Examination of Witnesses (Question Number
WEDNESDAY 17 OCTOBER 2001
40. What will the relationship be between the
Strategic Rail Authority and Railtrack taking these improvements
(Mr Linnard) There has already been quite a close
dialogue between Railtrack and the Strategic Rail Authority in
the context of specific special purpose vehicles, and indeed the
whole notion of special purpose vehicles arguably originates with
Sir Alastair Morton.
41. Doubtless he will tell us, Mr Linnard, please
do not secondguess him.
(Mr Linnard) So the Strategic Rail Authority has already
been talking to Railtrack and will talk to Railtrack and its successor
body about special purpose vehicles. Because all these infrastructure
up-grades depend on public funding, it will go in through the
Strategic Rail Authority, and it is the SRA which will have a
big say in what it wants to buy in the way of extra line capacity,
for passengers or freight, and all the other things which are
part of it.
42. That is very helpful, we will come back
to that. Could I ask for clarification please? It has been reported
that banks and other consortia in other European countries may
be interested in buying Railtrack or its successor. Could you
rule that out or rule it in, or are you not ruling anything out?
(Mr Linnard) In the first place, if we are talking
about Railtrack plc, the company which is in administration
43. Or its successor.
(Mr Linnard) In the first place, while Railtrack is
in administration it is a matter for the administrator. No doubt
because any successor body to Railtrack will need substantial
government funding, then a party which wanted to make an approach
would want to talk to the Government. We would naturally have
to consider any realistic proposal which was put to us. The scheme
that ministers have outlined for a company limited by guarantee
would take on all Railtrack's current and future liabilities,
and all I can say is that an alternative would at least need to
take on those liabilities if it were to be viable. So the Government
has a very big influence on whether Railtrack comes out of administration
as a company limited by guarantee, which is their preferred option,
or some other vehicle. They cannot absolutely rule out of consideration
anything, but a company limited by guarantee is the preference.
44. So we could be faced with a situation that
if a bid was made to the administrators in the next six months
which they thought was a viable bid from a private consortium
in another country, the Secretary of State could well be faced
with a decision to either approve that or not? Is that what you
(Mr Linnard) He would have to sign the transfer scheme
which takes Railtrack out of administration. Arguably that gives
him a veto over the successor body to Railtrack. What I am saying
is that as a matter of public law, that veto could not be exercised
unreasonably or irrationally.
45. You did say earlier on that ministers will
have a big influence on the successor body, I wrote it down although
I paraphrase slightly. Would the Secretary of State have a veto
or would he not? What sort of influence would the Secretary of
State have, and how would that influence be exercised on a successor
(Mr Linnard) What he will do is construct a company
limited by guarantee and discuss with the administrator the terms
on which Railtrack plc's assets and business would be taken out
of administration into that. He would also have to make and approve
a transfer scheme which implemented that transfer into the new
vehicle. Those are the levers.
Mr Stevenson: But it is after that my question
is directed to, in terms of a potential non-UK private buyer.
The suggestion you have made is that ministers would have a big
influence over the successor body. What you have described is
a mechanism for bringing that successor body into being.
46. Mr Linnard, if SNCF and the other groups,
including at least one other nationalised railway, want to buy
up this new company, will they be able to do so?
(Mr Linnard) There will be a power of veto for the
Government, either directly by ministers or by the Strategic Rail
Authority in terms of the on-sale of the assets out of the CLG.
47. I wanted to ask a question about this vertical
integration, which seems to be the flavour of this month, whether
it will be the flavour of next month remains to be seen. As you
have said, there are some companies which are enthusiastic and
some which are rather more tepid in their approach. If I can refer
you to the continuous problem of fragmentation in the industry,
how would the emergence of what could be numerous special purpose
vehicles throughout the country reduce that blight of fragmentation?
(Mr Linnard) I do not think we are looking at numerous
special purpose vehicles.
48. How many?
(Mr Linnard) We are looking at them being used where
there are major enhancement projects of the sort we are seeing
in South Central, which we will see on the East Coast Mainline.
I would be surprised if we get into double figures.
49. Twelve? 15?
(Mr Linnard) I would be surprised if it goes that
50. Directly on the West Coast Mainline, which
you have referred to, and some of us around the table have a particular
interest in this, who is going to pay for the up-grade of the
West Coast Mainline once the costs have been identified to your
satisfaction? Is it going to be the Government? Is it going to
be the special purpose vehicle with the Government? Is it going
to be the special purpose vehicle with the SRA and the Government?
Who is going to pay for it?
(Mr Linnard) We are not going to suggest that the
West Coast up-grade goes into a special purpose vehicle. It is
too far advanced, it is too complicated in terms of the number
of operators who use the line, the number of trains which use
the line, and it is too much an integral part of Railtrack's business
to be disentangled at this stage. So the West Coast Mainline,
the up-grade, will stay within Railtrack, the core business as
it is now, because it is essentially a maintenance and renewal
programme rather than an enhancement programme. What is clear
though is that for the successor body to Railtrack there needs
to be much more clarity on the cost of the West Coast up-grade.
We have to get to the bottom of the true cost and specification
of particularly phase two of the up-grade.
51. Are you saying it is such a mess no one
else will want to take it on and you will jolly well have to sort
it out yourselves using the new company? I paraphrase.
(Mr Linnard) That is one way of interpreting it. It
would also be practically very, very difficult at this stage with
a project which is well-advanced
52. What makes you think you can bring the costs
down if Railtrack were not capable of bringing them down themselves?
(Mr Linnard) This is one of the things which needs
to be addressed in Railtrack, both in administration and going
out of administration.
Chairman: Yes, Mr Linnard, it will have to be
53. Can I direct my questions back to Mr Coulshed,
because in answer to the Chairman earlier I did not feel I had
reached total parity about what it was he was saying. You were
talking about a mixture of franchises, short and long, and the
fear of many of us is that when you have a short franchise you
will have significant under-investment because it never pays to
invest if you only have something for a limited period of time.
What you seemed to say was, regardless of whether a franchise
is short or long, you envisage a situation where whoever took
on the franchise would have to inherit any investment made by
the previous organisation. Is that what you said?
(Mr Coulshed) I do not think I said it in quite such
the stark way as you have put it.
54. I wanted to say it in a stark way.
(Mr Coulshed) I understand that but I think the picture
is a bit moreconfused, I was going to say, but it is more
subtle than that.
55. Obtuse? I would not want to put words in
(Mr Coulshed) Thank you very much. It is clear that
of the major forms of investment in the railway, rolling stock
can be dealt with in the way I was describing. Infrastructure
by and large falls to Railtrack or its successors in the way which
has been discussed. It is not so obvious then that there are other
major forms of investment which it is necessary for train operators
to participate in. That is not to say it is not desirable or they
may not themselves want to do so in particular cases, but it is
not necessary to do that. Particularly in the case of rolling
stock companiesand I do not think this is so true for other
forms of investmentthey have made it pretty clear they
are looking for some kind of guarantee that if they invest money
on trains for a franchise which does not have very long to go,
they want to be sure that investment will not then be wasted when
the franchise ends.
Chairman: I think that was the recommendation
of this Committee some time ago.
56. So you envisage in the future any successor
company to any franchise will have a prior condition, a basic
fundamental condition, that there will be definite investmentand
I speak coming from an area like Merseyside where we have not
seen a new carriage in about 30 years reallythey should
buy new rolling stock or lease new rolling stock?
(Mr Coulshed) No, that is not what I said. If a preceding
franchisee wishes to purchase new rolling stock and the rolling
stock company seeks a guarantee that their rolling stock will
continue to be used by a successor franchisee, such a guarantee
Dr Pugh: That is quite an important point. In
your previous response to the Chairman you indicated the situations
you will create will bring out a preparedness on behalf of coach
companies to produce something but not a readiness on behalf of
the existing franchisees to buy. That is the point. If you are
the current franchisee for many networks and you have a few years
to run, and you are looking for a two year renewal after that,
you have little reason to go to the coach companies and insist
on new carriages.
57. Is it going to be part of the new franchising
(Mr Coulshed) It certainly could be. One of the things
which could be included in the terms of a replacement franchise
or an extension to an existing franchise, might be some commitment
to existing rolling stock.
58. So there has not been a change in direction
from the Secretary of State from previous statements about what
he wanted to see in the new franchises?
(Mr Linnard) Correct.
59. You referred to s.54 earlier but am I right
in thinking that s.54 has only been used two or three times in
the existence of a private railway industry? Therefore, are you
suggesting there is going to be a change of policy now from the
Treasury and the Department towards s.54?
(Mr Coulshed) It has not been used frequently in the
past and there is a greater readiness than there was in the past,