast and Cross Country networks, so the Department could say goodbye to the large premium payments which are due from Virgin in the latter years of those two franchises. I added that taking me under political control would go entirely against the grain of the major theme of the Government's policy position in the General Election campaign, which was about getting private sector capital into the provision of public services. I told them that such a step would do considerable harm to the ability of the Government to get companies to put money into public projects. I also mentioned the implications of the Human Rights Act 1998 because of the right of the citizen to have his civil rights determined by an impartial tribunal. For all those reasons, and others I can think of now, I said, "Would the Government really be prepared to take all those risks in order to prevent an interim review?". Mr Byers said simply that if I were to proceed with an interim review that is what the Government was prepared to do. He explained that the application to put the company into railway administration would be made on Sunday and the meeting ended at that point."[238]

8. According to Mr Winsor, if such legislation were to be passed by Parliament, that "clearly [his] independence would not only be compromised it would be extinguished."[239] Mr Byers said that he did "believe with railways and with other areas why as well, where it is appropriate, there should be independent economic regulation".[240] When the Secretary of State appeared before the Sub-Committee he said in relation to the Rail Regulator's evidence to this inquiry that, "clearly he said to the Committee for him it was 'business as usual'".[241] That is a bizarre and wholly inaccurate phrase for the Secretary of State to use considering Mr Winsor's discussion with the Secretary of State. We are astonished that the Secretary of State made an application for an administration order for Railtrack without consulting the Rail Regulator, who has had direct responsibility for assessing Railtrack's financial requirements for Control Period 2. We note that the removal of the Government support and the threat to introduce emergency legislation to by-pass the regulator made Railtrack's position impossible. It is lamentable that the company did not do more to prevent being placed in administration; however, the company's view that the threat of legislation was essentially the same as the legislation being in place is understandable.

9. By September 2001, Mr Byers had taken the decision not to support Railtrack and although he has publicly acknowledged preparing the legislation, he has refused to say when it was drafted.[242] Although the Department and the Secretary of State have not provided the date when the draft legislation was initially prepared, we find it informative that the administrators, Ernst and Young were approached as early as 23 August 2001 to start preparing for Railtrack's administration.[243] Mr Bloom, one of the joint administrators, said that "immediately following 23rd August, we were asked to look from a desk top ... 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."[244]

10. Commenting on Railtrack's financial position, Mr Winsor was critical of the company for approaching Government rather than invoking the regulatory mechanisms in place.[245] Mr Winsor said that he believed on 5 October that the company was solvent.[246] However, he said the company had failed to inform him that it had not received an expected payment from the Government on 1 October.[247] The Regulator was at a loss to explain what had happened between 5 October, when he believed the company to be solvent, and 7 October when the Secretary of State successfully applied for a railway administration order.[248] Moreover, it is clear from Mr Winsor's evidence that not only did the company not disclose figures to him, he said that in the meeting on 5 October the Secretary of State did not mention figures. He said that the company had a yawning gap in terms of the consequences of Hatfield, West Coast and other matters, that the financial position of the company had been very closely looked into over a period by the Government's financial advisers and they were satisfied that the company was insolvent. Mr Winsor said: "That really surprised me, of course it did, but it is for the court to make a determination as to whether or not the company is insolvent and the High Court decided, on the basis of the information given to it on Sunday afternoon, that the company was insolvent. It is a question for the directors as to how the company could be insolvent on the Sunday, when it was not insolvent according to their evidence on the Friday." [249]

11. The Regulator's interpretation of the documents lodged at the High Court is illuminating. Mr Winsor stated that, in his view "the thing which swung them from being solvent to insolvent"[250] was the company's view that "the Secretary of State had made a policy decision that he was not going to provide any more money to the company above the regulatory settlement — and the £445 million is part of the regulatory settlement — and had effectively neutralised the Regulator".[251] Mr Winsor said that because of Railtrack's view of the Secretary of State's position it "could not get a bond issue away. If it could not do that, it could not draw on its existing undrawn and committed banking facilities, and as a result of that it was insolvent."[252] In Mr Winsor's view, therefore, it was Railtrack's knowledge of the fact that the Secretary of State would remove the opportunity for the Regulator to do his job that had persuaded the Court to accept the Government's version of the company's position. Mr Winsor contended that the company had made an error by assuming if the Secretary of State threatened to introduce legislation that it would be enacted. Although, technically, that position is correct, it is extremely naive to believe that the Government would not have been successful in introducing such legislation.

12. In his initial statements to the House of Commons about the Railtrack administration order, the Secretary of State indicated that at the meeting on 25 July 2001, Mr Robinson, Chairman of Railtrack, had asked for additional financial support from the Government.[253] However in his evidence to the Committee he referred to a request for "a soft letter of comfort from the Government by the autumn before being able to access existing banking facilities".[254] Railtrack's business plan involved them seeking to draw down funds that had already been made available to them as credit facilities from the banks and subsequently to launch a bond issue that would assist its immediate cashflow. In its evidence to the Committee, Railtrack had indicated that statements from the Rail Regulator earlier in 2002 had undermined its relationships with City institutions, and hence it needed to demonstrate that it had the Government's backing.

13. It is clear from the evidence from the Secretary of State that Railtrack did not ask for further funds at the meeting on 25 July 2001. In answer to a series of questions asking whether Railtrack asked for more money from the Government at that meeting, Mr Byers eventually conceded that: "On 25 July that was not the detail of the conversation."[255]

14. Railtrack's financial position would have been strengthened if the RenewCo arrangements, discussed in April 2001, had been successfully put in place. It is clear from the correspondence the Sub-Committee has seen between the Department and the Strategic Rail Authority, that, contrary to Mr Byers' assertions, his Department took a significant role in preventing the RenewCo arrangements being put in place.

15. The implementation of the RenewCo arrangements hinged on whether they met the conditions set down in the April agreement. The Department has consistently stated that the decision not to proceed with RenewCo was based on the advice received from the independent Office of National Statistics. It is puzzling that the ONS was unable to provide that advice until 5 October. A letter from the ONS, provided in response to a written question, states that:

    "On 3 April 2001 provisional advice was given, based on the provisional information provided to ONS, that RenewCo would be classified as a private sector institution. Following the lifting of confidentiality restrictions the case was examined by the ONS's Public Sector Classification Committee, which on 14 June 2001 confirmed the earlier provisional advice."[256]

It goes on to state that:

    "On 26 September 2001 advice was given that, based on new information HM Treasury had provided on changes to the contract, the case would need to be re-examined.

    On 5 October 2001 provisional advice was given, based on the provisional information provided, that borrowing by RenewCo (now referred to as NGCL) would be classified as public sector borrowing."[257]

16. The Department has been concerned not to publicise the details of its discussions with the Strategic Rail Authority about the RenewCo, stating that such information is exempt from disclosure due to commercial confidentiality.[258] We struggle to see the justification for such timorous behaviour by the Department in relation to RenewCo, particularly since the arrangements have fallen. We do not accept the Department's assertion that the RenewCo arrangements were not responsible for Railtrack's administration. We believe that the Department was unwilling to proceed with the Renewco arrangements because it had already taken the decision in principle to seek an administration order for Railtrack.

17. It seems remarkable that the ONS were given one week, from 24 September to complete an analysis known to required by 1 October, on an agreement that was initiated with that known deadline in April.[259] It seems particularly harsh for the Secretary of State to say of the ONS that "it will obviously take its time in reaching any decisions on classification."[260]

18. We heard no evidence to indicate that the Government had a clear and achieveable strategy for the future of the industry when it sought the administration order, beyond its core intention of putting Railtrack onto a not-for-profit basis. In evidence on the Departmental Annual Report the Secretary of State stated he was confident that Railtrack would emerge from administration this year.[261] That is quite different from Mr Byers initial, confident, assertions that administration would last three to six months. We also heard evidence about the substantial costs of administration. Mr Spellar confirmed that the company in administration was receiving loans, rather than grants and that these amounted to in excess of £1.2 billion at that date.[262] The Sub-Committee was told that the loans would be repaid by the Administrator.[263] However, we are concerned that the only apparent way for this money to be repaid by the Administrator will be from a substantial asset sale to a new owner of the infrastructure Mr Byers confirmed that he would take the decision, on the basis of the administrators' advice about the form in which the company comes out of administration.[264]

19. We also heard evidence from both Railtrack[265] and the Unions[266] about the likely effect of the decision to press for administration on the morale and motivation of employees within Railtrack. Many Railtrack employees were shareholders in the company, who lost their investments when the company went into administration. We note that despite this, the Government is looking to the same workforce to deliver infrastructure improvements in the next few years.

20. We believe that the Government's decision to seek an administration order for Railtrack was taken in haste and without a clear strategy for the future of the Rail infrastructure. As a result there is a real danger of a hiatus in the process of investment in the railways, and at the very least the higher risk premium sought by the private sector for investing in the industry will place a substantial additional cost burden on the industry.

21. We are also dismayed about the variations in the Government's account of what took place prior to October 7th. Despite Government statements to the contrary, we have seen no concrete evidence to support the view that Railtrack actually asked the Government for further funds. The company's concern was for the Government to show support for the railways by providing a letter of comfort that would diminish the uncertainty in the City, and allow Railtrack to access funds already committed to the company. It is clear that the Secretary of State had decided not to support Railtrack, and that an early date, put in place mechanisms to close any alternative avenues for discussion of Railtrack's financial position. The Government has failed to provide answers to questions tabled by Members of Parliament about when legislation to sweep aside the independent regulator was first drafted.

22. The chaos in the railways has been increased by the placing of Railtrack in railway administration. Given that both Railtrack and the Regulator considered the company to be solvent on the date that the Secretary of State applied to the High Court, and in the absence of any evidence to suggest that any other factor apart from the withdrawal of Government support caused the insolvency of Railtrack, we conclude that Railtrack's demise was principally caused by the Secretary of State. This Committee is appalled at the Secretary of State's decision to apply for railway administration. By putting a solvent company into administration, he has robbed the shareholders of their investment. The implications for future investment from the private sector in transport projects, in particular under the Government's ten year transport plan, are grave.

23. We are also concerned that there is, as yet, no clear indication of how long Railtrack's administration will last, and that there is no clear evidence about how the costs of the process will be met once the loan provided by the Government has to be repaid.

24. This Committee considers the Secretary of State's decision to have been premature and it may well have damaging consequences for rail investment for years to come.

25. We conclude that the Secretary of State's decision to place Railtrack in administration had no sound financial or strategic basis, and that the direct consequence of the decision has been the creation of an investment hiatus that may last two years. We are concerned that it will prove to have been a huge mistake for the future of the industry.

26. The implications of the demise of Railtrack and the failure of the Secretary of State to agree long-term franchise renewals are far-reaching for the whole of the railway industry.

  Conclusions and Recommendations


(a)We are extremely concerned that, following the Government's refusal to support Railtrack and to force it into administration, private sector confidence in the railways will evaporate and as a consequence the industry will have to pay a much higher risk premium to attract this finance, or the Government will have to provide substantial guarantees to investors. (Paragraph 4).
  
(b)If the Strategic Rail Authority is to remain a viable force, the Government must allow the Authority to operate independently and free from Government interference. The Strategic Rail Authority must be held to its responsibility to publish an annual report and update its Strategic Plan. (Paragraph 5).
  
(c)We are astonished that the Secretary of State made an application for an administration order for Railtrack without consulting the Rail Regulator, who has had direct responsibility for assessing Railtrack's financial requirements for Control Period 2. We note that the removal of the Government support and the threat to introduce emergency legislation to by-pass the regulator made Railtrack's position impossible. It is lamentable that the company did not do more to prevent being placed in administration, however, the company's view that the threat of legislation was essentially the same as the legislation being in place is understandable. (Paragraph 8).
  
(d)We struggle to see the justification for such timorous behaviour by the Department in relation to RenewCo, particularly since the arrangements have fallen. We do not accept the Department's assertion that the RenewCo arrangements were not responsible for Railtrack's administration. We believe that the Department was unwilling to proceed with the Renewco arrangements because it had already taken the decision in principle to seek an administration order for Railtrack. (Paragraph 16).
  
(e)It seems remarkable that the ONS were given one week, from 24 September to complete an analysis known to required by 1 October, on an agreement that was initiated with that known deadline in April. It seems particularly harsh for the Secretary of State to say of the ONS that "it will obviously take its time in reaching any decisions on classification." (Paragraph 17)
  
(f)This Committee is appalled at the Secretary of State's decision to apply for railway administration. By putting a solvent company into administration, he has robbed the shareholders of their investment. The implications for future investment from the private sector in transport projects, in particular under the Government's ten year transport plan, are grave. (Paragraph 22).
  
(g)The implications of the demise of Railtrack and the failure of the Secretary of State to agree long-term franchise renewals are far-reaching for the whole of the railway industry. (Paragraph 26)

Motion made, and Question proposed, that the Report from the Transport Sub-committee be read a second time, paragraph by paragraph.—(The Chairman.)

Amendment proposed, to leave out the words "Report from the Transport Sub-committee" and insert the words "Draft Report proposed by Miss McIntosh".—(Miss McIntosh.)

Question put, That the Amendment be made.

The Committee divided.


Ayes, 3Noes, 9
    
Chris GraylingAndrew Bennett
Miss Anne McIntoshMr Clive Betts
Mr Bill WigginMr Brian Donohoe
Mrs Louise Ellman
Helen Jackson
Mr Bill O'Brien
Dr John Pugh
Christine Russell
Mr George Stevenson




Ordered, That the Report from the Transport Sub-committee be read a second time paragraph by paragraph.

Paragraphs 1 to 42 read and agreed to.

Paragraph 43, read as follows:

For the purposes of this inquiry, however, the key issue has been not the events surrounding the decision of 5 October, but whether Railtrack had performed its task effectively and whether it was likely to do so in the future and whether the present structure of the industry will be able to deliver Government's objectives for the railways. The company's performance has been woeful, and criticism of the company has been widespread and sustained. Indeed, in December 2001, what was reportedly one of the largest corporate fines to date was imposed on the company for failing to meet its performance targets. Mr Tom Winsor, the Rail Regulator, told us that the railway industry's core problem was the competence of Railtrack's management. The company neglected its assets, failing even to complete an asset register, and was hostile to its customers. Moreover, Mr Winsor described dealing with Railtrack as being "a very, very difficult and unpromising process". Those failings within Railtrack had direct consequences for the franchise replacement programme. For example, the company's inability to estimate the cost of infrastructure enhancements accurately and in a timely manner posed considerable difficulties for train operators. According to Mr Stephen Grant, Railtrack would inflate project costs by three or four times, but as a monopoly supplier, it was not required to justify its figures. This Committee's predecessor—the Environment, Transport and Regional Affairs Committee—examined the maintenance, renewal and development of the national rail network in considerable detail and concluded that Railtrack's stewardship of the nation's rail infrastructure was severely lacking, not least its failure to maintain and renew the network properly, its inadequate knowledge of its assets and its poor management and monitoring of the work of its maintenance contractors. On balance the Committee considers the Secretary of State's decision to apply for railway administration was correct. It was the failings of its own senior managers that led to Railtrack's downfall. As the Rail Regulator has said: "Railtrack are the authors of their own misfortune". The Sub-Committee intends to return to this matter in the near future.

Amendment proposed, in line 21, to leave out from the word "contractors" to the end of the paragraph, and insert the words "On balance the Committee believes it is too early to judge whether the Secretary of State's decision to apply for a railway administration order was correct. That question can only be adequately answered once it is clear how long administration will last and what form the successor company will take. However it is clear that there were serious management shortcomings at Railtrack which were a major factor in causing the problems which led to the Secretary of State's decision.".—(Chris Grayling.)

Question, That the Amendment be made, put and negatived.

Another Amendment proposed, in line 21, after the word "balance" insert ", though there remain strong differences of opinion,".—(Dr John Pugh.)

Question put, That the Amendment be made.

The Committee divided.


Ayes, 4Noes, 8
     
Chris GraylingAndrew Bennett
Miss Anne McIntoshMr Clive Betts
Dr John PughMr Brian Donohoe
Mr Bill WigginMrs Louise Ellman
Helen Jackson
Mr Bill O'Brien
Christine Russell
Mr George Stevenson


Paragraphs 44 to 72 read and agreed to.

Annex agreed to.

Motion made, and Question, That the Report be the First Report of the Committee to the House, put and agreed to.-(The Chairman.)

Ordered, That the Chairman do make the Report to the House.

Ordered, That the provisions of Standing Order No. 134 (Select committee (reports)) be applied to the Report.

Ordered, That the Appendices to the Minutes of Evidence taken before the Transport Sub-committee be reported to the House.

[Adjourned till Wednesday 30 January at Ten o'clock.




231   The Strategic Plan, Strategic Rail Authority, 14 January 2002, para 2. Hereinafter The Strategic Plan. Back

232   Ibid, p 58. Back

233   Ibid, p 62. Back

234   Ibid, para 2. Back

235   Q 545. Back

236  Ibid. Back

237   Q 761. Back

238   Q 765. Back

239   Q 780. Back

240   Q 864. Back

241   Q 829. Back

242   QQ 867-870. Back

243   QQ 425-428. Back

244   Q 427. Back

245   Q 764. Back

246   Q 791. Back

247   Ibid. Back

248   Ibid. Back

249   Q 793. Back

250   Ibid. Back

251   Ibid. Back

252   Ibid. Back

253   HC Deb, 15 October 2001, Col 954. Back

254   Q 845. Back

255   QQ 846-850. Back

256   HC Deb, 4 December 2001, Col 207W. Back

257   Ibid. Back

258   HC Deb, 26 November 2001, Col 607W. Back

259   HC Deb, 11 December 2001, Col 760W. Back

260   Uncorrected Evidence to the Transport, Local Government and the Regions Committee, 16 January 2002, Q 777. Back

261   Uncorrected evidence to the Transport, Local Government and the Regions Committee, 16 January 2002, Q 794. Back

262   Uncorrected Evidence to the Transport Sub-Committee, 12 December 2001, Q 566. Back

263   Uncorrected Evidence to the Transport Sub-Committee, 12 December 2001, QQ 567-568. Back

264   QQ 895-896. Back

265   Q 345 Back

266   Q 304 Back


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 31 January 2002