Department of Transport, Local Government and the Regions
Statement on Railtrack
keywords: click to search
Department of Transport, Local Government and the Regions
Phrases in [single square brackets] are hyperlinks in the original document
Phrases in [[double square brackets]] are editorial additions or corrections
Phrases in [[[triple square brackets]]] indicate embedded images or graphics in the original document. (These are not usually archived unless they contain significant additional information.)
Statement on Railtrack
note Hansard 15 Oct 2001 : Cols 954-6
The Secretary of State for Transport, Local Government and the Regions (Mr. Stephen Byers): With permission, Madam Deputy 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 7 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, as will Conservative Members. When the railway industry was restructured following the Railways Act 1993, Railtrack was created by the Conservative Government. In 1996, Railtrack was privatised by the Conservative Government. It was the only publicly floated utility subsidised by the Government. That subsidy made up the majority—in fact, some two thirds—of its revenue.
After the Hatfield train crash nearly 12 months ago, the whole network was urgently reviewed and fundamental safety issues were addressed. That added significantly to costs, with Railtrack claiming that it needed an extra £700 million a year to put the track in a proper condition.
On 2 April 2001, Railtrack asked for help because of its pressing financial difficulties. We brought forward £1.5 billion of investment from the period beyond 2006 to the five-year period starting on 1 April 2001. The first instalment of that deal was paid on 1 October this year in full—£337 million.
However in May, June and July, the company's position worsened dramatically. On 25 July, at a meeting in my office, the chairman said that the position was far worse than he had thought in April. Unless extra financial assistance from the Government was provided, it was clear that on 8 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 that 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 simply three options: restructuring, renationalisation or, as they described it, receivership. Thus it was Railtrack's advisers who first raised the possibility of insolvency if no additional Government funding was available.
I immediately 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 and a four-year suspension of the regulatory system. Those were Railtrack's proposals.
Given the company's demands, we began to prepare for the possibility that we might be unable to provide additional funding and that, as a consequence, Railtrack would be insolvent. To protect passengers' interests it was clearly right to explore the need for railway administration on a contingency basis. As a result, preliminary contact was made with Ernst and Young on 23 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
15 Oct 2001 : Column 955
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 3 October, but no way out of the dilemma could be found: either we gave the guarantee on money, or the company became insolvent. So, on Friday 5 October, I reviewed all the relevant papers and considered all the options, including Railtrack's proposed rescue package and the additional Government funding that would be required. Railtrack's proposals were cast in such a way that it was hard to be sure about the precise sum that it was seeking, but it was effectively an open-ended funding request to the Government. I decided that I could not give Railtrack a blank cheque.
That very afternoon, I informed John Robinson, the chairman of Railtrack, of my decision and of my intention to petition the High Court for a railway administration order if the company was insolvent. The order was granted on 7 October. 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 8 December this year, 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."
The press has made much of the position of shareholders. At the time of the April agreement, the Government felt that we should make it clear that our role 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 that statement had wide circulation in the City, it was released through the stock exchange news service.
The directors of Railtrack have now 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 direct to Railtrack shareholders. We believe that it would be wrong to make new money available, and 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 that recognises that the needs of the travelling public must come first. We shall propose 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 re-invested in the railway network. Such a company would have the needs of the travelling public and other users as a priority. As it would have 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
15 Oct 2001 : Column 956
directors. Performance targets would be set and linked to levels of service, safety and value for money. The board would work on commercial lines but would focus 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 intense 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 these proposals with the industry's key players. We are clear that it is important for the new structure to provide 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 that we shall propose would be able to raise funds in the market. [Hon. Members: "Which market?"] Wait and see. 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 to the new company with no loss of principal or interest. Any debt transferred to the new company would be financially sound and would have, at the time of transfer, good long and short-term credit ratings.
Many talented and motivated people work in Railtrack. They have worked with dedication, especially over the past seven days, and I thank them for that. I know that they and the rest of the industry want 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 that is united and not fragmented; a railway industry with a shared strategic vision; a railway industry that can respond to the needs of our time; and a railway network provider that answers to the millions of passengers and not to private shareholders.
Our decisive action makes all that possible, and I commend it to the House.
Railhub Archive ::: 2001-10-15 DTR-002