Railtrack

HL Deb 25 March 2002 vol 633 cc64-75

6.40 p.m.

The Minister of State, Department for Transport, Local Government and the Regions (Lord Falconer of Thoroton)

My Lords, with the leave of the House, I shall now repeat a Statement being made in another place by my right honourable friend Stephen Byers. The Statement is as follows:

"I would like to make a Statement on the bid for Railtrack plc made today by Network Rail.

"As the House will be aware, Railtrack was taken into administration on 7th October as a result of a High Court Order. As Mr Justice Lightman said at the time: 'This is clearly a case where the making of a railway administration order is not only appropriate, but absolutely essential, and I shall therefore make that order immediately'. "The reason Railtrack was put into administration was that it was, or was likely to be, unable to pay its debts. But let us remember that it had failed to maintain the railway safely and properly. It had failed to gain a proper understanding of its assets. Hatfield and its aftermath demonstrated this. And it had failed to manage modernisation projects like the West Coast Main Line.

"Let us not forget that Railtrack was at the heart of the flawed and failed privatisation carried out by the Tories. The Government have always said that what we need is a successor to Railtrack that is focused on the public interest and on the needs of passengers.

"Railtrack has made some progress during administration under the management of John Armin. His appointment as chief executive has been widely welcomed in the industry.

"I agree with the Transport Select Committee which said: 'It is imperative that the process of administration be completed as soon as possible'. "Because of the difficulties in putting together a business plan and the limited knowledge this company has of its own assets, the administrator has indicated that there will be further delays in launching his competitive process.

"What we need is an end to administration so that the improvements we all want to see to the country's rail infrastructure can be delivered as soon as possible. There is therefore a value to the Government, the taxpayer and rail users in an earlier exit from administration. Network Rail's bid reflects this approach. Network Rail say that its proposal could if accepted take Railtrack plc out of administration as early as the end of July 2002.

"Network Rail is a company limited by guarantee. It will not have shareholders so it will not be paying out dividends. Unlike Railtrack, its operating surplus will be re-invested in the rail network. Its core focus will be the maintenance and renewal or Britain's railways. It will focus on the needs of the travelling public, not short-term profit for shareholders. It will be able to raise capital for investment more cheaply. A better deal all round for the travelling public.

"The Government have always said that Railtrack shareholders should get the value in the company to which they are entitled. Railtrack Group has assets that could be used to provide value for its shareholders. My understanding is that Railtrack Group has over £350 million in cash deposits and an interest as owner in section 1 of the Channel Tunnel rail link and some property interests.

"The Government have indicated that a grant of £300 million will be made available to reflect the benefits of an early exit from administration. If such an early exit is not achieved then the money will not be available.

"An earlier exit from administration, resulting in a more focused and efficient rail network operator, would lead to the quicker realisation of efficiency savings; it would reduce performance penalties; and it would allow 10-year plan projects to proceed more quickly.

"Network Rail's proposal, based on the concept of a company limited by guarantee, is designed to be more efficient than Railtrack, with lower financing costs and no dividends to pay. That is why the Government are prepared to make this payment.

"For the Government it will be self-financing from savings that will be made. It therefore follows that if there is not an early exit then the savings will not be made and in such circumstances the £300 million will not be available.

"Since Railtrack was taken into administration the Government have said that every single penny of taxpayers' money must be used to improve the rail network. That is exactly what this grant of £300 million will do. It will benefit the travelling public. That has to be our top priority.

"The administrator has said that he is actively reviewing Network Rail's proposal in the context of administration. If the bid were successful, it would enable a company limited by guarantee to become the successor to Railtrack. As the House will know, the Government have said all along that they view a company limited by guarantee as an attractive successor body.

"Network Rail is committed to engineering excellence. Its bid has the potential to bring the rail industry together and overcome the fragmentation that has all too often characterised it in the past.

"It is now for the administrator to decide how he should conduct the process in the light of today's bid. He has confirmed that he will treat any further proposals that might be made on their merits. Getting Railtrack out of administration must be done on the basis that it will produce a viable, financially sound company, one that takes a longterm perspective and that puts the emphasis first and foremost on operating a safe, efficient and reliable rail network.

"Taking action on Railtrack has been criticised by some, including the Tories. But today's developments demonstrate what can be achieved: a railway system that is united and not fragmented: a railway industry with a shared strategic vision; a railway industry that values its employees and will invest in them; and a railway network provider that will answer to the millions of passengers and not to private shareholders. This is all now possible as we lay to rest Railtrack and develop a railway system for the future".

My Lords, that concludes the Statement.

6.46 p.m.

Baroness Hanham

My Lords, perhaps I may thank the Minister for reading the Secretary of State's Statement to the House and commiserate with him for having to do so. I understand why he read it with some speed, for this is nothing short of the U-turn of all U-turns. It must be quite embarrassing for the Minister to have to be associated with it. Far more, it is a real affront to the intelligence of Parliament, to the investors in Railtrack and to the British public As the Secretary of State knows, there were, and remain, serious concerns about the actions he took to put Railtrack into administration, the subsequent cost to the taxpayer—which looks now like amounting to far more than if Railtrack had been given the money for which it was asking—and the effect on the shareholders, which was dismissed at the time as being of no relevance.

It is six months since the Secretary of State impetuously pulled the rug on Railtrack, plunging the administration of the rail service and the viability of the company into uncharted waters, the individual shareholders who had invested for their pensions into potential penury, and the large investment companies into apoplectic disbelief.

Now we have a brief statement extolling the virtues of bringing the administration to an end by accepting a bid from Network Rail which is a company limited by guarantee. One of the reasons given for pushing ahead at this stage to finalise the successor to Railtrack—the company limited by guarantee—is that it will bring the costly administration to an end at an earlier stage.

Those costs are running at about £1 million a day. So if that were to be the case it would be welcome. But no one but the Secretary of State seems to think that there is the least likelihood of achieving that before the middle of 2003, whatever measures are adopted. So will the Minister give an indication of how much more expenditure he believes that the taxpayer will have to provide before this part of this sorry mess is resolved?

The company limited by guarantee—a creature previously unknown in major projects—has no shareholders. The Secretary of State has pushed it forward as the appropriate vehicle for dealing with the dilemma that he has created for himself, ignoring the fact that other consortiums were positioning themselves to bid which might provide more favourable terms.

The Minister has said that the administrator has said that there will be further delays to launching the competitive process. So will the Minister indicate whether this process is still to be followed at some unspecified time, when other bids will be judged against Network Rail? Or is the reality of the situation that this is to be a single tender to get the Secretary of State off the hook and that there will be no other options considered as to the most effective economic and administrative structure? In any other public authority this would be against standing orders and against financial instructions.

The Secretary of State has also made a feature of the fact that this company will have no shareholders. On whom will the company fall back if there are any further financial problems—the taxpayer?

Will the Minister also advise us as to whether or not the Government will be seeking representation on the board of Network Rail or any other CLG to protect their investment in both the Strategic Rail Authority and the train operators to whom they provide heavy subsidies? Will the Minister say how, without shareholders, the board of the company can be held to account? Is he satisfied that the Secretary of State has no conflict of interest since he employs the administrators, he is bidding for a company offered for sale by the administrators, and he is providing public funds to support Railtrack's successor? In all this the Secretary of State leaves many more questions unanswered than answered. I hope that the Minister will be able to help us.

I turn now to the benighted shareholders. So far, having barely had any truck with their problems, now in his Statement the Secretary of State says that the Government's position has always been that shareholders should get the value in the company to which they are entitled. But that hardly fits with his statement to shareholders quoted in the independent on 21st November that, There is no question of using taxpayers' money to compensate the shareholders for what was basically a bad investment". The Secretary of State has gone from dismissing shareholders' claims as hardly justifying more consideration than their valueless share certificates, to an admission that they have to be recompensed and by the taxpayer.

Whether the proposed pay-off which amounts to a share value of £2.50, which is 30 pence below their value at the time the Secretary of State pulled the plug, will be sufficient is obviously yet to be decided by their representatives and legal advisers. But presumably the Government have a fall-back position if the shareholders do not accept this offer. It is certain, however, that the threat of legal action, as well as to future investment by the City in PPP, has finally convinced, if not the Secretary of State, then the Prime Minister, that more than the railways is at stake here.

The Secretary of State has now promised the shareholders £1.3 billion, but has fudged the Government's responsibilities for this whole sorry mess by leaving it to the new company limited by guarantee to raise that amount—£300 million from government sources— that is to say, to be taken from the £65 billion promised to the Strategic Rail Authority for the 10-year plan so recently discussed in this House. Perhaps the Minister will say whether that £300 million is to be available only to Network Rail or will it be made available if at any stage any other company is considered as a bidder? There is to be £200 million from the City and £90 million from the sale of assets which include, apparently, the yet unfinished Channel Tunnel rail link.

It is to be hoped that all this money is actually available and will not involve the company in additional borrowing in order to fund the shareholders' compensation. This whole saga is indeed a sorry tale and I doubt we have heard the last of it.

6.54 p.m.

Lord Bradshaw

My Lords, I join in thanking the Minister for making the Statement. However, I start from the position that we are here because the railways were privatised and that responsibility for the whole sorry shambles which has gone on since must be laid at the doors of the people who supported it and the method of privatisation.

Am I right in saying that the costs of administration are being borne by the shareholders and not the Government? I believe that to be the case. It is quite important. What are we paying £300 million for? I am talking about "us", the public. Is it going to the shareholders? It is not going to buy a single new sleeper, piece of rail or anything we might want. Is it just for buying off the shareholders from pursuing a law suit, which I do not believe they would win? I believe, like the shareholders of Marconi, that people who invest in something which is not viable deserve to lose their money. I have no sympathy with them. I have sympathy with people in Railtrack who may have been paid in shares, but I do not have sympathy with people who gambled on the Stock Exchange and lost.

Will it make Railtrack plc more efficient in the discharge of its functions? It is nothing to do with making the railways more united, I believe the Minister said. That is the job of the Strategic Rail Authority. It has nothing to do with giving the railways a shared strategic vision. That is the job of the Strategic Rail Authority. I do not believe it has anything to do with what we have heard today.

I believe that it might be more to do with cosying up to certain money men in the City. I was told very authoritatively last week by someone who is extremely well known as a company director—I must not say who he was—that money is available to support good schemes on the railways. That is private money in the City and he has a lot of it. So any suggestion that there is not the money for schemes is also wrong. We should not listen to a few fund managers in the City who whine and write letters to The Times. They do not represent the whole of the investing public.

I am not saying—I do not believe we ever have—that the Government are wrong, because we do not have the facts. They are not in the public domain. But we are very suspicious that this is the same story that we were told about the Underground. What we are trying to do is make PH deals and SPV deals risk-free, which they ought not to be because someone ought to carry some risk in such matters. One pays substantially more for money that way than by funding it through bonds or from ordinary public funds. It is a great deal cheaper than many of the fancy ways of getting money which are favoured by the Minister's friend, the Chancellor of the Exchequer, but which I believe are not favoured by everybody.

Finally—and I mean this very seriously—can we have an assurance from the Minister that whatever shenanigans are going on between Mr Byers, Mr Brown, the Treasury and these companies, the money is being made available on a day-to-day basis to keep the railways safe for passengers to use—after all, we run them for the passengers and not the shareholders—and that the necessary money is available for the modernisation schemes which have to carry on? We cannot just stop the railways for years while this awful mess is sorted out.

6.59 p.m.

Lord Falconer of Thoroton

My Lords. I shall deal first with the points raised by the noble Baroness, Lady Hanham. Her first question was what expense was being saved. What is made clear in the Statement is that if there is early exit from administration, that will have the effect of allowing the railways to go forward. There will be efficiency savings in that regard. It will enable the railways to focus on their core business. I believe that every sensible person will agree that the quicker administration comes to an end the better. The view taken, as my right honourable friend said in another place, by the Transport Select Committee is that it is imperative that the process of administration is completed as soon as possible. I think that everyone recognises that there will be savings if the process comes to an end as quickly as possible. Making available the £300 million acknowledges that; it seems to us a sensible course. Our concern in all of this must be the travelling public.

The next question asked by the noble Baroness was whether the competitive procedure is still to be followed or whether it is to be "a single tender", in breach, as she would put it, of all organisations' standards of order. It is a matter for the administrators to decide what is now the right course in the light of the approach that has been made. They must judge what is the right course.

The noble Baroness said that there would be no shareholders on whom to fall back. As she knows, where a company is limited by guarantee, it has guarantors instead of shareholders. Of course, shareholders in Railtrack were not going to come forward with the additional money required, so there is a parallel between guarantors and shareholders.

Baroness Hanham

My Lords, who are the guarantors?

Lord Falconer of Thoroton

My Lords, as was made clear at the outset, the guarantors will be a range of people representing the whole industry. In answer to her next question—will the Government be seeking representation on the board?—the SRA will be represented on the board. Her next question was: am I satisfied that there is no conflict of interest? She will recall that when the CLG bid was being put together, responsibility for it was placed in the hands of the SRA. Mr Ian McAllister, former chairman of Ford Great Britain, was put in charge of running that bid. The CLG bid is therefore coming from a non-departmental public body separate from the Department for Transport, Local Government and the Regions.

The noble Baroness next asked: will the money come from the £65 billion? As has been made clear throughout, the sum is self-financing because of the savings made by an early exit from administration. Will the money be available to any other bidder? The principle underlying the £300 million is that it is a sum for an early exit from administration, so if another bidder put forward a proposal that led to an early exit from administration—obviously, subject to negotiation and agreement—some sum for early exit from administration would be available.

I think that that deals with all of the questions asked by the noble Baroness. The noble Lord, Lord Bradshaw, asked whether the cost of administration is being borne by the shareholders. Currently, the cost of administration is being borne by the company itself, not by the shareholders—as is normal. What are we buying for the £300 million? We are buying an early exit from administration. As is made clear in the Statement, if there is no early exit from administration, the £300 million will not be available. Is the money to bring an end to the lawsuit? We seek by the £300 million payment without much further ado—although obviously there will be some further ado and we cannot get out of administration before July—to bring to an end what is plainly a transitional process from where we were before administration to the permanent future for the railways.

I am sure that the noble Lord, Lord Bradshaw, would be the first to agree that what we really want is a permanent and settled future for the railways. The quicker that we get out of administration, the better. I think that the last question with which I am in a position to deal is: who is taking the risk? The risk will obviously be taken by the CLG, in the context of the arrangement set up if it is the successful bidder.

Baroness Hanham

My Lords, may I ask the Minister about the implications of what he said about the single tender bid? Did he say that Network Rail is being accepted as a single tender bidder without considering whether any other company provides a better offer, a better bid or a better outcome, and that at present the only justification for choosing Network Rail is that it may be able to get out of administration by July 2002?

Lord Falconer of Thoroton

No, my Lords, that is not what I said. Network Rail is making a bid. That bid includes £300 million by way of grant provided by the Government, which is a payment for early exit from administration. It is now for the administrator to consider the bid.

7.6 p.m.

Lord Faulkner of Worcester

My Lords, can my noble and learned friend confirm that the Government are not by this announcement creating value that did not exist before, and that the payment of £300 million reflects not compensation to shareholders but an assessment to the value of the travelling public of taking the company out of administration much more quickly than would otherwise be the case? Is he aware that most people concerned with the industry will welcome today's Statement, and that they certainly believe that the decision to put Railtrack into administration in the first place was entirely justified? After Hatfield, it was a company that was clearly insolvent. It had demonstrated that it was incapable of managing its costs; it was incapable of producing a register of its assets; and it treated its customers in a scandalous and disgraceful manner. Administration was the only alternative way to deal with it.

Is my noble and learned friend further aware that there is immense goodwill towards Mr John Armitt and the fresh start that he has already made at Railtrack, and that there are already some signs that the company's performance is improving?

Lord Falconer of Thoroton

Yes, my Lords, I agree that that payment is not creating any new value for the shareholders, it represents the value of an early exit from administration. I agree that most people engaged in the industry regard the appointment of the administrators as the right course. I agree that most people in the industry will welcome today's announcement because it may bring closer the end of administration. I further agree with the proposition that the input of Mr John Armitt, the chief executive of Railtrack, has been beneficial to Railtrack, and that there are already some signs of improvement in Railtrack's performance.

Lord Boardman

My Lords, the noble and learned Lord said that there would be no shareholders in Network Rail. Presumably, the capital is being formed by guaranteed share capital on the one hand and loans and grants on the other. To what extent are the Government providing assurance, cross-guarantees or letters of comfort in respect of the capital required by Network Rail to carry out this operation and to run the railways afterwards? He suggested in his Statement that no government liability will remain. Is that so?

Lord Falconer of Thoroton

My Lords, everyone accepts that government grants will have to be provided to keep the rail network going. No one doubts that. Network Rail's bid, just like any other, must reflect that basic fact.

Lord Berkeley

My Lords, the Government have given—offered, I should say—the Railtrack shareholders a jolly good deal today. I declare an interest as chairman of a rail freight group. As the noble Lord, Lord Bradshaw, said, they do not deserve anything much. However, since, as my noble and learned friend said, there is no asset register, there is not much that we can do.

One significant factor that my noble and learned friend did not mention is the approach that the CLG is taking to the management of Railtrack and how it intends to get away from its arrogant approach to a much more inclusive partnership approach, which will bring great benefits to the railways and stop all the confrontation that has been going on for years.

In the Statement, my noble and learned friend mentioned an early exit and that anyone whose bid was successful and who achieved the early exit would receive the £300 million prize. How early is early?

What is the timetable for the administrator to receive other bids, if necessary, and complete the process? He mentioned July, but is that the final date?

Lord Falconer of Thoroton

My Lords, on the initial part of my noble friend's question, the partnership approach is most important. One benefit of a company limited by guarantee is that the guarantors can represent a wide range of stakeholders engaged in running or being a customer or financier of the rail industry. We think that incredibly important.

I must make clear that the availability of £300 million to anybody who offers the early exit depends on precisely what early exit is offered by any bidder. It would not necessarily be £300 million; it would depend on the terms of the early exit. Network Rail says that its proposal, if accepted, could take Railtrack plc out of administration as early as the end of July 2002. However, it is for the administrators to consider whether that is deliverable.

Lord King of Bridgwater

My Lords, is it not clear that this is a sensible move? It should remove the chance of a court action that would involve the Secretary of State having to give evidence under oath, which would have been highly embarrassing for him but would not have helped the railways one bit. Nobody is in much doubt that the Secretary of State's role in the affair has been less than glorious. It is better to get on with dealing with things that might be of benefit to the railways.

I find the endless harking back to rail privatisation nauseating. Any system can be made to work if we get the right management to run it. The most discouraging feature of the Government's role is that they have sat for five years criticising the system while doing nothing to improve it and make it work. After five years of what amounts to total negligence, the Government cannot say, with hindsight, that everybody knew that it was a disaster. Why did not they do something about it?

The noble Lord, Lord Bradshaw, implied that the City was full of money and was happy to invest in all sorts of schemes. The House knows that the City will not do so, without some real guarantees, letters of comfort or assurances. I understand that Network Rail's proposals would require the borrowing of £9,000 million. How will that be guaranteed? What assurances will be given? People will not lend their money—our pension funds—unless they have a guarantee.

Lord Falconer of Thoroton

My Lords, that was a series of profoundly unfair remarks from the noble Lord. First, we spent five years trying to make the privatisation work. Eventually, in October 2002, in the terms that were set out by Mr Justice Lightman, Railtrack was put into administration. It was made clear, when we took office in 1997, that we thought that the right course was to try to make it work. Ultimately, it could not be made to work. The right course now is to look forward and try to find a proper future for the organisation of the railways.

I think that the noble Lord was saying that it was sensible to get Railtrack out of administration as quickly as possible. He did not say that, but I think that that is what he meant. We agree with that proposition, and we think that the details of the bid that has been announced today bring that outcome closer.

The Earl of Mar and Kellie

My Lords, can the Minister assure the House that the company limited by guarantee will have enough money to run the railway system safely and develop it?

Lord Falconer of Thoroton

My Lords, it is for the administrator and then the Secretary of State to make a judgment about the new arrangements. Of course, in forming their views, they will focus on safety, efficiency and a good service to the travelling public.

Lord Northbrook

My Lords, I declare an interest as a fund manager—not a holder—of Railtrack shares. Does the Minister agree that the Government, in baling out the shareholders—having realised that they could not have won the case brought against them by City fund managers—have, in effect, admitted that Railtrack was put into administration wrongly? if he does not, why not?

Lord Falconer of Thoroton

My Lords, I do not accept that. The £300 million has been made available in order to bring an early end to the administration.

Lord Hylton

My Lords, the Statement refers to raising capital for investment more cheaply. Further on, there is reference to lower financing costs. Can the Minister explain how that will come about, without substantial government guarantees or letters of comfort, as appears to be happening already in the case of the London Tube consortia? If that is what we are to be faced with in public private partnerships, they will not have succeeded in transferring any significant burden of risk from public to private shoulders.

Lord Falconer of Thoroton

My Lords, a company limited by guarantee will not pay out dividends; it will be for the market to judge whether it is prepared to advance funds to it. That, in turn, will depend upon the reliability of repayment, and the market will make its judgment on that. Depending on the arrangement, it will see that it is a perfectly safe investment.

Lord Shutt of Greetland

My Lords, I have a couple of questions for the Minister. It always struck me that the value of Railtrack was what it was worth in the markets on rug-pulling day. The offer that has now been put up is worth about 90 per cent of that price. However, there is also the rump Railtrack. I would be interested to know what the Minister thinks the value of that 90 per cent plus the rump Railtrack might be. It may well be that it is higher than the value on rug-pulling day.

In the Statement, the Minister said that there would be less fragmentation. It seems to me that there will now be one more player. There will be Network Rail, but there will also still be rump Railtrack. Will not that mean that, even after all this, there will be more fragmentation in the railway industry?

Lord Falconer of Thoroton

My Lords, the first question was about the value of rump Railtrack on rug-pulling day, as the noble Lord put it. I would not achieve much by speculating about that. The £300 million that we have spoken about today is the value of an early exit from administration.

The second question was about how it prevents fragmentation to have both Network Rail and rump Railtrack. The answer is that Network Rail seeks to deal with fragmentation by bringing all the players together through the company limited by guarantee so that there is substantial partnership in the running of the railways. That principle is not undermined by the existence of rump Railtrack, whatever that means in precise legal terms.