WEDNESDAY 29 NOVEMBER 2000

SIR ALASTAIR MORTON AND MR MIKE GRANT

  740. A very small shareholder but a very large investor.
  (Sir Alastair Morton) This is back to the point we were discussing over here. If we are going to put large sums of public money into Railtrack we expect Railtrack to be fit for purpose.

  741. You are one of the country's most experienced and most successful businessmen. If you were getting your own personal chequebook out to make some investments in a company, what sort of mix between technical competence and business competence would you be expecting to see on the board of that company?
  (Sir Alastair Morton) I would expect Railtrack to show that it can deliver the operating facilities, the maintenance programme, the renewal programme, and the enhanced investment programme that is required to meet all of the specifications we are wanting to see in the railway we want to see.

  742. You want to see all of those things before allowing this investment to flow. Are you telling this Committee that you do see all of those things or that you are still asking questions?
  (Sir Alastair Morton) No, still asking questions.

  743. So if the answers you get back are that they are not in a position to deliver all of these things then you will be insisting on having an influence over board members?
  (Sir Alastair Morton) There is a frontier here with the Rail Regulator. The Rail Regulator has a duty to see that Railtrack gets remunerated for its work supplying infrastructure to the users at a level that is spelt out in statute. The Rail Regulator has just done that exercise. That is meant to cover operations, maintenance and renewal and make some provision for financing investment. The Regulator also has a duty to see that Railtrack does not misuse its monopoly position. If Railtrack makes a miserable mess of everything it does, short of losing its licence it could be said to be abusing its monopoly position by making life unnecessarily miserable for all those out to use it. The Regulator has powers to pursue Railtrack and, if he so concludes, to fine Railtrack as long as he follows due process. So there is that going on. I am talking particularly about the investment programme which has to be put on top of the general programme, so if you like I am talking about both. We want to be satisfied that before we transfer money, other than by way of subsidy through TOCs for use of the rails, we are satisfied it is going to make good use of it, and we are still asking questions.

  744. So it is possible that at some point in the near future, if you felt it to be necessary, you could say either direct to the Railtrack board or through Government "any further investment is dependent upon us picking the new chairman of the board or the new technical cirector of the board"? It is an option that is available to you.
  (Sir Alastair Morton) I have been around for quite a long time and I have been on the boards of nationalised industries and state corporations on a number of occasions and the Government picking chairmen of nationalised industries is not an unblemished history.

  745. Companies picking chairmen is not an unblemished history. Perhaps you would like to give us a short list.
  (Sir Alastair Morton) I think saying that we want it right is always a better posture in this sort of relationship than saying "move over, I will do it myself".

  746. But will you at least be feeding a job description into the board of Railtrack?
  (Sir Alastair Morton) I think that is a perfectly fair statement. That is not the only job description on their minds, they have got their own, but certainly they know what I think is necessary, yes.

  747. You do have a direct responsibility, of course, for the new franchises so presumably you apply these same criteria to the companies that have put themselves before you as possible franchisees?
  (Sir Alastair Morton) Yes.
  (Mr Grant) We have a long list of criteria on how we are judging the franchisees, including the management.

  748. When you are going through those criteria, assuming that you are satisfied that the company is fit for the purpose and is capable of delivering its objectives, can you just say something about how you intend to balance economic performance of those franchises with social issues that you have to take into account, the need to perhaps improve services for regeneration purposes or that you need to fulfil a social function with a railways as well as an economic one?
  (Sir Alastair Morton) By the time we get to negotiating a new franchise, Mike Grant and his colleagues have consulted very widely over what the parties served by that franchise would like to see. Hopefully it will be a list fully reflecting the concerns of lots of people. We then encourage the would-be franchisees to canvass similarly to establish their own ideas of what they think they would like to supply because they are there to make money out of supplying a service that people want to buy. You then see some rather different proposals coming in and you get local pressure groups lining up behind one or the other because they see their concerns being better addressed by one candidate rather than the other. We saw that in the recent South Central franchise competition when Connex had ideas that pleased one group over there while GoVia had ideas that pleased another group rather more over here. There is a "what does the market want, the users, the customers—and how will the candidates supply it" approach to this rather than us sitting at home thinking that we would like to see so and so on a map.

  749. It has been suggested in the press recently that you are considering some very long franchises for some companies.
  (Sir Alastair Morton) Up to 20 years.

  750. Up to 20 years. Does the set of targets that you give a franchise that is going to have its contract for 20 years differ from one that is only going to have seven years, say?
  (Mr Grant) The new franchise arrangements are very different from the existing franchises. First of all, as far as management is concerned, which was an earlier question, we do an analysis, both at the strategic, the operational and the individual level, we go in and look at that. We look at the customer focus, the business management, value chain people and the asset management and that gives us a picture, if you like, of what we think about the management, whether they can make the step change that we are actually looking for. Then, of course, you have to do the economic evaluation, which is both the fare box and the socio-economic benefits, and we obviously come up with an economic evaluation. Then a crucial decision is do you believe that they can deliver it? It is a mixture of the economic and financial evaluation and what you think of the management that leads us to the decision. As far as the new franchises are concerned, there are review points and we will be looking for continuous improvement over the 20 years. There will probably be five or seven year review points where we will be looking for continuous improvement and if that continuous improvement is not there then we can take the franchise back.

  751. So the review points are actually going to be break points, it is not as if they have automatically got it for 20 years?
  (Mr Grant) There are two sets of reviews. One is to look to the next stage of investment, because there are three stages of investment in the new franchises—committed outputs, primary aspirations and secondary aspirations—then, of course, there are the quality improvements we are looking for. There will be two types of review under the new franchise.

  752. How will you deal with the investment issue that I am sure a franchise company will put to you when they are coming up to one of these reviews that they have had to front load their investment in order to achieve your targets? They may have fallen back on those targets slightly and, therefore, you are looking critically at whether to continue with that franchise and they will argue "but we have put all this money in, we are entitled to another five years because that is when we will be taking money in".
  (Mr Grant) The basis of the investment is on the committed outputs, what are they committed to deliver? That is the basis of the franchise period to start with and the cash flows that go with it. The next stage, which might be five or ten years hence depending on the type of franchise it is, is a separate investment decision. Clearly it is linked to the first in so far as have they delivered what they said, but there is no obligation to continue with the existing franchise on the new investment if they have not delivered the first part.

  753. Will all of these franchises be exclusive rights to run rail services in a particular area?
  (Mr Grant) They will be specified services over a particular area. The two we have got to heads of terms are Chiltern against specified routes and South Central.

  754. Can I just ask you a little bit about the investment proposals for the Channel Tunnel Rail Link and in particular what influence you will be having over the way that investment is flowing into perhaps the Phase 2? Are the recent problems that Railtrack are experiencing in any way changing those plans?
  (Sir Alastair Morton) Because we are still a shadow the responsibility for that is still with the Department. I have really nothing to tell you at this time.

  755. You would tell us tomorrow, would you?
  (Sir Alastair Morton) I think I would like a little time to read the file, if I may.

  756. You can always come back at the same time next week.
  (Sir Alastair Morton) I think we can leave that one now.

  757. That is something that you would be prepared to come back to us on in a few weeks' time?
  (Mr Grant) The arrangements are that once we become legitimate— Sorry, Chairman.

  Chairman: I think you became legitimate this afternoon but we will not mention it.

  758. I wish somebody knew who was running the railway this afternoon.
  (Mr Grant) There would be a hand over and it would probably be over a few months period from the Department to ourselves but it is not next week.

  759. Sir Alastair, do you think that all this hoo-ha after Hatfield is going to have a long-term effect on the use of railways, passenger and freight, or do you think that the public will return because those projections in the 10 Year Plan are vital in calculating the potential viability of the railway industry, are they not?
  (Sir Alastair Morton) I am inclined to believe, but obviously we will have to wait and see, that in passenger traffic we will see the level going back up again pretty smartly. Commuting by road is a highly uncertain occupation. I do not mean safety so much as I mean time. Congestion on roads does drive people on to the rails, or encourage them on to the rails perhaps I should say. I have seen this happen before elsewhere in other sectors, that while people get bothered they actually return to their primary concern, which is punctuality and reasonable comfort obviously. In the matter of freight I think the picture is more uncertain. The Government has reduced the previously escalated fuel duty, has allowed 44 tonne trucks under certain conditions on to the roads, and we have had this shock in which, because we are still somewhat in the traditional style of operation of railways where freight is the losable option when you have got a congestion problem or a queue of trains waiting to use the line, as it were, freight has suffered quite a lot in this particular shock. There have been some adverse developments in freight. Freight was always facing quite a challenge on that 80 per cent. I am in no sense saying it is impossible, it depends on capital investment in certain groups, which is still to happen, so we have no way of testing how fast it will come back. I am concerned about freight, I am less concerned about passengers.