Examination of Witnesses (Questions 566
WEDNESDAY 31 OCTOBER 2001
566. Gentlemen, I apologise for keeping you
waiting. As you can imagine, we have had some interesting things
to learn this afternoon. Could I ask you firstly to identify yourselves
for the record and then to remember when you agree we would be
grateful if you did not repeat and if you disagree if you indicate
to us and we shall then endeavour to try and get you in. Could
you introduce yourselves in no particular order of status.
(Mr Parker) My name is Hugo Parker and
I am a Director at the Royal Bank of Canada.
(Mr Bell) My name is Adrian Bell and I am Chairman
of the Royal Bank of Canada in London.
(Mr Grant) Stephen Grant, Grant Transport Strategy
(Mr Grayling) Tony Grayling, Senior Research Fellow
at the Institute for Public Policy Research.
567. Thank you very much. If you have any opening
remarks would you give me some indication. Mr Bell?
(Mr Bell) There are two things that we really want
to say to this Committee. The first is that we are entirely confident
that not-for-profit organisations, if correctly structured, can
raise very substantial sums of money under the private sector.
While there has been a lot of analysis of Welsh Water, we think
that the Committee should concentrate on the volumes of money
that have been raised in the social housing sector which are of
the order of some £15 billion over the last five years, and
they should also look at the way in which that sector is regulated.
The second thing I wish to say is that the price of that money
depends on who looks after the interests of those lenders. The
way in which the social housing sector is organised requires the
Housing Corporation to look after the Government's money as lent
to housing associations, and since that money is subordinated
it, in turn, effectively means that the Regulator is looking after
the money of the private investor. We think that is a structure
that the Government should be looking at very closely in terms
of the structure of Railtrack II, if I can put it like that.
568. From your own experience, you would say
there has not been a problem with that kind of structure in relation
(Mr Bell) We have been involved with housing for 13
years and it has been an uphill struggle to convince pension funds
and life assurance companies to become involved. Having said that,
social housing bonds have become an asset class of their own inside
the fixed income market in the United Kingdom and there is no
problem with the availability of that money.
569. Could you really say "safe as houses","safe
(Mr Bell) I think that the issue for lenders in the
social housing sector is not that the houses are safe or unsafe,
the issue is that the cash flow is relatively well assured and
the regulatory authority is a very tight regulatory authority
so that they know there is someone who will intervene to put the
borrower right were he ever to get into trouble. Nothing would
fill a pension fund or life assurance company with more horror
than the idea they would be moving into your constituencies and
seizing large amounts of social housing. It is an impractical
action for them to take. Security of the housing is not the issue;
it is the way in which the movement is regulated and the way in
which the Government is forced to protect its own interests and
in the process protect the interests of the senior lenders, who
are the private sector.
(Mr Grant) Whilst I think the social housing model
is useful, I am struggling to see how it translates across to
railways, because although the revenue side is relatively stable,
(I say only relatively stable because we do see swings of up to
20 per cent based on economic growth) the cost side of the equation
is very, very difficult to predict, as the Committee has heard
(Mr Grayling) The Institute for Public Policy Research
and myself have been advocating the transfer of Railtrack to a
not-for-profit trust or company for some time so we clearly welcome
the Government's decision to pursue that route, but we think that
is going to be only one of a number of steps that the Government
will need to take in order to put the railways back on track and
those other steps will include reforms to the way that the network
operator is structured, reforms to regulation, a revamping of
the passenger franchises, and, ultimately, a review of the ten-year
Transport Plan, if the Government is to meet its targets of 50
per cent growth of passengers.
570. Just one or two minor alterations then?
(Mr Grayling) A major review.
571. Am I to assume from your evidence, Mr Bell,
that you do not believe there is a problem with a not-for-profit
structure as long as certain safeguards are built in?
(Mr Bell) I do not think there is a problem with a
not-for-profit structure so long as there is debt that ranks below
the private sector money where the Regulator has an interest in
defending that debt and is looking after the interests of that
572. Ultimately, however, the Government would
have to bear the risk, would it not?
(Mr Bell) I think the problem with all interfaces
between the public sector and the private sector is the degree
of risk the Government is taking. People in the private sector
are taking a degree of risk on government and the consistency
of government decision-making in the social housing sector. In
essence, we are to no lesser degree dealing with a monopoly supplier
of housing in a large number of areas, and while there is supposedly
an open market, the ability to pay rent depends on housing grants,
and the ability to build further housing depends to some degree
on capital grant coming out of government. I would say that the
situation with the railways is entirely analogous because the
ability of the TOCs to pay Railtrack depends to some degree on
the grants that the TOCs are being given by government, and the
ability to improve the track will to some degree depend on how
government puts subsidy into Railtrack to enable it to fulfil
that task. In the middle there is private sector money and it
is at what I would regard as fairly tight rates and it assumes
part of the risk of the efficient running of Railtrack.
Mr Stevenson: I have one question only but it
is broken down into a number of different elements. Given that
we have eminent financial witnesses and eminent academic witnesses
here, my question is, I hope, straightforward. We have evidence
before the Committee that the Government is actually paying, and
Railtrack have admitted that there was not a single major infrastructure
project they were involved in or went forward without the Government
effectively paying for it. We have heard from other witnesses
that, irrespective of what structure emerges from the present
situation, 75 per cent plus of the costs overall will have to
be met by government. We have the Strategic Rail Authority who
are effectively negotiating and talking about such innovations
as special purpose vehicles, vertical integration. Behind all
that, as a backdrop there seems to be general acceptance throughout
the industry that one of the major problems that has led to the
situation that we now face is fragmentation. Given all that, my
question is this: what do we want Railtrack or a successor to
573. Mr Grayling, your view will be different
from the others, I suspect.
(Mr Grayling) My view is that the new network operator
should focus on operating, maintaining and renewing the existing
infrastructure and that it is appropriate for there to be ring-fenced
public/private partnerships for major enhancement projects. I
take account of what you say about a lot of public funding going
into the railways, but I think it is appropriate that public funding
goes into the railways because the public interest in the railways
is getting people out of their cars and freight out of lorries
and onto trains, and we have to make a public value-for-money
assessment of the money that the taxpayer is putting into the
system. I also think that we can sometimes distinguish between
the funding and the provision of a service, and it is not necessarily
the case that a publicly-funded service has to always be provided
in the public sector.
574. I did not say that; I did not even imply
that. In fact, what I am getting at is could not the SRA do that
equally as well?
(Mr Grayling) Are you suggesting that the SRA should
be the network owner and operator?
Mr Stevenson: I am seeking your protection here,
Chairman. I thought we asked the questions, or am I naive?
575. No, fine, we are asking the questions.
Is it possible the SRA could fulfil that role? (Mr Grayling)
It is possible but within the public sector there are likely to
be constraints put on it by the Treasury which would be unhelpful.
(Mr Grant) It seems to me difficult to separate out
operation, maintenance and renewal from enhancement. We have been
talking about the East Coast Main Line and the nature of the enhancements
that we need to upgrade the existing line do stretch almost from
the end of the platform at King's Cross right into Edinburgh Waverley.
It is a series of separate issues and very much when you enhance
an asset you avoid the need to maintain and repair and renew it.
(Mr Grant) Therefore, I think they are two sides of
the same coin. They are also, in my view, very much driven by
the business plan that is ultimately owned by the train operating
company in terms of the revenue that the enhancement will generate
and therefore the profitability or otherwise, and the extent of
public subsidy that would be needed to deliver a particular level
of railway service.
(Mr Parker) I think the role of Railtrack is to own
and manage the assets. The idea of having private sector money
in there is to make the money go further. It does not obviate
the need for some public sector money on the basis that there
is a finite budget and if you lever more money in, you therefore
get more work done quicker.
577. If I could focus on what Mr Bell has said
about the regulatory framework. I do not know how closely you
have monitored the regulatory framework under which Railtrack
operated over the last three years, but could you just explain
why you think the regulatory framework for social housing is preferable
to the existing framework?
(Mr Bell) The Housing Corporation are enjoined to
do a number of things. One of those thingsand it is an
important issue for the lendersis to protect the grant
that government provides to the housing associations across the
country. The regulator has powers of intervention, can fire the
board of any social housing or any housing association, can force
merger upon any housing association, can go to the Treasury and
ask for funds to support any housing association. If the grant
provided by the Housing Corporation is lost, then the Housing
Corporation itself will have to appear in front of the Committee
of Public Accounts and justify itself on its failure to manage
that housing association or supervise it properly. All of that
gives enormous protection to private lenders because private lenders
can only lose money once the Government has lost theirs.
578. If I could just ask, the thing that concerns
me is that you are not really comparing like with like because
the safety aspect of the rail regulatory framework has got to
be supreme and I think that has to be an overriding factor compared
(Mr Bell) I said it was one aspect amongst many that
the Housing Corporation had to protect in the same way as a rail
regulator has a number of other priorities as well that he has
579. So what changes would be proposed to the
regulatory framework to ensure that the Government's proposals
(Mr Bell) I think that there is a requirement that
needs to be imposed on him under the new structure to look after
the subordinated debt that I assume the Government will be putting
into a not-for-profit entity. And that is exactly the same requirement
that the regulator has with social housing, and mirrors, in a
way, the requirement that regulators of utility sectors have to
look after the fundability of those utilities within the regulatory