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Network Rail has a plausible battle plan – but first contact with the enemy awaits, not to mention the first meeting with Railtrack
Network Rail's bid to get Railtrack out of administration early was seen by some commentators as a case of the end justifying the means. And yes, it is good news – but of course, good news is relative. A wooden leg might restore mobility, but if gangrene had not been allowed to set in it would not have been needed.
Railtrack needed to be brought out of Administration only because it was forced into insolvency last October by Transport Secretary Stephen Byers. If Byers hadn't leaned on the Regulator and if the press hadn't reported the leaked decision to pull the plug on the Renewco funding scheme over that fated weekend, Railtrack could have drawn down more of the existing £1.7bn facility with its banks. This would have kept the business running while it planned an enhancement holiday to balance the books and pursued the Regulator for an interim review.
Which is not to deny that Railtrack on the eve of administration was already a severely dysfunctional business compared with the organisation that took over the railway infrastructure in April 1994. Readers of this column will have followed the progressive ratcheting up of cost and ratcheting down of expectation from the start.
If Railtrack had been losing altitude for years, Hatfield tipped it into a spin. Chairman John Robinson, lacking experience of this unusual corporate attitude, tried an unauthorised recovery procedure allowing Stephen Byers to flip Railtrack inverted leaving it to crash and burn.
Now you will recall that when Railtrack was forced into Administration, Byers was quite clear that there would be no compensation for shareholder. As the warning goes, share prices can rise or fall and there is no guarantee that you won't lose your money. So if you had bought Railtrack shares, tough luck, ditto if your pension provider or ISA holder had bought Railtrack shares, ditto if you had acquired shares through Railtrack's employee scheme.
‘I can say for certain there will be no taxpayers money made available to support shareholders', was Mr Byers' mantra. Unfortunately in addition to signallers and railway journalists, an awful lot of shares were held by big financial institutions on which the Government depends for private finance as it tries to improve public services.
And they wrote highly stroppy letters to the Treasury pointing out that if those who invested hundreds of millions in Government-supported businesses like Railtrack could have the rug pulled from under them by Government, then borrowing money for the public finance initiative was going to be much more expensive than expected. As for the £35billion private funding for the railways under the 10 year transport plan….
That was bad enough for the Treasury. But there was worse in train. Railtrack and its share and bondholders were planning to take the Transport Secretary to court on a charge of misfeasance, claiming that he had abused his powers to put Railtrack into administration.
Had this court case gone ahead we would have seen the Transport Secretary in the witness box being quizzed by a redoubtable QC for several days. Well, obviously, that would have been hugely embarrassing for the Government.
Clearly something had to be done. So, almost overnight, the nebulous body we had been calling ‘Clug', the Government's Company Limited by Guarantee (CLG), emerged as Network Rail, complete with new corporate identify, and announced an offer to take over Railtrack plc, PDQ.
And in this offer was a one off, accept-it-or-it's-gone, half a billion crisp oncers for Railtrack's shareholders. It was enough to stall the threat of legal action. If you took the £500million from Network Rail plus the offer to buy Railtrack's rights to run and maintain Phase 1 of the Channel Tunnel Rail Link conveniently announced a few days later, Railtrack Group was worth about £2.50 a share, not far short of the £2.80 prior to administration.
It looks as if that will be enough to pacify the institutional shareholders. But it was clearly all done in a ruddy blush.
Rushed? I was phoned at home on the afternoon of Sunday 24 March with an invitation to the Network Rail press conference the next morning. And at the press conference the city experts found the numbers a bit perfunctory. Given this caveat the deal looks like this.
Railtrack Group will be paid the £500m by Network Rail as a fixed ‘early exit' payment if it lets go of Railtrack, hopefully with completion in July. In weasel speak, the £1/2billion ‘ fully recognises the economic benefit of an early end to administration'.
If there is a £500million economic benefit of getting Railtrack out of administration in just under a year, presumably there was a similar economic disbenefit from putting it into administration in the first place. Readers might also ponder on the contrast between ‘here's £500million to keep Stephen Byers out of the dock' and the recent agonising over, for example, whether the National Health Service could afford £17m a year for a new breast-cancer drug treatment. This sort of thing could give railways a bad name in Government.
Even worse, the £500million includes a £300million grant from the SRA. A straight bung. The remainder is part of the £9billion of bridging finance raised by Network Rail from a syndicate of banks led by Royal Bank of Scotland and Barclays Bank.
Network Rail will use this loan to pay off Railtrack plc's debts of £6.5 billion, including redeeming £1.5 billion of bonds, and settle around £400million of inter-company loans within Railtrack. It will also provide up to £2bn of working capital to fund on-going operations.
Once Network Rail has settled in, say within one to two years, it will refinance its initial borrowings, probably by securitising its track access income. This is a pretty secure income stream, since the SRA seems willing and able to pay up no matter what vicissitudes visit the train operating companies.
Behind the bridging loan is a back-stop facility provided through the SRA. If Network Rail can't complete the securitisation to pay off the bridging loan it will be able to draw on Government stand-by facilities.
As a company limited by guarantee, Network Rail will be run on commercial lines and aim to make a surplus. Any surplus will either be reinvested back into the business or, conceivably, could be used to reduce the TOCs access charges.
Don't ask how you determine what the surplus should be. Or what is the point of the surplus? And certainly don't ask how Rail Regulator Tom Winsor fits a surplus into his Periodic Reviews, although I bet he has a team of wonks working out a suitable algorithm.
Given that the Treasury believes that all railway operators are profligate ne'er do wells who will waste the public's money unless watched like hawks, I suspect that if Network Rail does make a surplus the National Audit Office will be sent in PDQ to show that subsidy levels to the railways are clearly too high. What happens if Network Rail runs a deficit is a subject for conjecture.
But that's enough money. What really counts is what the Network Rail management are bringing to the party and how they see the railway developing.
So at the beginning of April I spent a diverting hour with the two Ians at the top of Network Rail. Chairman Ian McAllister was formerly Chairman, Managing Director & Chief Executive of the Ford Motor Company. Managing Director Iain Iain Coucher has been very much into things Underground as Chief Executive of the Tube Lines PPP bidder and before that from, 1996 to 1998, Chief Executive of the TranSys consortium which is bringing smart card ticketing to London through the Prestige PFI.
As we went through the breakdown of the £9billion Iain Coucher emphasised that Network Rail was unlikely to spend all of the working capital, the £2billion being a top end figure covering the remainder of Control Period 2 (2001-2006). Talk of control periods led into my first question: why had the press announcement omitted any mention to an Interim Review of track access charges by the Rail Regulator?
To obtain an interim review Network Rail would have to prove that there had been a material change of circumstances. While Rail Regulator Tom Winsor had signalled pretty clearly to Railtrack before administration that he thought that the post Hatfield situation represented a material change, Coucher is more cautious. ‘We are unsure that there has been a sufficiently material change of circumstances to justify an Interim Review' he told me.
Expounding on this, frankly, surprising opinion, he pointed out that the costs of Hatfield had already been absorbed by the existing Railtrack plc. Subsequently, administration hasn't changed circumstances materially. And, as Coucher sees it there are significant risks if Network Rail bases its budget on an interim review.
‘If we plan on going for a review, and then don't get it, or we do get it but it's for less than we asked, that leaves you with a problem. So we have had to plan on getting to the end of CP2 without an Interim Review'.
But what about the Regulator's broad hints? Iain Coucher is unconvinced. Yes the Regulator has said he is duty bound to consider a request for an Interim Review but the outcome would remain uncertain. Ian McAllister added that an Interim Review would take about a year anyway. Even on an optimistic timescale, this means that any extra money would not be authorised much before the end of 2003 – leaving just over two years of CP2 to go.
I am not alone in finding this attitude incomprehensible. Railtrack plc is already spending at over the level allowed for in the Periodic Review and is working up its submission for an Interim Review. It will be interesting to see if Network Rail's view changes when it eventually meet the Railtrack management team.
Yes, such was the rush to save Byers's skin that Network Rail's claimed ‘robust business plan' was based on advice from its consultants Jarvis and Arup, but with no input from those actually in charge of the railway.
So, no rush for an interim review. Another reason could be that Network Rail doesn't know how big a hole West Coast Route Modernisation (WCRM) will leave in Railtrack's budget.
When I asked about the WCRM, Coucher prefaced his answer with a sardonic ‘ha ha'. Network Rail will inherit whatever settlement is hammered out between Virgin and Railtrack.
At the Railway Forum/Modern Railways Innovation Awards dinner I was discussing the settlement with Richard Bowker and he had no expectations of any quick fixes – a couple of months rather than weeks being a likely timescale.
Forget the cost of unscrambling the deal with Railtrack set up for Virgin by him and Tom Winsor. The big problem, the really big problem, is determining future demand on the WCML, decising how much capacity can be afforded to meet that demand, and dividing whatever capacity is available between the competing passenger and freight operators.
Coucher hopes that the inherited WCRM projectwill be ‘adequately scoped and have enough funds'. Is a settlement a pre-condition of Network Rail taking over Railtrack? ‘We have to ensure that there are sufficient resources to complete the West Coast' Coucher replied, adding cheerfully, ‘we'll pick it up and run with it'.
WCRM is, of course, not the scale of project Network Rail expects to do in future. At the launch it was emphasised that Network Rail will concentrate on its core priorities of operations, maintenance and renewal (OMR). Major enhancements will be handed over to ‘Special Purpose Vehicles' These will be responsible for the design, build finance and transfer of ‘significant projects' to Network Rail at a pre-agreed price.
Yes, well, the only trouble is I have yet to meet anyone, particularly in the City, who can see how a serious SPV like quadrupling Welwyn Viaduct, could work. Sir Alastair Morton, father of the railway SPV, gave me several mini-seminars on the subject, leaving me none the wiser, or rather with my practical objections unassuaged.
But Iain Coucher reminded me that Network Rail will be funded entirely by debt. With no equity it will lack the scope to absorb the large risks associated with big construction projects. However, ‘simple straightforward upgrades of lines' will be handled in house. The Chiltern ‘Project Evergreen' falls within this category.
When I pointed out that the lesson of history is that you cannot run projects independently of the working railway – Leeds first being a classic example – he agreed. A key issue is how the SPV controls the risk of working on someone else's infrastructure and vice versa.
Then there is issue of how, say, a return is earned on the cost of quadrupling the Welwyn viaduct bottleneck. It certainly can't be covered from track access charges.
Currently Network Rail is working with the SRA on a ‘revised enhancements code' which will lay out the ‘general roles and responsibilities of the three parties involved – the SRA, Network Rail and the construction SPV. This code will have to be broad-brush because every SPV will be different.
But, adds Coucher ‘we have learned the lessons from other similar projects, that trying to drop new bits onto the operational railway just doesn't work'. As a result Network Rail will be ‘very, very much involved with the SPV in the interface areas'. ‘We will have a very active role, sometimes it will be more, sometimes it will be less, it depends on the nature of the up-grade'.
Before a project, or the next phase of a project is started everybody has to be absolutely clear what risk they are taking, who is responsible for which part and how the whole thing fits together Iain Coucher |
Network Rail clearly places great store on the Enhancements Code. My feeling is that much depends on what you mean by enhancement. Take the ‘ECML Upgrade' for example. This is convenient shorthand for what, in effect, is not one big bang but a series of local schemes over a period of years. For example, signalling will be replaced on age and condition as a series of discrete schemes.
A combination of resignalling and associated track layout work to improve capacity or reliability is the sort of scheme the Eastern Region should be able to manage through its contractors and a signalling company. An ECML Upgrade SPV doesn't really exist on the ground.
Anyway, OMR will be the main task for Network Rail. ‘We have to get the existing infrastructure upgraded and a much, much higher level of performance', says Coucher. He also wants to catch up with the backlog of renewals ‘which over time means that the cost of maintaining the railway gets less'.
Déjà vu or what? Back in the early days of its existence, a firm called Railtrack published graphs of future expenditure on renewals and maintenance, which showed exactly the same theory – renewals up front followed by declining maintenance costs. What happened to them, I wonder?
Together with enhancements, all this means more activity on the railway, just as the government wants to see more freight and passengers carried. And, of course, there are all the other capacity destroying features of today's railway reported in this column.
So when Network Rail gets to meet the Railtrack management, one of the things it will talk about is ‘how we can start to plan work more effectively on a national basis and to get more out of possessions'. And Iain Coucher is sure ‘there is a lot we can do'.
One of the things Network Rail intends to do is build a network wide availability model. This will enable the company to ‘look at the railway as a whole and much further into the future in terms of traffic patterns and use and condition of the assets and degradation rates and start to plan maintenance renewals and enhancements over a longer time period'.
Network Rail has already spoken to contractors and others at working level, including asking how possessions can be made more effective. But with a contractor among its advisors and no Railtrack input, its perceptions may be a bit skewed.
This affects particularly the current issue of the degree of control the infrastructure owner should have over its contractors. Network Rail will inherit a number of IMC2000 contracts which expire in 2-3 years time. Meanwhile, there are a number of schemes in place testing different relationships, such as the Project Wessex scheme with Balfour Beatty and the Eastern Region work described in Modern Railways (March 2002).
‘If it turns out that the right thing do is to bring more maintenance in house, we will do that' says Iain Coucher. However, the initial thought is that ‘maybe' this is just moving the problem to a different place. A preferable solution would be to make the existing interfaces work better.
While Network Rail has not spoken to Eastern Region management, my report on what I saw at the grass roots at Tottenham Hale ‘seems to be a good model'. Iain Coucher believes that the maintenance contractors have been ‘working very hard to introduce a degree of professionalism and responsibility and to make their businesses work very well and those are areas we would not necessarily want to change'. He thinks that ‘perhaps' the change should come from ‘our side' to make sure that our side of the interface fence works better. Note my remarks about skewed perceptions above.
And he admits ‘we do need to talk to the Railtrack Headquarters, Zones and Areas as well as the contractors'. Not half! I suspect that meeting Railtrack's men and women at the sharp end and hearing some of their horror stories may involve an abrupt reorientation of perception.
That said, the Eastern Region approach is ‘pretty much the model we see going forward', says Iain Coucher, ‘ and we'd like to test with (Eastern Region Director) Robin Gisby further developments'.
Taking the new/old company forward Ian McAllister wants to retain as much as possible of the existing Railtrack management because continuity is important. Also important is that ‘accountabilities and responsibilities are clearly defined'; he feels that there is ‘some degree of confusion' between the roles of the zones and the centre.
Well, not if you are in a Zone or Region. Administration has encouraged those who run the daily railway to form square and fight their own clearly defined battles in the general confusion. Hence the problems described below with cut backs imposed on their maintenance budgets.
Ian McAllister is a great believer in delegation as the key to successful management ‘but you delegate within an operating box', he adds. ‘You don't have different engineering standards by region and if you have negotiated a possession you don't allow a Regional or Zone manager to close it down at 24hours notice'. That sounds like more apocryphal evidence from a contractor or TOC to me.
So Network Rail wants to ‘sit down' with the Railtrack Zone and Regional directors to discuss which is the most effective way of operating the system. While at the time of the interview Network Rail hadn't been able to do that ‘we have our own views but we don't want to do it by prescription, we want to do it by consultation' Iain Iain Coucher emphasised.
Hmm, should be fun. As should be reconciling the renewals that need to be done with the money available. This is going to mean prioritising need.
Iain Coucher sees Network Rail at the centre as determining where the money is spent in the Zones and Regions. Put bluntly, this will mean Zone B being told by the Centre that a pet scheme is less urgent than renewals in Zone A ‘and will not be done this year'. Need will be determined on a national basis. But the decision will, clearly, depend on the priorities decided within the Zones.
He sums up the choice like this, ‘If we have got limited resource, where best do we spend that limited resource to give a better railway to the nation'. Now that is seriously philosophical stuff, starting with the definitions of ‘better', ‘railway' and ‘nation'.
When I suggested at the end of the interview that the message I had got was ‘back to basics, run the network properly for the next two to three years, catch up on the post Hatfield hiatus and instead of thinking big just think professional and get it done', both Ian and Iain agreed.
So a boring railway in prospect then. But as Ian McAllister pointed out, ‘to make the boring railway work, you need heroes in every role'. Well, that's an encouraging start.