Examination of Witnesses (Question Number
WEDNESDAY 17 OCTOBER 2001
20. That is a tiny bit disingenuous, is it not,
Mr Coulshed? Bankers on the whole do not invest in new assets
unless they know someone is going to give them a very good return.
(Mr Coulshed) I was going to come on to that.
(Mr Coulshed) There is a power for the Secretary of
State to give an assurance under s.54 of the 1993 Act which effectively
assures the rolling stock company that at the end of a franchise,
if that comes before the end of the lease period for rolling stock,
the successor franchisee will be required to take on the terms
of the lease. So one way or another, the length of the rolling
stock leases does not have to constrain the length of franchises.
22. We are concerned primarily about customer
service, and heaven knows the customers have suffered over these
past 12 months. Has the Secretary of State issued that order,
so there is this smooth transition? If not, when will he issue
it to ensure the customer service we are all looking for?
(Mr Coulshed) This is a customer service point? I
am not sure I understood the first part of the question.
23. I am talking about the customers who use
(Mr Linnard) What we are saying on GNER, if I can
step back a bit and look at the East Coast franchise, is that
there was a proposition for a new 20-year franchise on the East
Coast Mainline and there was competition, as is well known, between
GNER, Sea Containers and the Virgin-Stagecoach Group. A central
part of the refranchising proposition and part of the case for
a long franchise was the need for a major up-grade of the East
Coast Mainline serving freight as well as passengers. It became
clear quite late in the refranchising process that the costs and
certainty of delivery of that up-grade were very unclear indeed.
24. To whom?
(Mr Linnard) To Railtrack actually.
25. To Railtrack?
(Mr Linnard) Yes.
26. It came as a great surprise to them when
they had to pay rather more for modernising the lines than they
believed on their own calculations?
(Mr Linnard) When it came to looking at the bids and
trying to nail down the bids and turn those into what would be
franchise agreements with subsidy going in which, among other
things, would remunerate the cost of up-grading the line, it became
clear to the SRA in discussion with Railtrack that there was insufficient
confidence about what the up-grade would cost. Clearly, that is
not a basis on which to sign a 20-year franchise, because if there
is uncertainty about the cost there is simply too much risk about
the cost escalating. Having seen what happened on the West Coast
Line and the cost escalation on that, nobody wanted to get into
that position again. So what we said, and what the Secretary of
State announced a couple of months ago on East Coast, was that
he would ask the Strategic Rail Authority to negotiate a two year
extension with GNER, and the rationale for that is that a two
year extension would allow two things to be done. First of all,
it would allow the existing rolling stock on the line to be up-graded,
refurbished, a major programme, and in some cases new rolling
stock to be brought in. A two year extension would also provide
sufficient time to get to the bottom of the cost figures of the
infrastructure work so in three to four years' time a competition
could be started for a new franchise, quite possibly a long franchise
because, as I say, we have not ruled out franchises of up to 20
years' duration, on the basis of sufficiently detailed and firm
cost estimates for the up-grade so that we would not be faced
with a similar position that we have had to face on the West Coast
27. Are GNER and Virgin going to get back the
money they put up in their bids, or is it just hard luck?
(Mr Linnard) There has been no agreement to pay their
28. So it is hard luck?
(Mr Linnard) Yes.
29. In view of what you have just said, would
the delay not react against passenger services?
(Mr Linnard) When we were looking at the information
that the SRA had received from the bidders, it was clear that
the customer service on the East Coast Mainline is actually very
good at the moment in terms of the effort the franchisee puts
in to dealing responsibly and well with customers. The problem
is capacity. The SRA's analysis made it pretty clear that there
were capacity issues which could be addressed in two stages, firstly
rolling stock which could be done quickly, and secondly, line
capacity which would take longer. But we do not think that a two
year extension and therefore a delay of up to two years in the
refranchising process will delay the introduction of new rolling
stock or infrastructure capacity.
Chairman: We can go on arguing this but I think
we must move on.
30. There has been a fairly wide-ranging discussion
about this issue since 7 October and there has been a proposal
there should be in certain parts of the country vertical integration.
Given what Mr O'Brien has just said, is it possible the delay
of the contracts or the refranchising contracts was in part due
to that possible proposal in the restructured Railtrack?
(Mr Linnard) No, it was not, to be honest. The decisions
on refranchising and the decisions on Railtrack are separate.
The decision on Railtrack stemmed not from a ministerial view
that Railtrack would be better off as a company limited by guarantee
or as part of a vertically integrated railway. It stemmed from
a request by Railtrack for substantial extra funding over and
above the extra amounts which had been advanced on 2 April and
from a view that the amount of extra funding asked for by Railtrack
could not be quantified.
31. Could not be quantified? You mean they gave
you a figure and you did not believe them?
(Mr Linnard) No, what Railtrack were asking for essentially
was what is called a cost-plus arrangement for a period of between
three and five years, ie we would pay their costs plus, and ministers
have called that a blank cheque.
32. But you have agreed there was fairly significant
lobbying from the train operating companies themselves to have
this form of vertical integration introduced. Stagecoach and Virgin
have for months now been arguing there was agreement. If I could
move on to the question as far as that is concerned, who will
then have the ownership of the railway?
(Mr Linnard) I will come on to that but I wanted to
make it very clear that the decision on Railtrack funding was
taken in the light of discussions with Railtrack about their financial
position and the options around that, it was not taken to create
some new structure. On vertical integration, Railtrack plc is
in administration and the intention is that it will be taken out
of administration as the single network provider, so the Railtrack
which comes out of administration as a new company will own and
operate the network assets and have initially at least the same
licence obligations as Railtrack had before it went into administration.
There is undoubtedly a question which will need to be addressed,
and I am aware of the views of different train operators, some
of whom are very keen on vertical integration, others are very
cautious about it, but that is not a decision which is in itself
affected by what has happened to Railtrack over the last ten days
33. What is the cost to the taxpayer going to
be of this new arrangement?
(Mr Linnard) What we hope is that Railtrack will come
out of administration into a company limited by guarantee
(Mr Linnard) Within three to six months.and
that over time that will provide more efficiency, more control
of costs and therefore the railway as a whole will be able to
achieve more benefit from the funding which has been earmarked
in the ten year plan.
35. What direction is it going to take, if one
takes the franchises in this new company, as far as numbers of
companies themselves are concerned which are going to be operating
on the railways? Are we going to see a massive reduction, or is
that what the Department thinks will be the case, that there will
be a massive reduction in the numbers of sub-contractors? Are
there going to be massive reductions in the number of operators
of the trains? What is it we are going to gain from this, after
the nonsense there was with the fragmentation of the railways?
(Mr Linnard) There is nothing that the decision on
Railtrack necessarily means for the number of train operators.
There has been some consolidation since privatisation. There are
now some operating groupsfor example National Expresswith
a substantial number of franchises. There may or may not be further
moves in that direction, it depends on a range of issues which
are not fundamentally connected with Railtrack's position.
Chairman: We do not want to get too far into
that particular one.
36. Will the proposals for enhanced companies
and special purpose vehicles which were being developed to support
infrastructural investment be continued under these new arrangements?
(Mr Linnard) Yes, they will.
37. You said a little earlier that you did not
want to see a repeat of what had happened on the West Coast Mainline,
how will the new arrangements improve infrastructural investment?
(Mr Linnard) What we want to see are proposals for
special purpose vehicles to take forward major up-gradesthe
East Coast Mainline, the up-grade that is associated with the
South Central replacement franchisewhich learn the lessons
really from the West Coast and from elsewhere on the public finance
initiative, which means proper allocation of risks, proper costing
before contracts are signed, proper incentives to control costs
and so forth. The problem with the West Coast up-grade is that
it was committed to by Railtrack at a time when costs were not
known and when enormous risks were taken on a new signalling system.
Chairman: You mean they did not know what they
were doing and they had to abandon that signalling system and
start again. Thank you.
38. How is it going to be different now? Who
is the "we", who is going to be responsible for delivering
(Mr Linnard) It is the Strategic Rail Authority which
will be in the lead in developing special purpose vehicles, and
some of the detail of how those are going to be developed are
going to be set out in the SRA strategic plan which is coming
out next month.
39. They are aware of this, are they?
(Mr Linnard) Yes.