Railtrack

Part of the debate – in the House of Lords at 6:09 pm on 15 October 2001.

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Photo of Lord Falconer of Thoroton Lord Falconer of Thoroton Minister of State (Housing and Planning), Department for Transport, Local Government and the Regions, Minister of State (Department of Transport, Local Government and Regions) (Housing & Planning) 6:09, 15 October 2001

With the leave of the House, I shall repeat a Statement made in another place by my honourable friend the Secretary of State for Transport, Local Government and the Regions:

"With permission, Mr Speaker, I wish to make a Statement concerning Railtrack: to describe to the House the worsening financial crisis facing Railtrack which led the Government to petition for railway administration on 7th October; and to outline the further measures that we intend to take to put the interests of the travelling public first.

"The House will be aware of the history of Railtrack. When the railway industry was restructured following the 1993 Railways Act, Railtrack was created.

"It was in 1996 that Railtrack was privatised. Railtrack was the only publicly floated utility subsidised by the Government, this subsidy making up the majority, in fact some two-thirds, of its revenue.

"After the Hatfield train crash, the whole network was urgently reviewed and fundamental safety issues addressed. This added significantly to costs, with Railtrack claiming it needed an additional £700 million a year to put the track into a proper condition.

"On 2nd April 2001, Railtrack asked for help because of pressing financial difficulties. We brought forward £1.5 billion of investment from the period beyond 2006 to the five-year period beginning on 1st April 2001. The first instalment of £337 million was paid on 1st October 2001. However in May, June and July, the company's position apparently deteriorated.

"Finally, on 25th July at a meeting in my office the chairman said that the position was far worse than it was thought in April. It was clear that unless extra financial assistance was provided, on 8th November when Railtrack was due to give its interim results, it would be unable to make the critical statement that "it was a going concern". The effect of this would have been disastrous. Immediately I ordered intensive discussions with Railtrack.

"In August, Railtrack's advisers came back to the department and said that there were only three options: restructuring; renationalisation; or, as they described it, receivership. So it was Railtrack's advisers who first raised the possibility of insolvency if no additional government funding was available.

"I asked my officials to investigate the restructuring option, which involved the provision of yet more funding to Railtrack. Railtrack asked for government funding to cover all its costs, plus a profit, plus a four-year suspension of the regulatory system. That was Railtrack's proposal.

"Given the company's demands, we also began to prepare for the possibility that we might feel unable to provide additional funding and that, as a consequence, Railtrack would prove to be insolvent.

"To protect the interests of passengers it was clearly right to explore the need for railway administration on a contingency basis. As a result, preliminary contact was made with Ernst & Young on 23rd August.

"There were further negotiations and various modified proposals. But it was becoming obvious that the company could not continue unless we offered to fund whatever losses it might have for a period of several years. I took the view that I simply could not responsibly enter into such a guarantee on behalf of the British taxpayer.

"We carried on discussions until 3rd October, but no way out of the dilemma could be found. Either we gave the guarantee on money or the company became insolvent.

"On Friday 5th October, I reviewed all the relevant papers and considered all the options, including Railtrack's proposed rescue package and the additional funding that would be required. Railtrack's proposals were cast in such a way that it was hard to be sure the precise sum it was seeking, but it was effectively an open-ended funding request on the Government.

"I decided that I could not give Railtrack a blank cheque. I informed John Robinson, the chairman of Railtrack, on Friday afternoon of this decision and of my intention to petition the High Court for a railway administration order if the company was insolvent. This order was granted on 7th October.

"Railtrack was taken into administration because it was, or was likely to become, unable to pay its debts. Our petition to the High Court showed that there would be a deficit of £700 million by 8th December, rising to £1.7 billion by the end of March next year.

"In granting the order, Mr Justice Lightman said:

"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".

"Much has been made in the press of the position of shareholders. At the time of the April agreement the Government felt that we should make clear that the role of government should be to support the railway network, but that we should not be seen as acting as guarantor of individual companies or their shareholders. We therefore agreed with Railtrack a statement of principles. The first point in the statement reads as follows:

"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 this had a wide circulation in the City it was sent out through the Stock Exchange News Service.

"The directors of Railtrack have said that they want £3.60 a share. On our calculations that would require the transfer of up to £1.5 billion of new money from the taxpayer to Railtrack shareholders. We believe that it would be wrong to make new money available. We will not do it.

"In the light of the administration of Railtrack, we believe that we should now consider reshaping the structure of the industry in a way which recognises that the needs of the travelling public must come first. We shall be proposing to the administrator that a private company limited by guarantee be established to take over Railtrack's responsibilities. Any operating surplus it makes would be reinvested in the railway network. Such a company would have the needs of the travelling public and other users as its priority. With no shareholders we would remove the conflict between the need to increase shareholder value and the interests of rail passengers.

"The company we propose would have responsibility for operations, maintenance and renewals. It would have a small professional board of executive and non-executive directors. Performance targets would be set linked to levels of service, safety and value for money. It would have a board working on commercial lines but focused solely on delivering a safe, well-maintained rail network that is fit for the 21st century.

"The company would be able to promote collaboration and co-operation around the wheel and track interface, the absence of which has been one of Railtrack's weaknesses.

"A private company limited by guarantee would need far less intensive regulation. We therefore intend to streamline the existing structure while still recognising that there will be a continued need for some form of independent economic regulation.

"We shall discuss our proposals with the industry's key players, but we are clear that it is important for the new structure to provide the following: strong strategic leadership; a cut in the burden of day-to-day interference; an end to the self-defeating system of penalties and compensation; clearer accountability; and an end to perverse incentives.

"The new company we will be proposing would be able to raise funds in the market. Private sector funding would operate in partnership with government to deliver the 10-year plan objectives for rail. Under our proposals, we intend to offer all existing lenders to Railtrack plc the opportunity to transfer over to the new company with no loss of principal or interest. Any debt transferred to the new company will be financially sound and have, at the time of transfer, good long-term and short-term credit ratings.

"Mr Speaker, there are many talented and motivated people working in Railtrack. They have worked with dedication, in particular over the past seven days, and I want to thank them for that. I know that they and the rest of the industry want to see an improved railway system. I believe that with the demise of Railtrack that is what they will get. The Government are committing some £30 billion to the network over the next 10 years.

"The administration of Railtrack provides us with a golden opportunity to create a railway system which is united and not fragmented; a railway industry with a shared strategic vision; a railway industry which can respond to the needs of our time; and a railway network provider that answers to the millions of passengers and not private shareholders. Our decisive action makes all this possible and I commend it to the House".

My Lords, that concludes the Statement.