Examination of Witness (Questions 40-59)|
WEDNESDAY 10 APRIL 2002
40. I know this might be a bit difficult but
what sort of timescale do you think we are looking at here for
any or all of these SPVs coming to fruition?
(Mr Bowker) It is difficult because by their nature
they are subject to intensive negotiation which we have yet to
do. Our anticipation is that during the course of the next calender
year a number of these SPVs should be put in place. That should
not unduly worry anybody, that does not mean that nothing is going
to happen for the next 12 months, an awful lot will and is happening,
but the financial closure of an SPV, as I said before, is the
last thing that you do in the process to securing the deal for
41. Yes. I am not sure how helpful that is in
terms of the question I asked but I think I understand what you
are saying. I have one more question about Special Purpose Vehicles
which has concerned many of us on the Committee. Do you not think
that in essence, in reality, given that whatever replaces Railtrack,
now in administration, being responsible for the existing infrastructure
and maintenance and development of that, and the SRA through the
Special Purpose Vehicles presumably will be responsible for new
infrastructure developments, and we were told that there could
be as many 15 Special Purpose Vehicles, do you not think by definition,
Mr Bowker, that is going to lead to more fragmentation of the
industry and not less? Would you not agree that fragmentation
has been one of the serious problems facing the industry since
(Mr Bowker) The way that we are approaching SPVs I
do not believe will lead to further fragmentation because I would
certainly agree with you that we need less complexity, not more.
The process that we are going through on SPVs at the moment is
based around what is called the DBFT model.
42. I have allowed you to get away with SPVs
for most of this but we are going to call them Special Purpose
Vehicles and we are certainly going to spell out what DVDs are,
which I thought were things you stuck in machines.
(Mr Bowker) There are two main forms of this kind
of project. There will either be a design, build, finance, transfer,
which is called DBFT, or you can have a design, build, finance
and operate. My view and the policy that we are developing is
around the former, the transfer scheme. In other words, I personally
believe that there is a lot of sense, and indeed a necessity,
in a very coherent single network operator. I think it would give
a huge amount of complexity if you had SPVs that had the infrastructure
and perhaps the train operator had to run on multiple operations.
43. A single network operator?
(Mr Bowker) Yes.
44. Mrs Dunwoody will shut me up in a minute,
I am sure, but what do you mean by that? Do you mean that we should
have a network in the country or in a region or in parts of the
country where we would have one operator?
(Mr Bowker) No. I think Railtrack at the moment is
the single network operator and I think that model in terms of
operational complexity is the least operationally complex. To
go back to your question about SPVs, I see SPVs as being the vehicles
through which the project finance and the risk management of the
construction of assets can be delivered but when they are complete
they are passed back to the network operator to manage and maintain
as part of a national infrastructure and in that way you do not
get increased fragmentation. The final point I would just make
because it is pertinent is that we are doing these SPV discussions
in partnership with Railtrack, not in exclusion from.
45. Well, are we saying that, because what you
are proposing is a form of vertical integration, is it not?
(Mr Bowker) No, Madam Chairman. This is purely down
to the upgrade of the infrastructure.
46. But the upgrades you are talking about are
quite large, are they not?
(Mr Bowker) Some of these infrastructure upgrades
are, indeed, large.
47. And therefore a Special Purpose Vehicle
that transfers the control of that upgrade from Railtrack to the
operator is quite an important and massive change, is it not?
(Mr Bowker) Forgive me, I may have misled you. Let
us take the East Coast as an example. The idea would be that an
SPV would be set up to design and manage and complete the upgrade
of the infrastructure, and it would have to interface with Railtrack,
or whoever comes after. When the upgrade is completed then it
would pass the infrastructure, as completed, back to the network
operator. So this is not about train operations: it is purely
about managing the project of infrastructure upgrade.
Chairman: I think we are going to come on to
that again in the future.
48. To some extent immediately. What I wanted
to ask you, probing on the financial side, is this: we have, after
you take into account rolling stock investment, something like
£23 billion of private financing designated under the 10
Year Plan for infrastructure investment. We know that you are
planning to take on debt of £9 billion pounds. By definition,
if you adopt the model you are talking about, over the course
of the next ten years Networkrail would have to make approximately
£23 billion worth of acquisitions of new infrastructure in
order to complete the model you have discussed which again, by
definition, would mean it would end up with debt of £32 billion.
This is a company that will have a turnover of £3, £4,
£5 billionsomething of that regionand that
does not work on any commercial model that exists anywhere in
the world short of those companies that go spectacularly bankrupt.
So it could only work with Government guarantees, is that correct?
(Mr Bowker) No. A lot of the projects in the 10 Year
Plan are towards the back end of the 10 Year Plan anyway in terms
of their completion. Thameslink 2000 is a good example. So the
financing of that and the take-out financing of that is quite
back-ended. In terms of the way in which it would be financed,
we have assumed in the Strategic Plan that it will use the same
fundamental financing model that Railtrack used which is that
when the asset is completed it becomes part of the regulated asset
base and it is remunerated through the track access charges. It
is the same model. That is the model in the plan, and it is that
model that I have referred to.
49. But if Balfour Beatty builds an upgraded
East Coast Main Line and then passes control of it back to Railtrack
or Networkrail, they are going to want to be paid for what they
have done which means that at some point Railtrack has either
got to write a cheque from its own resources or take on finance
in order to pay back Balfour Beatty for what they have done, so
there is either payment or security of debt. One way or another
that debt has to end up on somebody's balance sheet at the end
of ten years. So why am I wrong in saying that at the end of the
ten years there is a liability of £23 billion plus the debt
that Networkrail has already got? That has to sit somewhere and
has eventually to be repaid. How is it dealt with? It may come
back with charges, but there is a debt that has to sit on somebody's
(Mr Bowker) I accept that at the point at which the
asset is constructed it has to be financedI completely
accept thatbut the model that underpins the Strategic Plan
is the same model that Railtrack use which is that a company with
an investment grade credit rating is able to go and secure finance
off the back of the fact that it will be getting track access
charges within a regulated regime, and that is the model that
we have assumed to underpin the Strategic Plan, and that model
does not assume Government guarantees any different to the model
we currently have.
50. But it is correct to say that this company
will end up with a balance sheet debt of £30 odd billion?
(Mr Bowker) It is correct to say that whoever ends
up constructing these assets in terms of the projects in the Strategic
Plan will need to raise the necessary finance on their balance
sheet, or somebody else's, in order to finance them, yes.
51. But in numeric terms you are talking about
a company taking on debt that is nearly ten times its revenues.
I just do not understand how any financial institution, looking
at that equation, could say with confidence that that debt is
secure over what would have to be a substantial period of time?
(Mr Bowker) I go back to the fact that the model that
we have used in our plans is one where we are comfortable with
the financial mechanics and the relationships within it and is
the one that underpins that analysis, and demonstrates that we
can raise the necessary private finance that we need to create
these assets and then remunerate the investors in those assets
over a period of time off the back of an investment grade credit
rating supported by the regulatory matrix we currently have under
the Transport Act 2000.
52. When you published the Strategic Plan in
January you had a very clear timetable for the enhancement over
the ten year period. Do you still stand by those timetables?
(Mr Bowker) I think some of those timetables, like
any project, are complex: they are substantially complex projects.
We review them all the time. I am still comfortable with the broad
time scales that were set out there and I am still comfortable
that, as long as we do not shirk on delivery, we are able to deliver
the outputs of the Strategic Plan within the timeframe that is
set for it.
53. Would it be wrong to say that a number of
those projects are privately estimated within the industry as
being likely to be up to three years later than the plan says?
(Mr Bowker) I am not aware of any major infrastructure
project that is that late.
54. Looking at the extensions to South West
Trains platforms which are scheduled for the end of 2004, can
you state publicly that they will be open by the end of 2004?
(Mr Bowker) No, I cannot do that, but I can certainly
state that we are working quite hard with South West Trains at
the moment in fairly detailed negotiations to secure the basis
of a long term 20 year franchise agreement which will deal with
55. Lastly, you have been working closely with
the Networkrail team. Why do they need £9 billion of debt
where Railtrack previously only had about £6 billion?
(Mr Bowker) The amount of debt that Networkrail requires
is clearly a matter for them but it is legacy debt plus working
capital arrangements that they need. But that is a matter you
have to address to them.
56. But you are guaranteeing it?
(Mr Bowker) We are providing a last resort position
which is an in extremis resort position if the bridge financing
is not able to be successful.
57. So you must have asked them in detail why
they need that much? You are saying it is a matter for them but
it is a matter for you because you are providing ultimately in
extremis financing for them, so you must know in some detail why
they need £9 billion and not £6 billion?
(Mr Bowker) The £9 billion is made up of legacy
debt that they are inheriting, money that they require for project
completion and working capital arrangements.
58. It is 50 per cent more than was needed six
(Mr Bowker) I can only tell you the numbers I am aware
59. What involvement did you have in the discussions
to give £300 million via the Strategic Rail Authority to
the company limited by guarantee?
(Mr Bowker) The £300 million is purely in relation
to the benefits that can be secured.