Examination of Witness (Questions 120-139)|
WEDNESDAY 10 APRIL 2002
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
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
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
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 budgetand I will put
this in writingthey 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 thatit is a contingent liability. We believeand
more importantly Network Rail believethat 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.
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 significantlyand
this seems to have been lost in the argument about the £300
millionwe 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
(Mr Byers) That will be a matter for the Regulator.
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 billionan increase of some £4.5
billionand, 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 informationwe should have done
if we have notwhich 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
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.