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

Examination of Witness (Questions 120-139)




  120. Please do. I think we are fascinated.
  (Mr Byers) I will, Madam.

  121. Just give us a flavour.
  (Mr Byers) As always. I think the Committee will be aware that the Regulator had set Railtrack a profile of efficiency improvements in control period 2, beginning with net efficiency targets of 2 per cent in 2001-02 and 3 per cent in 2002-03. Railtrack had made no progress in achieving those efficiency targets. If those first two targets alone were matched, then it would save around £50 million for every £1 billion of expenditure so that would be a saving. The Committee will be aware that performance penalty payments for Railtrack are running at about £370 million a year—

  122. Aha! And this is regarded as a saving so, if the Strategic Rail Authority wanted to use it for specific passenger enhancements, you would not be too happy about it?
  (Mr Byers) I would be more than willing to support the Strategic Rail Authority's investment of money for passenger enhancements—as always.

Mr Donohoe

  123. But you are never going to get a saving of one hundred per cent on that?
  (Mr Byers) No, but if I can go through the four areas where there will be clear savings, I hope the Committee will realise that £300 million in this context is not an unreasonable amount to put forward.


  124. So we have efficiency savings?
  (Mr Byers) A reduction in penalty payments; if I can draw the Committee's attention to the cost of debt as opposed to the equity model, and if I can pray in aid the Rail Regulator's October 2000 periodic review, when he determined the 8 per cent real cost of capital return for control period 2, he estimated that the real cost of debt for Railtrack was of the range of 4.5 to 4.75 per cent, while the real cost of its equity was the range of 9.3 to 11.7 per cent, and to illustrate that, using the midpoint of both ranges, each £1 billion of finance raised through debt would be around £58 million cheaper in real cost of capital annually than raising the equivalent £1 billion through equity.

  125. We are firmly convinced and we would like it all in writing.
  (Mr Byers) I will do that. The other point to make is that, throughout the period of its five years, as an equity company Railtrack paid out dividends of £709 million, roughly £140 million a year. Network Rail is not an equity model but a model which will re-invest any savings—

Chris Grayling

  126. That is not a saving from your budget.
  (Mr Byers) No, but it will re-invest money into the railway network, and I think when members look at the detail and the savings which will accrue to my budget—and I will put this in writing—they will see that the £300 million is a sum which, in a year's time when you look at the annual figures, has not been lost from my budget but will be financed by savings we will make. That is an illustration of the sorts of savings we believe will be made as a result of an early exit. But I will repeat that, if we do not achieve an early exit, then that finance will not be available because it is not compensation for shareholders but is a sum we will get from other savings.

  127. But you are also providing £9 billion of loan guarantees?
  (Mr Byers) There is a separate issue which is to do with the £9 billion bridging finance. This is a very standard for governments to do. I know there has been interest that there is a contingent liability and people say this is a very large sum of money to have as a contingent liability, but if I can just give four illustrations of the sorts of contingent liabilities that the Government has signed up to, the Export Credit Guarantees Department, a Department of Trade & Industry responsibility, has a contingent liability of over £32 billion in credit insurance guarantees; the Department of Trade and Industry has a contingency liability of over £25 billion for British Nuclear Fuels liabilities; the Treasury has a £10 billion contingency liability in capital subscriptions for the European Investment Bank; and the Treasury also has a contingency liability of over £13 billion for the difference between notes and coins in circulation and the value of assets at the issuing department of the Bank of England. Now the £9 billion contingency is exactly that—it is a contingent liability. We believe—and more importantly Network Rail believe—that that is money they will be able to raise on the markets but there has to be a fallback position which is that a credit facility will be provided by the Strategic Rail Authority but the reason why Network Rail are confident that they will be able to raise that is they have two very secure streams of funding. They have nearly £7 billion of network grants and around £10 billion of passenger track access charges which are available in control period 2 alone. It is because of that security that they have no reservation that they will be able to raise the £9 billion.

Andrew Bennett

  128. On the question of this saving, or the way in which you justify the £300 million, you are saying basically that Railtrack's successor can be financed by bonds, yet you were saying as far as the Underground is concerned, that that is rubbish. It does seem a bit of a flip flop.
  (Mr Byers) No, because you will be aware, if you read the evidence I gave to this Select Committee before the Easter break, that we looked very carefully as part of the value for money exercise at the costs of bonds and we compared them to the proposal being put forward by the infrastructure companies and, on the basis of that value for money test, we believe that the modernisation proposals are the best way forward and do achieve value for money, but we looked at it compared to the bond approach.

  129. So have you looked at the financing of Railtrack's successor in the two ways?
  (Mr Byers) What we have looked at is the proposals coming from Network Rail, and we do believe that the proposals they put forward offer a real return. Most significantly—and this seems to have been lost in the argument about the £300 million—we now have the opportunity of the network operator, the company responsible for the licence, having one objective which is the travelling public and improving the quality of service to the train companies. No longer do we have this division of responsibilities of having to maximise returns for shareholders—

  130. I understand that but your argument—
  (Mr Byers) Well, it is a very significant development.

  131. But you are saying this is the cheaper way of doing it. In other words, you justify that figure of £300 million because it is cheaper?
  (Mr Byers) I am saying these are the Regulator's figures which he produced in the October 2000 periodic review, so they are there for everybody to see.


  132. Are you expecting any change in the regulatory regime after the company comes out of administration?
  (Mr Byers) It depends very much on whether or not Network Rail are successful in their proposal, and that will be a decision for the shareholders of Railtrack to determine, and I think the Regulator will then want to look at the regime in the light of that outcome but it will be a matter for the Regulator.

  133. So you have not calculated that as part of your figures?
  (Mr Byers) I have not.

  134. It will be a specific change in the regulatory regime?
  (Mr Byers) That will be a matter for the Regulator.

Mrs Ellman

  135. Have you made any requests for more grant funding to railways in the comprehensive spending review?
  (Mr Byers) There has been much correspondence between myself as the Secretary of State and the Chancellor on the whole issue of the spending review, as there is between all Secretaries of State and spending departments with the Chancellor at this particular phase, but I am not sure it would be appropriate to go into the details of the case that I have put forward to the Chancellor at the moment. I think we will have to wait until July to see how successful we might have been.

  136. Does that mean you have made a request for more money?
  (Mr Byers) It means what I said, I think, Mrs Ellman, so you can draw your own conclusions. The Committee are aware that I have said that in July we will publish our review of the progress so far on the 10 Year Plan for transport. Within that will be the question of rail, and there are pressures which have developed as far as rail is concerned, and they will need to be reflected upon. It is one of the reasons why the 10 Year Plan is such an important development and why it is important that we do not see it as being in tablets of stone but that we do recognise pressures when they develop and are able to respond to them. Sometimes that will mean re-directing resources within the 10 Year Plan: sometimes it might mean seeking to achieve additional funding. I think it is worth reminding the Committee, in relation to the funding of rail, that we have seen a £4.5 billion increase since the 10 Year Plan was first published. Rail to begin with was going to receive £60.4 billion: it is now projected to receive £64.9 billion—an increase of some £4.5 billion—and, most importantly, the total envelope within which we are operating in the 10 Year Plan has been extended to incorporate some additional funding for rail. So we have seen some change already as far as funding for rail is concerned.

  137. So how much more change do you want?
  (Mr Byers) I want to make sure that we can deliver improvements, first of all, with the money we already have. These are the largest sums of money we will see, public and private, being invested together in the railway system and I want to make sure we achieve real benefits and real improvements for the investment we will see.

  138. You told the Committee on a previous occasion that you want to see more funding for infrastructure "frontloaded". What do you mean by that?
  (Mr Byers) I think the profile of spending within the 10 Year Plan is very important. I am not sure I have provided the Committee with this information—we should have done if we have not—which is to look at the profile within the 10 Year Plan period. What we have done, certainly for rail, is to bring forward some of the major funding aspects of that into the first period of the 10 Year Plan because there are obviously needs and pressures within the railway system at the moment which we need to respond to. So rather than it being in the years 7, 8, 9 and 10 of the 10 Year Plan, spending has been brought forward into the earlier part of the 10 Year Plan so we have re-profiled spending.

Chris Grayling

  139. That does not stack up with what Mr Bowker said an hour ago when he said that most of the infrastructure was in the later period.
  (Mr Byers) Well, if I can show the Committee the profile of the overall spend, that may be helpful.

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