§ 3.31 p.m.
§ The Minister for the Cabinet Office and Chancellor of the Duchy of Lancaster (Lord Macdonald of Tradeston)
My Lords, with the leave of the House, I shall now repeat a Statement made in another place by my right honourable friend the Secretary of State for Transport. The Statement is as follows:
"I would like to make a Statement on the progress being made to put the ownership and operation of the rail network on a sound and sustainable footing; and as part of that the steps being taken to get Railtrack out of administration.
"I will keep the House informed over the next few weeks, but in the light of the conclusion of the sale and purchase agreement this morning between Railtrack Group and Network Rail, I thought it right to come to the House to set out the Government's strategy, the progress made so far and the next steps.
"As the House knows, the High Court put Railtrack into administration last October. As the presiding judge said then, the making of the railway administration order was, 'not only appropriate, but absolutely essential'.
"The Government's objective is to ensure that Britain's rail network is owned and managed by an effective and competent body and so secure a sustainable long-term future for the rail network.
"To achieve that, the next step is to remove Railtrack from administration as soon as possible and have the network under new ownership and strengthened management, who are committed to improving service and safety. That is in everyone's interests: the industry's, that of the workforce and the travelling public alike.
"On 25th March this year, my right honourable friend, the Member for North Tyneside, told the House of the bid made by Network Rail to acquire Railtrack from its parent company, Railtrack Group plc.
"While other bids would have been considered, none was received. Network Rail is a public interest company limited by guarantee and will be run for the benefit of the whole railway, concentrating on its core priorities of operating, maintaining and renewing the rail network. There will be no shareholders and any operating surplus will be used for the benefit of the railway system.
1510 "The company will operate on a sound commercial basis with a board and management whose performance targets will be aligned to the Strategic Rail Authority's long-term plan as well as the obligations under its network licence to its customers.
"Instead of shareholders, its directors will be accountable to the company's members who will not only be drawn from the rail industry, but will also include members representing the public interest and the Strategic Rail Authority. In this way, the directors of Network Rail will be answerable to people whose primary interest is in the long-term future of the railway.
"Railtrack Group and Network Rail have concluded a sale and purchase agreement to acquire Railtrack plc. I would like to set out in some detail the terms of this agreement.
"In line with its original offer, Network Rail will pay £500 million—pof which £a300 million will be provided by the Government—as well as taking over Railtrack's debt, which now stands at £7.1 billion. This includes loans from the European Investment Bank and the German bank, KfW, totalling just over £1 billion, which Network Rail plans to assume.
"In parallel, London and Continental Railways is acquiring from Railtrack its interest in the first phase of the Channel Tunnel Rail Link for £295 million. At a cost of £80 million, Network Rail will acquire the right to operate, manage and maintain the Channel Tunnel Rail Link and the concession to manage St Pancras station.
"I can tell the House that Network Rail has already secured up to £9 billion of bridge financing from commercial banks to fund its acquisition costs and to refinance Railtrack's existing debt, as well as to fund the immediate operation of the railway.
"Network Rail will also put in place additional commercial financing of up to £7 billion for its medium term requirements. This is necessary to cover operational expenditure as well as to cover substantial cost overruns which were inherited from Railtrack and which will have to be met.
"Network Rail will also need to have—as would any owner and operator—access to back-stop contingency funding. For this reason, the Strategic Rail Authority will provide an additional standby credit facility. This contingency funding of last resort has been set at £4 billion.
"Further details of this funding and of the short to medium term standby credit facilities offered to Network Rail by the Strategic Rail Authority are set out in the two minutes that I am laying before the House in the normal way.
"The House will also wish to know that the rail regulator has today issued a statement setting out his approach to a request for an early regulatory review.
1511 "These are large sums by any standards. But they are necessary, given the size of the task facing Network Rail, and they would be needed by any successor to Railtrack. There is no escaping the fact that Britain's railways need very large-scale investment—investment we believe is essential.
"It is because of the need for long-term sustained investment that the Government are, through the 10-year plan, increasing the average annual investment in the railways—on top of continued support for running costs—to £4.6 billion. That is more than three times the annual average in the 10 years prior to 1997.
"The public are entitled to expect that this investment will be spent efficiently and effectively. That has clearly not been the case in the past.
"The new company, Network Rail, faces a legacy of poor management and of very substantial cost overruns, which will have to be met. For example, when it began, Railtrack estimated that the cost of the West Coast Main Line project would amount to about £2 billion. It is now clear that the actual costs of the work will he considerably more than that.
"So what is now needed is a competent owner and operator. That is why Network Rail's acquisition of the railway network is so essential to the future of the industry.
"This agreement is a major step towards removing Railtrack from administration and putting the rail network back on a sound footing.
"The next stage in the process will involve Railtrack Group plc putting this offer to its shareholders at a special meeting which is expected to be held next month. It is for the company to decide how much it can offer its shareholders.
"The European Commission is also considering whether any aspect of the support being provided needs to be cleared as state aid.
"However, if the shareholders of Railtrack Group approve the bid at the special meeting and the appropriate clearance is obtained from the European Commission, I would expect to ask the High Court for an order releasing Railtrack plc from administration thereafter.
"It is obvious that Railtrack could not have carried on as it was. Even the company recognised that last summer. And what is more, the division and lack of common purpose that characterised the railway system in the past few years were damaging and destructive to the interests of both the industry and the travelling public.
"All the evidence shows that working together is crucial to the long-term success of the railway network. I can tell the House that over the past few months, despite the uncertainties of administration, the new management of Railtrack has enjoyed closer working relationships with the Strategic Rail Authority, as well as the rail regulator and the train operators—something which is essential if the network is to work effectively and efficiently to everyone's benefit.
1512 "The establishment of a public interest company in which the Strategic Rail Authority is represented will continue to foster this climate of better cooperation to the benefit of all concerned in terms of achieving the objectives set.
"The railways are of critical importance to the economic and social fabric of this country. There is now an urgent need to give the rail system stability. I believe that this agreement is the right and best way of building a modern and efficient network.
§ "I commend this Statement to the House".
§ My Lords, that concludes the Statement.
§ 3.40 p.m.
§ Viscount Astor
My Lords, I thank the Minister for repeating the Statement made in another place. Does that mean that he is now responsible for transport matters in this House and will be answering Questions for that department?
The one bit of vaguely good news is that the Government have made a U-turn and are now paying £300 million to the Railtrack shareholders. I should remind the Government that almost 90 per cent of Railtrack employees are also shareholders in the company. Will the Government now admit— I do not suppose that they will—that Railtrack was not insolvent, it was the Government who made it insolvent? Indeed, I believe that the Government misled the High Court. They made Railtrack insolvent by withdrawing funding.
To turn to Network Rail, it is a public interest company. Can the Minister define that? It will not have any shareholders, so who will own it? Perhaps he can give us an example of other similar companies in the government portfolio with which we can compare it. Or is it something of totally new invention? I understand that its accounts will appear in the accounts of the Strategic Rail Authority. Does that make it a subsidiary of the SRA? Will it have independent auditors? Who will be responsible for the audit?
The Government say that they will stand behind the £14 billion of debt funding by a letter of comfort from the Secretary of State. The minute states:the Secretary of State would intervene in a timely manner to ensure that adequate funds would be made available to the S RA, or any successor body".How will the Treasury account for those letters of comfort? Will that be on the Treasury books?
The public interest company will be accountable to its members. I understand that it will have 120 members. How will they be selected? I understand that that will be done by a special committee. Who will appoint the special committee? Will there be more than one person? Will it be the Secretary of State? How many directors will the company have? Presumably, it will not have all of those members on its board. How will the new entity be accountable to Parliament?
As I understand it, Network Rail will be responsible for track maintenance and special purpose vehicles will be set up for improvements to the rail system. 1513 Those vehicles will then sell the track to the SRA after they have improved it. Who will decide the price? How will that be decided? We want to ensure that we do not return to the bad old days of the cost-plus system.
Can the Minister tell us about the time frame? When do the Government expect to hear from the European Commission? Is that a matter of weeks or of months?
This has been a sorry tale. The Government had five years in which to solve the problems of Railtrack. I do not deny that it had problems; I do not deny that we did not get it 100 per cent right.
§ Viscount Astor
But we did not get it that wrong. After all, since privatization—the noble Lord, Lord McIntosh, would do well to listen to this—rail travel, the number of passengers using the network, rose by 30 per cent. In spite of the terrible disasters, rail travel is now safer and the train operating companies have invested hundreds of millions of pounds in new rolling stock.
As I said, this has been a sorry saga. Sadly, as always, the victims have been the travelling public.
§ 3.44 p.m.
§ Baroness Scott of Needham Market
My Lords, I thank the Minister for coming to the House to repeat the Statement. I place on record the support of those of us on these Benches for the start of a process that will move Railtrack out of administration and will place the railway infrastructure on a more sound and sustainable footing for the future.
Of course we believe that the public interest company is exactly the right way forward. Indeed, it would be extraordinary if we were to say anything else, because it was my honourable friend in another place who first suggested the idea of a public interest company as far back as last February. Almost a year ago to the day, the then Secretary of State commented that our proposals would introduce paralysis to the system. So I should be interested to hear what, apart from my honourable friend's oratory, persuaded the Government that a public interest company was the way forward.
We on these Benches have always taken the view that the interest of the travelling public must come first—that and recognising the importance of an efficiently functioning railway network for the economy of the whole country, but especially for London and the South East.
Railtrack shareholders who originally bought shares obtained them at bargain-basement prices estimated as undervalued by about £6 billion. Between May 1996 and entering receivership, shareholders received about £700 million in dividends. So we agreed with the Secretary of State when he said last October:new Government money will not be given to compensate shareholders".—[Official Report, Commons, 15/11/01; col. 961.]1514 Why has that changed? Also, what will happen if at their extraordinary general meeting the shareholders decide not to accept the offer?
When the Government put Railtrack into administration, they said that they were not prepared to underwrite the company indefinitely or to offer a blank cheque. But we have heard today that they will underwrite it to the tune of £4 billion, but use a sleight of hand that filters the money through the Strategic Rail Authority. I join the noble Viscount, Lord Astor, in asking how that will be publicly scrutinised, especially by Parliament.
Privatisation occurred against a backdrop of an industry in decline. The industry was never set up to manage the kind of growth in passenger numbers already referred to. It is an often untold success story that 30 per cent more people than previously are using the railways. The new, improved SRA has been a major step forward and it is clear that the players in the industry are willing and able to work together now in a way that they have not been previously. That was clearly demonstrated in the way that the industry responded to the terrible events at Potters Bar.
But there are some difficult decisions to be made. Managing the balance of access to the track to grow the market and to maintain and enhance the network will need a clarity of purpose and a willingness to work together that we have not yet seen. Network Rail will be a key player in providing that. There is no merit in simply rebranding. The lessons of Consignia must loom large in our thinking. Clearly, removal of the profit element will remove one major difficulty that bedevilled Railtrack, but it is not the only one. How can the Government be so sure that Network Rail will not suffer the same management problems as Railtrack? How will the relationship between its operational board and its rainbow coalition of members brought together from the industry work in practice?
Finally, how does Network Rail know exactly what it is taking on? There is still no asset register, despite the work under way while Railtrack has been in administration, and Network Rail has said that it will take it another 18 months to provide such a register. Against that background, how can Network Rail be sure how much money it will need to invest?
It has been a difficult time for the industry, the passengers and the people who work for and own shares in Railtrack. Administration has been costly, costing about £1 million a day. It has led to a decrease in consumer and investor confidence. Let us hope that today's announcement marks a new chapter in the future of the railways.
§ 3.49 p.m.
§ Lord Macdonald of Tradeston
My Lords, in reply to the noble Viscount, Lord Astor, yes, I have ministerial responsibility for answering Questions in the House on transport matters. I shall be ably assisted in that by my estimable and noble friend Lord McIntosh.
The noble Viscount suggested that Railtrack was not in an extremely difficult position. He said that it was not insolvent. When Railtrack came to the 1515 Government, it asked for what was virtually a blank cheque, for the suspension of the regulatory regime for several years and for the Government to support its share price during that period. I am sad to say that it became increasingly clear that the company was not in proper control either of its asset base or of its costs. That was why the Government took the action that they did and created the not-for-dividend public interest company about which the noble Viscount inquired.
The noble Viscount asked whether there were models for the public interest company. It is certainly the first rail network operator to be based on the model of a public interest company limited by guarantee, but such structures have been tried and tested at corporate level. I shall venture the example of BUPA, the successful private healthcare insurance company. It is, perhaps, the best known company limited by guarantee in the UK. There is also the more recently established Glas Cymru water company, which recently announced impressive preliminary results for the past financial year. In creating the company, we will, as the noble Baroness said, see money that might have gone to shareholders—as, understandably, hundreds of millions of pounds have done—reinvested in the railway.
The company will be limited by guarantee. The noble Viscount asked about auditing. The company will be consolidated into the accounts of the SRA. The auditors for Railtrack will continue to audit the new company, until the opportunity arises for the board to make decisions about any changes, as any company would do. The letter of comfort from the Secretary of State would not be a guarantee, as the noble Viscount will be aware. A Secretary of State could not fetter his discretion on such matters, but I am pleased to report that the evidence from the financial markets suggests that the company has been able to put in place financial arrangements that will assure the £9 billion that I mentioned.
As I said, there will be between 100 and 120 members of the company. The membership will be appointed by an independent appointments committee set up by the board inherited from the present structure of Network Rail. That board will include an appointee from the Strategic Rail Authority and will run the company along the expected lines. There will be representatives not just of those active in the industry—the train operating companies, the freight operating companies and many other interests—but of the public in the regions of the United Kingdom and other interest groups.
The noble Viscount inquired about the special purpose vehicle. Discussions are going on between the Strategic Rail Authority and Network Rail. We believe that understandings will be put in place on how the larger projects will be taken forward.
The SRA's accounts, into which Network Rail's accounts will be consolidated, will be laid before Parliament. They will show transparently how Network Rail is accounted for through the SRA. That is one of the advantages of the new structure. Network 1516 Rail is a private company, but it will follow the SR.A's strategic plan, which is itself subject to parliamentary scrutiny. With regard to the European Commission's time-frame, we hope that decisions can be made in the near future—in the next month or two. We go forward confidently with that.
I am grateful to the noble Baroness, Lady Scott of Needham Market, for the general welcome that she gave to the plans announced today. That welcome was, I think, amplified in notices that have been issued by the Office of the Rail Regulator, the Railway Forum and, as one would anticipate, the Strategic Rail Authority. I am delighted that there has been such a positive reaction. It is a great credit to those working in the industry that there has not been the kind of paralysis that one might have feared, had events developed in another fashion. We have done our best, with the help of the industry, to manage through the crisis.
The noble Baroness asked about compensation. I must make it clear that the moneys being offered to Railtrack are designed to encourage early exit, because of the benefits that the public would gain from an early decision. That is why the Government have put in our moneys alongside those of Network Rail. It is not compensation for shareholders; it is a recognition that the earlier the exit can be, the more financial advantage there will be to the public and the public purse. I anticipate confidently that the shareholders will look to the board for guidance. The guidance from the board will be that the offer is in the best interests of the shareholders.
I do not accept that the underwriting of the company represents any kind of sleight of hand. The £4 billion that we are seeing the SRA put in place will, in fact, be a form of quasi equity. Because the company will be a not-for-dividend company of the public interest model, it is important that it should have the resilience to be able to borrow. The £4 billion will be long stop money.
The noble Baroness asked why we thought that Network Rail would not have the same management problems. For one thing, the membership is representative of all railway interests. It has been made clear by the train operating companies—in many ways, the most important of those interests—and others that they want a company with well founded experience of engineering practice. So the emphasis will be on building a company that is capable of maintaining, operating and renewing such a vast network. It must also be a company whose management's interests are closely aligned with the targets set on the public's behalf by the SRA. Its management will, transparently, be under scrutiny inside a company that includes 120 or so representatives of the public interest.
The noble Baroness is right to point to the continuing problems with the company. The asset register is not complete. That is one of the saddest aspects of the whole affair since privatisation, which clearly was rather ill founded inasmuch as a price was put on assets that were never properly quantified.
1517 Despite the recent efforts of the SRA and of Railtrack itself, we are still short of all the information that we need. That is why we have put in the financial support for the company in such strong measure.
§ 4 p.m.
§ Lord Marsh
My Lords, the noble Lord made the point that there is an implied guarantee here, as there must be at the end of the day by any government. However, I cannot help wondering why he is so optimistic about this one. Every financial restructuring of British Rail and similar railways around the world has always been under-estimated. As he rightly said, no government can place responsibilities upon their successor. All have finished up with the same conclusion—massive debts—and the only way of dealing with it by different governments has always been by cutting the investment programme. It is not like BUPA and I wonder why the noble Lord is so optimistic.
§ Lord Macdonald of Tradeston
My Lords, I listen with great respect to the noble Lord, Lord Marsh, given his long experience in industry, government and in particular the transport field. I accept the cautions that he states. Indeed, there were these recurring crises during the period when the railways were nationalised.
However, I do not accept that that is an inevitable cycle. I believe that with the structures we have put in place we probably have the enlightened self-interests around the board table of a kind which may not have been in place previously. I believe, too, based on the profound experience of decades of running a nationalised industry, but now, too, from the rather sad experience of the past six years of a privatised Railtrack, that there are lessons to be learned. If there is a criticism that I will readily accept, it is that we continued to be supportive of Railtrack perhaps beyond the point that it was cautious so to do. But we felt that we had to do everything in our power to make the system work and to give the management our support. Clearly, we came to this conclusion with some reluctance and sadness. However, having done so we decided to try to analyse and invest in full measure.
In terms of analysis, the noble Lord may concede that there is probably more of that now than in the past. The quality of it may be debated but we have analysed the problems very thoroughly. We have tried to create the framework for investment. We have now put in place short-term funding of around £10 billion. There will be about £7 billion for the so-called legacy problems inherited from Railtrack. As I said earlier, there will be the long-term support of the quasi-equity £4 billion which will persist over perhaps 50 years. Much of that is contingent liability. I would not expect much of it to be called. There will be a cap on the borrowings. But I believe that we now have a better sense of the scope of the problem and the moneys and policies in place to deal with it.
§ Lord Faulkner of Worcester
My Lords, does my noble friend agree that the principal reason that this is 1518 such an important and welcome Statement is because it is a very valuable step towards undoing the damage of the fragmentation of the railway caused since privatisation? Like the noble Lord, I wish that the step had been taken earlier, but the fact that it has been taken is extremely welcome today.
I endorse the point made by the noble Baroness about the way in which the industry is at last getting its act together. It demonstrated that after the Potters Bar accident. The welcome for the Statement from the rail regulator, the Strategic Rail Authority, the Railway Forum, passenger interest and others shows that there is broad support for the way in which the Government are now tackling this matter.
I ask specifically about the future of Mr John Armitt who addressed the all-party railways group earlier this week and impressed all the members of that group. Under his stewardship the number of delays attributed to Railtrack has now fallen from 50 per cent to 25 per cent and the record of signals passed at danger is now at its lowest level ever. I very much hope that Mr Armitt will be part of the future of the railway. I hope that my noble friend can give me some comfort on that.
§ Lord Macdonald of Tradeston
My Lords, I think that we would all agree, including noble Lords on the other side of the House, that there were defects in the way in which the railway industry was privatised. The conspicuous fragmentation of the industry would be one of the areas that we would hope the new structures would address. That would be true in the area of contracting and subcontracting to which Lord Cullen has drawn particular attention and on which I am sure the new management will begin to take action to remedy.
Like the noble Lord, Lord Faulkner, I was heartened by the way the industry pulled together after the tragic events at Potters Bar. I think, too, that the leadership shown by John Armitt in the short time he has been there will surely commend him to the new company if he is minded to stay with it. John Armitt comes with an engineering background of the kind I emphasised is so desirable and in need of strengthening inside Network Rail.
Like the noble Lord, I look at all the problems and sigh for all the difficulties and tragedies we have had in recent years. However, although bearing in mind the noble Lord's cautions, we now go ahead with cautious optimism.
My Lords, will the Minister amplify his reference to the European Union? In particular, will he give an assurance that no European taxpayer outside this country will be required to help to contribute towards the losses incurred entirely in this country?
§ Lord Macdonald of Tradeston
My Lords, we have money in Railtrack at present from the European Investment Bank. But we have notified the European Commission on 31st May of the proposed package of financial support for Network Rail. We are simply 1519 now seeking confirmation that that package is compatible with the Treaty of Rome. We have every confidence that it is.
§ Lord Maclennan of Rogart
My Lords, since this is not a company answerable to its shareholders, can the Minister be a little more explicit about the role and composition of the members to whom, presumably, the hoard is accountable? Can he say how the interests between the rail users and the operating rail companies are to he reflected in the membership? What guidelines are being given to this independent group which is to choose the members so that we can judge the extent to which normal corporate governance requirements are being satisfied'? Will it be decided that there will be independent auditing within the new company? Will there be, for example, remuneration committees which will have the job of reporting on those kinds of issues as well? It seems a somewhat circuitous process with the board nominating the members nominating the governing hoard. We need to know a good deal more about the rules which will he applied.
§ Lord Macdonald of Tradeston
My Lords, to restate, I understand that there will be between 100 and 120 members. There will be a board of the company which will transfer from Network Rail as presently constituted but will in time be populated by people who are nominated by the members. The Strategic Rail Authority will be guaranteed membership on that board and may well have special powers inside the articles of association. No doubt the details of the relationship still have to be worked out.
The sale and purchase agreement has only just been signed so it is still early days. The thinking is that train operating companies, freight operating companies or contracting companies—a range of private sector interests in the railway industry—will be represented. We would also look to other outside bodies: in particular to the Scottish Parliament, to the Welsh Assembly, the regional interests in England and the passenger interests. I am not able to give the noble Lord a quick run through of what the articles of association might say, but I believe that the structure will be more accountable, more representative and more transparent.
§ Lord Lea of Crondall
My Lords, does the Minister accept that many noble Lords strongly support this method of drawing a line under the present position for two reasons? First, the solution is robust; and, secondly, it is important that we return to a credible medium-term investment strategy for the industry.
Perhaps I may pick up the point made by the noble Lord, Lord Renton. Does my noble friend agree that essentially the European Investment Bank is a facilitator, a financial intermediary, for private sector investment in the international bond market, and that Britain, far from receiving a subsidy, does not receive its normal proportionate share of such international money? I believe that it is right to say that we receive less as a proportion of the EIB's investments, and have done over many years, than France, Germany, Italy or 1520 even Spain. A big challenge is spelt out in paragraph 20 of the Statement on the 10-year plan: £4.6 billion a year, which is £46 billion. Does my noble friend confirm that that is a challenge that has been taken up by the Government. The Statement says:the Government will, through the 10 Year Plan, increase the average annual investment".But that must be in co-operation with fund managers—in other words the City of London. Do the Government intend to avoid the position in which the City of London sits on the sidelines with power without responsibility? Do they also recognise that, if we are in this together, there must be understanding of the way in which the medium-term plan, with the £46 billion, is put forward so that it is recognised by the international and national financial community as a viable, credible, medium-term plan?
§ Lord Macdonald of Tradeston
My Lords, I defer to my noble friend Lord Lea in his knowledge of matters European. I have listened with great interest to the points that he makes about the European Investment Bank. On the general finances, I believe that the most encouraging aspect of this development is the positive response that we have received from the financial markets. I also believe that the 10-year plan remains a positive framework inside which investors can make their judgments. The willingness of the financial community to come forward to support Network Rail in the first tranche of money that has been raised, must give us encouragement for the future. We still have quite a way to go. We await the extraordinary general meeting at which, I trust, the shareholders will want to approve the sale and purchase agreement and the deals that have been put before them.
As the noble Viscount suggested earlier. @@there is still some way to go before we can see how to take forward the special purpose vehicle. That discussion will have to take place between the SRA and Network Rail management. When I previously had responsibility for transport, there appeared to be a great enthusiasm in the City of London to work alongside us on the large levels of investment that we have assumed under the 10-year plan. I hope that, once the markets have had an opportunity to digest what is on offer and in prospect today, they will continue to take a positive approach.
§ 4.15 p.m.
§ Viscount Goschen
My Lords, all noble Lords wish Network Rail well in undertaking the refurbishment of the infrastructure of the 1JK's railways. A number of issues have yet to be answered. The Minister drew attention to the fact that the fragmentation of the railways would be reduced by the introduction of the Network Rail structure. How is that so? One network operator, Railtrack, is being replaced by another network operator, Network Rail. Surely, by itself that announcement will not produce any reduction in fragmentation of the railways. Network Rail may well pursue different policies in the future in conjunction with the SRA. The fact that there is a new network operator makes no difference to the number of 1521 companies. Indeed, we have heard that major projects will be undertaken by the use of special purpose vehicles, which means more corporate entities and not fewer—so more fragmentation not less.
On corporate governance, I thought that the Minister said that the board would have a role in appointing a committee that, in turn, would appoint the members who, in turn, would exercise corporate governance over the board. That appears to be a rather circular structure. At a time when corporate governance is increasingly under the spotlight, particularly in the United States, surely great emphasis should be placed on reassuring investors, or those bodies that are to provide finance to Network Rail through debt, that proper corporate governance procedures are in place.
Thirdly, on whether or not Network Rail is a public company, I did not understand the Minister's argument about BUPA. Unlike BUPA, this body is the Government's own creation. It will undertake the Government's transport policy through the SRA and indeed it is underwritten by the Government. Why does that not make it a public company? The noble Lord drew comfort from the fact that the £4 billion underwritten by the SRA is quasi equity. Equity means ownership, so that implies that the SRA owns this company or at least a proportion of it. The SRA is a vehicle of the Government, so it must be a government company.
Perhaps the Minister will say why the Government are being so coy about public ownership of this body. If it were a public company, the Government would have fully nationalised Railtrack, and I understand that that word holds some powerful connotations for the Government. Had they nationalised it, they would have been able to borrow on the gilt market, the cheapest possible form of borrowing, to refurbish our rail infrastructure. I should be grateful if the Minister could give the cost difference between the Government borrowing the money straight on the gilt market in the conventional way and the new body borrowing money commercially. If he cannot answer that now, perhaps he could provide me with that information at a later date.
§ Lord Macdonald of Tradeston
My Lords, on fragmentation, the particular area of concern highlighted by Lord Cullen was that of the contractors and subcontractors. Across the industry I believe that it is now understood that there can be a degree of consolidation in the contracting regimes. Indeed, Railtrack had embarked on that course some time ago. I anticipate consolidation there. It is also possible that, following some previous declarations, the franchising process pursued by the Strategic Rail Authority would lead to a kind of consolidation and less fragmentation in train operation. I believe that the fragmentation can be reduced, but more importantly we need strong management and strong co-operation across the industry of the kind that has emerged in recent months.
1522 The noble Viscount, Lord Goschen, asked about the board committee. The company will be accountable to its members, but of course it will be accountable also to the independent regulator. It will have a network licence requiring it to be operated as though it were a stand-alone limited company. The board will eventually be elected by its members, although as I said, the Strategic Rail Authority will have membership of the board and retain special rights. The appointments committee will be independent and make its judgments independently when appointing the 100 to 120 members of the company. But it is difficult for me to describe in detail to your Lordships the articles of association of this nascent company.
The question of government borrowing is of such profound complexity that I am not sure that I can offer the noble Viscount a quick and ready answer. I shall see if I can come back with something to address his concerns.