Select Committee on Transport, Local Government and the Regions Minutes of Evidence

Examination of Witness (Questions 732 - 739)




  732. May I thank you for coming to talk to us this afternoon. I should be very grateful if you would identify yourself for the record.
  (Mr Winsor) I am Tom Winsor. I am the Rail Regulator.

  733. Do you have some opening remarks you would like to make?
  (Mr Winsor) Yes. Thank you. Very briefly. I should like to say a few words about my actions and role before Railtrack went into administration and since. On 23 October 2000, I published my final conclusions in my periodic review of Railtrack's access charges for franchised passenger services. In general terms, that review provided for Railtrack to receive a 50 per cent increase in its income (compared to control period one) over the second control period, namely April 2001 to April 2006. That meant approximately £15 billion of revenue for that period. Of that £15 billion, the Government said that it would prefer that access charges were lower and that approximately £4 billion of the overall £15 billion were paid as direct grants by the SRA to Railtrack, instead of going through the train operators and being subject to the Government's indemnity in the franchise agreements. I co-operated with that on the basis that it did not matter how the money was paid to Railtrack as long as the company had a secure right to receive the money, and the conditions attaching to the network grants were the same as those which applied to access charges. Before these arrangements were established, I discussed the matter with Railtrack and they confirmed that they and their advisers were satisfied with them. On 15 January 2001, Railtrack accepted my decision on the periodic review. It therefore did not exercise its right of appeal to the Competition Commission. As a result, the new charging regime came into effect from 1 April 2001. The periodic review contains a mechanism which provides for an interim review if there has been a material change of circumstances and there is a compelling case for such a review. If Railtrack were to want an interim review at any time, it is of course open to the company to make its case.

  The periodic review decision was announced only a few days after the Hatfield derailment. As the implications of Hatfield began to be appreciated, Railtrack realised that its asset knowledge—its knowledge of the condition of its assets—was even less satisfactory than we or they had expected and that it might be necessary for the company's expenditure requirements in relation to the ongoing operation, maintenance and renewal of its network to be reconsidered in an interim review when the full effects of Hatfield were known. On 15 January 2001, I acknowledged that fact and said that I would consider such an application if and when made. I also made it plain—and Railtrack accepted—that the immediate financial consequences of Hatfield were for the shareholders of Railtrack to bear.

  Between 15 January 2001 and 5 October 2001, Railtrack made no application to me for an interim review. It still has not done so.

  Now that the railway administration order has been made, the administrators and the Government agree with me that the making of the railway administration order in relation to Railtrack does not affect my jurisdiction as Regulator. However, before taking enforcement action, should I consider that an appropriate course of action, I need the consent of the administrators or the leave of the court. Subject to that, for the Regulator it is business as usual. Since I became Regulator in July 1999, I have been carrying out a programme of reform of the accountability of Railtrack to its customers—the freight and passenger train operators—and to the public interest. That reform programme was described in my document published in June 2001. The programme is almost complete. Most of the reforms in it took effect in April, May and June this year; some have still to take effect. All of them have received considerable support in the railway industry—especially from the train operators, the SRA and the PTEs—and elsewhere. This Committee has welcomed many of them, as has the National Audit Office and the Committee of Public Accounts.

  Whatever the status of the successor to Railtrack, it is clear that the Government expects it to operate on a commercial basis. It will also be a monopoly. I therefore believe that I should proceed with the completion of my reform programme, and so far in this respect I have heard from the train operators and they are very firmly behind that. I shall of course also consult the Secretary of State, the SRA, the PTEs and others.

  The Government has also made it clear that the railways are to continue to be a co-operative joint venture between the private and public sectors with significant amounts of private sector investment. This means private sector finance for the successor to Railtrack, for passenger train operators, the freight companies and the providers of rolling stock. The railway is now a contract-based industry like all other private sector industries.

  Private sector finance needs stability, predictability, clarity of responsibility and fair treatment and a reasonable assurance of revenues. This is as true for the infrastructure as it is for the infrastructure users who invest in new rolling stock. We should bear in mind that some companies and their lenders and investors have already made very substantial investments in the railway.

  With the Government still being a major purchaser of the services of Railtrack's successor (either directly or through the train operators), and Railtrack's successor being a monopoly supplier of those services, private sector and public sector investors will need to be able to turn to an entity which is independent of Government in relation to the quality and price of infrastructure services. That entity should operate according to well-defined statutory and objective criteria and its decisions should be subject to challenge, as is the case with any public body. It would need to set the price and, within the Government's overall strategy for the industry, establish the quality of the infrastructure services to be provided. If that were not so and the Government were able to set the price, determine the quality and compel the infrastructure provider to sell on those terms but without providing some other form of Government guarantee to investors, no-one would invest in it—or investment would be extremely expensive—and the Government would have to take all the risks of the operation and pay all the costs.

  A different approach would involve a contract which, at the outset, fixes the price and quality of the infrastructure services to be provided in the long term. However, the railway is a complex business, however it is structured, and it would be next to impossible to be able to determine all these things in advance and for good. It would also be an enormously expensive way of buying infrastructure services because of the pricing by the infrastructure provider of the associated uncertainties. An alternative to such rigidity and attendant expense would be to have periodic reviews of these things undertaken by a separate and independent entity, working within the Government's overall transport strategy and having statutory regard to the finances of the buyers of infrastructure services and the interests of users of those services and the ultimate consumers of railway services, namely the freight customer and the passenger. That is the economically most efficient way of doing things. It protects the buyers and funders of infrastructure services from the expense and inflexibility of a contract-based approach, and it protects the infrastructure provider and the infrastructure users from arbitrary decisions which may prejudice the future long-term health of the industry. It is independent economic regulation and it has the strong support of the train operators—passenger and freight—and their investors and others. In its statements, both well before Railtrack went into administration and since then, the Government has accepted the necessity of independent economic regulation. I welcome that.

  Madam Chairman, this is my first public statement since Railtrack went into administration. Accordingly, given recent events, would it assist the Committee if I summarise very briefly in my conclusion of this opening statement the facts concerning my involvement in that matter? I was first informed of the impending administration of Railtrack by the Secretary of State at a meeting in his office which began at 4 pm on Friday 5 October 2001. The Secretary of State's private office had arranged the meeting with mine the day before. Until the meeting, I did not know that the company was claiming to Government that it was in financial difficulties so severe as to justify the making of a railway administration order. This was because the company wrongly decided not to use the established regulatory mechanisms for dealing with its financial position and instead conducted direct negotiations for additional funding with the Government. On 6 October 2001, the Chairman and Chief Executive of Railtrack telephoned me and asked whether, if the company made an application to me that night, there was any prospect of my carrying out an immediate interim review. I said that I would of course consider the application, but I should need to know the grounds for the review, how much money was in issue and when the company needed the money. The answers I was given made it clear to me that, in the time available, there was no prospect of doing what the company said was essential to protect it from administration. Accordingly no application was made.

  On 7 October 2001, the court decided that Railtrack was insolvent and so made the order putting the company into administration. The company did not oppose the petition for administration.

  Chairman: That is extremely helpful. Thank you very much indeed.

Mr Stevenson

  734. I reiterate Mrs Dunwoody's comments. You have indicated that the Government wish the successor to Railtrack to "operate on a commercial basis". Do you agree with that? Everything I have heard you say so far would indicate very clearly that it is impossible for such a company to operate on a commercial basis.
  (Mr Winsor) I do agree that the company can operate on a commercial basis and should do so. I do not understand why you think that it would be impossible for it to do so. If it has a secure revenue stream, from stable and predictable contracts which are honoured, for the provision of infrastructure services then it should be able to do that.

  735. I hesitate to bring in in defence of my statement evidence to us by Mr Steve Marshall last week, the present Chief Executive of Railtrack, but he said exactly that. In his view such companies cannot operate on a commercial basis. What I am trying to get at is that the previous Railtrack and any successor will clearly need enormous amounts of ongoing public money if they are to operate on a "commercial basis". Would you agree with that statement?
  (Mr Winsor) They will need large amounts of money, and the railway is subsidised and will continue to be subsidised and therefore a proportion of those amounts will need to come from the public purse. If it is behind your question that the railways should be regarded as an impenetrable black hole for money, and nobody really knows what the costs are and it is just a question of throwing money down this black hole without end, then I would differ from you. I believe that when the infrastructure provider, as we must now call Railtrack, has a sound management structure, clear incentives, a proper knowledge of the condition, capability and capacity of its assets and is properly focused on one thing—which is serving its customers and not complaining about the multiple interfaces and stakeholders pulling them in different directions, just serving the customer—then I believe that the finances of the company will become much more certain.

  736. Throwing money down a black hole is how some people may describe the situation heretofore with Railtrack. I am not in any way, shape or form either indicating in my questions or arguing that that should be the thing we look forward to in the future. However, what I am interested in is your interpretation of commercial bases. On the one hand you could say a company is on its own, it is in the private sector and it should be subject to private sector rules and pressures. On the other hand, given the railway industry we are talking about, which we know is not like that, significant amounts of public money could be required if a future company is to operate on a commercial basis. How do you interpret commercial basis?
  (Mr Winsor) The company is operating so as to make a profit and avoid a loss.

  737. May I ask one more question about the company which may emerge from this? The Government have indicated that their preference is for a company limited by guarantee. I should be interested to know what your views may be about that. Are you or have you been consulted about it? My second point is that what appears to be developing is a structure that will be more fragmented than the structure we have at the moment: special purpose vehicles, vertical integration, regional companies. Is that the way you interpret how the arguments are being developed and Government seems to be attracted to that? Do you think that if such a structure were to emerge it would lead to more fragmentation of the industry and not, as seems to be a requirement, less?
  (Mr Winsor) My view on the company limited by guarantee is that it is one option available to the administrators and they must consider all options. It is the Government's presently preferred option, but the Secretary of State says that he has an open mind and when he considers giving his consent to the transfer scheme, he will of course consider all the options on their individual merits and he will not close his mind until then; of course not. Have I been consulted in relation to this matter? The answer is no, not yet, but I expect to be as the Government's proposals are developed. Do I believe that the company limited by guarantee is a workable solution? The answer is that yes, it is. It is not the only workable solution, but it is possible. It will not have shareholders' equity of course, and therefore the cushion which shareholders' equity provides against inefficiency, incompetence and cost overruns (which are a manifestation of the first two), that cushion will be absent and therefore the company will have to have reserves made up in some other way to cushion it—


  738. It did not work terribly well under Railtrack, did it? It did not really work terribly well.
  (Mr Winsor) The shareholders of Railtrack took a considerable amount of pain in relation to the cost overruns and inefficiencies of the company and the under delivery of the company in the periodic review. There was a significant gap between what the company thought they should have had in the periodic review and what they did have, and we were able to penalise under delivery and inefficiency in relation to control period one. We have also set efficiency targets and other requirements in relation to control period two, which required the company to operate on a commercial basis.

  739. Forgive me, but the correlation you have made between shareholders and controls over the efficiency of the company has just not been there with Railtrack, has it?
  (Mr Winsor) What I am saying is that the shareholder equity provides a financial base which will be reduced if the company is incompetent or inefficient, as indeed has happened. Without that base . . . I am not talking about the shareholders exercising control over the management of Railtrack; the shareholders of Railtrack exercised hardly any control over the management of Railtrack and they have paid the price. However, there is a requirement for there to be some kind of financial cushion and equity provides one kind of cushion. That kind of equity has now been extinguished and therefore other means of providing a financial cushion need to be found. The Government believes—and I am sure they are right—that over time the company will perform well and significant reserves will be built up to provide that cushion. Until those significant reserves and that high performance are achieved, I am not certain where the cushion is going to come from. It may have to come from a Government guarantee. That is a possibility. Mr Stevenson, you asked me about fragmentation of the industry. Would SPVs proliferating on the network increase fragmentation? The answer is yes, it would, at least for the duration when they are in operation. It does depend on what flavour of SPV you have—there are 57 different varieties, or whatever. One way is for the SPV to do the work and then for the assets, once completed and commissioned and in full operation and accepted, to be transferred to the infrastructure provider for all purposes. It would at least need to be transferred to the infrastructure provider for the purposes of the operation of the day to day operation of the industry because signalling matters have to be on a completely seamless basis, otherwise there is a threat to safety as well as economic efficiency.

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