TUESDAY 1 MAY 2001

SIR ALASTAIR MORTON AND MR MIKE GRANT

  80. I think you are joining a long list.
  (Sir Alastair Morton) May I say, I think the line of route of the Central Railway may turn out to be very valuable to this country because we are short of capacity heading north out of London and south into London. What I find extremely difficult to be enthusiastic about—as Mr Gritten knows I have great admiration for Mr Gritten's stamina but not necessarily for his project—is the fact he is going to take the railway either under or around London, currently around, and join up with, I am not quite sure exactly where, the lines of the Channel Tunnel and achieve in France what is beyond the wit of EWS and others, which is unfettered access to freight routes in France, where there seems to be a lack of capacity.

  81. I am glad you picked on some of the cynical things I was going to ask you. One of other interesting things is essentially the central railway scheme is not linked to the National Rail network. Do you see that as a difficulty?
  (Sir Alastair Morton) It does not have to be.

  82. Would you prefer it to be.
  (Sir Alastair Morton) I think having a single, integrated network is preferable. Railtrack is going to operate phase one of the Channel Tunnel Rail Link and the recent announcement about phase two made it pretty clear that Railtrack will operate phase two as well, operate not own.

  83. Many of us are very cynical about the financial projections and the financial projected costs of Central Railway, would you join us?
  (Sir Alastair Morton) I do not think I will express a view because I do not think I have seen them recently. I am talking about practicality when I express scepticism.

  84. Strategy, I would like to seek your help and clarification on three particular areas of strategy. You mentioned the strategy for the West Midlands, yes we did see that on the television, it was very interesting, but the other important issue for the West Midlands is the West Coast Main Line, could you confirm that the £4 billion committed to Railtrack over the next five years is coming out of the £7 billion railway modernisation fund?
  (Sir Alastair Morton) No, it is a grant sum available in the Ten Year Plan of £4.5 billion, as published last summer, and that is primarily those grants to the West Coast Main Line.

  85. The anticipated costs for the West Coast Main Line have been increased by Railtrack to £6.3 billion. At the same time Railtrack are committed to find investment over the next five years, and half of that is coming from the public purse one way or another. What is your strategic approach to Railtrack requesting more funds: (a) in the light of the increased costs of West Coast Main Line and, (b) if they have difficulty raising their share of the £8 billion investment.
  (Sir Alastair Morton) If I may take the second, they have abandoned ship on the 8 billion, they do not intend to put any of it up.

  86. I will come back to that.
  (Sir Alastair Morton) This 8 billion is over and above West Coast Main Line. West Coast Main Line was not part of that 8 billion. That is part of what has changed and has delayed our ability to produce the plan.

  87. We are talking about 12 billion, four billion coming—
  (Sir Alastair Morton) I think we were talk about a lot more than 12.

  88. 8 billion to Railtrack.

  Chairman: Sir Alastair, you are going to have time to communicate with Mr Grant because the Committee stands suspended.

  The Committee suspended from 4.47 pm to 4.57 pm for a division in the House

  89. That is a very interesting, the fact that you say that Railtrack have walked away from the £8 billion, where is that 8 billion going to come from in that event?
  (Sir Alastair Morton) That is a very good question. I am sorry to keep harping on about this. One of the reasons why we take two steps forward and one step back from time to time in our march towards a series of strategies that cover the network as whole is questions like that. When the Ten Year Plan was published at the end of July last year there was a statement that there would be £63 billion, of which 29 would come from the public purse via the SRA, including the four billion that you refer to, and the RMF and other things. And 34 would come from the private sector, including Railtrack. Railtrack going missing creates a gap, a vacancy, as it were, and the question of where the private sector investment will come from for rail is a question that now has to be redeveloped around other methods of investment which we are engaged on developing. The idea that you simply increase the public purse if the private sector goes down is not automatic, I am afraid. If it did go on for too long the Treasury at some point would say, "This is back in the public sector now because all of the money is coming from us", and that would change all of the rules of the game and stop a strategic plan.

  90. The figures that you are talking about are way over your original budget. The Treasury have not said to you, "Just a moment, before you proceed any further, where is the money coming from?"
  (Sir Alastair Morton) The Treasury are saying the money is not there, except insofar as it has put the 29 billion in the Ten Year Plan. Two things have developed since then: one is the timing allocation of that into the next five years or the second five years, and within the next five years into the first two years that are the existing spending round, Spending Round 2000. The money was put in either at that time in one or other and it was put either as capital or as resource funding. I am sure you know all these terms far better than me.

  91. And?
  (Sir Alastair Morton) The availability to us of funding for the purposes that look to be necessary, particularly after this defection, no longer fits all of this. It is going to have to be rethought by the Government and we are confident they will do that as we move towards the next spending round.

  92. May I suggest, Sir Alastair, that is a fair old hole in this strategy that has to be repaired.
  (Sir Alastair Morton) Can I comment on that, because I agree with you, if I may. The fair old hole is going to have to be covered pretty largely from private sector sources, because that is where it was coming from before, but in order to attract neutral or independent third party private capital in large quantities into the network, as opposed to Railtrack, whose business it is, we are going to have to use public sector funds, our funding, in innovative ways, which have been touched upon in the announcement, to support and facilitate the entry of private sector capital in sufficient quantities. The plans for the structures of this have not yet been developed, this is a new departure.

  93. I think we do agree it is very significant information you are giving to the Committee and I do not think we would underestimate what you are saying. Could I ask you a further question about that to try to understand how the strategy hangs together, given than it has had a very severe mauling, by your own admission: that is that the four billion for the West Coast Main Line was announced middle of last year, something like that, approximately, your document on the strategic agenda was published 1st March, the changes to Railtrack's involvement were announced by the Secretary of State in April.
  (Sir Alastair Morton) 1st April.

  94. How does the granting of £4 billion of public money, which you described, I clearly recollect, to the Committee as a gift—gift was your word, not mine—how does the granting of that enormous amount of money to Railtrack, as a private monopoly funding, as it then was and still is, fit in with the strategy that we now see of Railtrack withdrawing from stations; Railtrack fading out of the scene of the East Coast Main Line; Railtrack walking away from its £8 billion commitment? Do you see the point I am getting at, a decision taken to grant them four billion on one strategy and now we have, by your own definition, Sir Alastair, a radically changed strategy, how do the two hang together?
  (Sir Alastair Morton) That is a good question. At the time the four billion, and still, because it still applies, was granted and under the instructions or the guidance of the Rail Regulator, who accepted the definition of major investment works on the West Coast Main Line as being renewals. The legislation says that the Regulator must provide Railtrack, under certain outlined conditions, the funding via the ability to charge sufficient to cover its reasonable operation, maintenance and renewal costs so if it is an efficient company it can make enough money out of that to support its general business, at that time thought to include enhancements. This was what the Regulator says is renewal money, to renew the West Coast Main Line and, therefore, was not optional money, was not an investment project reviewed by us and decided by us. It was simply to be paid through the medium of us, through our bank account to Railtrack, because Railtrack's revenue consists of money flowing from us direct in grants or indirectly through subsidies to operators which blend with their farebox income and pay track access charges to Railtrack. We now have a new situation. There has been no decision known to me to pull back from the upgrade of the West Coast Main Line; therefore, unless the definition were to cease to be renewal of the West Coast Main Line we consider ourselves still bound, from where we sit, by that obligation to pay 4 billion when the Regulator stays it is due. You then get to-is that the best use of public money? Which is where your question was headed, if I may say so.

  95. And the strategy? I am seeking to understand the strategy.
  (Sir Alastair Morton) I have said already, and I will confirm that this applies here too, that the use of taxpayers' money, you might say including that four billion, but then you have got the Regulator point, has to be positive, innovative and I would say strategic, if I may. In other words, it has to be used in alliance with, in conjunction with, private sector capital from global capital markets to create the biggest possible investment fund to pay for the huge bills of expanding the network, enhancing it, and I would also say replacing it or renewing it, whichever word you would like to use. What I am saying is it is not a very efficient use of money—this was what I had in mind when I said "gift"—to pay a pound of taxpayers' money for one pound's worth of work, it is much more useful to pay a pound of taxpayers' money, to link it up with two, three or four pounds of private money to get whatever that is.

  96. I think we all understand that and many of us would support that, but I am still at a loss to understand how the strategy hangs together when last July, or whenever it was, granting £4 billion to Railtrack entirely of public money as a grant, as a gift as you put it, and about ten months later we are talking about a completely different strategy emerging, not just marginal stuff. Out of the issues that you have raised, of the eight billion that Railtrack were then committed to, and they were very committed to it at that time, one could see the logic of it hanging together even though there were some questions about it. But now they have walked away from that eight billion and now they are walking away from stations, they are walking away from the East Coast Main Line and so on and it seems to me we are talking about an entirely different situation. What I am seeking to understand is how the granting of that four billion ties in with the present day strategy?
  (Sir Alastair Morton) It does not, it is part of the West Coast Main Line upgrade strategy, which is a given. That is not under discussion as to do or not to do, it is in progress, it is a given. Therefore, that was committed last year, going ahead from last year. I have criticised it, you are wondering about it. But actually the real question is the eight billion question, if I may call it that, which is looking forward at other projects, starting with the East Coast Main Line. Where is the money going to come from, and I have made my point about linking up with public sector capital.

  Mr Stevenson: In the interests of time can I move on to the next area?

  97. Before you do that, who is it that sets the conditions of the application of public money?
  (Sir Alastair Morton) At the end of the day the Treasury in my experience.

  98. What part do you play as the Strategic Rail Authority?
  (Sir Alastair Morton) We are the paymaster for grants to Railtrack and for our subsidies to train operating companies. We actually handle the money. We receive it from the Treasury and pay it to the appropriate parties. When we come to enhancement of the network and various things that are our judgment—rail/passenger partnership matters would be one example—then we are the parties who take decisions, subject always to certain limits that are set out in public documents or in the legislation where we have to get the Secretary of State's consent before we can—

  99. When would you get to the point, Sir Alastair, that you would say to the Government "This is all just falling apart. All of what was intended in the first place is not stacking up and we really do feel that we are in a position where you would be best to take the railway infrastructure back into public control"?
  (Sir Alastair Morton) I do not think I personally, starting there if I may as Chairman of SRA, would ever say that last part. If you do so you place the entire expenditure under the Treasury, where it was before, with the results that we are trying to cope with.