................................................................................ ON THE RECORD RECORDED FROM TRANSMISSION BBC-1 DATE: 19.5.96
................................................................................ JOHN HUMPHRYS: Good afternoon. Tomorrow we shall know who's got what in the great Rail Track share sale. We already know that it's been sold off at a bargain basement price. I'll be asking the Transport Secretary if he's betrayed a great national heritage, but first the news read by Moira Stuart. NEWS. HUMPHRYS: It's a shorter programme than usual today and we're devoting all of it to what's become the most controversial privatisation of them all - the sell-off of the railways. Last week, the share offer for Rail Track closed and tomorrow we'll know exactly how much the sale will raise for us, the taxpayers. But as Laura Trevelyan now reports, it's already been described as the bargain of the century. HUMPHRYS: Laura Trevelyan reporting. Sir George Young, hasn't the citizen got the right to feel angry about a vital national asset being sold off so cheaply? SIR GEORGE YOUNG: Certainly not. They way we have sold Rail Track has enabled the market to bid the price that they think it is worth, and by specifying a range within which the institutions bid we have actually managed to capture the higher value which we're now seeing the market placing on it, so not a single bid, but an exercise called book-building, and it's quite clear that there's been a tremendous appetite to invest in Rail Track, both from the public, some six-hundred-and-fifty thousand retail applications, and from the institutions, and I'm greatly reassured that there is this appetite to invest in the railways of the future, but the railway placed firmly in the private sector, freed of some of the constraints in the public sector, rather than the old nationalised industry, which I think was unresponsive to the needs of the customer, had difficulty getting money from the Treasury. And quite frankly that portrayal I think is a travesty of what the railway's going to be like over the next ten years, and far from closing lines we're actually opening lines. We're opening the Robin Hood line, we've opened or reopened two-hundred-and twenty stations. The last Labour Government closed about six hundred. So I'm in the business of expanding, investing, building, improving, not shrinking and cutting and closing, which was the impression given by that rather dismal film we've just seen. HUMPHRYS: Well, you tell us there was a great appetite for the shares from the public and the institutions. Of course there was a great appetite for the shares because the whole thing was being sold so cheaply. If you price something cheap enough people are going to want to buy it, it stands to reason. YOUNG: No. What's been happening is the Labour Party has been going around for the last two weeks saying the shares are too expensive, don't touch them. Now, apparently they're saying the shares are too cheap, and I think what has happened is people have actually disregarded what the Labour Party have had to say about this. Either they don't think they're going to get in, or if they do get in they'll have the good sense to leave things alone, which is their policy with all the other privatised industries. What I want to do is to see a healthy, confident railway industry, investing in West Coast Mainline. We announced Thames Link Two Thousand a few weeks ago, six-hundred-and-fifty miillion poundsworth of investment linking the lines north of the Thames with the lines south of the Thames in London. Now that's going to be paid for by Rail Track. Previously I would have had to go cap in hand to the Treasury, bid for the money in competition with Health and Education, and we might not have got it. So as with other privatisations putting it in the private sector enables it to access fresh funds from the City and the constraint about being in the public sector disappears, so I'm looking for an expansion in the investment not a contraction. HUMPHRYS: None of which deals with the point that I made, that you priced it so cheaply, therefore of course there was a huge response, three or four times over-subscribed. Of course it was over-subscribed. If I offered to you a tenner for nine quid, you'd say "Yes, please I'll have lots of those". YOUNG: Well, let me deal with that point very directly. Rail Track is not just its assets, it has liabilities. It has to invest eight billion pounds over the next five years. It's going to modernise the West Coast Mainline. It has to do Thames Link Two Thousand, and the value of a company is not simply the cost of its assets. The value of a company is what is its worth, what is its expenditure, what is its income? that is how you value a company, you don't just look at the historic costs of the assets. There are real liabilities and the taxpayer would have had to bear those liabilities in the future. Those liabilities are being transferred to the shareholder, and you have to put that on the table when you look at the balance of advantage as between shareholder and taxpayer. HUMPHRYS: And the smart guys in the City who put the bids together who buy the shares, who advise people, know all of that, they know exactly what something is worth, and they have decided that this is one heck of a bargain. That's why they were so enthusiastic about buying it, that's why the shares have been over-subscribed. YOUNG: But that ignores the point that I made right at the beginning, that when we put Rail Track on the market we specified a range, a lower range of three-hundred-and-fifty to three-hundred-and-ninety, so if indeed it was the case that there was an appetite to invest in the railways, if people did indeed disregard the propaganda of our opponents, we could accept the bids at the higher end of the range. HUMPHRYS: But the higher end of the range was preposterously low. That's..(INTERRUPTION)..one-point-nine-five billion pounds is the maximum you can get, and my point is not that it's at the top of that range, sure it's the top of the range, but what a dismally low range it was in the first place. YOUNG: No. Firstly the taxpayer is not just getting one-point-nine billion. Rail Track are taking over, over half a billion poundsworth of debt, which will be repaid to the government, bringing it up to about two-point-six billion, which is roughly what the net asset value was the last time there was a balance sheet. Sorry? HUMPHRYS: Whose figures? YOUNG: Those are audited accounts of Rail Track. But I think you have to come back to the main point, that this company does not just have assets, it has obligations, it has committed itself to spending at least a billion pounds a year on infrastructure. They will have to raise that money, they'll have to raise it on the strength of the balance sheet. HUMPHRYS: I want to come to that in a moment. YOUNG: So, it's not just a question of what is it worth, it is a question of what has it committed itself to do. If I can just, because it is relevant - Rail Track has a regulator, the regulator has said to Rail Track, "You must reduce by two per cent real, each year the charge you make to the train operating companies". So it's not a case that they can increase their charges and try and make lots of profits, nor is it as was implied, the case that they make a lot of money out of the property. They've only got the operational property, the non-operational land has remained with British Rail. HUMPHRYS: You tell me that the auditors figured it was worth two-point-six billion, but let me give you another figure. The Treasury, the guardian of our national treasure, thought a few years ago that
it was worth six-and-a-half billion, three times, more than three times what it's going to be sold for. YOUNG: No, no, that is not a figure which I recognise in the context of the worth of Rail Track as a going concern. The government has quite specifically not put a value during the whole process of privatisation on what we thought the shares would go, and you're talking with great confidence as if you know what's going to happen tomorrow morning when the market opens. HUMPHRYS: Well, let me tell you then, for the benefit of the viewer how the Treasury arrived at that figure. They based it on the calculation that if Rail Track had stayed in the public sector the return it would have had to make would have been on six-and-a-half billion. Now the Treasury are pretty smart at this kind of thing, they do those kind of sums all the time. That's the figure they came up with, three times, three times what you are going to raise. YOUNG: But we have since transferred to Rail Track a whole range of liabilities, and you have to set those liabilities against... HUMPHRYS: The Treasury ....... YOUNG: But they didn't because some of the liabilities were only incurred in the last few weeks. For example the liability to invest in Thames Link at a cost of six-hundred-and-fifty million pounds. HUMPHRYS: On which there will be a return... YOUNG: Well, on which there may be a return. On which there may be a return, but a return that is controlled by the regulator. He will not let them make a huge sum of money. That is risk capital that they have got to find and develop. HUMPHRYS: We're still talking - even if I accept that figure, which I don't because there's going to be a return, you know that perfectly well, but even if you accept that figure we're still talking about way down half of what the Treasury said the thing was worth, the whole operation was worth. YOUNG: No, no. I think when you value a company it is not just the value of its assets, it is the difference between its expenditure and its income, and it is taking into account of its liabilities, a contractual liability to invest eight billion pounds over the next five years in infrastructure. That has to have an impact on what shareholders think their company is worth. HUMPHRYS: Alright, let's pick up that point about income then, and here's another reason why you've undervalued it. How can it possibly be worth less than two billion pounds when the charges being made to the companies which will use the track have been calculated on the basis that it's worth three times that much, so even on the basis of income it doesn't work, the sum won't come out. YOUNG: The Rail Track was told last year to reduce by six per cent real the charges it made to the train operating companies, and they have been told for the next five years they've got to reduce their charges by two per cent over and above inflation, so they have been set a very challenging operating target by the regulator, and the benefits of those reduced operating charges will filter through to the train operating companies, and therefore through to the passengers. Now British Rail when it was in the public sector never had that sort of challenging target to become more efficient and pass the efficiency gains on to the travelling public. The way we've structured the privatisation with the regulator builds in real incentives to lower the costs, get more people to travel by rail. At the end of the day that is the goal I want to achieve, and I think that this structure of bringing in the private sector with the regulator will actually reverse decades of decline in railway use, both freight and passengers. HUMPHRYS: Well, perhaps, and we'll come on to that. But, let's look at some pretty, basic commonsense stuff here. It costs to build sixty miles of new railway line - it's going to cost between London and the Channel Tunnel - admittedly, expensive railway line because there are lots of tunnels and all that sort of thing - three billion pounds. Now, that is for sixty miles of track. You're flogging off the entire network - forty thousand miles, or whatever it is - for less than that. Commonsense- YOUNG: No. HUMPHRYS: -says that cannot- YOUNG: But that is- HUMPHRYS: -be right. YOUNG: But that is an absurd argument because you could say EuroTunnel cost eight billion pounds. Anybody who sold EuroTunnel for less than eight billion pounds would be betraying the shareholders. It goes back to the point- HUMPHRYS: Well, if you sold it for five hundred thousand quid one would say that's potty and that's what I'm suggesting to you. YOUNG: It goes back - No. It goes back to the point that I was making earlier on. It's not what it cost to build it, it's what it's worth as a going concern. And, when you value a company, it is what it's worth as a going concern that is relevant. Not what it cost some time ago to acquire the assets. HUMPHRYS: But you're not telling me there's no relationship between those two figures, for Heaven's sake? YOUNG: What is the Forth Bridge worth? Well, in many cases, a company is worth more than its assets. HUMPHRYS: Yes, sure, but- YOUNG: In some other cases, it's worth less than its assets. HUMPHRYS: Yeah, but look at.. this year. YOUNG: It depends on how it's.. expenditure. That is quite often what dictates the value of the shares. It's operating performance, not the value of its assets. HUMPHRYS: I accept that that is a factor but look at the sums that we're talking about: three billion pounds for sixty miles of railway line, as opposed to two billion pounds for forty thousand, plus bridges, plus tunnels, plus stations, plus all of this. YOUNG: If I may say so- HUMPHRYS: I mean, common sense, surely, has to come in here, at some stage. YOUNG: That is a very good argument for what we're doing because that Chunnel -Channel Tunnel rail link is not being built by the Government. It's being built by the private sector. HUMPHRYS: It's irrelevant. YOUNG: It's not irrelevant because if it had all been in the public sector, we may not have been able to afford it. And, what those who criticise the policy of privatisation have never answered is this: if Rail Track is not going to get the money from the City, if the Channel Tunnel rail link is going to be built with public money, where is it going to come from? Are you going to put up taxes? Are you going to put up borrowing? Are you going to cut back expenditure on the Health Service? HUMPHRYS: I'm not talking about principle, I'm talking about price. YOUNG: No, but you said that the Channel Tunnel rail link was being built very expensively. What I am saying is that is being provided- HUMPHRYS: What I am saying is that railways cost a lot of money, for all sorts of reasons - of course. YOUNG: Well, indeed, indeed. And, that is one of the reasons why Rail Track has liabilities because it has to improve and modernise a network that was built, in many cases, up to a hundred years ago. So, it's not just the cost of what it cost when you bought it. It is what is the obligations of keeping it in good condition. That influences the value of the shares. HUMPHRYS: And, we're going to come on to that, in a moment. Can I give you the real reason, perhaps, why you've had to give this away? Potentially- YOUNG: Oh, no, we're not giving it away. We're getting two and a half billion pounds for Rail Tracks (phon). We're not giving it away. HUMPHRYS: Well, let's accept that, for a moment. Potential investors - here's the reality, isn't it?. Potential investors wouldn't have paid more than that 'cos they were warned off by what a Labour Government would - if we get one will do to the railways. That's the fact. You had to get the sale in pretty, damn quickly because investors were scared off by the effect of a potential Labour Government. YOUNG: No, we have a clear commitment to privatisate the railways. We're going to deliver that commitment. We've made good progress with the franchises. Putting Rail Track in the private sector is actually an essential part of that policy because it enables it to go ahead with a much more ambitious investment programme than would have been the case if we had stayed in the public sector. Of course, we want to do it within the lifetime of this Parliament. I want to see the real benefits that passengers will get coming to them as quickly as possible. HUMPHRYS: Are you telling me that the threat of a potential Labour Governnment had no effect on the price whatsoever? YOUNG: Well, we were - well, you'll have to ask the people who invested in the shares. HUMPHRYS: Well, I've already heard from them. I've heard from NatWest, I've heard from Lloyds Bank. I've heard from hugely important people saying: Don't touch them because ... YOUNG: Well, there are.. HUMPHRYS: -look what (sic) a Labour Government. YOUNG: Well, there were two circulars, which people quote, that gave that advice. Quite clearly, there must have been a lot of other circulars - HUMPHRYS: Sure. YOUNG: - that gave different advice because the issue is heavily oversubscribed. But, we have a commitment to privatise the railways. We have a commitment to privatise other nationalised industries and we believe, actually, in the long run, this argument that you and I are having this morning would be seen to be really part of the small change. I think, people will recognise that this was the right... HUMPHRYS: Small change? Billions of pounds. Pretty big change to most people. YOUNG: Yes. Look, I don't think anybody is going to reverse what we're doing with the railways, as with other privatisations. Once they've happened, people say: Yes, that was the right thing to do. It was right with British airports, British airways, British Telecom. HUMPHRYS: Whether it was right or not isn't the point that we're dealing with this morning. The question is the price that we got for it - that you, we - the taxpayers - got for it. Wouldn't it have been more honourable to have waited until after the Election and then gone ahead with the share flotation? And, then, you could have maybe got a sensible price for it. Instead of this fire sale that we've seen. YOUNG: No, no, certainly not. The legislation which we passed in 1993 gave us the powers to privatise Rail Track. We made it quite clear that that was our ambition and it would be a betrayal of what we stand for, for the railways, if we hadn't gone ahead with the policy. HUMPHRYS: So, the political pressure was there for you to do this. See what I mean? (phon) YOUNG: I believe - No, no. There are real benefits to passengers in this policy. That is why we are doing it. I believe that when the next Election comes, whenever it comes, people will say: Yes, actually, they were right. The private sector is making a better fist of running the railways than British Rail used to. And, those who say we want to wind the clock back, we want to give it back to British Rail, we want to give them more subsidies, because we're reducing the amount of subsidy that is needed, that will be seen as a vote loser for our opponents. So, I'm confident that this is the right thing to do in political terms, but also in Transport terms. HUMPHRYS: Can I suggest to you another way in which the taxpayer is being ripped off here? And, that is that that money - the income, the profit which should have gone back to the taxpayer last year - is, instead, going to be used to pay a socking great dividend to those people who bought shares in the sale. That money shouldn't have gone to them. It should- YOUNG: Well- HUMPHRYS: -have gone to us - everybody. YOUNG: Yes. I reject that argument as well. Firstly, with British Telecom we did exactly the same procedure. But, more important, the existence of the dividend in October- HUMPHRYS: Don't make it right because you did it with somebody else - with great respect. YOUNG: But, more importantly, the existence of the dividend in October will, of course, influence the price that people pay for the shares. HUMPHRYS: I'll say. YOUNG: So, of course, the taxpayer will benefit because the taxpayer will get a higher price for the shares because of the dividend in October. HUMPHRYS: But, we've already established that at least a lot of people have accepted that the price for those shares was dismally low to begin with. All that the effect of that was doing was saying to people: look, here's another bribe. If we don't offer you that. All those people you say wanted people to buy shares, without that extra dividend, would have said: forget it. It would have been a flop. That's why you did it, wasn't it? YOUNG: No. The existence- HUMPHRYS: A bribe. YOUNG: No, no. The existence of the dividend may have reflected on the value that people were prepared to pay for the shares. HUMPHRYS: They have. YOUNG: To that extent, the taxpayer benefits. If the share price is higher because of the dividend, the taxpayer gets a bigger receipt on disposal of the shares. HUMPHRYS: So, in other words, you're taking it out of one of our hands. You know, this is our taxpayer's hand and you're giving it to the other hand in order to make this sale work. YOUNG: No, no. It's perfectly normal. HUMPHRYS: I mean that's an economic nonsense, isn't it? YOUNG: It's perfectly normal for a company in October to pay a dividend to those who are on its shareholders' lists. HUMPHRYS: Alright. YOUNG: We've done it with British Telecom Three and I don't accept - we spent about twenty minutes dealing with the argument that it was a giveaway. I strongly reject that. HUMPHRYS: Alright. Well, let's move on. YOUNG: I think, it is a fair balance between shareholder and taxpayer. HUMPHRYS: Alright. Let us move on and now imagine a world in which Rail Track is owned by a private company. It will have an asset worth more than it paid for. Now, you have at least acknowledged that because the asset itself on the bare value of the thing... YOUNG: Well, I'm not sure I have but go on. HUMPHRYS: Alright, well OK. How are you going to stop the company borrowing money against that asset and, then, distributing that to the shareholders to keep them sweet? YOUNG: On the property side? HUMPHRYS: On the entire value of the thing. YOUNG: Well, well- HUMPHRYS: Yah, property, particularly. YOUNG: You can't. Your programme implied that people could go round closing tracks and closing stations. They can't. HUMPHRYS: I think, we talked about closing tracks. We talked about them closing various things. We didn't talk about - but, anyway. YOUNG: They can't, they have a licence. Yeah, I think, they did mention closing stations. They can't do that. They have a licence. They have not one regulator but two regulators and the notion that Rail Track can go round closing stations and closing tracks- HUMPHRYS: No, but that's not the question I'm asking you. YOUNG: -is absurd. But, the answer to your question is there is a regulator and the role of the regulator - part of the role of the regulator - if they do make exceptional profits on property - twenty-five per cent of that goes straight through to those running the train operating companies. But, in assessing what Rail Track charges the train operating companies, he has taken into account the income from property not only what they're getting now but what they're likely to get. That is already deemed to be part of Rail Track's income available for modernising the railways. HUMPHRYS: How are you going to stop a takeover? YOUNG: There are - I have powers and also the licence has powers to prevent- HUMPHRYS: Right, will you stop the takeover? YOUNG: Well if anybody wants to take it over we have the powers both of the licence and the Secretary of State's consent to prevent a control of Rail Track changing hands. That is written into the licence. HUMPHRYS: Do you, will you care? Do you care? Do you? YOUNG: Well we'll have to see, I mean, you've spent a lot of the time saying this isn't really worth buying and now you're saying it's so worth buying- HUMPHRYS: On the contrary, I said it was one hell of a good buy. I said exactly the opposite. YOUNG: You are now saying that it's now likely to be taken over by another company. HUMPHRYS: I'm asking-..entirely. If I can just clear that up because that is entirely consistent with the whole thrust of this discussion. YOUNG: Yes. HUMPHRYS: My point is that you have given it away, that it is a very, very good buy indeed which is why so many people want the shares. YOUNG: The short answer to your question is 'yes' we do have powers to stop control. HUMPHRYS: Well, but the question was would you? YOUNG: Hypothetical. I have not the slightest idea - hypothetical. HUMPHRYS: Do you-Alright, well let me ask you a very direct question then. Do you happen to have any- YOUNG: I haven't sold it yet John, I've still got it until tomorrow morning. HUMPHRYS: Alright. But, tomorrow you will have sold it and tomorrow lunchtime, let's assume that you get, I don't know an American company for instance saying: we'd rather like to buy this and here's a decent price for it. Have you, in principle, and I'm not dealing with the detail of this, but have you in principle any objection to it being taken over by them? YOUNG: Well we have the powers to do that- HUMPHRYS: I understand that. YOUNG: And we have taken the powers precisely to prevent Rail Track, control of Rail Track, changing ownership from one company to another company. HUMPHRYS: That isn't quite the same is it? You haven't actually said we will stop anybody taking it over. YOUNG: We have the powers to stop somebody taking it over which we will use if we deem it to be in the national interest. But I have to say, just at the moment, that isn't right at the top of my order of priorities. HUMPHRYS: Well, but, perhaps it ought to be because we therefore have the prospect that Rail Track could be bought by, let us say, an American company, or a German company or a French company. YOUNG: Right or the Government if it wanted to could stop it. HUMPHRYS: If it wanted to. YOUNG: If it wanted to. HUMPHRYS: But you're telling me-. YOUNG: It's a hypothetical question. It has not been put to me. HUMPHRYS: It isn't at all hypothetical. YOUNG: And, anyway- HUMPHRYS: It is entirely conceivable that somebody will come along and offer to buy it. We've seen it happening with electricity companies and heaven knows what else, so it's entirely feasible. YOUNG: Yes. HUMPHRYS: And, what I am saying to you is do you have a principled approach to this? YOUNG: Well, let me- HUMPHRYS: Do you say we don't want a foreigner owning Raill Track for instance? YOUNG: Well let me answer the question in this way. We have invited to run one of the franchise train operating companies, a company which is foreign owned. They have got the contract for London South Central. They put in the best bid, they already run a railway company in France. HUMPHRYS: Just a bit of Rail Track. YOUNG: And, I see no reason why they shouldn't run that particular service and that franchise for seven years. HUMPHRYS: Alright, so in other words not much difference between that and Rail Track is there? YOUNG: No, there is a lot of difference between that and Rail Track because it's a franchise for seven years. With Rail Track
not only do I have the powers to stop control changing, it's also very heavily regulated. They can't put up the tariffs, they can't close services without the approval of the regulator. So it's not quite like some other companies that people might want to buy and take over. It is fairly heavily regulated in the constraints on what people can do with it. HUMPHRYS: BT and Rail Track has the strategic responsibility for that service, for the entire network. That was made quite clear by your predecessor. What you seem to be saying this morning is that you've no objection in principle to that responsibility being taken over by a foreigner? YOUNG: I want the responsibility for developing Rail Track to be with the company that is investing in it. I haven't begun to think about what would happen- HUMPHRYS: Alright. YOUNG: - if somebody put in a bid to take over Rail Track because as of now, it isn't even a private company. It's still publicly owned. HUMPHRYS: Right, let's- YOUNG: But I have those powers if I need them. HUMPHRYS: Alright, let's-let's look at another incentive that you gave people to buy those shares. Independent forecasters said it would cost about ten-ten point six billion pounds, over ten years, to look after the tunnels and the bridges and all the rest, to keep them in good maintenance. Now, when the prospectus came out that figure had gone down to one point four billion. That was simply dishonest, wasn't it? YOUNG: It most certainly was not dishonest and if I may say so, that's a very serious accusation to make against those who published the Rail Track prospectus. What happened was that initially, a report was produced at York for Rail Track, that put the figure that you've just quoted on bringing the infrastructure up to good condition. That was done in a very short space of time, on a very small sample. Not, frankly, using the best techniques. HUMPHRYS: On a very distinguished organisation. YOUNG: No, you've made a very serious accusation John, let me deal with it. Rail Track then commissioned WS Atkins (phon) to do a much more authoritative broadly based exercising- exercise, using the best techniques that are available and they did that. That was the one that is in the prospectus and Rail Track, and, indeed, the Department believe that is the information that investors need. HUMPHRYS: And it came out at a tenth, a tenth of the verdict, a ninth of the figure. That's extraordinary... isn't it? YOUNG: It is also more consistent with what British Rail had historically been investing in the railway network. The York figure quite frankly was a figure that was inconsistent with what British Rail had been spending. HUMPHRYS: A tiny amount has got to be spent therefore on maintaining the tunnels and the track. YOUNG: No. HUMPHRYS: What the danger must exist, if I may just put this one very briefly to you, the danger must exist surely that the intention is to run down the network. That's the point that Bill Bradshaw was making in that film. YOUNG: Absolutely not, absolutely not. It is a wholly untrue allegation. What Rail Track did in December was to publish a network management strategy, committing themselves to a very substantial investment. They are going to spend eight billion pounds over the next five years. That is probably more than British Rail would have spent had it remained in the public sector. HUMPHRYS: Sir George Young, thank you very much. That's it for this week - the Grand Prix is forcing us off the track a bit early. See you at the same time next week. Good afternoon. ...oooOOOooo...