2001-02-15 Statement by the Deputy Prime Minister in response to Railtrack's increase in cost estimates for the upgrade of the East Cost Main Line (Department of Transport, Local Government and the Regions)

2001-02-14 Railtrack cost increase forces East Coast Main Line review (Strategic Rail Authority)

_______________________________________________________________

date 2 April 2001
source Railtrack plc
type Press release

o £1.5 billion accelerated funding settlement

o Statement of principles agreed with Her Majesty's Government

o New partnership arrangements with the SRA

o CTRL Sections 1 and 2 finalised

o Railtrack trading update

Funding Settlement

Railtrack announces agreement with the Strategic Rail Authority (SRA) and the
Government (HMG) for the securing of £1.5 billion of funding: £1.3bn to
support the core business and £0.2bn to support project development. In
addition the Company will be insulated from freight charging changes.

The acceleration of this income, deferred in the original regulatory
determination beyond 2006, will provide a stable financial basis for the
Company and will ensure that a credit rating within the A category is
maintained. The satisfactory resolution of this issue means that Railtrack
need not now approach the Regulator for an interim review of its
financeability.

Statement of Principles with Her Majesty's Government

As part of this agreement the Company has agreed a statement of principles
with the Government, which endorses Railtrack's role as the national
infrastructure operator. These undertakings recognise Railtrack's unique role
as a Public Company, which provides an important public service attracting
significant public funding. Against this background the Board has agreed to
appoint, after consultation with Government, a non-executive Director (NED) to
its main Board with the background and credentials to provide a powerful
public and consumer interest voice around the boardroom table. The nominee
will be selected by the Board and will have obligations identical to other
NEDs.

In addition the Company has signalled its intention not to pay any exceptional
or special dividends to shareholders over the next five years. The rate of
growth in dividends paid up from Railtrack PLC, the regulated entity, will not
exceed earnings growth. Railtrack has also agreed, subject to market
conditions and shareholder approval, to raise £250 million of preferred equity
by 31 March 2002 for the benefit of Railtrack PLC.

A detailed statement of the principles, agreed between HMG and Railtrack, are
attached as appendix one.

SRA / Railtrack partnership

In addition Railtrack has reached agreement on a framework for a more clearly
defined partnership with the SRA. As previously announced by the Railtrack
Board, the total number and aggregate cost of proposed railway enhancement
projects is too much for any one company. A more participative approach to
future enhancements is therefore required (a list of Railtrack's current
projects is attached in appendix two). Railtrack will continue to have an
essential ongoing involvement in all major upgrades as the network integrator.
The degree of involvement by Railtrack in terms of managerial and financial
control and the allocation of risk will differ on a project-by-project basis.

Railtrack has agreed to work with the SRA to establish a competitive
procurement process for future large projects. This new approach will be
reflected in part 2 of Railtrack's network management statement, which will be
published in autumn 2001.

Channel Tunnel Rail Link - Section2

Railtrack welcomes the agreement with Government, announced today, to proceed
with phase 2 of the Channel Tunnel Rail Link (CTRL 2) without the need for
Railtrack to exercise its purchase option. This option will cease, by mutual
agreement, and the project will be built by Bechtel and London and Continental
Railways with Railtrack providing a range of railway services on a cost plus
fixed fee basis. In addition Railtrack will be paid a performance-related fee
for operating the completed railway. This is an example of the more
participative approach that the Railtrack Board and the SRA has been
advocating for future enhancements and will restrict the Company's overall
exposure to construction risk while it continues to deliver its existing
projects.

Commenting on the successful outcome to the discussions Chief Executive Steve
Marshall said:

'I am pleased that we have secured the cash, which the Regulator had said we
need to maintain the existing network. Our long-term role as the national
infrastructure owner and operator has been fully endorsed by the Government.
The challenge now is to deliver the improved services that our customers and
the travelling public expect.

' Railtrack has an enormous programme of major projects - we are not being
stripped of enhancements. The investment burden and construction risk of all
the further enhancement demanded is too large for any one company. A flexible
approach must be right.'

Business Developments

In addition to resolving the Company's funding issues, over the final quarter
of the financial year the focus has been on:

o putting customers and engineering skills at the top of our agenda

o delivering the National Recovery Programme

o completing a detailed review of the business to 'flush out' and
address legacy issues

o beginning to develop the business plan and future strategy



National Recovery Programme

On the 18th January Railtrack published plans for each train company, which
showed that it had been necessary to impose over 1,000 speed restrictions to
deal with gauge corner cracking post Hatfield. Railtrack has delivered
against its commitments with over 400 miles of track already re-railed against
the 450 planned, 710 sets of points replaced and 800 speed restrictions now
lifted. The Company is on target to return well over 90% of services to
normal timetable by Easter.

Since January our extensive programme of track inspection has found some 218
additional gauge corner cracking sites where it has been necessary and prudent
to impose a speed restriction to ensure safety. We are striving to remove as
many of these as quickly and safely as possible ahead of Easter. However it
does mean that some services will not return to normal until 21 May, as
outlined in our updated plan that we presented to the Regulator and our
customers on 12 March.

We are aware that a number of train and freight operators have indicated that
they are not satisfied with the level of compensation paid, and some have
suggested that legal action may follow. Having sought further legal advice,
Railtrack remains of the view that its obligations have been met in full.

Business Review

The Operating Railway

Increasing inspection activity arising from the National Recovery Programme
and recent adverse weather conditions have shown the variable quality of the
existing infrastructure, and the need for a greater amount of future
investment than the Company had previously recognised. Decades of under
investment pre-dating privatisation, increasing traffic since privatisation
and the nature of the maintenance contracts put in place at privatisation have
all contributed to this. The exceptional weather has also caused deterioration
with landslips and flooding. The need to invest in stabilising embankments,
for example, is estimated to exceed the level previously predicted by some £
250m over the next 5 years.

The immediate consequences are poorer train performance and increased future
maintenance and renewals costs. Railtrack is committed to improving the
reliability of the network. However it will be a significant challenge to
return performance to pre Hatfield levels and performance regime payments are
likely to total £400 million to £500 million over the five-year period
commencing 1 April 2001.

An increased focus on engineering and a wide-ranging review of our maintenance
and renewal delivery processes is well underway. New 'IMC 2000' contracts
have been let, incorporating changes to enable Railtrack to better control the
work on the network. The cost of improving the reliability of the
infrastructure will be higher than previously expected, although some of this
will be addressed as part of the 2002 interim ORR review of ongoing costs
arising from Hatfield.

Major Projects

The Company has undertaken a detailed review of its major projects as detailed
below:

West Coast Route Modernisation

Phase one of the programme is progressing well, with construction 56%
complete. Delivery of phase one is scheduled for October 2002. A detailed cost
review of the total programme including phase two which is still in reasonably
early stages of development, has resulted in projected project costs
increasing by £500 million to £6.3 billion. This increase represents £200
million additional scope (e.g. bi-directional signalling now required in
certain locations) and £300 million additional TOC compensation. In addition
there are a number of significant outstanding commercial issues, which will be
addressed in discussion with our customers and the SRA over the coming months.

Channel Tunnel Phase 1

The project is progressing to budget and is now 60% complete. The agreement
with Government on CTRL2, announced today, will enable Railtrack to put in
place a structured project financing for phase 1 of the project to assist in
the funding of the £1.7 billion acquisition of Section 1. We are anticipating
that the equity return on the £400 million to £450 million equity component of
the acquisition should be in the order of 9 - 10% real.

Thameslink 2000

Railtrack and the SRA are both committed to this strategically important
project. Implementation timescales have slipped due to delays in the planning
process although this is drawing to a close shortly. In the meantime, work is
progressing and a joint procurement review will also be undertaken with the
SRA during the balance of the year.

Cross Country Route Modernisation

A supplemental track access agreement was signed with Virgin trains at the
beginning of March for the Cross Country Route Modernisation. The total
project is estimated to cost around £200 million, including £98 million of
track renewals, and completion is scheduled for summer 2003.

While it is disappointing that there have been further cost increases,
particularly on the West Coast project, there have been some significant
successes on the delivery side and many lessons have been learned. The review
has shown again the danger of early contractual commitments and Railtrack will
not make commitments on this basis in future. The recent presentation of costs
to the SRA on the East Coast Main Line was an example of how the Company's
approach has now changed to ensure that increasing costs are identified before
commitment as a result of thorough feasibility and planning work. This is in
line with the ORR's current enhancement framework.

Business Performance

As previously announced, after taking into account an exceptional item
totalling some £600 million, Railtrack will report a substantial loss in the
financial year ended 31 March 2001. Reported trading results have continued to
be impacted by generally poor train performance (£5m further deterioration
excluding the effects of gauge corner cracking) and additional costs in other
areas.

Financial performance in the year ended March 2002 will be impacted by poor
train performance, compounded by the more onerous performance regime,
increased costs of maintenance and renewal activities and higher project
costs. In addition it is unlikely that any efficiencies will be achievable in
the first year of the new regulatory control period.

Outlook

Looking out across the five-year regulatory control period, 2001 - 2006, the
regulatory settlement remains extremely challenging. The management team are
developing plans to restructure the business which will result in an increased
focus on the operating railway and a more discrete enhancement business which
enables the level of risk and stretch that Railtrack can shoulder to be
supplemented by other parties.

A revised structure will need to deliver improved network quality, better
customer focus and a lower cost base. As previously announced the Company will
still apply for an interim ORR review, likely to commence in summer 2002, to
cover the longer-term very substantial implications, both direct and indirect,
of Hatfield.

Further details will follow in the Company's Preliminary Results to be
announced on 24 May 2001.

Steve Marshall Chief Executive said:

'Railtrack has in the past been guilty of over promising and under delivering,
particularly to its customers but also to its shareholders - this has got to
stop. We must be ambitious, but we must also be realistic in equal measure.

During recent months, alongside managing the National Recovery Plan, we have
undertaken a thorough and realistic review of the business. This has shown
problems in some areas. We now need to get on and address these and this will
require significant changes to the way we do things.

Railtrack can and will rise to the challenge - but it needs the support of its
stakeholders and the public. It will take time, focus and money. Decades of
under investment cannot be fixed overnight.'

APPENDIX 1

Statement of Principles agreed between the Government and Railtrack


A. General

1. The Government stands behind the rail system but not behind 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.

2. Railtrack recognises that it must intensify its efforts and raise the
performance of its core business - the safe operation, maintenance and renewal
of the existing railway.

3. Railtrack needs to raise funds from the financial markets in order to
meet its obligations to customers and stakeholders. The company also needs
to receive sufficient Government funding, as determined by the Regulator.

4. Railtrack agrees that the responsibility for the funding and delivery
of major enhancement schemes can rest with other companies or consortia.
Nevertheless, the Government recognises that Railtrack's network integration
role will require its active involvement in all major enhancement schemes.
The financial and other resources that it devotes to enhancements should
constitute a reasonable proportion of its business in relation to its core
activities and, for large enhancements, should be deployed through public
private partnerships with the Government and others.

5. Railtrack recognises that the structure of its organisation needs to
change to address existing weaknesses and to provide a better service to its
customers and must evolve to meet future challenges. This includes the
separate management of enhancement activities from operations, maintenance and
routine renewals.

6. The Government recognises, within the context of the current statutory
framework, that the respective responsibilities of the Rail Regulator and the
SRA will be clarified to guard against potential overlaps through the issue of
General Guidance to the Regulator and revised Directions and Guidance to the
SRA.

7. Railtrack agrees to co-operate with Government and the SRA in taking
forward integrated transport schemes to realise the 10 Year Plan targets.

8. Railtrack undertakes to work constructively and co-operatively with
HSE and other stakeholders in implementing decisions arising from the Cullen/
Uff and Cullen public inquiries into rail safety. The Government recognises
that this is likely to require additional funding.

B. The Existing Network

1. The Rail Regulator is responsible for monitoring and enforcing Railtrack's
stewardship of the network and its relations with its customers.

2. Railtrack has already agreed a series of licence modifications
designed to strengthen its public accountability. These include a commitment
to establish and maintain a comprehensive register of the condition and
capability of its assets together with arrangements for improved monitoring
and reporting. This requirement is currently out for consultation. Railtrack
has publicly stated that it needs to develop a much stronger customer focus
and, as a start, is discussing with the Regulator a further licence
modification to this end.

3. Railtrack's forthcoming network management statement on the core railway
(Part 1) will be published by the end of May 2001 and will address its asset
stewardship obligations. In particular, the company will set out how it will:

o deliver effective and coherent management of contracted out work,
particularly maintenance, where the company will examine the scope for
establishing an in-house comparator;

o deliver consistency and customer focus across all its activities,
with a view to implementing partnerships and joint action plans at local level
with train operators and other industry players;

o reinforce both Railtrack's and the industry's engineering skills
base.

4. In developing these reforms Railtrack will continue to work closely
with other stakeholders, where appropriate through the Rail Industry Group
chaired by the SRA, and the industry's National Task Force.

C. Expanding the Network

1. The SRA and Railtrack will develop jointly a methodology for
identifying the minimum scale of project suitable for competitive procurement.
All projects above this threshold will be subject to competitive procurement.
This new approach will be reflected in part 2 of the 2001 NMS, which in
addition to identifying potential future projects will set out the agreed
method of procurement.

2. For enhancement projects subject to competitive procurement, Project
Development Groups (PDGs)- to include Railtrack, the SRA, specialist advisers,
and, where appropriate, other stakeholders (e.g. TOCs) - will be established
to assess likely costs and benefits and to develop each project to the point
where it can be tendered competitively. Over the summer SRA together with HMT
and DETR will establish, in discussion with Railtrack, a new procurement and
funding framework for project development work. This is likely to involve
project development work being purchased from third parties in addition to
Railtrack. In the meantime, Railtrack will continue with its current programme
of project development work.

3. Once each project has been developed to the point it can be
competitively tendered, and the specification has been endorsed by the SRA,
bids will be invited from project management and financing and engineering
consortia. Projects will be taken forward through public private partnerships
with the Government, where appropriate Railtrack, and third parties, using the
SRA's £7bn Rail Modernisation Fund to lever in private capital.

4. In carrying out its core operations, maintenance and renewal business,
Railtrack will act to facilitate enhancement schemes, and work with
potential third party providers thereof. In all cases Railtrack will ensure
that new schemes are compatible with the safe and efficient operation of the
network, and in many cases it may be appropriate for Railtrack to take a
financial stake in the successful delivery of enhancement projects.

5. Subject to the establishment of effective Chinese walls, Railtrack
may also choose to participate directly in one of the consortia bidding for a
project. Ultimately Railtrack may choose to bid in its own right, but not
before the performance of the network has improved to the point where it can
afford to devote sufficient management effort. In order to avoid potential
conflicts of interest it is not expected that specialist advisers involved in
PDGs will be able to participate as bidders for the main construction
contract.

6. The intention is that Railtrack should operate the whole of the
existing railway network even where enhancements have been delivered by other
firms. Once a project on the existing railway has been successfully completed
by a third party, the aim is to provide Railtrack with the opportunity to
purchase it. Railtrack and the SRA will explore financing and other mechanisms
to facilitate this.

D. CTRL phase 2

1. Railtrack supports the Channel Tunnel Rail Link and has agreed to
participate on reasonable terms with the LCR led delivery of CTRL phase 2.

E. Bringing Forward Government Grants

1. The Government agrees to accelerate the payment of revenues payable
under the October 2000 periodic review final conclusions.

2. Bringing forward these payments will help to stabilise the financial
planning of the company, pending further reviews by the Rail Regulator. It
will also reduce long-term public sector support costs as a result of
consequential adjustments to the regulatory asset base that applies from 2006
onwards.

3. In agreeing to bring forward these payments the Government reiterates
its firm view and Railtrack has accepted that the immediate financial
consequences of the Hatfield accident, including the cost of delivery of the
National Rail Recovery Plan, must fall to Railtrack's shareholders.

4. Railtrack Group do not intend to pay any exceptional or special
dividends over the next five years, nor does the Group intend to make any
return of capital to equity holders over the same period. In addition,
dividends paid up from Railtrack PLC will only be paid in line with earnings
growth over Control Period 2 as a whole.

5. Railtrack agrees to make any necessary changes to its Board structure
to recognise the new approach to enhancement schemes and the public private
partnerships that this will entail.

F. Public interest

1. Railtrack's Board fully recognises that it has a responsibility to its
passengers and other customers and the public at large as well as to its
shareholders. In consultation with Government, it proposes to appoint a
non-executive director to its main Board with a remit to provide a powerful
public and consumer interest voice within the Board.

G. Conclusions

1. The Government, The SRA and Railtrack believe that the new relationship
summarised above will enable the company to concentrate on the core network and
its all important relationships with its customers and other stakeholders, while
offering the prospect of longer term growth through proportionate participation
in and eventual purchase of enhancement projects.

Appendix two

Railtrack Enhancement Schemes

o Railtrack will proceed with:


- West Coast Route Modernisation

- Cross Country Route Modernisation

- East Coast Main Line phase 1

- Sunderland Direct

- Manchester Masterplan

- Thameslink (subject to procurement review)

- Channel Tunnel Rail Link section 1


o Proceeding under new arrangements

- Chiltern

- modern facilities at stations

- incremental output statements

- South Central SPV, being explored


o Feasibility and project development

- East Coast Main Line phases 2-4 and others

Railhub Archive ::: 2001-04-02 RTK-001