§ Lord Marsh rose to call attention to the current and long-term problems of the railway industry; and to move for Papers.
§ The noble Lord said: My Lords, particularly in the presence of the Leader of the House, I first declare an interest. I am pleased to say that I am in receipt of a pension from the British Rail pension fund. Furthermore, particularly since the noble and learned Lord is still present, the regulations are now very tough and we must include friends and relations in such declarations. I suspect that at least 85 per cent of the chaps with whom I went to school, together with my father, my grandfather, two uncles and four cousins, were also employed by the GWR, known colloquially as "God's Wonderful Railway".
§ On a slightly more serious note, I am also very lucky to have enjoyed the unique experience of serving in a Labour Cabinet as Minister of Transport. Then, within a couple of months, I moved directly across to become chairman of the British Railways Board under a Conservative government. Both regimes were equally difficult. I introduce this personal note because the seven years that I spent in those two diametrically opposed functions, working under both parties, formed the basis of a lasting fascination that I have with the subject of today's debate.
§ As is the case today, the railway and its voracious appetite for ever-increasing injections of public money dominated the work of the Ministry of Transport under both parties. It spawned, as it does today, numerous study groups on the future of the railway to the joy and financial benefit of an endless queue of highly paid consultants. That occurred within five or six years of the previous massive restructuring, which took place under the late Lord Beeching and resulted in the biggest deficit ever.
§ It is interesting and, I believe, relevant that we are again debating yet another major upheaval only five years after the previous one. That is one of the problems which exists for this particular industry. It is not surprising because most new Ministers and all new governments take office with a desperate desire to solve the problems which their predecessors found insoluble. But the result of constant political upheavals and the obsession with trying to pretend that the rail system might one day make a profit achieves very little other than massive disruption and increased expenditure.
§ I left the Ministry of Transport during its 50th anniversary. When I left, I was the 25th Minister of Transport. I cannot believe that any normal business could emerge unscathed and survive with five different owner/managers, each introducing a different policy every 10 years.
§ The problem is that passenger railway systems are simply not like other large industrial organisations. In many areas, they are sui generis. They are certainly not like the other privatised industries of gas, water and electricity. They differ in many ways but, in one respect above all others, they are unique. Specifically, 1421 passenger railway systems have now operated across the world for well over 100 years; and throughout that period, they have all operated without ever returning a true profit on the capital employed. There are many reasons why that is so, but it has been the case not only in this country but also in France, Germany, Japan and virtually every other country in the world.
§ Accountants have turned railway accounting and the cosmetics thereof into an art form. It is done by hidden subsidies of one form or another. But still the Government have to stand behind it. One great thing that the passenger railway systems of the world discovered—at least, their finance directors did—was socially necessary lines. Every time an upheaval or a restructuring occurred and matters became difficult, one could always find some socially necessary lines. On occasion it would have been much cheaper to give each passenger a car with a chauffeur and to ask him to drive himself. At the end, one might say, "Well, we've given them some money because it was socially necessary and look at the effect it's had on the bottom line".
§ But the unfortunate characteristic of a lack of profitability is quite fundamental. It is in the nature of the beast. There are many reasons why that is so, and I give but just one example. Passengers do not travel seamlessly throughout the 24 hours of a day. In every part of these enormous railway systems, with their vast amounts of capital equipment, and during each hour of the 24, a high proportion of the system does not earn a penny. That is where the big problem lies, and it is why infrastructure and investment programmes are a never-ending subject of argument. And there is nothing that one can do about it.
§ To add to the problem, despite the dreams of the Treasury, which has a long history of trying to get the railway deficit off its books, and despite the dreams of new governments, all history demonstrates that no government can shelter from the financial problems presented by the railway any more than they can walk away from the problems of the National Health Service. At the end of the day, the government will always be the lender of last resort, knowing that they will never get their money back. Yet that is exactly what the Conservative government, prompted by the Treasury, sought to achieve with privatisation and the disastrous decision to separate the railway track from the operation of the trains which use it.
§ Despite the attempts and efforts of the European Union over the past 10 years to get national rail companies to separate their fixed networks from the operation of the services, in no other major passenger system in the world are the infrastructure and the operations both separate and privatised. It was a unique idea. One could say that it was brave, but it has not worked. The result of that truly unique experiment has been a financial and operational shambles without precedent in this or any other passenger railway system. It has produced a situation in which Railtrack cannot even produce a register of its assets five years after its flotation.1422
§ The problem is compounded by the fact that, despite all the warnings, many of those who were responsible for the industry—Ministers and civil servants—refused to face up to the size and fundamental nature of the problem. As recently as April this year, the Government were still convinced that all that was needed was a little patching up in the case of Railtrack and another £1.5 billion to keep the wolf from the door. As an American tax victim once said in court, "You have a billion dollars here and a billion dollars there and, before you know where you are, you're talking serious money".
The noble Lord, Lord Macdonald—a much respected Minister—described the Government's position when he said:
I share the conviction … that mistakes were made in the privatisation process … But after years of fragmentation and instability, surely the answer is not more upheaval. What we need now is evolution rather than revolution".—[Official Report, 5/4/01; col. 976.]
With difficulty I restrain myself from making a single-syllabled comment—it would be unparliamentary. That statement describes clearly the course on which the Government have embarked—a course that many of us believe can only make a bad situation worse—and it completely underestimates the nature and scale of the problem.
§ Last week, one year after the Paddington train crash, which claimed the lives of 31 people and left 500 injured, the Crown Prosecution Service announced that it would not bring proceedings against any person or company for manslaughter. I thought long and hard before deciding to introduce that tragic issue into this debate. It is not difficult to imagine and understand the feelings of those who suffered loss and injury in one of the world's worst accidents in railway history. I introduce it because that accident and the Cullen report into the events that led up to it are central to my conviction that the management structure that was introduced by the act of privatisation was and still is fundamentally and dangerously flawed. I believe that the CPS was completely right in its decision not to bring prosecutions against any person or company. In my view, the evidence contained in the Cullen report, which runs to 279 pages and is terrifying to read, makes it clear beyond argument that there are and were no guilty men against whom to proceed.
§ I am told that a definition of corporate manslaughter requires a, "controlling mind". That is a remarkably apt definition. I say in all seriousness that the fragmented structure of the post-privatised railway had—and has—no controlling mind. No one was truly accountable to anyone else; or, if they were, they did not know it. That is the system that we are debating and which the Government believe will be reformed by evolution over an unspecified time-scale. That is not merely grossly optimistic; when one reads some of the comments of those who gave evidence to the inquiry, it becomes clear that it is also a dangerously complacent policy.1423
The Cullen report is long and difficult. I shall offer to noble Lords a small but representative group of quotations. There are very many others. They give a flavour of the situation in an industry in which vehicles weighing hundreds of tonnes travel at high speeds with large numbers of people upon them. Noble Lords should forget about the various initials that they will hear in this alphabet soup of quotations, with the exception of one set of initials: SPADs, which stands for "Signals passed at danger". That acronym strikes horror into the hearts of railway managers and was at the base of what happened at Paddington. The first quotation states:
Mr Holmes told the Inquiry that … he wanted to rationalise the groups which were dedicated to SPAD Management, with the ultimate aim of having … a single focus. With that in mind he established the SPADRAM Group, intending to wind up the others. The GTMG did not meet after Mr Melanophy left … in May 1999, and the SPAD Action Group had not met since the autumn of 1998 … he initially allowed the STSG to continue, provided that it was closely linked to the SPADRAM Group. However, there was uncertainty over whether or not the STSG had been overtaken. Mr Bray and Mr Mayo attended for a meeting of the STSG in June 1999 but discovered that no one else had appeared. The meeting was aborted and no minutes were taken".
That involved a meeting of a large number of people to discuss signals passed at danger.
The report also states:
In April 1998 the Great Western Zone Safety Management Group … which discussed safety performance, asked that the minutes from the SPAD Reduction Group be attached to their minutes. In October"—
I point out that that was five months later—
the SMG minuted that 'the actions arising from the SPAD Technical Group were not being conveyed to the relevant operators, and a process was required that enabled them to be aware of the decisions'".
That is a fantastic idea when you come to think of it. The report continues:
Even those who were in key safety management posts appeared to have had limited knowledge of what was going on in the groups. For example, Mr Robson was unaware of matters being discussed in the SPAD Action Group, despite being the Project Safety Manager at the time".
I come to the last quotation, which is from Her Majesty's Railway Inspectorate. That states:
The idea of BR's public sector responsibility as something to be relied on has died hard and indeed was perpetuated by Railtrack's initial assertion that was the directing mind for safety on the railway. Reality has not lived up to expectation, but expectation has affected the HMRI's"—
that refers to Her Majesty's Railway Inspectorate—
attitudes to industry standards to enforcement and toughness and checking follow-up and follow-through … HSE as a whole were assuming compliance and that duty holders would exercise their responsibilities, because that was very much part and parcel of what we had expected from BR and we did not feel the need to intervene, to probe, to audit, to inspect as much when you had a single body exercising its responsibilities in that way".
§ I could go on in that way. It makes the blood run cold to think about what was happening in response to a danger that was apparent to everybody and no one knew how to cope with it.1424
§ I have concentrated on safety, although that is only one example—it is obviously the major example—of the lack of clear lines of accountability from the signal box to the chairman's office. If an organisation that is the size of our railway system, which spreads literally from Land's End to John o'Groats, does not have efficient lines of command and communication in the field of safety, and is a major spender, one cannot possibly have optimal financial control.
§ It would be absurd to suggest that BR was a paragon of managerial virtue. It had many problems, some of which were the direct and inevitable result of government policies. The lines of communication and accountability were absolutely clear because it had a functional board at the centre. The functions were human resources, engineering, finance, passengers and freight. That was replicated in each region, in each division and in each area. Therefore, if there was a problem with the track, the engineer on the board would demand a report from the regional engineer; the regional engineer would demand reports from his district engineers; and the district engineers would demand reports from the area engineers. It is now more than 12 months since the accident, and nobody knows who was responsible, because there is no organisational chart that could show one who was responsible.
§ This is not just a bee in my bonnet; it is crucial to our breaking away from the present system. What happened in the past has happened. All governments make mistakes. As a former Minister, I am an expert on that, having also made my share. I am not opposed to privatisation; far from it. I strongly believe that we need to have within the railway system a major element of private capital if for no other reason than to protect the investment programme, which is currently treated light-heartedly by government after government.
§ I was chairman of the BRB for five years. During that time, we had six reductions in a 10-year investment programme under two governments and five Ministers. It is no good talking about a 10-year investment programme unless the parties get together in some weird way and begin to preserve that programme for the future.
§ There are many ways to achieve those objectives. Whatever the final outcome that is produced, an organisation in which executives at every level can be held accountable for their actions is pretty basic as a start.
§ I am much concerned about whether the Government have yet grasped that particular nettle. It has been reported that Railtrack will be replaced by 15 directors reporting to a board of up to 40 members, representing the train operating companies, the rolling stock companies, passenger groups, trade unions and the CBI. It would be outrageous if that juvenile proposition were to emerge as a possibility. I hope that the Minister will clarify that it is not so.
§ The problems are serious but they are not a party issue. I can confirm that Labour railway trains are very much like Conservative ones. The Government are in a unique position. They have their majority; they have 1425 the time; and they cannot he held directly responsible for this difficulty. They have the opportunity to achieve something that will be very popular with the electorate. Indeed, it could even persuade the electorate to forgive them for the many wicked things that they have done in the past few years. My Lords, I beg to move for papers.
§ 3.41 p.m.
§ Lord Faulkner of Worcester
My Lords, I am sure that the whole House is grateful to the noble Lord, Lord Marsh, for initiating the debate today, as it gives us a good opportunity not only to look back on what has gone wrong with rail privatisation, but to look forward to a new era, which many of us hope the reconstruction of Railtrack will create.
I particularly enjoyed the noble Lord's reference to the number of transport Ministers who had served before him. As someone who worked for the British Railways Board after he was chairman, I can say that the number of changes in Ministers has not altered too much since then. Eight former Secretaries of State for Transport sit on the Conservative Benches of this House—an extraordinary number—and I am particularly looking forward to the contribution of the noble Lord, Lord MacGregor of Pulham Market, who is one of them. The eighth was the arrival of the noble Lord, Lord King of Bridgwater, the other day.
So many things went wrong after rail privatisation in 1994 that it is hard to know where to begin. Despite having a licence which had as its prime requirement the need to pay attention to the public interest, ahead of the interests of shareholders, Railtrack gave every impression of believing that its main duty was to sweat the assets that it had acquired from the state, cut costs on essential items, such as maintenance and renewals, and reward its senior people on the same sort basis as if they had been successful entrepreneurs in the private sector. All that, despite the fact that two-thirds of the company's income came from the taxpayer.
The company was flawed from the beginning. As an unnamed rail contractor commented—presumably he did not dare to be named—to the magazine Contract Journal on 17th October, Railtrack,had a total disregard for the supply chain. Its network statements produced annually were a hoax, a huge public relations exercise designed to fool the public into believing a lot of money was being spent. But Railtrack was promising things that it was not actually getting down to doing. It was all jam tomorrow. In rail maintenance, Railtrack had driven down prices irrespective of safety".It is hard to disagree with that view. That approach led directly to gauge corner cracking on the rails, to the Hatfield disaster, and then to a spell of blind panic on Railtrack's part. Chris Green, the well-respected chief executive of Virgin Trains, said in his Sir Robert Reid lecture on 13th February this year:The railway industry has scored an own goal of epic proportions. It should have entered the new millennium with every thing going for it. Passenger travel had soared by a third in just four years. Public goodwill for a rail renaissance was supported by all political parties—and private investment had started to solve the deep-seated funding problems".1426 The train operators' attempts to build up passenger confidence and build new markets were blown away almost overnight by universal speed restrictions and line closures. But the effort to drive down costs by, for example, putting out as much track maintenance work as possible out to private contractors, some of whom had no experience of working on the railway, had the opposite effect. Virtually everything that Railtrack did cost more than in the days of the single, unified, publicly owned railway. Major investment projects now cost between 2.4 and three times more. Even relatively straightforward maintenance contracts are one and a half times as expensive.
It is disappointing, but not surprising, that the outgoing chief executive of Railtrack has attempted to blame the regulatory regime for Railtrack's collapse, describing it as,intrusive and largely uncontrolled over-regulation".The fact is that Tom Winsor, the regulator, had spotted that track quality was getting worse and that the number of broken rails had increased well before the Hatfield disaster. Not unreasonably he demanded that Railtrack should do something about it.
I shall say more about the new proposed structure in a moment, but I want to make the point now that. I do not support the view that the Office of the Flail Regulator should be subsumed into that of the Strategic Rail Authority. Neither do the train operating companies or the rail freight industry. I commend to noble Lords the comments of James Strachan, a non-executive director of Ofgem, who wrote in The Times on 24th October:Whatever the structure used for Son of Railtrack, short of renationalisation, we need to remind Government that, if consumers are to be protected, there will always be a need for strong, independent economic regulation of natural monopolies that reside, to whatever extent, in the private sector".As for the assertion that the Government—in other words, taxpayers—should compensate Railtrack shareholders because some will lose money, whatever happened to the warning that shares can go down in value as well as up? If noble Lords took themselves off to a betting shop in Victoria Street and asked to place a bet on A Romp too Far in the 4.25 race at Cheltenham this afternoon—I have checked that such a horse exists and that it is running—on the basis that if they did not win they would still expect to get their stake back, we can imagine what sort of reaction they would get from across the counter.
Despite the efforts to rewrite the history of recent events at Railtrack, the possibility of the company going into administration had been clear for months. Steve Marshall, chief executive of Railtrack, told the Financial Times on 11th April:Yes, they [the Government] would allow us to go bust. It's quite clearly item one on the agreement with the Government. While the Government stands behind the industry, they don't stand behind any particular company, of course they don't".In July, Railtrack's financial advisers told the directors that administration was one of the options facing the company. On the 25th of that month, less than four months after extra funding had been agreed, the Government were advised that the company's 1427 financial position was even worse than it appeared in April and that unless Ministers effectively handed over a blank cheque, Railtrack would be insolvent.
In my view, the Secretary of State, Stephen Byers, deserves credit for acting firmly and decisively. He has correctly used the powers given to him by the previous Government's Railways Act 1993.
Will Hutton wrote in the Observer on 14th October:What else was he supposed to do? Was the Government to offer an open-ended cheque book to keep bankrupt Railtrack alive? Equally why should the state pay £7 billion—the average share price over the last 3 years—to nationalise a bankrupt company? If Byers announced a withdrawal of subsidy, the result would have been a collapsing share price and mayhem. The solution he hit upon, simultaneously refusing the subsidy, allowing Railtrack to go into administration but guaranteeing creditors would be paid, allowed the rail service to continue uninterrupted last week".He continued:And the future structure for Railtrack, a company limited by guarantee but with the public-interest objectives and no shareholders, allows the rail industry to go forward, removing some of the in-built contradictions that have trapped it until now. Byers deserves a round of applause".In a Written Answer published in Hansard last Tuesday, the Secretary of State set out to Parliament how he envisages Railtrack will come out of administration and why he prefers the not for profit solution—the formation of a new company limited by guarantee to take over Railtrack plc's railway assets and its role as network operator.
The reaction to those proposals from within the industry and from representatives of passengers and other users has been almost universally favourable. The chairman of the Rail Passengers' Council, Stewart Francis, said on 8th October:We have been advocating radical evolution since the truly rotten state of the rail industry became apparent. Almost a year ago we floated the idea of Railtrack becoming a public trust, and now we hope that the inclusion of regulators, train operators and passenger representatives on the board will help bring about the joined-up railway we need".I know that that view is shared by the more enlightened chief executives of the train operating companies.
I agree with them. But we must realise that it will be a struggle to deliver the targets contained in the Government's 10-year plan on the basis of the investment already committed and planned, particularly if a recession brings about a serious reduction in consumer spending.
There are some hopeful signs. The first of those is the appointment of Richard Bowker as the new chairman of the Strategic Rail Authority. He is widely respected within the industry and he deserves the warmest of welcomes to what will be a critical and challenging job.
Secondly, when the railway manages to get things right we should praise and support it. Last Tuesday, in the company of three Members from another place, I spent a morning at the Railway Test Centre in Nottinghamshire and tried out the new Pendolino tilting train which Virgin is buying from Alsthom. As a veteran of British Rail's advanced passenger train in 1428 the early 1980s—the prototype I travelled on then did at least get as far as Crewe, I remember—I was a little sceptical of whether the new technology would work.
My verdict is that it will and that the potential is there for reducing journey times on the West Coast Main Line and for doubling both train frequencies and the number of passengers carried. Fulfilling those targets really matters because they are an important ingredient in the overall 10-year plan for the railway. They in turn depend on delivering the upgrade on the West Coast Main Line.
It would be foolish to imagine that the way ahead for the railway will be easy; of course it will not. For as long as any of us can remember, and as the noble Lord, Lord Marsh, so graphically described from his own experience, our rail system has been under-funded and under-appreciated, certainly compared with the railways in continental Europe and elsewhere in the world. The structure will require still more reform; there are far too many train-operating companies and many of them have franchises which are much too short.
There is also too little collaboration between them and the other players in the industry. There is too great a reliance on the system of penalties and rewards and insufficient attention is given to the needs of passengers and other customers. But as far as Railtrack is concerned, the Government should be congratulated on at last grasping the nettle and from that fundamental reform we should encourage them to build a better railway which I am sure the new structure will deliver.
§ 3.52 p.m.
§ Lord MacGregor of Pulham Market
My Lords, as a new boy to your Lordships' House I did not expect to be speaking quite so early in the debate. However, I am delighted to have the opportunity to do so.
I do not have the time to go over all the issues relating to privatisation. However, having been Secretary of State in the early stages of privatisation until mid-1994, I fully sympathise with the points made by the noble Lord, Lord Marsh, in relation to the difficulties faced by any Secretary of State for Transport. It should not be forgotten that there were many criticisms and problems associated with the old British Rail, including some of those described by the noble Lord, Lord Marsh, as existing within the new system.
I take the noble Lord's point about subsidies. It was never the intention of privatisation to do away with subsidies; we made that clear from the outset. We were endeavouring to acquire many of the benefits of privatisation—the change in culture and management—while recognising that subsidies had to continue.
However, I would not quote French railways as a good example of public subsidy. When I was Secretary of State, 22 per cent of the total expenditure of French railways was interest payment on debt. That was a huge waste of money, so much so that on a number of 1429 occasions the debt simply had to be liquidated. That was effectively a further government subsidy; it is certainly not the route we want to go down.
I agree with the noble Lord, Lord Marsh, about the need for private capital. That was one of the major purposes of privatisation, and I shall say more on that later. I agree also with his criticism of what has been floated in the newspapers about the new board structure. It would be unworkable, taking us back to many errors of the past.
Because of the time I can make only five points. First, I always said that our original plans would have to evolve and change in the light of developments. I can see three areas where I would have made changes. The first is fewer franchises. I worried at the time about the number of franchises we had in the original proposal, but I always thought that in due course the market would sort out a better structure. That is in fact what happened. I agree that we could have fewer franchises still.
Secondly, we should have longer franchises. I was not able to persuade the Treasury in that regard. I remember introducing PEPs into the other place when I was a Treasury Minister. Those PEPs arrangements were not as flexible as I would have wished because I failed to negotiate sufficiently with the Inland Revenue. However, I felt that once we had introduced the system the realities would come about and changes would be made. That is what happened with PEPs and what should be happening with longer franchises. Once the franchises were in place and the need for investment in rolling stock lessened, I felt that it would become obvious that the franchises should be longer. That continues to be my belief. Unfortunately, so far, the Government have done the reverse.
Thirdly, I believe that some aspects of access charging need changing, especially to obtain the right incentives for Railtrack to increase the use of its infrastructure with corresponding investment and expenditure decisions.
None of those points is fundamental. One that is, and one that. I would not change, is the establishment of a single national track authority, separate from operations, as against the management and control of both track and trains being held by the same body on a regional basis—the old romantic regional railway notion. There were four reasons, following careful consideration, for my going down that route. The first was that although in certain parts of the country—the Isle of Wight and perhaps Scotland where Scotrail had roughly 95 per cent of the traffic—we could have a body doing both, which I made clear I was willing to consider for them, in the majority of cases there would be a conflict of interest because so many different train operating companies as well as freight were using the tracks. That was a clear problem. Although there is now a suggestion of an experiment in one or two parts of the country, the point is still a strong one.
The second reason was that one of our key priorities was a higher level of investment in the rail infrastructure. There was no proper correlation between the real investment needs of the infrastructure 1430 and the capacity of individual train-operating companies, with their own capital structures, to make that investment. The proper prioritisation of investment had to be done by the single authority.
The third reason was safety; that is, that Railtrack would have the key role in ensuring the safety aspects of track and signalling. The existence of a national track authority would ensure that safety standards and procedures were co-ordinated in a clear and consistent way. I shall say something more about safety in a moment, but that was a key consideration.
The fourth reason was the need for the national track authority to ensure the efficient co-ordination of operational time-tabling across the network. I believe that those reasons remain as relevant today.
Privatisation was working extremely well and the Chris Green quotation proved that. I agree with the tribute paid to Chris Green. There was a big increase in passengers and a big increase in freight. It was the first time there had been a reversal of the constant decline in the amount of freight since the Second World War. There were considerable increases in investment, both in rolling stock and in infrastructure. All that was working well until the Paddington and Hatfield crashes.
My second main point is that this Government have had as much time as the previous government—it is eight years in total since the Bill was introduced—to make any changes they wish. I am sorry to have to say it, but this Government's time has been characterised, instead of making the system work, by a determination to undermine the privatisation without reversing it. There has been a culture of blame and bullying; there has been constant interference. I thought it was massively ironic that the Secretary of State, in his Statement of 15th October, said in the other place, at col. 956, that we need,a cut in the burden of day-to-day interference".That has been much greater than it was during our period.
The wrong choice of regulator was made. I noted what Steve Marshall, the chief executive of Railtrack, said the other day about the demeanour and comments of the regulator and there is some truth in that. There has been a lack of decision-making. I have already criticised the decisions made on the franchises, which have become shorter rather than longer, and there has been a lack of decision-making elsewhere. The Strategic Rail Authority to date has clearly not worked and the frustrations of its outgoing chairman are evident and public. The result was that when we had the tragic accident at Paddington and Hatfield, there was a huge overreaction. Previous accidents during the time of British Rail did not produce the panic reaction and closure of the system that we saw for a long time following those two accidents, particularly Hatfield. Much of that was due to the culture of blame and bullying and the fact that the management lost its nerve.
Thirdly, as regards safety, the number of SPADs reduced substantially following privatisation. There was clearly a management failure in both accident 1431 situations. That was borne out by the reports. However, I do not believe that it was a fundamental failure of the structure. Airlines and airport authorities, which are thoroughly privatised, give a high priority to safety because it is vital to their future commercial operation. The same does and should apply to rail.
We gave a high priority to safety in the original privatisation proposals. I would not have gone ahead had the Health and Safety Commission not validated the entire structure we put in place. At the time the chairman of British Rail said that that was an appropriate structure. However, there is a point which is relevant to Paddington and Hatfield; it is one that is sometimes difficult to make. Following any inquiry into a rail accident, it is always difficult in reaction to make a balanced judgment on whether to make a huge commitment to additional expenditure at the expense of expansion of the railway. It is also difficult to make a balanced judgment regarding expenditure on safety issues between road and rail.
I faced that situation after the Clapham inquiry. The chairman of British Rail and I agreed that the high expenditure recommended by the Clapham inquiry could not be justified by the benefits that came from it. One has to remember that 90 per cent of all traffic is on the roads, yet we spend much less on road safety measures than on rail. I tried to increase such expenditure. At the time of the Hatfield crash, on average there were 10 deaths on the roads each day; 3,500 per year. That fact is not publicised. That is very much higher than the figure for rail. In terms of cost benefit for public expenditure, we should spend more on road safety measures. That is where the real benefits lie. That is difficult to say, but I believe that it is necessary.
My next point is the question of a level playing field, which was much discussed. When I was Secretary of State I believed, as I still do, that motorway charging needs to introduced. I believe that for a whole variety of reasons, not least to achieve a proper recognition of the cost of travel by road compared to rail. That would help to further increase rail passenger and freight usage.
My final point concerns where we are now. I believe that the action of the Secretary of State has been immensely damaging, above all for the future financing of the railway infrastructure. One of the great benefits of introducing the privatisation of Railtrack—which I did not do, I was looking to the longer term—was that it would bring in extra private capital. In response to a Question regarding future private financing in the other place, the Secretary of State said:The proposed company to take over Railtrack's liabilities … will be a private company; therefore its borrowing and finance will not score against public borrowing, but will be in the private sector".—[Official Report, Commons, 15/10/01; col. 971.]Bingo, just like that! That is a triumph of hope over expertise. We all know that the £34 billion which is in the programme will not come from the private sector in the way it would have done previously; it will either 1432 be much more expensive with huge legal conditions attached or it will need a firm government guarantee, in which case it will score as government expenditure. Any Chief Secretary knows that. That will be the great flaw and black hole in the programme ahead. The commitments to health and education undertaken by the Chancellor, coupled with the fact that public finances will become pretty rickety in future as we go through economic uncertainties, mean that there is no chance that that £34 billion will come from the public sector, either by government guarantee or directly. That is the black hole and the consequence of the action recently taken.
§ 4.4 p.m.
§ Baroness Scott of Needham Market
My Lords, I am grateful to the noble Lord, Lord Marsh, for initiating the debate and for opening our discussions in a characteristically passionate and thought-provoking way. Until I heard his opening remarks I had not realised that the hereditary principle had ever extended to the railways. However, as so often here, I have learnt something new.
There has certainly never been a better time than now to discuss the future of the railways. It is important today to focus our attention on the future and how we think the industry should look in the years to come rather than looking back and indulging in too many recriminations about how we arrived at today's situation. Above all, it is important not to lose sight of the needs of the passengers. All too often such debates take place without the word "passenger" being heard. The needs of passengers are relatively straightforward, although not simple to achieve. They want a safe, efficient railway at a price which offers real choice.
We are fortunate indeed to have within your Lordships' House a wealth of expertise and knowledge about the railways, which has been gained over many years from a variety of sources. I am particularly grateful to my noble friend Lord Bradshaw, who will sum-up from these Benches, for his knowledge, which has been built up over a lifetime in the industry. The noble Lord, Lord Marsh, referred to consultants. I suspect that no Government could afford to pay consultancy fees for the collective expertise in your Lordships' House today.
I sincerely hope that the Government will take advantage of such free advice. Frankly, at present they need all the help they can get in framing the future development of our rail system. As we have heard, "short-termism" has been the curse of a number of aspects of policy-making. That is never more apparent than in transport planning, and railway planning in particular.
I am well aware that when the railway industry was privatised there was a real concern in this House which cut across party lines. However, one thing was clear at the time: the government of the day had a clear agenda. There was a belief that the hey day of the railways was over and that save for the movement of people between large urban centres, in the main, the track had been replaced by the road. With that scenario, it was 1433 theoretically understandable that the private sector could do the job at least as well as the state, and perhaps better.
However, today's agenda is different. Years of transport policy geared towards facilitating car use has led to severe congestion problems, and not just in cities. Congestion, along with an understanding that to stand a chance of achieving the Kyoto commitments with regard to CO2 emissions, means that we have to tackle the transport sector. That has led to a rethink of the contribution the railway can make to a more sustainable transport system. That will not happen without investment. Experience everywhere else in the world tells us that no major rail system can run without large amounts of investment. Much of that has to be public.
The first big question for the Government at this time is for them to be honest about how they see the future role of the railways. Do they see a return to the managed decline that we saw in the previous administration, or do they genuinely believe in a revitalised railway, one which contributes to a wider agenda of sustainability, accessibility and regional regeneration? If they believe that, how much are they prepared to spend on that objective? How much do they realistically see coming in from the private sector? Are they sure that systems are in place which can objectively assess the comparative value of public investment in rail as opposed to other transport modes? How should we be making investment decisions within the industry? How should we judge investment in maintenance, safety and new infrastructure? How do we balance the needs of local versus inter-city services and the needs of passengers versus freight? Do we have the policy-making framework to be able to make those decisions? I am not sure that we do.
The Government need to consider what kind of projects are suitable for special purpose vehicles. We, on these Benches, believe that they can be retained although perhaps in a different way. Today's news about the West Coast Main Line has shown how we need to take a fresh look at such projects to ensure widespread agreement on what can be achieved and how. I hope that the Minister will take the opportunity to tell the House how he sees the future of the West Coast Main Line and phase 2 of the Channel Tunnel Rail Link, which is so important for our region.
The role of the private investor in transport schemes has been brought under close scrutiny as a result of the way in which the demise of Railtrack was handled. My noble friend Lord Oakeshott will concentrate his remarks on the financial aspects of the current crisis.
Can the Minister say how long the Government intend Railtrack to stay in administration? From these Benches, we believe that there must be in place far more detailed plans on how the infrastructure is to be brought up to an acceptable standard before the network is handed over to a new body. We shall be seeking cast iron assurances on how this work is to be done and how it will be funded before we shall be happy about any future arrangements.
1434 The restoration of a reliable network has to be the overriding priority if passenger confidence in the network is to be restored. It is more important for the handing over to be done properly than to hurry the process. There is no shame in taking time to think about the fundamental questions of the rail industry; and there is no problem about taking time if that time is well used.
In recent days and weeks, we have heard considerable doubts about the ability of the industry ever to return to the days of vertical integration. The estimated cost of bringing infrastructure up to standard is regarded by many as being too high for the industry to bear, particularly as we may move into a recession in the aftermath of the events of 11 th September. In addition, there are many questions to be answered about how the needs of all users would be dealt with objectively within a vertically integrated system. Perhaps the Minister will tell the House how vertical integration would comply with recent European Union directives on the separation of networks and operators.
The Government's decision earlier this year to extend franchises on a two-year basis gives a further opportunity to think again about franchising: how many franchises there should be; and whether they should include maintenance and renewal. If there are fewer but larger franchises, is there a role for smaller franchises embedded within the larger ones? Larger franchises would provide an opportunity to reduce the fragmentation in the industry. It is interesting to note that from their different perspectives, the noble Lord, Lord Faulkner, and the noble Lord, Lord MacGregor, have come to the view that there should be fewer franchises.
The relationships between all the players in the railway industry needs to be carefully thought through. Do the Government believe that the SRA is a sufficient body to set the policy framework, manage the industry and act on their behalf in deciding whether the interests of taxpayers and passengers are being upheld? If not, do they intend to continue to interfere with its work, creating a body in which no one has any real confidence? Alternatively, will they step aside, strengthen the SRA and allow it and its new chairman to do the job that they set it up to do a few years ago? If a more regional structure for the railways emerges, there are certain aspects which probably should be decided nationally—for example., timetabling, capacity and signalling.
We on these Benches have real concerns about the ability of the SRA to take into account wider regional policy objectives. We are seeing worrying signs of a concentration of investment in the South East. I know that my noble friends Lord Shutt, Lord Greaves and Lord Mar and Kellie will talk about that aspect. I am sure that the noble Lord, Lord Berkeley, will make a robust case for the rail freight industry. I should like to hear what the Government have to say about freight with regard to meeting the targets they outlined in the 10-year plan—how long ago that seems—and access charges.
1435 We believe that the fragmentation of the industry is largely to blame for its current state. We should like to see the Government take this opportunity to place the remaining economic functions of the Rail Regulator within the SRA. We also question the development of a performance regime in which it sometimes seems that regulation becomes an end unto itself—a plethora of bodies which each tends to justify its own existence by creating ever more regulation. The end result is a set of contradictory demands on the industry. Obviously operators should pay if they fail to provide sufficient rolling stock or drivers but if the effect of the regime is to reduce the maintenance of the track and the undertaking of new works, little has been achieved. The role of the SRA in determining the future shape of regulation should be central to all this. With the creation of a not-for-profit infrastructure provider, some of the need for regulation has disappeared. We believe that railways safety should be regulated by professionals within the SRA. On the subject of safety, perhaps I may ask the Minister whether the programme of installation for TPWS will continue and will not be interrupted.
I should like to say a few words about the staff within the rail industry. They have done a very good job under very difficult circumstances during the past year and will continue to do so. We should pay tribute to them.
There is an opportunity now to start with a blank sheet of paper—or as close as we shall ever get to that. I am well aware that I have raised more questions than I have given answers. However, there are times when there is nothing wrong with asking questions provided that we take time to consider them and the answers to those questions. Undue haste and a lack of clear objectives could plunge the rail industry into a turmoil which, after the recent decades of under-investment, could sink for ever the chances of this country developing a rail system which not only meets the needs of our passengers but also matches the expectations of one of the strongest economies in the world.
§ 4.15 p.m.
§ Lord Bridges
My Lords, like other noble Lords, I am grateful to the noble Lord, Lord Marsh, for introducing this Motion. It enables us to discuss an extremely important and difficult problem. I found his remarks very illuminating. I shall illustrate by a specific example the nature of some of the difficulties facing those framing policy on rail investment. It is a subject on which I have been in correspondence with the noble and learned Lord, Lord Falconer, and concerns the urgent need to improve rail connections with ports in East Anglia.
To appreciate the difficulty, it is necessary to understand a significant trend in our foreign trade. Over the past 40 years, there has been a fundamental change. Until the 1950s, our main exports of manufactures destined for world markets were shipped across the ocean sea routes on cargo liners 1436 trading out of the big west coast ports such as Glasgow, Liverpool and Bristol. Since then there have been two significant changes, one in the markets, the other in the ships. The largest segment of our exports is now destined for other countries in Europe, whether in the European Union or outside it. The ships transporting them are specialised container vessels, many of which trade out of the port of Felixstowe. Previously a small dozy enterprise, it has been vigorously expanded by large investments to become our biggest container port, second only to Rotterdam in Europe. Further investments are planned, both at Felixstowe and at Harwich on the other side of the same estuary, which would approximately double the number of containers now handled there within the space of a few years. The problem is how to move the containers from factory to port or—in the case of imports—from port to consignee.
There is a single track rail connection between Felixstowe and Ipswich to which some useful improvements have been made recently but current capacity is well below the anticipated volumes foreseen after the expansion of the port. The developments planned on the other side of the estuary, by the same company, could be handled by the existing double track between Harwich and Manningtree. But serious problems will arrive in moving the imported containers to their final destination because of congestion on the track between Colchester and Stratford and on the north London line between Stratford and the main trunk lines from London to the Midlands and Scotland and because of the inability of the cross-country route between Ipswich and Peterborough to handle the volumes forecast. The worry, therefore, is that within a few years container capacity at Felixstowe and Harwich will have been doubled before the railways are ready.
I have explained these anxieties to the noble and learned Lord. He responded courteously to my letters on the subject. He explains that he is confident of the Government's commitment to a scheme capable of making the necessary investments but he cannot say whether these will be forthcoming in time to carry the traffic which is expected to occur within the next five years. If this does not happen, the results will be dire because millions of containers will have to travel by road on routes which are already overloaded, congested and dangerous.
I understand the Government's dilemma but I also recall that they have made pledges about an integrated transport policy in two general elections. We expect the Government to fulfil those pledges in this particular case, which may prove to be a critical test of their ability to maintain public confidence in their effectiveness as a government. At least that is how it appears to many people who live in the region as I do.
As I have already explained to the Minister's office, I regret that because of a long-standing engagement I do not expect to be able to be in the House when the Minister replies. I apologise for the apparent discourtesy, but I shall study what he says on the subject with close attention.
§ 4.22 p.m.
My Lords, as the noble Baroness, Lady Scott, suggested, I declare an interest as chairman of the Rail Freight Group. I shall concentrate my final remarks on rail freight and what I believe it requires from the network.
To put matters in context, seven years ago it was said:Rail privatisation will bring extra efficiency, free up investment, expand choice, enhance services that the customer wants. Privatisation should be judged by the results".Those were the words of Dr Brian Mawhinney, one of the few Secretaries of State for Transport of that era who is not in your Lordships' House.
I believe that today we are here to judge whether or not it has been a success. Undoubtedly, for freight it has been a success. Freight has grown by 40 per cent. The competition above rail has been good for customers, and the industry survived Hatfield. Traffic has grown by 6 per cent in the past quarter compared with the previous year. The SRA's freight strategy has been widely welcomed and the industry is looking positive. I believe that passenger traffic is also up by about 30 per cent. One can debate whether that is due to privatisation, the economy or whatever.
I see the main problem as the infrastructure provider. Railtrack was privatised. More importantly, its management team introduced a culture of arrogance, bullying and "knowing all the answers" that ill served its customers and, in the end, its shareholders. I believe that the main problem lies in the answer to the question: what should be done to ensure a safe and reliable rail infrastructure to meet the needs of its customers?
The noble Lord, Lord Marsh, who introduced the debate, debated SPADs at some length. The noble Lord rightly placed much of the blame with management—bad communications, general sloppiness and a few other things—of a company that was happy to welcome growth without growing the network to accommodate it. I welcome the fact that the Government put Railtrack into administration—not before time—because the company had lost control of its finances, expected to live on government hand-outs, became bogged down in red tape and was unable to respond to customers' needs. In the past year it had said on a number of occasions that it would be four years before it could do anything. That is unacceptable. It still has no real engineering control over its network, maintenance and renewal. I believe that basically it lost its way managerially and financially.
The Government say that they want to simplify the system and have fewer interfaces, more joined-up regulation and many other things. I understand that. However, they must be careful not to abolish any organisation because they do not like the personalities concerned, especially when such a change may require legislation and cause several years' delay. All noble Lords remember the hiatus caused by privatisation, which I am sure was not intended. I do not believe that the train manufacturers got an order for over three years. Many thousands of jobs were lost and the 1438 business lost a good deal of confidence. The challenge today is to make whatever change is necessary without that happening again.
I believe that the old saying, "If it ain't broke, don't fix it" applies here. It is easy to sit here and debate change, but it is Railtrack which is broke and needs to be fixed, not the rest of the industry. Above rail, freight is alive and well, especially since the regulator has halved access charges. It has invested £1 billion of private sector finance since privatisation. I hope that my noble and learned friend will confirm that the £4 billion in the Government's 10-year plan for freight is still ring fenced and that on those conditions the industry can deliver the 80 per cent growth under the plan. Competition and network-wide access are essential.
The passenger TOCs are more dependent on economy, but I believe that, having set them up with franchise and track access agreements and many other arrangements, it would be foolish to chuck all those things away unnecessarily unless it was seen to be essential to make very significant improvements. I believe that if we are to have competition above rail both in passenger and freight—it is not ideal but at least it is there—we must retain the split between the infrastructure provider and the train operators above it.
Some noble Lords have talked about major restructuring. We have not had re-nationalisation yet. Many have suggested that all contractors should suddenly return to public ownership. To me, that means 300,000 more civil servants, which I am sure the Government would enjoy. There is also the question of vertical integration and whether TOCs would take over responsibility for maintaining and renewing the track and many of the other activities currently undertaken by Railtrack.
The noble Lord, Lord MacGregor, spoke eloquently about why he split the track from the trains. I must agree with him that that is the right solution. I could speak at length about why such vertical integration would be very difficult for freight, but it would also be difficult for many of the passenger train operators who are not lucky enough to be vertically integrated. The number of contracts which would have to be created between each of them and the vertically integrated company would make it very much more complex rather than simpler. I prefer to see what can be done to fix the son of Railtrack and whether it can be done quickly and without the delays and uncertainties caused by the need for new legislation.
I believe that a company limited by guarantee with the kind of board membership as proposed by the Government will work. The freight and passenger industry together with the wider stakeholder must be represented. I believe that in those circumstances the company would be sensitive to the needs of its customers, something which Railtrack manifestly failed to achieve. Obviously, it would be highly desirable to provide some incentives to the staff. Maintenance and renewal contracts must be let for much longer periods, perhaps 20 years, with some 1439 franchising and partnerships; if not, no contractor will invest in the very expensive equipment that is required to maintain a modern railway. We have passed the age when sleepers were laid by hand. That was done only last year on the Settle to Carlisle line which had to be closed for a month.
Will the funding of the new Railtrack be a problem? Funding must come from government in some way and through track access charges. It could borrow and issue bonds. A change in the arrangements whereby all train operators paid Railtrack on the same basis—in other words, as with freight, short run marginal costs, with a lump sum being provided effectively by government to cover Railtrack's fixed costs—would provide a little more transparency. Nobody has come up with a better solution. I believe that the status quo with Railtrack is unsupportable.
Alongside a change in Railtrack—or Newtrack—we need some thinking and leadership from the Strategic Rail Authority. I welcome Richard Bowker. Can my noble and learned friend say when Mr Bowker is to begin work, and for how long he will be excluded—probably out of necessity—from taking any part in discussions about his former company? I hope that under his leadership the SRA will be proactive and show leadership right across the board. I do not know whether that is the Government's intention; if not, I question why the SRA is there.
Alongside that, what is to be the role of the Department for Transport, Local Government and the Regions? There is currently on the table a draft agreement which has been negotiated between Virgin and Railtrack and the department. I understand that that agreement, which is called the Hartwell accord, was submitted to the department earlier this month. Why was it submitted to the department and not the Strategic Rail Authority which is responsible for negotiating franchises? For freight and other passenger operators it is extremely serious because it proposes that the only operator on the line between Rugby and Stafford will be Virgin. There will be no freight and no other passenger trains. Virgin trains will get priority everywhere. The four-tracking between Rugby and Stafford will be abolished because the cost will go up suddenly—somewhere between two and four times—to about £1 billion.
That is driving a coach and horses through all the franchise agreements. How can the Government expect to instruct the SRA to reach agreement on that basis? Therefore, because I am extremely worried about the document, the next question for my noble and learned friend is: have the Government consulted the SRA on it?
I move now to the Rail Regulator. As other noble Lords have said, he is there to protect private sector companies against changes to their operating conditions and costs and their profitability as well as dealing with competition matters. I see the future of Newtrack as being a kind of delivery arm of the Government and the SRA. It would be unacceptable not to have an independent body. Knowing how much and how frequently governments change their minds, 1440 for what appear to be good reasons at the time, the lack of an independent Rail Regulator would put off a number of private investors who might otherwise want to invest in the network, be it trains, freight facilities, wagons or whatever.
I conclude by saying that I believe that the change from Railtrack to Newtrack in its management, its business ethos and its structure, together with a careful selection of staff and a much stronger and more effective engineering management, will have a major and beneficial effect. It is interesting because we have already seen a change in Railtrack's staff. It is as if a burden has been lifted from their individual shoulders. The company's bills are being paid by the administrator much more quickly than they were by Railtrack. So I see costs being reduced and service quality being improved. Added to that should be a proper long-term contract for maintenance and renewal with, possibly, direct payments to Railtrack by the SRA for the general network and for the enhancements being done separately. That will enable the Government to achieve their objectives and to sort out the mess that Railtrack has left without a hiatus of two or three years while we go through unnecessary new legislation.
§ 4.23 p.m.
§ Lord Hunt of Wirral
My Lords, I congratulate the noble Lord, Lord Marsh, on initiating this important debate on the railway industry. We also all appreciated the noble Lord's passionate plea for stability, particularly in the longer-term, for this great industry. I found the noble Lord's reference to the whole procedure as having been a massive upheaval very interesting. How right he was to remind us all of the words used from time to time by Government Ministers. I merely quote what Mr Keith Hill said on 1st May 2001. As the noble Lord, Lord Marsh, pointed out, Mr Hill said that,the answer is not yet more upheaval".or should it be "not yet more upheaval". I am not quite sure, but an indication is given when he said:What we now need is evolution rather than revolution".Then Mr Hill, almost with omniscience, went on to state:It has been argued that the public money going to Railtrack should generate an equity stake. However, the money that the Government will be paying Railtrack … is to meet the cost of improvements to the network".A short intervention from Mrs Dunwoody was greeted with the words:I think that my hon. Friend is alluding to the £1.5 billion in funding for Railtrack … and the benefits that it will confer in terms of infrastructure renewal".—[Official Report, Commons, 1/5/01; col. 176WH.]So, if I had been a shareholder listening to Mr Hill I would have felt comforted.
I want to make a short intervention in the debate to refer particularly to the position of the 255,000 shareholders. Those in the industry to whom I have spoken would be appalled by the reference of the noble and learned Lord, Lord Falconer, that buying shares is 1441 just the same as going into a betting shop. The problem here is that those shareholders to whom I have spoken believe that this particular horse was nobbled. I want to go into some detail about that.
There is no doubt that a substantial number of Railtrack employees invested in the company. That is quite apart from the private individuals who would otherwise be unconnected with the company but whose pensions depend on investment in equities. Nor should it ever be forgotten that the employee shareholders, whom I believe have been treated very badly, include signallers without whom the rail network simply cannot run.
What has upset people is the way that shareholders have been treated so contemptuously and have also been spoken about so disparagingly, particularly by Government Ministers. We are dealing with many small shareholders who bought shares at privatisation and who are employees of the company.
I want to try and work out what happened over the weekend of the 5th, 6th, 7th and eventually Monday, 8th October. I believe that there is some evidence which I hope that the Minister can dispel that there was a false market in Railtrack shares at least on Friday 5th October. We are assisted by the Secretary of State. He sets out clearly what happened. He stated:We carried on discussions until 3 October, but no way out of the dilemma could be found: either we gave the guarantee on money, or the company became insolvent. So, on Friday 5 October, I reviewed all the relevant papers and considered all the options".Later he said that,I informed John Robinson, the chairman of Railtrack, of my decision and of my intention to petition the High Court for a railway administration order if the company was insolvent. The order was granted on 7 October".—[Official Report, Commons. 15/10/01; col. 955.]From my investigations there was a meeting, to which the Secretary of State has alluded, between Stephen Byers and John Robinson at 4.45 p.m. That meeting is a key meeting because the markets had closed at 4.30 p.m. I shall return to that in a moment. As I understand the matter, at about 9 p.m. that evening—Friday 5th October—a team from Schroder Salomon Smith Barney went to Railtrack House to amplify what the Secretary of State had told John Robinson at the earlier meeting. Apparently the Secretary of State said that he would prefer a joint approach to the High Court, but that if Railtrack did not support the petition the Secretary of State was still minded to proceed in any event.
In trying to follow the sequence of events a little assistance was given to me in The Times on Tuesday 23rd October. It was an innovation; a solicitor going into print, acting for the Government and telling us what happened. The article starts:A simple phone call late on a Friday evening torpedoes any weekend social plans of 35-year-old Robert Hickmott … with news of an urgent assignment that must be completed by Sunday night".He later states in the article:'A critical event is the Railtrack board meeting at 2 pm on Saturday and after that it becomes clear that we will have to work overnight to pull together our evidence to get the order'".1442 I have made inquiries. There was indeed a Railtrack board meeting on Saturday 6th October at which a message was received by the board that the directors of Railtrack had to decide to send a letter to the Secretary of State stating that the company was insolvent. As I understand the position, Railtrack refused to do so as it did not believe that to be the case. However, it became aware that journalists were being briefed. At some stage—perhaps in a Select Committee we need to know what was being said to journalists at the time. But it became absolutely clear that there was no way in which Railtrack could be anything other than high and dry on the Monday morning unable to draw on its credit lines.
Of course that refusal to write the letter meant that the Government then had to set about producing financial evidence. Noble Lords will know that I am a solicitor, a senior partner of a national legal practice. I am accustomed to looking through court bundles. For that reason, I welcomed the opportunity to go through the court bundle. In it I found a witness statement from David Rowlands at the Department for Transport, Local Government and the Regions, together with two documents, one from Arthur Andersen and the other a letter from Schroder Salomon Smith Barney which, on reading them, appear pretty thin as well as being highly speculative. When one looks at the way in which the evidence was presented, of course the judge had no alternative but to make the necessary order.
What I should also like to know is this: what were the circumstances that gave rise to the laying of the Railway Administration Order Rules 2001? I ask that question because in the court bundle, and elsewhere, I have discovered some interesting information. First, however, when were those regulations signed? Although a corrigendum has been issued which tries to put right one or two details, it is clear that the regulations were signed by the Lord Chancellor, not on the Saturday, but on Friday, 5th October. That is made clear on page 36 of the rules. Can the Minister let me know at what time on Friday, 5th October the Lord Chancellor signed the rules to indicate his concurrence to their being made? If Mr Byers told Mr Robinson that the decision to seek a railway administration order had been taken after the markets closed on 5th October, but before Mr Robinson's meeting with the Secretary of State at 4.45 p.m., we have a time window of only 15 minutes.
Perhaps the Minister can assist me on that detail. If, in fact, the decision had not been made and the order had not been signed, it meant that no announcement of the Government's plans could be made to the London Stock Exchange until 7 a.m. on Monday 8th October. If, however, the Lord Chancellor had signed the regulations earlier in the day, or even if his office had received the regulations for signature before the markets closed, that would suggest that the Secretary of State had in fact taken his decision before the markets closed. What causes myself and others connected with the railway industry concern is whether the Government had created a false market.
1443 I shall conclude my remarks with further evidence. I should first be interested in particular to know from the Minister whether my suspicions are correct on two points. First, a major reorganisation took place, covering the restructuring of the Railways Directorate. That was referred to in the 11th October issue of Rail Business Intelligence. Perhaps I should not subscribe to a conspiracy theory, but it would be interesting to learn whether that restructuring of the Railways Directorate was as innocent as it is made to sound by the Department for Transport, Local Government and the Regions.
More important, and again referring to the court bundle, I found a copy of the Railway Administration Order Rules 2001. I always pay great attention to any markings made on such papers in court bundles because quite often they can divulge the date on which they were actually prepared rather than the date on which they were lodged. Lo and behold, on the top of the statutory instrument I found the date 28th September 2001, timed on a fax machine at 10.09.48. It is not clear whose fax machine was used, but in the top left-hand corner is the number 5986 771 001. I have not tried to contact that number to find out what it could mean, but it seems clear—I am happy to share this with the Minister—that the Railway Administration Order Rules were not only in contemplation but also in execution before 5th October.
I understand that a clear commitment had been made to the company that the Government would ensure that it would be made aware of the true situation at all times. Of course, however, if it is the case that it was not made aware until 4.45 p.m. on Friday, 5th October, then it was under no obligation, but were not the Government? I do hope that the Minister will be able to set my fears at rest.
§ 4.45 p.m.
§ Lord Shutt of Greetland
My Lords, I thank the noble Lord, Lord Marsh, for introducing a debate on the current and long-term problems of the railway industry. I believe that noble Lords are well placed to discuss this matter, in that most of your Lordships have had all kinds of railway experience in trying to travel to the House. Each week we hear various travellers' tales. However, perhaps we do not know the half of it, because journeys undertaken by noble Lords to reach this place are usually made on the best of the railways. We need to look further afield and see how the railways function in provincial areas. What is the position in the regions?
I should like to offer a case study of what is now taking place in Yorkshire and the North East. The provider of passenger rail services in Yorkshire and the North East, which covers Tyne and Wear PTA, West Yorkshire PTA and South Yorkshire PTA, was from February 1997 Regional Railways North East. The proprietors were MTL. Then a new name was introduced: Northern Spirit. The spirit vanished and another new name was introduced: Arriva. Now, if 1444 noble Lords will believe it, the newest name is Arriva Northern. That company appeared on the scene in February 2000. It was given a one-year franchise which has now been extended to two years.
It has been 20 months since Arriva Northern arrived, while four years and eight months have passed since the first and original franchise. The case study for this week is as follows: two days ago, on Monday, a revised timetable was issued. It revealed over 1,100 cancellations. All the timetables have had to be reprinted. Some of those cancellations comprise odd train services here and there; that is, shared misery. Travellers need to check the new timetables afresh because a particular train service may well have been cancelled and deleted. Furthermore, trains from Yorkshire to Manchester Airport have been substantially deleted, in particular the overnight services. A third set of services to have been affected is what I call the wholesale division: Leeds to Goole, nothing; Leeds to Knottingley, nothing; Wakefield to Pontefract, nothing; and half of all services between Wakefield and Sheffield deleted. It is interesting to note that those routes where, as from Monday next, no rail services will be provided, are in the same areas in which the Arriva Bus Company has a monopoly on bus service provision.
When the franchises were first handed out, it is my recollection that, although the bus companies were keen to join in with rail franchising, care was taken to ensure that any bus companies given opportunities to move into rail were offered those opportunities in areas where they did not function as bus companies. It appears that that has now become very fuzzy. It will be interesting to hear the views of the Minister in regard to franchising. Will there be a clear division in future or will this fuzziness continue?
In addition, there are only five trains a day between Leeds and Morecambe which go through Skipton and North Lancashire. Two of those will be cancelled as of Monday. The only service from Leeds to Glasgow via the Settle and Carlisle line has been cancelled. The whole of the service from Newcastle to the smaller towns, up the East Coast Main Line towards Berwick, has been cancelled.
There has been a substantial reduction in services and, in many cases, the cancellation of an entire service. Does the Minister think that people in London and the South East would put up with this with a week's notice? I suspect it is something that could be done in the provinces but that it would not past muster further south.
The reason for train cancellations and the cancellation of entire services is driver shortages. The first franchise holder dispensed with the services of several drivers early on in the franchise. But it has been 20 months since the new franchise holder took over, and here we are with these current cancellations. Bearing in mind that the companies operating the trains do not have to worry about the track or rolling stock but have only to operate the trains, it seems mighty strange to me that they cannot arrange sufficient staffing—especially 20 months on—to provide the services they have contracted to provide.
1445 On top of driver shortages we have rolling stock shortages. Amazingly, in the area in which the West Yorkshire PTA operates and pays for services, 18 fewer vehicles are available now than was the case in May 2000.
That is the short term. In Yorkshire, we are now saying that it is better to travel hopefully than to Arriva. But what about the long term? We have heard a good deal about Railtrack, and clearly there are very many problems there. I have indicated where we have problems with an operator after nearly five years of the privatised system. In addition, bearing in mind that 18 fewer coaches are available, is there not a further problem with the leasing companies and the rolling stock providers?
We have a fragmented railway system which has a great many problems. A great many areas need to be examined. Now is the time for the entire rail industry to turn the disaster of Railtrack into an opportunity to create a joined-up railway.
§ 4.54 p.m.
§ Lord Palmer
My Lords, I echo particularly the closing words of the noble Lord, Lord Shutt.
I thank my noble friend Lord Marsh for his timely introduction of this crucially important debate. I must, as always when discussing the railways, declare an interest. The first Lord Palmer was a director of the Great Western Railway for 48 years, for 42 of which he was vice chairman. I was also privileged to learn how to drive trains in our yard at Reading station when I was a child.
It has become abundantly clear in the debate so far that our railway industry is in a terrible muddle and mess. There is no doubt that everyone is in agreement that we need a root and branch reform of the Rail Regulator, the SRA, and, indeed, of Railtrack.
I know that we should not always believe what we read in the press, but even today there was an extraordinary headline that millions of pounds worth of brand new rolling stock is lying idle because the rails cannot take it. It is an extraordinary state of affairs that we are in.
I long to know—I have already in the past asked the noble and learned Lord-this question—who is going to invest in this wonderful new Railtrack. This worries me because we must bear in mind that the Government cannot give a completely open-ended financial commitment.
I strongly believe that there must be a full consultation with all aspects of the rail industry, especially with the unions and with the hands-on chief executives of the private rail operating companies.
The noble Lord, Lord Berkeley, mentioned the issue of management. I completely agree with him that good management is absolutely vital. I have read reports of the new chief executive of Railtrack earning a seven figure annual sum. To me, that amount of money ought to be invested wisely in lower and middle management.
1446 As we heard from the noble Lord, Lord Marsh, in the old days of British Rail line management ran right the way through the company. At the end of the day, the director responsible on the British Rail board knew exactly what was happening on the ground because of the way the whole system worked upwards. I strongly urge that that system should be reverted to.
When one looks at the structure of fares, it would be helpful if Her Majesty's Government could bring some kind of influence to bear on the rail companies. I spent a long time this morning trying to work out the best way of getting home to Scotland. Here I should declare an interest in that I travel frequently on the Great North Eastern Railway line. It may interest your Lordships' to know that a second-class return rare from Edinburgh can range from £36 to £79. I find it even more extraordinary that it is £61 cheaper to travel first class from Aberdeen to London than it is from Edinburgh to London. My geography tells me that Edinburgh is 150 miles closer to London than Aberdeen. I know that the noble and learned Lord may say that it is a problem for the rail companies, but it does make extraordinary sense. For those without easy access to a computer, trying to work out the cheapest and most sensible rail fare is by no means a simple matter.
In conclusion, I completely agree with the noble Baroness, Lady Scott. At long last we have a chance to grasp the problems facing our rail industry. Let us hope that Her Majesty's Government take, once and for all, decisive action and as soon as possible.
§ 4.58 p.m.
§ Lord Lea of Crondall
My Lords, am pleased to follow the noble Lord, Lord Palmer, because I wish to address the issue of investment finance which he has raised.
The Railtrack episode has not done a lot for the popularity of rail privatisation, whether on the part of the institutional investors or, indeed, the employees, whose terms of employment have included a share scheme as part of the employment package. So they have our sympathy.
I have less sympathy, however, than the noble Lord, Lord Hunt, for merchant banks and others in the City of London, who are the only people he has not blamed. It may be said that it is the Government's fault, oar it is someone's fault, but it is those in the City of London who have earned considerable sums out of privatisation and who complain when anything goes wrong with a scheme—let us not forget this—that they designed and have been paid for. This crisis of rail finance is, in my submission, as much a crisis of the City of London as of the rail management or the Government.
Let me say why. As an article in Insurance Day pointed out on 23rd October, there were two years of soaring profits with dividends to match, but,:in order to meet the short-term demand for dividends, relatively little was ploughed back into capital projects, leaving an ageing infrastructure desperately in need of renewal. So the central question is this. Has 1447 the problem of short-termism been thought through, when we have to finance a 10-year plan to the tune of £60 billion, with half, broadly speaking, coming from the public sector and half from the private sector?
Have people not noticed the inconsistency of saying one minute that the money, both public and private, is at the end of the day all coming out of one pot—which is true—and in the next breath saying that it is all very difficult for public finance because of the PSBR, and it is difficult for private finance because of the absence of guarantees?
So where do we go from here? The question that I wish to explore is how far the City is prepared to be innovative in creating, with the public authorities, the pragmatic design of a financial instrument for long-term infrastructure investment; and in particular how we inject some credibility into the £34 billion of private investment mentioned in the 10-year plan, and within that the £23.5 billion for infrastructure upgrades over and above the Channel Tunnel link and the West Coast Main Line.
We have invented a new short-term vehicle for Railtrack in terms of company law—it is not a shareholder company. We now need to see whether we can match this innovative instrument with credibility for the medium term in terms of raising these vast amounts of capital.
We therefore need to look for a new kind of financial intermediary. I shall describe it as an "intermediary" in the sense that it is between the savings institutions and the pension funds, etc, which are quintessentially interested in long-term returns and the long-term infrastructure of the country, and the rail industry. We need above all a financial intermediary which itself has long-term credibility.
This point was unfortunately simply glossed over in the 10-year plan, which states that the private sector is expected to invest £34 billion over the next 10 years and the public sector £30 billion. At the time, that sounded impressive. But the key question is: who in the private sector was committed to the sum of £34 billion? In terms of the £30 billion of public sector finance and the £34 billion of private money, are we comparing apples with apples? No, we are not.
As an American Senator once remarked about defence contracts, £30 billion here and £30 billion there soon starts to add up to real money. But that would be wrong in this case. It is not real money, is it? Certain things have to be done to make that £34 billion into real money. Similar questions arise in regard to the public sector finance. How much is new money? That is a matter of interpretation. But so far as the private sector financing is concerned, the assumption is of roughly a doubling in broad terms from £2 billion to approaching £4 billion a year of the annual investment spend.
For a nation of our wealth, that is not a big figure. The annual flow into savings institutions is about £100 billion. So if the amount is £4 billion, we are talking of 4 per cent. As regards the financial intermediary—the national investment bank—that is 1448 a figure that we can take in our stride. But for the 10-year plan to be credible, we must know exactly who is expected to raise which amount of money, how, and through which type of financial vehicle.
The noble Lord, Lord MacGregor, said that to rely on the current financial formula to obtain the £34 billion is a triumph of hope over experience. I agree with him—and I looked forward to hearing his solution. What was it? He did not have one—and I do not think that Hansard will record him as having one.
I want to urge that serious consideration should be given to the innovative idea put forward by John Smith and his colleagues in the mid-1980s—and supported by the National Economic Development Council through the publication of its report on a new financial intermediary for long-term investment, generally through bond finance, but most notably for infrastructure.
The report had the zippy title, Practical Aspects of a New Financial Intermediary. Noble Lords will recall that this was before the age of "spin"; but even then, the Labour Party thought that it might be just a tiny bit easier for people to get the drift if the idea was termed a "national investment bank" or "national infrastructure bank"; and I shall do likewise.
The NEDC discussed the report's findings in the mid-1980s—in a committee chaired by Lord Ashburton. The noble Lord, Lord Christopher, and I were members, along with people from the Treasury, the Bank of England, the merchant banks and the CBI. That will probably damn the idea out of hand for a start! It was based on a number of pieces of research, including studies of the European Investment Bank and Credit National in France. If the EIB example is to be entertained, we do not have to pay more for the money. That is an issue on which people give their views without the research evidence to back them up. We do not have to pay more for that sort of money.
I do not expect this to be taken as a good idea in the way that a rabbit is plucked out of a hat. However, I hope that my noble friend the Minister will say that he expects the analysis of these challenges for investment—medium-term investment in a field where short-termism and the relevant rate of return is self-evidently absurd—to go forward to an inquiry on the basis that at this stage nothing is ruled in and nothing is ruled out. In particular, the risk element needs to be insulated from the savings institutions to the extent that this is true of the European Investment Bank when it raises large sums in the capital markets.
By the time the 10-year plan is finished, as Keynes said, we may all be dead. But at least we hope to live long enough to see an infrastructure which is not such that the German Ambassador can say in 10 years' time, as he said last week, that parts of our infrastructure remind him of living in a third world country. The Railtrack fiasco gives us a great opportunity for lateral thinking. I am sanguine that the line of thinking that I have put forward will form a valid and necessary part of that.
1449 I make one final point, on international cooperation on investment. It may be that in some cases we should be looking overseas, and we now have quite a lot of overseas investment, from Swiss railways, France, Germany and so on. I have noted the keen interest shown, for example, by SNCF in co-operating with the proposal of Central Railway for a freight route along the line from Liverpool to the Channel Tunnel in the context of development of the trans-European rail freight network. Perhaps the national infrastructure bank and the French opposite number could be involved in the £6 billion on that project as well.
§ 5.8 p.m.
§ Lord Freeman
My Lords, first, I declare an interest. I am employed by PricewaterhouseCoopers, advisers to the Government on certain aspects of transport infrastructure and operations—although I hasten to say that I am not involved in work on the railways. The noble Lord, Lord Marsh, is not in his place, but perhaps I may point out to him that I am not as highly paid a consultant as he seemed to imply we all are. I declare also that I served three Secretaries of State, each serving their regulated two years in the department without remission—including my noble friend Lord MacGregor, who was a distinguished Secretary of State for Transport. I pay tribute to his achievement in his tenure in office.
I want to concentrate my remarks to the Minister, and through him to the department, on franchise train operations. First, on balance, the quality of train services has improved dramatically since before privatisation. We all have a love-hate relationship with the railways. We love the romance and we hate the operators, whether British Rail or the present franchised operators of the privatised railways.
Perhaps I may say to the noble Lord, Lord Shutt, who is not in his place, that we tend to lose a sense of proportion if we focus on particularly bad examples of service. If we stand back and look at the quality of service now being provided by the privatised passenger train operators compared with that provided under British Rail, there has been improvement and innovation. The trains are cleaner and more punctual and reliable than they were under British Rail. We have seen examples of innovation by management in terms of cheaper fares—certainly there are more expensive fares on certain services—and more innovative services and fares for those who wish to travel. In general I believe that the privatisation has been a success.
I put four points to the Minister. First, I refer to the lengths of franchises. My noble friend mentioned this. When the railways were privatised many of the early franchises were of seven years' duration. Towards the end of the process they were much longer, up to 15 years. The present Secretary of State has indicated his preference, as I understand it, for short-term renewals; that is, five years. We now have 14 franchises coming up for renewal within the next two-and-a-half years. To renew those franchises for short terms would be a great disaster. I strongly recommend the Minister to 1450 convey to the Secretary of State the wisdom of long-term franchises of at least 15 years. Why do I say that? With a longer franchise—and, indeed, after a competition has been held for that franchise—one is able to plan more consistently and to recruit and train staff. One is also able to invest either in stations or in new rolling stock, as Virgin Trains is doing, with much greater confidence than if one has the right to run a train service for only five or seven years. I would welcome a commitment on the part of the Secretary of State to keep an open mind on the subject. He appears to have closed his mind to the matter and prefers short-term franchises.
Secondly, I refer to vertical integration. I believe that many noble Lords would agree that to muddy the waters and seek to go back to an integrated railway may be impractical. However, I make a plea that both as regards pilot schemes and certain railway lines where there is perhaps only a single passenger train operator, we should experiment with the train operator being responsible for track maintenance and renewal. I believe that makes sense. I am not in favour of transferring ownership of the track to the train operators for the reason that my noble friend Lord MacGregor gave; namely, that it is better not only for reasons of safety but also for reasons of investment to have a single integrated national network of ownership which is able to plan coherently. I do not believe either that responsibility for signalling should be passed to the train operating companies. However, responsibility for maintenance and much stronger co-ordination and collaboration at the local level would, I think, be of benefit to the railway industry. Certainly the previous administration never closed its mind to such an innovation.
Thirdly—I say this at the risk of being unpopular—I suggest to the Minister that we should revisit the tightness of the regulatory regime of passenger rail fares. Your Lordships will remember that when the process was introduced the regime for many fares, particularly on commuter services and on some rural services where there was effectively a monopoly, meant that each year the train operators could not increase fares by more than the retail prices index minus 1 per cent. Hence there has been a real terms reduction in rail fares over the past live years. The noble Lord, Lord Berkeley, referred to the welcome increase of some 40 per cent in passenger numbers—although that is now beginning to stabilise given the possible impending downturn in the economy—and 40 per cent increase in freight. That is most welcome. One of the reasons for the increase in passenger numbers is the real terms reduction in rail fares. Other reasons for that are innovative fares, a better quality of service on some lines and, of course, the growth in the economy.
However, an RPI minus 1 per cent regime imposes a big penalty on train operating companies. Over 10 years, with an annual fare revenue of about £1 5 billion that penalty involves a sum of £150 million which benefits passengers but which is not available to the train operating companies to reinvest. The Strategic Rail Authority should encourage the Office of the Rail 1451 Regulator and the Franchising Director, now incorporated in the Strategic Rail Authority, when they refranchise to look again seriously at whether such a regime is too tight. Alastair Morton, as chairman of the Strategic Rail Authority, has always reminded us that the three sources of finance—the passenger, the taxpayer and the City of London—all have to make a contribution to the massive investment that is required. I agree with the noble Lord, Lord Marsh, when he correctly pointed out—my noble friend Lord MacGregor agreed with him and therefore I do not make a party political point, even when I refer to a noble Lord on the Cross Benches—that the taxpayer must be a permanent subsidiser of the railway system. That was always envisaged in the privatisation proposals and in the legislation the previous administration introduced. I believe that the passenger, through rail fares, should make a bigger contribution to the required investment in the railway system.
Fourthly, I come to the vexed question of track access charges. I know that for many this is rather an arcane subject. What we got wrong in the initial model of the track access charges was the inflexibility of the charging by Railtrack of the train operating companies. The model was inflexible as it did not take account of the number of trains—which reflected the—growth in the market—which used the railway infrastructure. Railtrack did not receive any significant extra income in the early years of the boom and therefore was under some constraint in terms of reinvesting in the railway infrastructure. A much more flexible system is required so that the increased number of trains, passengers and freight trains that use the infrastructure in boom years should result in more money being ploughed back into the infrastructure through higher track access charges. The converse is true: when we are in a period of stability or falling levels of usage, Railtrack must absorb the reduced level of track charges through reserves it must build up in good years.
I refer to the problem of driver shortages, which is the single biggest problem for the rail industry. Mistakes were made by the first operators of some of the franchised routes who sacked some drivers and did not maintain sufficient safety margins. The train operating companies now have over a thousand drivers in training. It will take time for them to come fully into service. We should recognise the efforts they have made. I hope that when fines are next levied on some of the franchised train operating companies the Government will bear in mind that action has now been taken by many of the train operating companies. I hope that if the working week is shortened beyond 35 hours—that was one of the principal causes of the reduction in hours in which drivers were available—there will be some flexibility shown towards and understanding of the problems.
I wish to place on record my recognition of the success of the vast majority of dedicated managers and staff on our railway system. We criticise them too 1452 easily and too often. That is particularly true of the media. What is needed is greater encouragement and less interference.
§ 5.19 p.m.
§ Lord Oakeshott of Seagrove Bay
My Lords, I propose to focus today on the current financial problems of the railways and on Railtrack in particular. The noble Lords, Lord MacGregor and Lord Hunt of Wirral, and other Conservatives have attacked the Government, with some justification, for the shambolic way they put Railtrack into administration. But the country will take a great deal more notice of Conservative criticisms when they have the courage to admit that they landed the railways in this mess with their privatisation into penny packets before the 1997 general election.
I had a quick look at the Labour manifesto for 1997, which seemed to give a pretty fair summary of what had happened at that stage. It said:The process of rail privatisation is now largely complete. It has made fortunes for a few, but has been a poor deal for the taxpayer. It has fragmented the network and now threatens services".That was pretty clear. Then, when we get to 2001, what do we find in the latest manifesto? It said:Labour's priority is to improve and expand railway and road travel. Our ten-year transport plan, supported by all the key players, matches large resources with major reform".If socialism was the language of priorities many years ago, I am afraid that is new Labourism being all things to all men. When it came to Railtrack, the manifesto said:Railtrack is being reformed to focus on the operation of existing track and signalling. The Rail Regulator with strengthened powers will ensure the delivery of higher standards, increased safety and increased investment by the company".Some reform. That was just four months ago, before they pulled the plug.
What should the Government do now? First—on this at least I agree with the noble Lord, Lord Faulkner of Worcester—taxpayers' money should not go towards bailing out Railtrack shareholders. There have been several declarations of interest in the debate. I declare an interest as an investment manager who did not invest in Railtrack for the pension funds and charities entrusted to my care. Equity investment is all about risk and rewards. There were clear health warnings in the original prospectus. Leading investment banks warned this summer that Railtrack shares could easily be worthless. Any professional investors who thought that they had a government guarantee did not do their homework. Some big investors collected juicy dividends and chose to bet on the Government pouring more money in. They lost. If private shareholders were told that they had a guarantee, they should sue their advisers.
Railtrack should never have been a plc quoted on the Stock Exchange. It could never have made a real profit. It depended totally on government subsidies, was at the mercy of the regulator and had enormous potential liabilities, as Hatfield showed. The normal market disciplines and incentives of the private sector did not apply.
1453 In the real world, as the noble Lord, Lord Marsh, and others, have pointed out, the taxpayer has to underwrite the operation of our railway system. The public will not tolerate the economic disruption and enormous social cost of the railways grinding to a halt.
Once we face that fact, only two questions really matter for the future of Railtrack. First, how do we maintain and improve our railway track and infrastructure at the lowest long-term cost? Secondly, what is the simplest form of ownership now, with clear accountability at the top and managers and staff left to get on with their jobs down the line? Mr Byers's proposal for Newtrack fails on both counts. His proposed new "private sector" company limited by guarantee is an economic sham. He hopes that it will get a BBB credit rating, although at the moment it does not even have that. A company with BBB rating is defined as having,weakened capacity to meet financial commitments",with the added caution that,certain protective elements may be lacking".You can say that again. Even to get to that stage, the Government have to give itreserves to act as a buffer for performance risks",as well as a "standby loan facility". That means that the taxpayer provides all the equity in the new company and is effectively the lender of last resort. The Government are not giving a guarantee; just a postdated cheque. There is no one else to stand behind any loans if Newtrack runs into trouble. The whole charade just means that lenders will charge billions more for their money and the long-term interest rate will be between 1 and 3 per cent higher than if the Government came clean and funded it all by issuing gilts.
As the National Audit Office said in its recent report on public/private partnerships:The Treasury considers that increasing public borrowing has an external cost on the Government's reputation for prudence and the reputational externality is a calculation to reflect this assumed cost".The accountants Deloitte & Touche dismissed the Treasury's argument in their report on the London Underground PPP. They said:In our view, the concept of reputational externality is largely theoretical and the potential quantum would be very small. We have not been persuaded by the evidence provided to us".In other words, the taxpayer and railway travellers will be paying a high price in the future so that the Chancellor of the Exchequer can boast how prudent he is to keep essential borrowing for our railway system out of the public sector borrowing requirement.
The Government's plans for the successor to Railtrack are expensive and complicated. As the Financial Times put it last week:By structuring the industry to avoid the formal definition of nationalisation, Ministers are seeking to gain the commercial and presentational advantages of nationalisation without its political embarrassment. Instead they risk generating the disadvantages of nationalisation without its benefits. All, it seems, because they have an obsession with not increasing public sector net debt, even by the 0.3 per cent of national income that Railtrack's debts represent. Its complicated structure and diverse board almost guarantee another round of railway buck-passing".1454 The managers and staff of Railtrack now need a breathing space of at least two or three years so that they can buckle down to their jobs without constant reorganisation and interference. It is far too soon to experiment with fancy new corporate structures while Railtrack is in crisis. Whether Railtrack is formally renationalised or is run for some time by the special railway administrators with DTLR paying the piper and calling the tune, the result should be the same.
As I am sure we all know, Harry Truman used to have a sign on his desk in the White House saying, "The buck stops here". The buck stops with Mr Byers now, whether he likes it or not, and that is where it should stay until this basic public service is out of intensive care and well down the track towards recovery.
§ 5.27 p.m.
§ Lord Beaumont of Whitley
My Lords, I, too, thank the noble Lord, Lord Marsh, for introducing this subject and for one of the most entertaining, informative and passionate speeches that I have heard in this House in 30 years. I also thank the noble Lord, Lord Hunt of Wirral, for his very informative speech. We have learnt a great deal this afternoon.
Before I leave previous speeches, I should like to defend the noble Lord, Lord Shutt. He is perfectly capable of defending himself, but was not in the Chamber when the noble Lord, Lord Freeman, suggested that he was picking up bad areas out of the blue. Arriva Northern is local to the noble Lord, Lord Shutt, and presumably he has to deal with it regularly. I was up in York on Saturday and saw how dreadful it was and looked. The noble Lord was right to pick it out, because our view of the railways is based on the lines of which we have personal experience.
On 5th April this year, I asked an Unstirred Question on the possible renationalisatiort of Railtrack. I little realised then how right I was—I knew that I was right, but I did not know quite how right. Originally, the Green Party had drafted a short Bill to allow the Government to take Railtrack back into public ownership, but because it involved expertditure on compensation for shareholders, we were advised that only a government Minister could put it forward. We challenged the then 'Transport Minister, the noble Lord, Lord Macdonald, to take it forward, but sadly he failed to rise to the challenge.
If the Government had heeded our advice, Railtrack could have been brought back into public ownership in a controlled manner. Instead, it was done in a panic over a weekend. It would also have allowed the Government to work out a new structure for the railways before sending in the administrators. Instead, the Government have put Railtrack into administration and are now desperately searching for a new structure for the railways. That will cause a hiatus—a long period of uncertainty—while a new structure is devised and implemented. That is something that the Government claimed to be keen to avoid.
1455 In reply to the debate on 5th April, the noble Lord, Lord Macdonald, referring to the proposal for nationalisation, said:To do so would probably take a couple of years and involve potentially complex and controversial primary legislation, during which time the industry would be effectively paralysed".—[Official Report, 5/4/01; col. 975.]What a terrible prospect compared with what we have before us at the moment. Let us consider what has happened. I believe that "paralysis" accurately describes the state of the rail industry today.
Almost exactly six months later, on 6th October, the Government realised that Railtrack in the private sector could not meet its public service obligations, and they felt compelled to take the revolutionary step of bringing Railtrack back into public ownership. Will the Government now admit that they were wrong six months ago, just as the Conservatives were wrong six years ago when they decided to sell off Railtrack?
Where do we go from here? We welcome the Government's proposal for Railtrack to be replaced by a not-for-profit trust of some kind. However, many questions remain unanswered. Who will be on the board of the trust and who will appoint them? Where will the trust get its funding from and how much will that be? What roles will the Strategic Rail Authority and the Rail Regulator have in the new structure? All those questions need to be answered, and answered fairly soon.
The replacement for Railtrack—dubbed by some "Newtrack", although that sounds more like a device for torturing the Mayor of London's favourite pets—needs to be publicly owned and accountable. However, on a day-to-day basis it must be kept out of the clutches of the Treasury—an organisation which for many decades has had a malign influence on the railways. It is hoped that the not-for-profit trust will satisfy that requirement.
It seems to us that a more radical restructuring of the rail industry is needed than that recently proposed by the Government. At the time of privatisation, the old British Rail was fragmented into more than 100 companies. Simply changing one of those companies from a PLC to a not-for-profit trust will not solve the problems caused by the fragmentation of the industry. The railways must be reintegrated into a much smaller number of units. As well as improving efficiency, that would vastly reduce the legal and accountancy overheads caused by the thousands of contracts between the 100 companies which are now necessary to operate every train.
Let us take, for example, infrastructure maintenance. It was the lack of knowledge about the state of the track and the fact that information was spread among several different companies and contractors that led to the failure to repair the gauge corner cracking which caused the terrible fatal crash at Hatfield last year. Therefore, track inspection and maintenance need to be reintegrated into the replacement for Railtrack.
1456 The Commons Select Committee on Environment, Transport and Regional Affairs supports that proposal. In its Sixth Report, published in March this year, it was highly critical of the present system. It said in paragraph 51:Given that the previous means of managing maintenance and renewal contractors has failed, we strongly recommend that Railtrack take over direct responsibility for inspecting the network, and for directly employing those who work on the maintenance and renewal of the rail network. It should do so without any further prevarication and delay, and without awaiting the outcome of a spurious 'review'. In order to carry out these functions properly we recommend that Railtrack employ adequate engineering and project management expertise".In the longer term, as passenger franchises expire, they can be brought back into the public sector at no cost. A revised SRA could have responsibility for operating the trains. Some poorly performing train operating companies should be brought back into the public sector immediately. Arriva Trains Northern, which I have already mentioned in another context and which the SRA proposes to fine £2 million for cancelling 1,000 trains each week over the summer, would be a prime candidate. Ultimately, the rolling stock could also be bought back.
The number of regulatory and safety bodies for the rail industry needs to be reduced. A proliferation of different bodies with varying responsibilities causes confusion and errors. The Government will have to provide more funding for the rail industry. Given what has just happened to Railtrack and the lack of compensation for investors, financial institutions are unlikely to invest the £30 billion that the Government had expected over the next 10 years. The £26 billion of government funding in the 10-year transport plan will not be sufficient for the needs of the rail industry. Most of it will be taken up with subsidies to train operating companies and two major projects—the West Coast Main Line upgrade and the Channel Tunnel rail link. Only about £5 billion is likely to be available for other projects.
In order to provide the country with a railway system fit for the 21st century, far more money will be required. The governments of other European countries invest far more in their railways than the UK has done over recent decades. Raising the rail network of this country to European standards will require European levels of investment.
Following Railtrack's collapse, many supposedly committed schemes now have an uncertain future. Thameslink 2000—I remind the House that the "2000" refers to the year in which it was supposed to begin operation, not the year in which its public inquiry would take place—is awaiting the inspector's report from the public inquiry and a decision by the Minister. At the time of privatisation, Railtrack was given £500 million of public funds towards that scheme. Who will now pay for it to be built and where has the £500 million gone?
Is the funding for the construction and operation of both phases of the Channel Tunnel rail link still secure? Will the domestic services planned for the Channel Tunnel rail link to serve Kent go ahead? 1457 Which, if any, of the many options for upgrading the West Coast Main Line will go ahead? Who will decide and who will pay?
And what of the many other schemes to upgrade our rail network? What will be the future of CrossRail and Orbirail in London? Will there be a role for Transport for London in taking forward these schemes? If PTEs can specify rail services in other metropolitan areas, can London's regional government do the same?
If the Government intend to create three mini-Railtracks with their PPP proposals for the London Underground, how long do they believe that those will survive before they, too, must be bailed out? And how much damage will have been done to the Underground before that happens?
Many former rail lines closed by Dr Beeching should be reopened. A grant application for the first phase of the East West Rail Link, which is planned eventually to link Oxford and Cambridge, was recently refused by the SRA. Where is the funding for such essential services to come from?
The railways are an essential part of a sustainable transport policy. My ancestors, the Peases, were among the first people to help to put the railway system of England on the map—to start it and to get it going. They were entrepreneurs who did a job for the country. I hope that there will still be for their, and my, descendants a decent rail system in the years to come. However, at the moment the signs do not look very hopeful.
§ 5.39 p.m.
§ Lord Elder
My Lords, I, too, congratulate the noble Lord, Lord Marsh, on providing us with the opportunity to have this debate. It asks us to reflect on the current and long-term problems of the railways.
At the start, it would be churlish not to record the fact that, following the terrible events at Paddington and Hatfield, some services are now more or less back to normal. l heard what the noble Lord, Lord Shutt of Greetland, said. Of course, I appreciate that in areas where, in particular, there is a very heavy commuting burden and a long-term problem of investment, getting back to normal may not sound like much. But we should also remember that on some routes a high-class, high speed passenger service is available. One such takes me from Scotland to London with some regularity. ln being rightly critical of things when they go wrong, we should also be prepared to say something when people appear to be getting things right.
Undoubtedly the most important recent event has been the administration of Railtrack, which should be unequivocally welcomed. That is not to underestimate the difficulties ahead, but for the first time in a long time, there is a real way forward for the industry. That industry is still largely traumatised by the effects of fragmentation, which were experienced during a botched process of privatisation. For the first time in a long time, it is unequivocally the case that the interests of the travelling public, the freight industry and safety are all being treated with the importance that they deserve.
1458 The noble Lord, Lord MacGregor, pointed out in his most interesting contribution that the Government have been in charge of the present set-up for almost as long as the previous government were. However, he drew the wrong conclusion from that—it is certainly a conclusion with which. I should disagree. If the Government can be criticised on their policy regarding Railtrack—I readily concede that this is much easier to see in retrospect—it may be that they tried, for rather longer than should have been the case, to try to make the structure that was inherited work. In fact, time and events showed that the structure was so riddled with flaws that it was always going to fail.
Following the administration of Railtrack, we have a base from which we can move forward by putting safety and the passenger at the top of the queue. Following the announcement earlier this week by the Rail Regulator, it is also clear, as my noble friend Lord Berkeley pointed out, that the final conclusions of the freight charging policy from the Rail Regulator have been widely welcomed by the industry. We can see a way forward for freight, which the Government are rightly committed to advancing in Transport 2010.
I should like to spend a little time on the position in Scotland. There are signs that the McLeish settlement", which emerged during the passage of the Scotland Act, is, as some of us feared, not as settled as we might have hoped. There remains a tension between the Scottish Executive and the SRA. Decisions about the network in Scotland are increasingly being made away from Scotland and involve a degree of centralisation that is neither helpful nor necessary.
There has been a close partnership in Scotland, with a single Railtrack zone, a vastly dominant train operating company and a single infrastructure maintenance operator. One control room handles Railtrack and ScotRail operations. That has been a sensible basis on which to proceed.
Whatever the structure of the new successor to Railtrack—whatever form it takes—I very much hope that it will be borne in mind that that structure should be fit for its purpose in relation to all areas of the country. The overwhelming majority of journeys that start in Scotland—95 per cent of them—are made entirely within Scotland. The new structure will need to take account of that. It should also reflect the fact that while the Scottish network should of course be integrated into the rest of the national network, there must be sufficient local influence to ensure that the Scottish rail network is integrated with the rest of the transport system—with buses, roads, ferries and the air service. As a matter of course in Scotland, train timetables show boat connections to the islands and, where necessary, bus connections to ferry ports. That happens between Inverness and Ullapool and Thurso and Scrabster. No one service provides complete cover for the whole of Scotland. If decisions about one service are taken without awareness of the rest, we will not end up providing the comprehensive service to our communities that they need.
1459 There is also the issue of accountability. The bulk of Railtrack's income in Scotland comes from franchise payments underwritten with funds from the Scottish Parliament, not through the SRA budget. Centralising further decisions can only undermine proper accountability. I believe that the administration of Railtrack offers a new and wholly welcome opportunity to get those matters right.
The Government need to show real determination in ensuring that the necessary investment is provided. There can be no suggestion that waving a magic wand will change things overnight. However, we now have a basis on which to build. The priorities are right and, in view of the determination that the Secretary of State showed in his decisions earlier this month relating to Railtrack, we have the basis on which we can ensure, with our work, that the railway has a certain and productive future.
§ 5.44 p.m.
§ Viscount Goschen
My Lords, in considering the future of the railways in the United Kingdom, I strongly believe that we have to look at the background to the original privatisation process. During this long and informed debate, very few voices have called for British Rail to be re-made.
It is now widely accepted in almost all quarters that the old British Rail, which had served a purpose, faced real problems regarding the way in which it was structured. It was a monolithic organisation. Although many excellent people worked for it—both managers and operators of rail services—they faced real problems. The noble Lord, Lord Marsh, pointed out that the typical reaction of British Rail over the years was simply to ask for more money, which went into a bottomless pit. There was little transparency within British Rail and the services and infrastructure were poor. It was almost an organisation without hope. Successive governments had looked at it and put it in the category of being too difficult to do anything about.
That was the background to the privatisation process. That process developed an innovative framework. Privatisation was a bold move, and there have been some real problems with elements of the resulting structure. Even the Government—the Labour Party was one of the fiercest critics of the privatisation process at the time and has been subsequently—broadly propose a similar framework. They are looking at reconstituting one of the major players within the privatisation framework. Broadly speaking, they are considering having train operating companies that are independent from the body that will manage the infrastructure.
The principal aims were to introduce the disciplines of the private sector. We know that that was never intended to mean that the railway system would be without subsidy; it meant that getting commercial management and commercial investment would make a fundamental difference to the levels of service. That has proved to be the case. The noble Lord, Lord 1460 Berkeley, and others commented on the number of people who now travel by rail—there has been an increase of about 30 per cent in the passenger traffic that is carried by the rail network. That happened in a network that was failing. It was heading only one way—very much downhill. It moved downhill in terms of the amount of freight and the number of passengers that were carried and in terms of its ability to maintain the infrastructure.
§ Lord Faulkner of Worcester
My Lords, is the noble Viscount aware that when British Rail handed over the West Coast Main Line in 1994, there was not a single speed restriction on the main line between London and Glasgow? That involves a very different picture from that associated with what has happened under the Railtrack administration.
§ Viscount Goschen
My Lords, I do not know whether that is the case or not and I do not have the time to debate individual lines or individual pieces of infrastructure. The fact is that the rail network was not getting the investment that it required. The privatisation process opened up new avenues for investment. I believe that the noble Lord will accept that.
There has been a turnaround in relation to the privatisation process—new management, new money and new services have come about. The noble Lord, Lord Berkeley, sent me a memo the other day concerning the increase in the freight that is carried by the rail network. An increase of 40 per cent in freight is an extraordinary statistic. The noble Lord mentioned that that meant that 400 million lorry miles had been taken off the road, which is well worth doing.
I am the first to accept that improvements in services have been slow in coming. There have been real structural problems with the rail network. Railtrack has clearly failed to deliver the improvements to the network that were expected of it. In his statement to the 2001 report, the CEO said:In its relatively brief period as a PLC. Railtrack has tended to over-promise and under-deliver to its shareholders".All parties recognise that although significant flaws resulted from the privatisation process, it also brought significant benefits. There has been much time to put the situation right. The Government have had four and a half years to consider the structure of the railways. The previous Conservative government had very much less time once the privatisation process had begun. The Government have seen fit to overturn their own legislation, passed only two or so years ago, on asylum, but have left the principal structure of the railways untouched. They heavily criticised Railtrack and used it as a whipping boy, but did not have the courage of their earlier convictions to do something about it. They put the rail network into the worst of all worlds, which was to have an ever more intense regulatory regime—putting another layer on top of the Office of the Rail Regulator and the Strategic Rail Authority. That created some sort of competition between the regulators to be ever tougher on Railtrack.
1461 Whatever the merits or otherwise of the Government's overall strategy for the rail industry, they made a terrible, fundamental and hugely damaging mistake by forcing one of their largest private sector partners out of business. This Administration have made a great deal of capital about their desire to work with the private sector; they have put a lot into their image of being a reliable partner in public/private partnerships. That bond has been shattered. At a stroke, the Government have torpedoed their credibility to operate as a partner to financial institutions and industry.
As the noble Lord, Lord Beaumont of Whitley, said, there was an alternative. If the Government had sought to bring Railtrack within public hands, they could have pursued an orderly renationalisation; through consultation with the industry, and more widely, they could have pursued an ordered process to fulfil their political and structural aims for the railways. Instead, they pinched the oxygen tube and said, "Oh, the patient has died." They forced Railtrack out of business—we must be clear about that.
The consequence is clear. Future PPP or privatisation initiatives, including setting up the successor body to Railtrack, will be more difficult to execute. A relatively limited band of financial institutions finance PPP projects. They will be more wary. The Government have been prepared to move the goalposts on this occasion; they could well do so in future. The Government's abuse of their authority will have a high and recurring cost.
We must look forward and consider how to proceed. Instead of pursuing a orderly and controlled process, the Government have shot first and asked questions later. Policy is being made on the hoof. The Government currently intend to create a not-for-profit company structure, but the lack of detail about their proposal is of deep concern. We have heard little from the Minister or the Secretary of State about exactly how it will work.
I entirely agree with the second part of the speech of the noble Lord, Lord Oakeshott of Seagrove Bay. I did not agree with anything that he said in the first part of his speech, but the second part was excellent. He provided a clinical analysis of the fundamental flaws of the Government's proposed structure. They want to be all things to all men.
We do not know how the company will be structured. The Government have said that about 90 per cent of the company's income would come from long-term contracts. However, predictability of income has not been the issue; the problem has been on the cost side. The lesson of Hatfield and other incidents must be that renewals and maintenance are as able grossly to exceed budget as are major upgrade programmes.
Given that Railtrack's debt is currently trading with junk status, what extra guarantees will the Government consider? What is the timetable for the process? For how long will the interim arrangements continue? When can we expect some detail about the new structure, and when will it be introduced? Will it require further primary legislation?
1462 To return to financing, on 15th October, we were told by the Minister in an incisive remark thatthe new company will be able to raise capital on the bass that it will be a company limited by guarantee, with certain assets guaranteed by certain people. In that way, the company will be able to raise money."—[Official Report, 15/10/01; col. 394]That is a wonderful, insightful statement that tells us little. The Government look to the private sector to provide what they call investment, but if they are to have a true partnership with the private sector, they must give private sector partners the opportunity to gain a proper reward against their risks. The Government have increased the risk; the cost will be therefore be higher. As the noble Lord, Lord Oakeshott of Seagrove Bay, said, £30 billion cannot be raised from the private sector unless guarantees are given, in which case in effect it is government borrowing. The noble Lord, Lord Lea, suggested creating an innovative financial structure; it is called a gilt-edged security. Effectively, it means that the Government can borrow extremely cheaply.
The Government must come clean about what they want. If they want the new body essentially to be Railtrack in the public sector, they should say so. That is called renationalisation. The party opposite argued for that for a while; it has now changed its tune. If the Government want a genuine partnership, the questions of risk, guarantees and reward must be addressed. At present, the Government have sought to portray the investors—the shareholders—as the bogeymen of the story. If they want to raise capital from the private sector, they must look to the financial institutions and smaller investors, who have suffered by the Government's precipitate move of forcing Railtrack into administration.
§ 5.57 p.m.
§ Lord Greaves
My Lords, this is a timely debate. I am surprised that we have heard from several apologists for the present state of the railways—or, at least, for privatisation. Other noble Lords have given examples of where things have gone wrong. The noble Viscount suggested that the West Coast Main Line is just one line, but it is the single most important main line in the country.
§ Viscount Goschen
My Lords, I must interrupt the noble Lord, but only once. A large part of my speech was taken up by admitting that there were flaws in the privatisation process—and, indeed, with elements of the structure. However, better options have never been proposed for a structure that would raise new investment and increase transparency.
§ Lord Greaves
My Lords, I accept that; I was just engaging in some gentle political teasing. After about three and a half hours of debate, a little teasing is in order.
I shall pick up the matter raised by my noble friend Lord Shutt of Greetland—rail services in the north of England—though I shall consider those services more broadly than he did. First, there is now a great deal of alarm in the north of England—and, I am sure, in 1463 other regions—at the ever-strengthening rumours emanating from the Strategic Rail Authority and other relevant bodies that the great bulk of the £60 million investment promised in the 10-year plan, if it ever comes about, and of rail subsidy will be concentrated in the South East. Those rumours are gathering pace. Will the Minister give a guarantee that what might be thought of as far-away places with strange-sounding names in the north of England and other locations get a fair crack of the whip?
My second point relates to mainline links to the north of England and to the inter-city services which serve the North and which provide vital links south and north. My noble friend Lady Scott of Needham Market referred to reports in today's newspapers that the financing of any further phases of the West Coast Main Line is in doubt and must be renegotiated. The Pendolino trains, which are being designed and paid for to run at 140 miles an hour, will not be able to run faster than the existing services on the line. Further improvements to the line are in doubt and additional paths for freight services, which some of us thought were always in doubt, may no longer exist. That is a matter of concern and I should be grateful if the Minister would comment.
The modernisation of the East Coast Main Line has come and gone, has come again and gone again. There were bids to build a new high-speed line but that proposal disappeared. It seems that all we shall get on that line, if anything, is refurbishment of the existing rolling stock and not much more. The electric trains are more than 10 years old and their refurbishment is becoming urgent. As one who travels on those trains I can say that they are becoming distinctly tatty and sometimes one has to walk down two or three carriages before finding a working WC. They really do need refurbishing and it is time that was done.
The fundamental issue about main railway services from the north of England to the South is that, do what you will with the West and East Coast Main Lines and Midland Main Line, capacity is fast running out. Sooner or later government will have to grasp the nettle which they grasped over 50 years by spending billions of pounds in current terms on the motorway network. The Government must accept that we need a new railway network. Whether it is a new high-speed passenger line or a new freight line are matters for debate. But the existing capacity on railway lines from the north to the south of England is simply not enough to meet the needs of the next 10 or 20 years. That is an important strategic issue and the responsibility cannot be dished out to the train operating companies in the hope that they might build new lines. The Government must grasp it. Although the railways are to some extent in limbo, as several noble Lords have said, this is a time to get a grip on the issue.
My third point about railway services in the north of England relates to local services. I endorse everything said by my noble friend Lord Shutt about Arriva and its franchise in Yorkshire. We are a little better off in the North West. I understand that the noble and learned Lord the Minister recently visited 1464 north-east Lancashire to look at housing. He should be grateful that he did not have to travel on our local branch line. If he had, he might have been sick when he arrived at Accrington, Burnley or Nelson—towns he visited. The trains—technicians know them as Class 142 pacers, originally designed by putting a rail body on top of a Leyland national bus chassis—in addition to running to Colne on the east Lancashire line also run to Blackpool. That is entirely appropriate because travelling on them is like travelling on the big dipper at Blackpool. They are awful. It is no surprise that such trains do not operate in the South East because the people there would not accept them. Sooner or later—and preferably sooner—they will have to be replaced.
The main issue relating to services within my region is the trans-Pennine franchise. The end of October is about the time of year when people in the north of England look out of their windows towards the Pennine hills and discover that they cannot see them because they are covered in hill fog. We shall see that for the next few months. The fog which has surrounded the whole saga of the trans-Pennine express franchise is extraordinary and seems to get worse by the day.
The Strategic Rail Authority recommended to the Government that one of the three selected bidders should be awarded a franchise. It is a general open secret that it was Connex. The Government batted it back to the SRA and told it to begin again. Why they did so—political reluctance to see the Connex bid succeed, part of the process of shortening the franchises, or for other obscure reasons—no one knows because no one has come clean about the matter. My next question to the Minister—and if he wants to write to me I shall be happy—is: why was the SRA recommendation to the Government to award the franchise and get on with it rejected?
There are many concerns about the trans-Pennine franchise, which in many ways is an anomaly. The statutory Section 34 consultations with the passenger transport executives are now taking place. However, substantial areas which are at present covered by trans-Pennine express services are not in PTE areas, particularly in Lancashire and North Yorkshire. There is considerable concern that because of the statutory need to consult the PTEs the other areas are not being properly consulted and are being omitted from the core proposals.
The core franchise is being reconsidered but, again, there are considerable concerns; for example, that the highly successful service from Leeds and Bradford via the Calder Vale route to Burnley and Preston, an innovatory service of the past 20 years carrying two million customers a year, is not part of the core franchise and may be downgraded to a local service.
The SRA press release, issued when the Government batted back the franchise, stated that it would have discussions with the Government as well as with the PTEs. What is the Government's view of that? What will the Government be saying to the SRA about that franchise? For how long will the franchise extend? Will it be short, medium or long? What is the 1465 relationship between such franchises which are currently being discussed on the ground and the SRA's strategic plan? Will they have to be changed to fit in with the strategic plan, if it ever appears?
Finally, as a result of all that and the close integration of the trans-Pennine services with many local services, particularly at the end of services to places such as Hull, Scarborough and Blackpool, why are the Government pressing ahead with a separate trans-Pennine franchise when the SRA is rightly looking at a new north of England franchise under which the whole of the north of England will be put together for local services? If this is a time when people are taking stock and trying to get things right, would it not be more sensible for the trans-Pennine franchise to be abandoned and to be included within the new north of England franchise?
§ 6.9 p.m.
§ Lord Haskel
My Lords, I congratulate the noble Lord, Lord Marsh, on drawing our attention to the problems of the railway industry. He is right to d o so because the problems are enormous. Railtrack has collapsed financially and is in administration, despite the billions of pounds of public money which have been poured into it and in spite of the expert advice that it received from many consultants. The Strategic Rail Authority's plan is more than a year late. Some train operators are struggling economically and the SRA's refranchising policy is incomplete, as we heard from the noble Lord, Lord Greaves.
The current chairman of the SRA, Sir Alastair Morton, who will leave at the end of this year, is on record as saying that to sort all this out the industry needs £1 billion more per year than the £3 billion already budgeted.
Despite privatisation, the Government remain closely involved. The noble Lord, Lord Marsh, explained that the Government remain the lender of last resort, which is the nature of their involvement. The noble Lord, Lord Oakeshott, also made that point. I congratulate him on quoting from the Labour Party manifesto as, in having read it, he has an advantage over many members of the Labour Party.
It is now apparent that privatisation was just another phase in the relationship between the Government and those who run the railways. The reason for the Government's involvement continues to exist. A successful railway system is central to our quality of life and economic performance. Perhaps that is why there was an impression that Railtrack was too important to fail. Shareholders felt that the company's social role ensured that it would not go bankrupt. Now, of course, we all know differently. In spite of the case for the prosecution argued by the noble Lord, Lord Hunt, which may or may not be relevant, the Minister should make it absolutely clear to the public and investors that a government guarantee extends only to continuing the service provided and not to the shares of the company providing the service.
1466 Fortunately the Government have been able to find an energetic new chairman to take on the difficult task of getting the industry out of this mess. Like other noble Lords, I congratulate William Bowker on taking on the job, and I wish him every success. I hope that the Government will give him the opportunity to fit everything together. As the noble Baroness, Lady Scott, said, the fragmentation of the railway system has caused so much concern.
I also think that the Government must encourage Mr Bowker to recruit top managers and, if necessary, pay them top salaries. Otherwise, he will be forced to subcontract and out-source much of the work of Railtrack and the Strategic Rail Authority. That practice was identified as a cause of the Hatfield accident.
The out-sourcing approach has a particular appeal. Perhaps its most basic appeal lies in the cost savings achieved by encouraging competitive bidding on contracts. As my noble friend Lord Faulkner explained, this is illusory. Indeed, at the end of the nineties, there was a fashion to out-source thanks to the IT revolution and the creation of virtual companies. I think that that has all become somewhat discredited now. We have learnt that in a crisis, especially after a serious rail accident, or a time of economic change or political uncertainty, those contracts are an unstable basis on which to build a business.
In practice, we now know that such contracts do not really align the interests of those involved. They do not create the trust and common purpose that is built up in a company's own team. Maintaining miles of track and signals may seem a dull task—the unromantic part of running a railway, as the noble Lord, Lord Freeman, said. But we have now learnt that if the owner cannot keep the railway running, he does not have a business, as nobody else can keep it running. That is why I hope that the Government will encourage Mr Bowker to build up his own staff to build up Railtrack's engineering capacity. That is very important, as my noble friend Lord Berkeley and the noble Lord, Lord Palmer, said. Indeed, the noble Lord, Lord Palmer, may have some expertise that he learnt in his childhood to offer.
The noble Lord, Lord MacGregor, spoke about the cost of safety and how travel by car is less safe. I do not think that that is relevant. If one cannot run a railway safely, one does not have a business. Mr Bowker's executives must take responsibility for safety if they wish to maintain the confidence of the travelling public.
Like the noble Lord, Lord Marsh, I hesitate to raise this, but the Government's Law Officers must look very closely at why the Crown Prosecution Service could say last week thatan over arching problem in the lawmade it impossible to identify anyone employed by Railtrack or Thames Trains who could be held responsible for the 31 passengers who died and the 400 passengers who were injured in the Paddington rail crash. At the same time, the CPS said that there was 1467 history of corporate failings. Certainly prosecutions have been brought successfully by the Health and Safety Executive, but when an inquiry such as that of Lord Cullen identifies a lamentable failure in maintaining signals and the existence of poor driver training, yet no prosecutions are brought, the only conclusion that can be drawn is that nobody is accountable.
Rail passengers are dependent on drivers, signalmen and safety experts. Inevitably it heightens their anxiety that when things go wrong nobody is to blame. For passengers to have confidence, there has to be some responsibility. Only then will they have confidence in the commitment to safety of the railway industry. I hope that my noble friend the Minister can tell us when that change in the law will take place.
A change at the top is a good moment to make changes in policy and strategy. It is always easier to do it then. The Government have used the opportunity presented by Railtrack's administration to introduce the concept of a non-profit making company into the railway industry, instead of nationalisation. I hope that there will be a change in policy, or will the Government seriously consider offers from consortia in the private sector—the for profit, rather than the not-for-profit organisations?
I ask that because the Government seem to be into policy revisions at present. As other noble Lords have said, perhaps the Government will use this opportunity to review their railway policy. The noble Viscount, Lord Goschen, thought that leaving Railtrack in place implied acceptance. Perhaps the real reason for Railtrack being left in place is that the Government wanted to avoid major upheaval. That has now been forced on the Government, so now is the time to do something.
The Government will always be involved as long as they hold the purse strings, but they have an opportunity to take the politics out of the delivery of rail services. That delivery of services should be left to Mr Bowker and his team. The ability to distinguish between government strategic involvement on the one hand and the minutiae of political control on the other is central to the success of running a railway, as it is in all public services.
The noble Lord, Lord MacGregor, spoke about blame. Eliminating the politics of blame would be a good place to start.
§ 6.18 p.m.
§ Baroness Noakes
My Lords, I thank the noble Lord, Lord Marsh, for initiating this important debate. The noble Lord's experience of and commitment to the railway industry were evident in his excellent speech.
My experience of railways is as one of those consultants who are not very highly paid. In the past, I was involved in carrying out efficiency studies of British Rail, to which the answer was "not very". Later, I was involved in privatisation matters, including the formation of the largest of the freight 1468 operators. Other noble Lords are much more experienced than I am on such matters. Indeed, I pay tribute to the powerful speech of my noble friend Lord MacGregor on the background of railway privatisation.
I should like to discuss two areas. First, the "smash-and-grab raid" by the Government on Railtrack; and, secondly, the creation of the new company that the Government intend will be the successor to Railtrack.
A clear consequence of the Government's actions in relation to Railtrack is that shareholders have suffered major losses. One distinguishing feature of old-style Labour nationalisation was that they recompensed those who owned the companies that were nationalised. It seems that the guiding principle of new Labour is expropriation. I have to say I was shocked by the comments of the noble Lord, Faulkner of Worcester—I see he is not in his place—when he tried to equate punting on horse races to investment in financial instruments. It demonstrates the lack of understanding on the Benches opposite of the financial markets. It also ignores the significance of employee ownership of shares, about which the noble Lord, Lord Lea, reminded us.
The shock waves of the Government's action will go beyond the railway industry. As my noble friend Lord Goschen forcefully pointed out, public-private partnerships are bound to be affected. They will be more costly and more difficult to negotiate. The Government have forfeited the trust of capital markets.
When the noble and learned Lord, Lord Falconer, repeated the Statement of the Secretary of State on 15th October, he painted a picture of a government being presented with, a request for a blank cheque by Railtrack. I am not surprised, because it would be difficult to put an exact figure on the amount that Railtrack needed to survive and the duration of that support, especially given the fact that it was the Government who controlled, directly or indirectly, a major part of Railtrack's cash flows.
I would have expected detailed and intensive discussions and investigations to have taken place to find the scale of the problem and provide a financial solution. It seems clear from the statements that have been made, in particular by the chairman and chief executive of Railtrack, that they thought they were dealing with the Government on the basis that a solution involving some form of financial support would be found. Indeed, until 5th October they seemed to have had little or no idea that the Government had been plotting to invoke the administration procedures of the Railways Act.
The noble and learned Lord told the House that Railtrack's own advisers first raised the possibility of what they called "receivership". Can he say whether any detailed discussions were held between his department and Railtrack as to the possibility of seeking an administration order, or whether it was simply brought up as a surprise on 5th October? In the private sector, if a company is in financial difficulties, detailed discussions would be expected to be held 1469 between bankers and debtors in straitened circumstances. They would not expect discussions to be held on one basis while the banker plotted to do something else. Did the Government have open discussions with Railtrack about the options during that period?
I turn from that part of the story to the Government's plans for a new company to run the railway infrastructure. The noble and learned Lord told us that the Government were unwilling to write a blank cheque to Railtrack. But so far they have failed to set out the financial implications of the post-Railtrack regime. They said that they will provide a stand-by, subordinated loan provision which will be capped. But they have not said on what terms it will be made available, nor how much they expect the facility to cost. I should be grateful if the Minister would clarify those matters and say, in particular, what estimates the Government make of the amount of the cap to be applied.
Only time will tell whether financial institutions will buy that proposition. But there will be a direct correlation between the kinds of limits and conditions that the Treasury try to write into support for the new company, the willingness of lenders to lend and the price at which they are prepared to lend. The Government may want to avoid guarantees or other forms of blank cheque, but like other noble Lords I believe it is far from clear that they will achieve it.
The Government intend to use a private company limited by guarantee as the successor company. The Government have not yet said who the guarantors will be. Indeed, the Minister said on 17th October, in response to my noble friend Lady Blatch, that there will not be a need for guarantors. I have never heard a company limited by guarantee that does not have guarantors.
In a Written Answer in another place on 23rd October, the Secretary of State said that the Strategic Rail Authority will be a founder member and that the majority of other members will come from the private sector, including individuals from passenger and employee groups, and,Individuals drawn from private sector companies with a direct stake in the railways.Presumably those will he the guarantors.
What evidence do the Government have that private sector individuals, especially from companies with a stake in the railways, will be willing to become members and hence guarantors of this new company? Those guarantees may not be large in financial terms, but for the private sector of much greater significance is the issue of reputation risk in becoming involved in the new company.
The Secretary of State also said that,the members would have a governance role equivalent to that of shareholders but would have no additional powers".—[Official Report, Commons, 23/10/01: col. 196W.]That is very nice theory. But the Government are creating a forum in which the divergent interests of the members will be played out. Those members do not 1470 have the financial incentives of shareholding to guide their actions. They will be guided by their sectional interests. If there were disagreements, for example, over the appointment of directors, that could easily paralyse the effective operation of the new board.
However hard the Government try to set up a professional PLC-equivalent board, it will be difficult in practice for that to take effect. The disciplines of ownership pressures from shareholders will be replaced by an uncertain regime of stakeholder interests coupled with government involvement, whether direct or through the Strategic Rail Authority. At its highest, it is an experiment in corporate governance and such an experiment is a dangerous thing when we are talking about a business which is significant for our economy.
In the Statement of 15th October it was also said that,Performance targets would be set linked to levels of service, safety and value for money".—[Official Report, 15/10/01; col. 386.]But who will set those targets? How will they be set? And who will take action if the targets are not met? In this world without shareholders that the Government are trying to create, those are important questions in understanding whether the company can in fact operate on a sensible basis.
Finally, I should like to touch on whether the successor company can genuinely be said to be outside the public sector, a point touched on by the noble Lord, Lord Oakeshott. This is not a semantic point as to whether or not the Government have nationalised Railtrack by the back door; it is about whether, going forward, this company is on or off the Government's balance sheet and hence whether the company's borrowings are counted as public debt.
If I understand the doctrine correctly, the Office of National Statistics would count a company as within the public sector if it were de facto controlled by the public sector. So while we can see that in a technical sense it could be said that control was in the private sector if the Government manage to find a majority of the members from the private sector and those members then appoint a majority of the directors; but will not the substance remain that the company is controlled by the Government, either directly or through the SRA? Direct financial support will dominate the company's finances and new loans, whether direct or through special purpose vehicles, will need to be propped up by the financial cushion provided by the Government, and may even require explicit financial guarantees.
The whole world will know that the Government will call the tune for the new company. Is it not the worst form of window dressing to pretend otherwise in the national accounts? I look forward to the remainder of the debate today and to the response of the noble and learned Lord.
§ 6.30 p.m.
§ The Earl of Mar and Kellie
My Lords, I start by apologising for not being in my place for the first half 1471 of the debate. I was attending the Constitution Committee. I shall undertake to read Hansard even more rigorously than usual and the contributions I have missed.
In view of what I want to say, I should perhaps declare one or two interests. My home is set on a hill above the track bed of the proposed Stirling Alloa Kincardine railway. I have outline planning consent for a new suburb of Alloa and, perhaps less related, I am a regular traveller with GNER while coming to this House.
I am pleased that the debate has brought to the House a subject which is relevant to Scotland. Railways are largely a reserved matter, though there is a distinct place for the Scottish Executive in railway matters. That is not a complaint. I believe in Scottish domestic self-government and, possibly perversely, in one railway network for Great Britain.
This morning I received Answers to four Written Questions. I thank the noble and learned Lord, Lord Falconer of Thoroton, for his largely helpful replies. In particular I approve of the placement of responsibility for railway reopening projects with the SRA. I, among others, look forward to the publication of the SRA strategic plan in November.
I cannot avoid mentioning the reopening of the Alloa railway. Under the leadership of the Clackmannanshire Council, that project is nearly ready for the off. A cost-benefit analysis will be available in December confirming both passenger and freight potential. The reopening of the railway from Stirling to Alloa and Kincardine would deliver benefits in four sectors. First, the re-establishment of the 11 or so miles of track would reconnect Stirling with Dunfermline and would bring railways back to several towns and enhance the network. The railway is operational from Kincardine to Dunfermline.
Secondly, Scotrail's proposed hourly passenger service from Alloa to Glasgow and half-hourly service to Stirling puts Alloa, Scotland's largest town, back on to the railway network. It puts Alloa into the Glasgow travel-to-work area, and, for example, would allow Glaswegians to move home to rural Clackmannanshire, with all its leisure and recreational possibilities, while continuing to commute to their jobs in Glasgow.
Thirdly, the railway running through to Kincardine will enable coal trains from Ayrshire to find a shorter route to Longannet Power Station, a major energy source capable of 26 megawatts and with a substantial future. The passenger railway would provide local benefits. However, the freight railway would provide national benefits. Not only would coal trains have a shorter journey; the congestion on the Forth Rail Bridge would be reduced. Hence, more passenger services could be allowed on to the bridge.
Fourthly, the Alloa railway would allow substantial rail access to the proposed Rosyth Europort. The opportunity to export goods by sea to Europe must not be missed. Excellent infrastructure in the hinterland will be essential for us to land the environmental benefits which Rosyth Europort will 1472 make possible. In the light of the lobbying material I received this morning from the Central Railway, I suppose that the Central Railway and Rosyth Europort will be in some form of competition in the Scottish context.
Railway reopenings are complex activities, even when the track bed is still intact. While I praise the project leadership of Clackmannanshire Council, I believe that railway reopenings and new routes should be facilitated by a section of the SRA which will, or jolly well should, become a centre of excellence in that activity. Whatever experience and expertise the Clackmannanshire Council may have gained will be difficult to pass on. An SRA team will take the knowledge from project to project across Great Britain.
I know from the Minister's Answers that the SRA will be able to pay towards the cost of some reopenings, while others will require the awkwardly-named "special purpose vehicles" approach. I hope that the Minister will clarify the scale of projects which will need an SPV. I suppose that the Larkhall project and Edinburgh Crossrail to Penicuik could be SRA-direct projects, while Borders Rail, from Edinburgh to Carlisle on the old Waverley route, will require an SPV.
Finally, I should like to mention a possible experiment in so-called vertical integration: the reconnection of rail and wheel which, it is rumoured, may be visited upon the railway network in Scotland. While it is always flattering for Scotland to test drive United Kingdom government initiatives, I am less than enthusiastic. I see problems with one train operator having charge of the Scottish network. I wonder about the issue of impartiality when there are six major train operators in Scotland, both passenger and freight. In history there always were problems with running power over another company's lines, which were exacerbated whenever there was competition. I see problems with standards if the Great Britain rail network is broken up in any way.
In conclusion, the mnemonic of the Stirling Alloa Dunfermline railway is "the SAD railway". We must keep our eye on the ball to give it a happy beginning and a rosy and substantial future.
My Lords, before the noble Earl sits down, I wonder whether he can help the House. He mentioned the cost benefit of the Stirling Alloa Dunfermline line. Is he able to give the House some figures for costs?
§ The Earl of Mar and Kellie
My Lords, I must say honestly that I cannot. However, I can recall that Railtrack, which was happy with £15 million, suddenly decided that it would like a more gold-plated version and demanded £25 million. That was difficult to cope with, particularly as the Scottish Executive had already made a grant of £6.5 million towards the project. Railtrack's sudden change of heart was an unhappy one.
§ 6.37 p.m.
§ Lord Cobbold
My Lords, as a child I was obsessed by railways. I would spend hour after hour sitting by the main line of the London and North Eastern Railway ticking off passing steam engines in my book of numbers. There were the great streamline beauties such as Mallard, Dominion of Canada and Sir Nigel Gresley. Each had a distinctive whistle. At night from my bed I could recognise those whistles and hear the swoosh of water as they dropped their nozzles into the Langley Troughs, the first water pick-up out of Kings Cross.
Indeed, it was my ambition to become an engine driver, one that, happily, I was able to fulfil many years later on a privately-owned two foot narrow gauge steam railway. I have also been a commuter depending on the railways for daily transport to and from work in London. Indeed, in those days when asked casually what I did for exercise, golf or tennis, I would reply, "No, I run for trains". It is with great sadness that I witness the current state of the railways and the demise of Railtrack.
However, I believe that we now have to ask ourselves, perhaps again, whether the age of the railway is over. When it is possible to fly to New York and back for less than the cost of a return rail ticket to Edinburgh. something must be wrong. If travel by train is expensive now, how much more expensive will it be after the £63 billion investment promised in John Prescott's 10-year transport plan?
In his article in the Daily Telegraph on 15th October, Roger Ford, the Editor of Rail Business Intelligence wrote of the expense and muddle of the safety requirements now being imposed on the railways. He says that the cost per life saved of installing the train protection and warning system is now around £10 million, three times the maximum in Railtrack's original safety case and 100 times what the Government spend per life saved on the roads. He adds that British Rail's original electrification of the West Coast Main Line in 1966 averaged £5 million per mile. Now it is more like £15 million per mile. To the layman those figures are horrific.
The solution is not obvious. Noble Lords have made many suggestions about what should be done and the next stages to be undertaken. However, I believe that we taxpayers have to ask ourselves whether we are being blinded by old habits. For example, might not these huge sums be better spent in extending and improving the road network? Are there any more radical alternatives to consider? Could we convert some of the lines to express bus routes?
Clearly, commuter rail services around major conurbations have a continuing vital role to play. However, parking is a regular problem with commuter services. Most stations are in town centres with limited parking areas. Commuter cars fill up the car parks and reduce the spaces available for shoppers during the day. A way out of that difficulty might be to create more edge-of-town parkway stations with ample parking for commuters and good shuttle bus links to the town centre and local residential areas. Problems may arise, of course, if the green belt is involved.
1474 The present plight of our railways is dire and will require some tough decisions. I do not envy the task of those who will have to make them. I only hope that the decisions will be based on a broad and fair assessment of the most efficient and competitive transport modes available in the decades to come and not just on railway nostalgia.
§ 6.41 p.m.
§ Lord Bradshaw
My Lords, I begin by declaring an interest. I am a professional railwayrnan; I joined the railway at the age of 17. I do not accept the criticisms which have been made generally about British Rail. The infrastructure was not poor. That there was constant interference by Ministers about pay, fares and investment is true, but the railway was handed over in pretty good fettle. Today it is not in good fettle. If one looks out of the carriage window at the wet spots in the rail or broken rails one sees that standards have declined substantially.
I was a railwayman in the west of England division. I was Operating Superintendent from Penzance to Worcester. I went to Liverpool. I went to Crewe. I was responsible for the national timetable. I was Director of Operations for British Rail; and I was General Manager of the Western Region. Therefore I have some background in the railways. At the time, I think that many of us believed that privatisation was a good thing. We were living in the euphoria of the privatisation of water, gas, electricity, telecommunications and B AA. But the model which was adopted for the railways is the wrong model and that is the cause of the trouble that we are now in.
The sudden collapse of Railtrack was a surprise. We expected it gradually and slowly to collapse because it was a thoroughly inefficient company. That is the reason that it has collapsed. From the very beginning it was inefficient and its inefficiency is writ large on almost everything to which it set its hand.
It is not surprising that no off-the-shelf solutions are available for the problems. It was a sudden collapse. It takes time to think about the solutions which will emerge. They cannot emerge immediately. It may be as long as two years before we know the solutions. After all, it took the Conservative Government two years and more to privatise the railway—in fact, almost the whole of a Parliament.
We are now in receivership. I think that we shall emerge into the green fields at some time in the future. I believe that vertical integration is essential. Only one person can control a railway. I have heard the arguments against that from the noble Lord, Lord Berkeley, and others and I shall deal with them. Other mechanisms can be tried, but underlying them all is vertical integration of the wheel and the rail. I know that Rail Freight Group is against it. I know that the Association of Train Operating Companies is against it but it is a trade association and unlikely to come forward with any proposals which do not fit the lowest common denominator. That is what trade associations do and that is what they are for.
1475 I believe that freight can be protected in two ways. The paths, at the new price which has been agreed by the Rail Regulator, can be bought by the SRA and investment can be made by the SRA. Freight is important and the SRA has to protect it but there are mechanisms for protection. There are difficulties in financing the 10-year plan but we believe in it. We want train operating companies to be able to invest where they want to invest. Last week I asked Stagecoach where it wanted to invest. It replied, "In car parks". It is often not what one expects. If the companies are in charge they want to invest in small things.
Incremental investment in a long franchise is probably the way forward. We do not believe in a north-south divide. The noble Lords, Lord Shutt and Lord Greaves, spoke of the parlous state of many of the railways in the north of England. It is not good enough that half of the country is being treated as a second-class citizen. We need a new north-south line. That will free up capacity on the East Coast and West Coast Main Lines for freight and other purposes.
The noble Lord, Lord Freeman, referred to fares regulation. We need to look at the issue again. But some fares need to come down while others increase. The reduction of 1 per cent has not been felt by many users because most train operating companies have another clause by which they can put up fares if quality has increased.
We shall need longer, possibly rolling, franchises. By that I mean a franchise whose end date is moved so that one does not have a hiatus in investment which extends also to training, station refurbishment and many other matters.
We want to see consolidation of franchises. I do not mean that there is no room for small franchises, because some work very well. But there has to be some consolidation; and we have to revisit the issue of running powers where freight trains and cross-country trains can run on the metal of another company. There have been some famous disputes about running powers—the lighting at Carlisle in 1908, and so on. Such disputes are now read for amusement by people who know about railways. Any disputes on running powers were largely settled in brief business before lunch at a monthly luncheon for general managers. That demonstrates how difficult they were to deal with.
We are interested in how the SRA, or its successor, will relate to the DETR. I hope that the noble and learned Lord will make clear how these two bodies will get on together. I believe that the noble Lord, Lord Haskel, said that we did not need two people to do one job. The noble Lord also referred to salaries. When I was a railwayman I do not recall ever being highly motivated by the extent of my salary. In a debate in the House last week the right reverend Prelate the Bishop of Oxford spoke about public service. That is a motivating feature of which we should not lose sight.
We need to train engineers, drivers and many others. Last year the Stagecoach group managed to recruit four graduates. Many companies recruited none at all. 1476 Stagecoach by its own admission, needs to recruit about 20 graduates. It is very difficult to attract people to an industry which is the butt of people's jokes.
The unions are not in general a force for good and exist in a Victorian world. They try to put the clock back and say that more guards and drivers are required to do the same amount of work. Although operating a train is a skilled job, these days it is not so skilled that it takes two years to train someone to drive a local passenger train. Changes need to be made.
I turn to the West Coast Main Line. Perhaps 125 miles an hour is enough and Virgin should be offered the Silverlink franchise. If so, I am sure that a different railway would emerge. A good deal of the cushion would be squeezed out because one operator would operate the railway.
Regulation was introduced on the railways in part to introduce competition. I remember that many of the early advocates told us that we would turn up at Waterloo and make our choice of the red, yellow or blue train, and that was the reason for regulation. Passengers and customers do not want such regulation; they just want a good, reliable service. We need such economic regulation as complies with EU law, not an all-pervasive regulator.
Although performance regimes generally are very expensive, which is their greatest effect, they have not raised performance. When I was in charge of the West Coast Main Line 90 per cent of services ran on time, not 10 minutes or so late. It has become a lot worse since then. I believe that performance regimes are wasteful and we should find something else to replace them. Obviously, people must pay for short or cancelled trains, and the SRA has a mechanism to deal with that.
The noble Lord, Lord Haskel, also mentioned safety. Once we have TPWS installed on the system we shall not kill anyone else in collisions. I have just looked at the figures over a 20-year period. In only one year did BR kill a significant number of people in a train accident. It is possible to have safety without an all-pervasive Health and Safety Executive whose costs are so high that it cannot even tell the Library what they are. However, those costs are substantially more than they used to be under the form of regulation to which I was accustomed on the railways.
Therefore, we are on the side of passengers and freight. We are willing to give fair passage to any legislation which in due course comes before this House. If it meets the criteria that I have set out we shall be enthusiastic supporters of it.
§ 6.54 p.m.
§ Viscount Astor
My Lords, I thank the noble Lord, Lord Marsh, for giving us the opportunity to put the Government under scrutiny on their rail policy. The Government have tried to shift the blame for the demise of Railtrack by claiming that it is not their fault but that of the previous Conservative government who introduced rail privatisation. The noble and learned Lord levelled that accusation against me last week and I intend to deal with it this evening. I take the House 1477 back to 1993 when the then Conservative government brought the Railways Bill before Parliament. During the passage of the Bill the Labour Party fought privatisation tooth and nail, as was its right. But even after the Bill passed into law the Labour Party did everything that it could to try to wreck the process. I remind noble Lords that Clare Short, then the Labour transport spokesman, threatened that a new Labour government would renationalise the railways without compensation to those who had invested. Despite these threats the privatisation of rail went ahead successfully and raised just under £2 billion for Railtrack. The Labour Party could not prevent privatisation but wanted to see it fail. Perhaps I may remind noble Lords of its policy document Consensus for Change published in June 1996:A Labour government will use its powers to acquire the ownership of Railtrack".I believe that privatisation and public/private partnerships work. They bring improved efficiency and better customer service. They work because of good management and the right incentives. We all remember that at the start of the privatisation of the railways it was difficult for train operating companies. All of us must accept that under-investment in the rail system over a very long period meant that a lot of catching up was required. But since 1994 there have been dramatic changes. There are now 30 per cent more passengers using the rail system. In 1994 there were 735 million passenger journeys, and last year 957 million passengers were carried.
At the beginning, the companies had to operate with old rolling stock and it took time before real improvements became apparent. Some operators have been more successful than others. Some of the less successful operators have, quite rightly, lost their franchise. Passengers are still frustrated by delays and cancellations. I do not pretend that there is not a lot more to do and many more improvements to make, but the rail companies have shown a dramatic improvement since the days of BR. I accept that there could have been improvements in the way that incentives were established. Train operators were encouraged to increase revenue and cut costs, while incentives to improve the quality of the services were weak.
The Government now appear to accept the principle of private rail operators, but that is open to question. The Government claim that they want further private sector investment in the network, but some of the rail operators are coming to the end of their 10-year licences. If the Government wanted to sustain levels of investment they would have given out new long-term franchise extensions to those operators who had proved successful. What did they do? They granted only two-year extensions to the operating companies. Like my noble friend Lord Freeman, I ask the Government how they expect the companies to plan and invest for the long term. Will the Minister explain why extensions have been granted for only two years?
1478 As far as I am aware, not even the most fervent Labour revisionist has called for the renationalisation of those train operating companies. There was a slight wobble when John Prescott said in his speech to the Labour Party Conference in 1997:I will keep open the option of the public sector running the railway".Will the Minister give an assurance that those train operating companies will not be brought into the public sector?
I turn to Railtrack. I contend that privatisation was also the right approach. I accept that there are arguments that it could have been done in many different ways. With hindsight, it is easy to put together different scenarios. One alternative which has been mentioned this afternoon would have been the vertical integration of track and train operators, but I remind your Lordships that other similar industries have successful separations. The infrastructure of the electricity industry is owned by the National Grid, not the generators. The posit ion is also similar in the gas industry.
The noble Lord, Lord Marsh, said that rail was different. The noble Lord, Lord Berkeley, disagreed with him and believed that there should be such separation. There is a difference of view. But it is important to remember that Railtrack is responsible for the timetabling, signalling and priority of train services. If it was the responsibility of, say, local companies, who would decide on the priorities of express services against local services, the Royal Mail or freight?
Another alternative was that Railtrack should have been split into six regional companies, either independent or linked with the operators. That point has been raised. That would have been difficult to operate as many smaller train companies operate part or most of their services on shared tracks. I doubt whether any of those alternatives would have worked better. I believe, however, that there should have been greater incentives for Railtrack to increase the use of its infrastructure.
What I am clear about is that without privatisation there would not have been the money to improve the rail network. Since 1994 about £15 billion of private investment has been put into the railways. How much further behind would the network be without the money spent on safety upgrades and improvements?
The Government contend that privatisation was wrong or was done in the wrong way. If that is so, it is up to the Government to explain why. The Government have had five years to put in place changes if they thought that was the case. They have not done so. My noble friend Lord Goschen reminded us about that matter. They have set up the Strategic Rail Authority but it has yet to produce a strategic rail plan. The Minister accuses us of getting it wrong. I do not claim that we got it 100 per cent right, but I strongly defend the principles of our policy.
However, I must tell the Government—this is perhaps the most important point I want to make on the subject of Railtrack—that if we had been sitting on 1479 their side of the House we would have acted. If the structure had needed to be altered, we would have come back to Parliament. We would have been flexible. If changes had been needed we would have made them. We would have been honest about the problems.
My noble friend Lord MacGregor was absolutely right in his analysis of what has happened. What we would not have done is what the Government have done. They have put in place policies which have meant that Railtrack was bound to come under huge pressure. Because passenger and freight traffic grew so rapidly so did the demands on the infrastructure. The tragedies at Hatfield and Paddington and the subsequent safety improvements increased an already strained budget. Railtrack was caught by the demands of the Rail Regulator, the Health and Safety Executive and the Strategic Rail Authority. It had to carry out necessary and vital safety improvements, maintain the network and deal with an increasing capital expenditure programme.
The Government are responsible because two-thirds of Railtrack's income came from government subsidies. The noble and learned Lord claimed that Railtrack,needed a blank cheque from the Government for the next few years and the suspension of all regulatory control".—[Official Report, 15/10/01; col. 390.]Railtrack strongly disputes that assertion. It disputes that it was insolvent. It further disputes that it ever asked for suspension from regulatory control. John Robinson, chairman of Railtrack, when asked if administration had been included in a presentation to government, said:It was always clear that administration was only ever noted for the purpose of ruling it out for compelling reasons. Railtrack was not insolvent at 4.45 pm on Friday October 11th until the Government withdrew its support".The Secretary of State forced the company into administration by withdrawing government support and withdrawing a binding agreement made in March of £1.5 billion of funding through the Strategic Rail Authority. It is not true that Railtrack ever asked for a blank cheque. I ask the noble and learned Lord whether the Secretary of State therefore contravened Section 4 of the Railways Act 1993. I have given the noble and learned Lord notice of that question and others that I want to ask him this evening.
Can the noble and learned Lord confirm that the Strategic Rail Authority, which is directly accountable to the Secretary of State and is responsible for planning and supervising the activities of the rail industry, was not consulted? Sir Alastair Morton, its chairman, has questioned why there was not a regulatory review into whether Railtrack was actually insolvent. Why was Sir Alastair not consulted by the Secretary of State before he acted? I can only conclude that the Government wanted Railtrack to fail.
Indeed, we know now that the Secretary of State's spin doctors told him that it was going to be a "good news story". It was going to be the Secretary of State standing out for the taxpayer against an unpopular 1480 company. I am afraid that the Secretary of State forgot that many of those taxpayers were also shareholders. As my noble friend Lord Hunt said, they also forget that over 90 per cent of Railtrack employees are shareholders. Many have now lost their savings and are facing redundancy.
Can the Minister explain why the Rail Regulator, Tom Winsor, as early as June was publicly undermining Railtrack? Does the Minister think that that was the correct way for a regulator to behave? Was he acting at the behest of the Government?
The Government will face many claims from shareholders, bondholders and employees of Railtrack. I contend that the Government could have avoided this crisis. The Secretary of State is still running around changing policy almost on a daily basis. Has he finally made up his mind? We look forward to hearing the details of the Government's policy from the noble and learned Lord this evening.
I should like briefly to look at the Government's new proposals and their effect on the rail industry. I realise that I do not have too much time. However, the noble and learned Lord will note that he has, since we started at 3.20 p.m., an hour and a quarter in which to wind up. I am sure that he will not mind if I trespass a couple of minutes into his time, unless of course he wants to speak for an hour and a quarter—in which case I shall immediately sit down.
If we want a better railway the Government must get right the structure, management and incentives. There must be clear objectives, clear performance criteria and clarity of the roles of the different public authorities with—this is important—strong independent regulation. Adequate funding from the Government must be in place before the private sector finance can be raised. A culture of improved service to customers must be imposed from the top of the organisation.
The Minister criticised Railtrack for paying its recent dividend. Does the Minister agree that one can raise private finance only on the basis that there will be some return? Railtrack had been asked by the Government to raise new equity. It would have had no chance if it had passed on its dividend.
If the new company is going to be a non-profit, non-dividend company how will the Government get the £30 billion of private finance required over the next 10 years? Railtrack, the Strategic Rail Authority, the Rail Regulator, the train operating companies and the department all believe that they have an important role in the future. That would not be a problem if they also had clear roles and responsibilities. I believe that there is a muddle.
On Friday, the Minister in another place, David Jamieson, was asked in a Question for Written Answer about an approach from West LB, the German bank. He answered that it was up to the bank to submit its proposals to the railway administrator,who is responsible for making proposals on how to move the company out of administration".—[Official Report, Commons, 26/10/01; col. 425W.]1481 In another Written Answer he said that the Government,intend to enable a proposal to be made to the railway administrators which would, if accepted, result in the transfer of both the business of the company and the debt of the finance creditors participating in the standstill to a new company limited by guarantee".—[col. 425W.]Since then the Minister has also answered a further Question in another place, saying that any proposal made by the administrator will go to the Secretary of State for consideration and approval. That begs the question: who is making the policy here? Is it the administrator or the Government? Does the administrator therefore not have any form of duty to the shareholders, or will his sole duty be to the Secretary of State?
We are also told that the new company will not be responsible for new track or major upgrades. Those will be left to special purpose vehicles. Therefore, we shall have an extra body working on the railways. That will mean more confusion. It will certainly cost more money. Will these special purpose vehicles be responsible for signalling, safety and ongoing maintenance? How will that work?
Who will he affected in the end? I am afraid that it comes back, as always, to the poor old passengers. The Government's plans will mean delays. They will mean delays on the introduction of new trains, new safety measures, new signalling, new stations and platform upgrades. Again the people who will suffer most are the passengers.
§ 7.10 p.m.
§ The Minister of State, Department for Transport, Local Government and the Regions (Lord Falconer of Thoroton)
My Lords. I thank all noble Lords who have contributed to the debate. It has been an impressive discussion, although I doubt that anyone needed to call attention to the problems facing the rail industry, since they are plain for all to see, most particularly in the recent failure of Railtrack. The critical issue is how to address those problems now.
I pay special tribute to the speech of the noble Lord, Lord Marsh. The noble Lord, Lord Beaumont of Whitley, said that it was the best speech he had heard in 30 years. I have not been a Member of the House for that long but, although I disagree with several points made by the noble Lord, Lord Marsh, I do not think that anyone could deny that it was an incredibly impressive speech. It provided a strong start to the debate.
A number of contributions dealt with issues regarding rail travel in particular parts of the country. The noble Lord, Lord Bridges, who unfortunately is not in his place, spoke of the problems encountered in the provision of freight services in East Anglia; the noble Lord, Lord Shutt of Greetland, outlined difficulties in the north of England, as did the noble Lord, Lord Greaves; the noble Lord, Lord Elder, dealt with problems in relation to Scotland; the noble Lord, Lord Beaumont of Whitley, also referred to problems 1482 in the north of England; and the noble Earl, Lord Mar and Kellie, treated the House to the new world of the Alloa railway.
I hope that those noble Lords who referred to specific regions of the country will forgive me if I deal in writing with the particular points that they have raised. However, all noble Lords emphasised with force the considerable problems faced by the rail network. Using graphic descriptions, they have illustrated the need for action, investment and a proper structure that will deliver a rail network that is suitable for the travelling public.
Perhaps I may begin my remarks by turning to rail privatisation and the creation of Railtrack. The previous Tory administration made a mess of restructuring the railway industry, in particular as regards the rushed privatisation of Railtrack. The noble Lord, Lord MacGregor, who at the time was the Secretary of State for Transport, readily acknowledged the privatisation and in his contribution gave a detailed defence of his actions. He deprecated the blame culture that had taken over since privatisation. He then blamed the current Secretary of State, he blamed the personality of the regulator; he blamed individual decisions reached by the current Secretary of State he blamed the Strategic Rail Authority. He said that all was going well until Paddington and Hatfield, but later in his remarks commented that, after Paddington and Hatfield, things began to go wrong.
I do not know whether the noble Lord, Lord MacGregor, listened to the speech made by the noble Lord, Lord Marsh, during which he quoted passages from the account written by Lord Cullen of what had been taking place in Rail track prior to Paddington. If the noble Lord, Lord MacGregor, interpreted that account of the state of affairs in Railtrack as an indication that things were going well, then in my view he was sorely mistaken. Things were not going well. Paddington and Hatfield simply brought to the surface a whole series of real problems.
The noble Viscount, Lord Goschen, who was the Parliamentary Under-Secretary of State at the Department of Transport from 1994 and thus, I assume, not party to the decision to privatise, also vigorously defended rail privatisation. However, he appeared to defend it on two separate bases. He said, first, that the Labour Government had not moved quickly enough to make changes. He then appeared to state that we had moved too quickly to bring Railtrack to an end once the administration had taken place. He commented that we should have allowed the company to continue for longer. The noble Viscount was not clear—
§ Viscount Goschen
My Lords, the noble and learned Lord is very good at tempting me to my feet. I do not think that I made any of those comments. I said that the noble and learned Lord's administration had four-and-a-half years in which to look at the structure of Railtrack, but took no positive action to provide a remedy. When the Government did take action, it was 1483 a precipitate move to force the company out of business. That did not form part of a controlled process and thus should be deprecated.
§ Lord Falconer of Thoroton
My Lords, the noble Viscount stated that we were too slow in making changes and too quick in bringing Railtrack to an end. As I said, it is not clear which attack was favoured by the noble Viscount.
When we came to power in 1997, we were pragmatic about the rail industry. We took the view that the right course, given that the clock could not be turned back, was to acknowledge that privatisation had taken place and then to make every effort to ensure that the system which we had inherited worked well. I do not think that there can be any doubt that that is what we tried to do. We most certainly did not seek the demise of Railtrack. I believe that many would share the view expressed by the noble Lord, Lord Elder; that is, perhaps we took too long to come to a conclusion about the future of Railtrack.
It has been alleged that the decision to put Railtrack into administration was taken long before 5th October. Some appear to believe that the Government were waiting for an opportunity to step in, wind up Railtrack and get the company on the cheap. That is most certainly not the case. Let me give noble Lords all the facts as they have been detailed both in another place and in this House.
My noble friend Lord Faulkner pointed out that last July, Railtrack approached the department with the news that the company's financial problems were far worse than had been anticipated less than four months earlier. The noble Viscount, Lord Astor, will recall that, at that time, an agreement had been reached in which the Government would give Railtrack £1.5 billion. However, when Railtrack met with the DTLR on 25th July, it stated that the sum of £1.5 billion was not sufficient to keep the company going. So there is no question of the DTLR reneging on any agreement that had been reached.
As I have said, back in April the Government agreed to a package of funding measures which we understood would stabilise the financial position of Railtrack—that is what we had been told. Suddenly we were then told that, unless the Government put up yet more money, the company would face severe financial difficulties in trying to meet its debt repayments, thereby affecting its ability to declare itself as a going concern when it came to announce interim results in November. Noble Lords will understand that that would have made it impossible for Railtrack to continue to trade. At that stage, in July, receivership was mentioned—although that is the wrong expression.
The Government asked Railtrack to bring forward acceptable restructuring proposals. From late July until early October various iterations were discussed and considered, but ultimately the best that Railtrack and its advisers could come up with was a package that amounted to an open-ended funding request with no 1484 guarantee of improved performance. The noble Lord, Lord Marsh, indicated during the course of his remarks that Railtrack was a company that did not know what assets it owned. That was the state of the management of Railtrack by this October. Thus it was not surprising that Railtrack was not in a position to calculate what sums of money, in addition to the £1.5 billion which had been agreed in April, it now required to survive.
The Government were faced with the option of continuing to fund Railtrack. After detailed discussions held through July, August, September and the beginning of October as regards what was required, the Government were faced with giving Railtrack an open-ended guarantee to continue financing the company, with no idea of how much would be required and no idea of how long such uncapped finance would be needed.
As a responsible Government, it was our duty, throughout the period of the detailed discussions, to make contingency plans in the event that Railtrack failed to come up with acceptable proposals. We would rightly have been criticised if we had not done so. We put work in hand to explore other options, including the possibility of administration, if it came to that. On the basis that administration was a possibility, we also commissioned work to consider what might replace Railtrack in that event. Again, we would have been criticised if such work had not been carried out.
There is absolutely no element of subterfuge or plot here. These are simply the actions of a prudent government, seeking to ensure that they are ready for any contingency. As I made clear in the Statement on 15th October, discussion of Railtrack's proposals continued until 3rd October. On 5th October my right honourable friend the Secretary of State reviewed all the relevant papers and considered all the options, including Railtrack's proposed rescue package and the additional funding required. He decided that he could not give Railtrack a blank cheque.
That decision was made during the course of Friday afternoon. At that stage the right action to take was to speak immediately to the board of Railtrack. The Secretary of State asked the chairman of Railtrack to come to see him. The chairman arrived at approximately 5 o'clock that evening, when he was told what the position was. As the noble Lord, Lord Hunt, said, there was a board meeting of Railtrack at 2 o'clock on Saturday. At that board meeting, the decision was made by the Railtrack board not to oppose the grant of an administration order.
The following day, Mr Justice Lightman, sitting in the Chancery Division, granted an order placing Railtrack in administration. He said that it was urgent and right that such an order should be made. The noble Lord, Lord Hunt, described the evidence as "quite thin". That is not the view taken by Mr Justice Lightman. He thought that it was a clear and urgent case.
As regards the position of the shareholders, the allegation is that we pulled the rug from under the shareholders "precipitately", to use the word of the 1485 noble Viscount, Lord Goschen. In April, when the agreement which the noble Viscount, Lord Astor, wrongly said that we broke was made, we agreed a statement of principle with Railtrack as part of the April settlement. The first point read:The Government stands behind the rail system but not individual rail companies and their shareholders who need to be fully aware of the projected liabilities of the companies in which they invest and the performance risks they face".To ensure that that statement had wide circulation in the City, it was released to the Stock Exchange news service.
The message could not have been plainer. Indeed, it was clearly well understood by Railtrack management. In an interview to the Financial Times on 11th April, Railtrack's chief executive, Mr Steve Marshall, said:Yes, they [the Government] would allow us to go bust. It's quite clearly item one on the agreement with Government. While the Government stands behind the industry, they don't stand behind any particular company, of course they don't".The management of Railtrack were perfectly aware of what was the position because it had been spelt out in the agreement published in April 2001.
So it is wrong—it is based on wrong information—to suggest that there was any breach of an agreement; it is wrong to suggest that the position was not made absolutely clear in April; and it is wrong to suggest that that was not made public.
§ Lord Falconer of Thoroton
My Lords, if I may continue with the issue of the shareholders, I shall then let the noble Lord intervene.
I should make it clear that the Government sympathise with Railtrack shareholders, particularly Railtrack employees and other small investors. We are prepared to work with Railtrack Group to assist in realising the value of group assets, but, as we have made clear, the Government cannot justify putting more taxpayers' money into supporting Railtrack's poor performance or shareholders' value.
We have been as open as possible. It is for others to consider whether Railtrack itself has been sufficiently forthcoming in keeping its own shareholders properly informed of its financial position. Our priority has been to ensure the continuing, safe operation of the rail network. The board of Railtrack plainly had obligations to its shareholders which it was obliged to discharge. Railtrack, as the interview with Mr Marshall on 11 th April makes clear, was fully aware of the whole position.
§ Lord Hunt of Wirral
My Lords, I am grateful to the noble and learned Lord for giving way. From what he says now, he is indeed conceding that for some time, as the documents show, the Government had been contingency planning to place Railtrack in administration. He has also explained that the last 1486 minute flurry in evidence was caused by Railtrack refusing to sign its own death warrant, as it had every right to do.
Is the Minister aware that what he has said means that the Secretary of State had made his decision before the Stock Market closed on. Friday, 5th October, and that the Government therefore allowed a false market to take place, at least on Friday, 5th October?
§ Lord Falconer of Thoroton
My Lords, that is a ridiculous suggestion, if I may say so. I have made clear that during the course of the afternoon the Secretary of State reviewed the papers, made up his mind and called immediately for the chairman of the board of the company—which is precisely the right course—who came at 5 p.m. and was told what the Secretary of State had in mind. The idea that that created a false market is, with respect to the noble Lord, ridiculous.
It is important now to ensure that we do not waste this opportunity to create a better railway system. Noble Lords on all sides of the House have urged us to take that opportunity, and we agree that it is an opportunity that we must take. We all agree that change is required.
We are developing what we regard as an attractive successor vehicle, and we will put a proposal to the administrator for a company limited by guarantee—a "CLG", as I shall call it as time goes on—to take over Railtrack plc's railway assets and its role as a network operator.
As recent press coverage has made clear—the noble Viscount, Lord Astor, referred to this—there is every possibility that there may be more than one transfer proposal before the administrator. We welcome this. It is the administrator's duty to consider all reasonable proposals put to him and, under Schedule 7 to the Railways Act 1993, to make a recommendation to my right honourable friend the Secretary of State for his consideration and approval.
To assist potential proposals, guidelines on the principal issues that will need to be satisfied to obtain the approval of the Secretary of State are to be outlined today in response to a Written Question in another place. That Written Question was answered at 3.30 p.m. and set out the principles in relation to other bids.
We remain confident, however, that our proposals for a CLG—to be developed and put to the administrator by a separate bid team—will offer the best solution. Our proposals were outlined in a little more detail last week in response to a Writ ten Question in another place. Some noble Lords may find it helpful if I reiterate the main aspects.
A company limited by guarantee would be a private sector company. The noble Baroness, Lady Noakes, raised the question of whether it would be really a private sector company. The Office of National Statistics, an independent body, has to make the decision about that. It has made the decision that it is. 1487 It would not have shareholders and consequently would not have the need to pay dividends in return for equity funding.
§ Baroness Noakes
My Lords, can the noble and learned Lord explain how the Office of National Statistics can make a decision in the absence of a fully worked-out set of proposals being put to the administrators?
§ Lord Falconer of Thoroton
My Lords, obviously it will have to look at the matter again, but, on the basis of the proposals that have already been outlined, it believes the position would be that the CLG would not be in the public sector; it would be in the private sector.
The CLG would be a private sector company without shareholders and consequently without the need to pay dividends in return for equity funding. Its management would be incentivised on a commercial basis to deliver efficiency and performance improvements. Operating surpluses from the company would be reinvested in the network.
The noble Lord, Lord Marsh, asked what would be the management structure and whether it would be sufficiently stable to deliver. The noble Lord, Lord MacGregor, raised the same point. The board, which we anticipate would comprise between 12 and 15 executive and non-executive directors, would be highly professional. It would be tightly focused on delivering a quality rail network fit for the 21st-century and would be remunerated and incentivised accordingly. Corporate governance structures would be comparable to those of a traditional plc.
As noble Lords know, instead of shareholders, a CLG has members. Those are the people that the noble Baroness, Lady Noakes, rightly described as the guarantors. The guarantee in a company limited by guarantee is a nominal guarantee, similar to a nominal share value.
The Strategic Rail Authority would be founder member of the CLG and we anticipate that the majority of the other members would come from the private sector. Individuals drawn from private sector companies with a direct stake in the railways, other interests including passenger groups and employees and the SRA or its successor could all be possible members.
The members would have a governance role equivalent to that of shareholders but would have no additional powers. They would be well placed to ensure the high performance and full accountability of the board. In answer to the point raised by the noble Baroness, Lady Scott of Needham Market, the company structure would certainly comply with all EU directives.
For funding purposes, the CLG would have the same sources of revenue as Railtrack—property income, track access charges and grant. Some 90 per cent of the company's income would be covered by stable long-term contracts. Revisions to these contracts, for example to reflect any changes to the 1488 regulatory regime, would be subject to independent regulation in respect of the fair price to be paid for the outputs that the Government wish to purchase.
The CLG would be structured to ensure that it was sufficiently financially robust to contribute towards the delivery of our 10-year plan targets for rail, for which we have committed some £30 billion of public expenditure on the railways, with much improved value for money. It would be designed to ensure that it could play its role in levering in the matching £34 billion of private sector investment identified in the plan.
A number of speakers raised this issue. I believe that they have all accepted that a company limited by guarantee could not raise equity; it would have to raise debt finance. It would not need equity to raise debt finance. The company would have the existing debt from Railtrack transferred to it, and it would be able to borrow further from the debt market to the extent necessary.
The Government are confident that the CLG would be able to raise funds—
My Lords, can my noble and learned friend help the House? I believe it to be the case that in the 10-year plan the—34 billion of investment from the private sector includes investment in rolling stock, both passenger and freight. But that has little to do with the CLG; it is investment by the rolling stock leasing companies and other such bodies. That is unaffected by the present change.
§ Lord Falconer of Thoroton
My Lords, it is unaffected by it. Indeed, much of the major infrastructure investment will come from special purpose vehicles. The new body will be focused on the maintenance and engineering job that Railtrack has had to undertake. One point is very clear from what happened to Railtrack. I am sure that the noble Lord, Lord Bradshaw, will agree. One of the things that seemed to happen was that the rail engineering abilities of Railtrack—whatever else British Rail's faults were—were not as good as British Rail's had been. The new company will focus on the delivery of that particular function.
The cost of the borrowing would, as speakers on all sides of the House have said, depend on the company's credit rating. Under the proposals that we are currently developing, we should expect it to have a solid investment grade—that is, at least BBB, and potentially higher.
The noble Lord, Lord Oakeshott, in a slightly contradictory sequence in his speech, appeared to say on the one hand that the market would regard the standby facility as being something akin to a guarantee, and on the other that nevertheless it would charge high rates of interest. We anticipated that in practice lenders would view the company as a very low credit risk and a sound basis for their investment. The "cushion" between the risk of poor financial performance and debt providers that equity would provide under the standard PLC model would come from two main sources.
1489 First, we should expect to put in place an arrangement by which the company could access a standby, subordinated loan facility. This facility would be enshrined in a contract, providing explicit support in specific circumstances up to a predetermined limit. It would be capped. It would not amount to a government guarantee of debt, but the repayment of this facility would be "last in the queue" as regards creditors for repayment. The possible value of this facility would be determined once the administrator had a better understanding of Railtrack plc's true financial position. So we are talking about a subordinated loan up to a specified amount. That is the first point on which the market will have to judge the proposal. Although I understand people raising issues about this, the ability to judge what credit rating there will be will very much depend, to start with, on the market's view of that facility. So it might be sensible to wait until the market has had an opportunity to make a judgment about that.
Secondly, although the company would not be distributing profits in the form of dividends, it would earn a surplus over direct costs. This would be sufficient over time to build up a significant reserve. So it would be a company with a subordinated loan facility, building up reserves. Can such a company get to a moderately high-level investment grade in the market'? Yes, it can. Whether it does so depends on the detail and the view taken by the market. Together, the company's reserves and the explicit loan facility would mean that the CLG would have access to sufficient funds to cover foreseeable circumstances.
Under the CLG structure revenues would go further than they would have done with Railtrack. The cost of capital would be lower, there would be no dividends and the company would be able to prioritise cashflows in favour of lenders.
In addition, the company would operate with much lower risks than Railtrack, concentrating on operating and maintaining the infrastructure as well as undertaking small-scale renewals. The CLG would not undertake major new projects with all their attendant risks of cost overrun.
As we announced in April this year, we anticipate that projects such as these, like the East Coast Main Line upgrade, will henceforward be undertaken by special purpose vehicles. These are likely to be bespoke joint venture companies financed through a partnership of government support and private sector investment.
A CLG would continue to undertake maintenance and small-scale renewals through contracts with the private sector infrastructure companies. However, it would improve the definition of these contracts, with greater clarity over the allocation of risk, and improve the management and monitoring of the outputs that are delivered.
A CLG company structure could be combined with a different, more streamlined, regulatory regime from the one under which the industry has had to labour to date and this would help to underpin its credit rating. Transparent independent economic regulation would 1490 continue to be an element in the regulatory regime. This will be a key part of our forthcoming consultation process.
In the light of my remarks, I ask the noble Lord, Lord Palmer, the noble Baroness, Lady Noakes, the noble Viscount, Lord Goschen, and the noble Lords, Lord MacGregor, Lord Freeman and Lord Oakeshott, to pause before they start to say that it will not be possible to raise debt in the market. Once the scheme is described in more detail, it will be seen as much easier than noble Lords are suggesting.
§ Lord Oakeshott of Seagrove Bay
My Lords, we are not saying that it will not be possible to raise debt in the market; we are saying that it will be very expensive to do so in this way.
§ Lord Falconer of Thoroton
My Lords, that is the noble Lord's view. Other speakers were more sepulchral. I say to the noble Lord, judge what the price may be when you see the details.
We are confident that the CLG that we propose, along with the associated regulatory changes would, among other things, produce a focused, professional, private sector company committed to maintaining and improving the rail network; rid the industry of the previous tensions between the need to generate short-term increases in share price and the long-term needs of the network; give those with a stake in our railway infrastructure an input into how that infrastructure is operated and maintained; and put an end, once and for all, to the divisions that were all too apparent in the industry when the network was under Railtrack's stewardship.
It has been a very difficult period for the railways. That much is obvious. It is obvious from the early speeches to which I referred that a great deal needs to be done. But there is an opportunity here to provide a proper future for the rail industry and to provide arrangements that will deliver for the travelling public. The important thing is that we should all act constructively in an attempt to ensure that we can deliver that.
§ 7.38 p.m.
§ Lord Marsh
My Lords, it is obvious that by the standards of this House it is in danger of becoming rowdy. It is important that the Cross Benches should intervene in an effort to restore peace and understanding.
It has been a great pleasure and an honour to take part in the debate. I thank all those noble Lords who have produced a classic House of Lords debate. It has been quiet, relevant and informed. It is no criticism to say that such a debate would not have been possible at the other end of the corridor. It has been well worth while and I am grateful to have taken part. Despite the fact that I could speak for at least another three-quarters of an hour, I beg leave to withdraw the Motion for Papers.
§ Motion for Papers, by leave, withdrawn.