Examination of Witnesses (Questions 560
WEDNESDAY 22 NOVEMBER 2000
560. So how many more engineers now are there
within the structure than there were before? It is very nice that
you have changed your job description and it is terribly important
to have people at that level who do know about engineering, but
how many more engineers have we got now at that level?
(Mr Middleton) We now have a Chief Engineer in the
company, that is the most recent appointment we have made, and
we will be recruiting more engineers over the course of the next
few weeks and months.
Chairman: I have to suspend the Committee, and
I am going to ask Members to be back in 15 minutes, if they will.
The Committee suspended from 4.46 pm to 4.58
pm for a division in the House
Chairman: I think it is a notional 5 o'clock.
We shall now follow the new railways scheme and say that we are
not on time but we are almost.
561. Is it true that Sir Alastair Morton, reported
in the weekend's press as such, is conducting a `root-and-branch'
review of Railtrack's management?
(Mr Marshall) No, it is not. I am very grateful for
the opportunity to comment on it, because obviously we have seen
a lot of press speculation. It is not true at all. Sir Alastair
met both with the Chairman and then separately with myself yesterday,
he is making entirely reasonable enquiries, as a result of the
change of management, as to what our agenda is, what plans we
have in place to fulfil the recovery plan, and also to be clear
that, in terms of a longer-term arrangement, we have what we need
to deliver the enhancement programme for the railway, and all
the rest of it. That is the extent of his interest, and I think
it is an entirely legitimate interest, given the public funding
that is going into the railway.
562. So there has been no meeting between him
and Railtrack on this issue of a review?
(Mr Marshall) No; but, as I say, we had a meeting
yesterday, it was a very productive meeting, and indeed I understand
the SRA has issued a press release this afternoon confirming precisely
what their objectives are, and they described the meeting as positive,
and we will go forward and continue to talk about our plans. But
it is certainly not a root-and-branch review of Railtrack, and
I think that is clear from the press release.
563. Going back to the earlier questioning of
you, Sir Philip, what are your opinions about the share price
of Railtrack at present?
(Sir Philip Beck) The share price of Railtrack, obviously,
is affected by comments in the press, but I do not really have
any comment to make about the specific level of the share price
at this moment.
(Mr Marshall) No; clearly it has suffered over the
last day or two in response to the press speculation. The reaction
following our interim results was fairly restrained. The market,
at this stage, I would suggest to you, is looking to see the regulatory
review being concluded and, like the travelling public and everybody
else, also looking to see evidence that the recovery plan is completed
on a timely basis.
564. Have you talked to your shareholders, your
(Mr Marshall) Yes, of course.
565. And what was their reaction to your appointment,
if they are really genuinely worried about the sort of publicity
that the company is getting?
(Mr Marshall) The principal concern at this stage
was precisely Mr Donohoe's early question, which is to what extent
the Government, or the SRA, were indeed rumoured to be reviewing
Railtrack; that is the concern.
566. What would be the option, Mr Marshall,
that the Government could take, I am sure, that when making this
massive investment over the next ten years they take some interest
in your company? What is Railtrack's opinion of that; do you believe
that that would be legitimate for the Government to consider?
(Mr Marshall) It is legitimate for the Government
to consider any financing alternatives that it wishes to. But
if I could respond to your question in another way, at the end
of the day, we need to step back and think about what is happening
in terms of the financing arrangements for Railtrack. The reality
is that the Regulator has moved considerably in the current periodic
review, but Railtrack is investing the totality of what the Regulator
is providing us and also has to borrow to invest a great deal
more; that is the reality. So Railtrack is investing the funds
it is getting from the state, and needs in public markets to add
to that a great deal more to do what is required to upgrade the
567. But the difference is that the private
money that you key in comes in on the basis of a return; what
is it, in your opinion, that the Government gets in return?
(Mr Marshall) What the Government gets is transfer
of risk, because at the end of the day the risk, on the enhancement
programme, and in raising the extra money that Railtrack has to
raise on its balance sheet, is borne by the private investors,
both debt and equity. That does relieve the state of the need
to provide all of the financing that Railtrack requires.
568. But it would not make any difference at
all if the Government were to suggest that they were giving money
on the basis of a bond, or on the basis of some form of interest,
would it; they could do that?
(Mr Marshall) It certainly could propose that, but
it would be a matter for the Government, and the Government would
also need to take into account the risk it might be taking in
such a position; because nothing comes risk-free, and the model
that Railtrack was set up on, for good or for ill, it is where
we are today, is on the basis that private sector capital is brought
in to bear some of that risk.
569. Are you having to raise a lot of extra
capital on the private markets because, in fact, in the last three
years you have not kept up with the level of investment that you
(Mr Marshall) Actually, the reverse, Madam Chair.
In practice, Railtrack has invested a great deal more over the
last three years than ever it was set up to do, and that has been
recognised to an extent by the current Regulator; but we have
borrowed, we have invested £2.5 billion this year alone and
we will therefore have debt at the end of this year in excess
of £3 billion.
570. Can I ask, Mr Marshall, would the West
Coast Main Line modernisation go ahead if the Government did not
provide the £4 billion in direct grant?
(Mr Marshall) The regulatory review has indeed recognised
the need to finance and go ahead with the West Coast route
571. Would it go ahead if it did not, which
is a direct grant? My question was, would the West Coast modernisation
go ahead if Government, through the Regulator, did not provide
£4 billion worth of direct grant; will it go ahead?
(Mr Marshall) That would be very difficult, if not
impossible, for us to finance without it.
572. It would not go ahead?
(Mr Marshall) It would not go ahead.
573. I see; thank you. And the £4 billion,
can I ask, as ex-Finance Director, now Chief Executive, if the
Government did not provide that £4 billion, how much would
it cost, could you assess for us, for Railtrack to raise that
£4 billion on the capital market?
(Mr Marshall) I will respond directly to your question,
but could I make a clarification before I do so. The £4 billion
that is being provided directly through the Strategic Rail Authority,
in effect a Government grant, as you rightly say, is not actually
for West Coast, it is a grant towards the extra cost of renewing
the whole network.
574. Why did you not say that when you responded
to my first question then, with respect, when I asked directly
about the West Coast, you said it would not go ahead without the
(Mr Marshall) Because, Mr Stevenson, that is so, because
if Railtrack were £4 billion worse off it would be such a
stretch for us it simply could not go ahead.
575. Let us not mince words over that. Could
you give me some idea then of what it would cost Railtrack to
raise the £4 billion on the capital markets?
(Mr Marshall) To raise an additional £4 billion,
let us say, the first thing Railtrack would have to do in those
circumstances, if it did not have that grant, to be frank with
you, is to do a rights issue; we would probably need an additional
£1 billion of equity and we would then be able to borrow
bank loans to bridge the extra three.
576. So, at a minimum, that grant being available
removes the requirement for you to raise £1 billion worth
of equity, which you would have to honour sooner or later?
(Mr Marshall) Broadly speaking, that would be the
impact of the debt, yes.
577. Could I then go on to your supplementary
memorandum, Mr Marshall, please, and this whole issue of public/private
involvement, and public money levering in private money. In the
document, you seem to have some doubts about just how successful
this might be, and if I can quote, about the ten-year plan and
investment, the document says: "At present it is not clear
the extent to which investment will be funded through refranchising
with funding passing through TOCs, or more directly through capital
grants . . ." Are you clearer now on that, given the Rail
(Mr Marshall) We are precisely clear on the intent
in the periodic review, and I have no doubt further questions
are coming on the periodic review so I will not dwell on it now,
unless you wish me to, but I would make an additional point, which
is that the Government's ten-year plan makes provision for a £7
billion railway maintenance fund, development fund, for the Strategic
Rail Authority. It remains at this stage, and we understand why,
unclear as to how that funding might be channelled into the railway
industry. That matter, we anticipate, will be clarified in the
Strategic Rail Authority's plan, which I understand is due sometime
in January of next year.
578. Finally, on that issue, if I might, Mrs
Dunwoody, whereas the situation appears to be clear about the
relationship between Railtrack investment and public resources,
there are still significant doubts that need to be clarified,
obviously, in terms of what you have said in your document. But
that is not what your predecessor told the Committee, on 5 July
this year, on this whole issue of the public interest and how
that should be protected. He said that Railtrack had proposed
that the SRA invest in preference shares in Railtrack, as being
the most efficient way to lever public money into the railway.
Do you agree with that?
(Mr Marshall) I think it could be an efficient way,
but it is not necessarily the only way.
579. It says: "as being the most efficient
way . . ." Do you agree with that?
(Mr Marshall) No, I think it is overstating it, if
you are asking my opinion.