Select Committee on Transport Minutes of Evidence


Examination of Witnesses (Questions 1260-1279)

MR TOM WINSOR, MR MICHAEL BESWICK AND MR JOHN THOMAS

29 OCTOBER 2003

  Q1260 Chairman: We are all European now, Mr Winsor.

  Mr Winsor: What is unusual about a contract saying, "I promise to pay you money in the following circumstances"? If I were a shipbuilder and I built an aircraft carrier for the Ministry of Defence, and once I had built it and had handed it over and they say, "Thanks for the aircraft carrier but we choose not to pay for it" or, "We are only going to pay you half of the amount in question", I would happily sue the Government because that is what I would be entitled to do and I would be successful. What is unusual—and I say there is nothing unusual—between the Government being required to honour a private law contract in the railway industry and the Government being required to honour a private law contract in any other field of activity?

  Q1261 Clive Efford: Except that in most contracts the end fee is agreed beforehand, whereas in this you seem to be suggesting that the government has signed a blank cheque for whatever figures you fill in for the future.

  Mr Winsor: You could characterise the contract as follows: there is a contract between the state and the private sector. It says that every five years or so there is a question to be arbitrated. The question is how much money does the network properly require and what should the charges be. It has very properly put that question into the hands of an arbitrator—in this case the Regulator—but it could have been an arbitrator or a judge, none of whom would be elected. Having decided in a sovereign act to put that question into the hands of an independent third party, operating according to statutory public interest criteria and with a constrained discretion as indeed section 4 of the Railways Act gives me, there are no grounds, it seems to me, for the Government later to complain that they wish they had not done it and they have chosen not to pay.

  Q1262 Clive Efford: You have said in recent speeches that your function is an essential condition for investment in the industry. Can you quantify the investment that has been made as a result of your function?

  Mr Winsor: Is extremely difficult to do that. One of the essential requirements of private investment in the industry is independent economic regulation so that those who put money into the industry, whether as equity investors or providers of capital, can know that this industry is going to be healthy on a long term, sustainable basis, free of political considerations which will operate so as to turn on and off the money tap on a whim. That is what British Rail had to suffer during all the years of nationalisation and the result of that was, in some cases, the British Railways Board did not know from year to year, even after the start of a financial year, how much money they were going to have. As a result, we had patchy maintenance and the state of the network is in part attributable to that. What privatisation and the creation of independent economic regulation achieved was that these questions as to the financial health of the industry would be taken away from political control and put, according to public interest criteria, into the hands of an officer appointed by government but independent of government. It is not possible to say who would have come into the industry or who would not have come into the industry and to what extent as a result of a different structure or as a result of the presence of independent economic regulation. The fundamental point that it is necessary to make is that having started off restructuring the industry on a particular basis, with independent economic regulation, it is extremely difficult, if not impossible, for government later to change its mind and expect the private sector investors to be quite happy about it. When government did almost change its mind on 8 October 2001, when the Government was getting ready to put in place a Bill to take my office under direct political control, the private investors, including all the passenger train operators and EWS, the principal freight operator, wrote a letter to the Secretary of State for Transport on 15 October 2001 saying, "Do not touch independent economic regulation. It is an essential cornerstone of the basis on which we came into the industry." The letter in question was signed by all the passenger train operating companies and EWS. Indeed, it was also signed by Richard Bowker, who is now the chairman of the Strategic Rail Authority but was then chairman of the Virgin Rail Group. I go further: he even drafted it. It is essential for private investment in the railway industry that things are not turned on their head in an arbitrary way.

  Q1263 Clive Efford: You have said in the past that part of your function is to give protection to operators and investors in the industry but if they are effective operators and investors why do they need protection?

  Mr Winsor: They need two kinds of protection. Operators and investors need to know that monopolies and dominant market powers will not be abused. There is only one network. There is only one Network Rail. Therefore, train operators, passenger and freight, and those who stand behind them and invest in them need to know that Network Rail will not be permitted to abuse its monopoly. My goodness, Railtrack surely did do that through a deliberate policy of neglect of its assets and hostility to its customers. The industry also needs to know that the finances of the industry will not be arbitrarily altered by political intervention. For example, which investor would invest as Virgin and EWS have in well over £1 billion-worth of new rolling stock if the network on which it must operate was going to be arbitrarily put into a system of decline and neglect because the Government decided to turn off the money tap? Who would buy a Ferrari motor car if the infrastructure on which it had to run was going to be some—

  Q1264 Chairman: That is not quite the situation in relation to Virgin, is it? Virgin's involvement at the present has a large degree of management about a management contract.

  Mr Winsor: Yes, but they came into the industry—

  Q1265 Chairman: They came into the industry on one basis; they are not operating on that same basis now.

  Mr Winsor: Given that £1.5 billion-worth of rolling stock was largely debt financed, there are a lot of nervous financial institutions who do not want to see the basis on which they have lent money being arbitrarily altered.

  Chairman: The situation is not quite as you describe it.

  Q1266 Clive Efford: The fear is there because things will be altered because of the failures. If these operators are performing in the way that they state they are intending to do when they take on these contracts, they have nothing to fear. When they fail, is not that when they need that sort of protection?

  Mr Winsor: No. If the train operators are honouring their contracts to the letter providing the services that they are required to provide to their customers, they can still face an unjustified interference in their rights and in the value of their businesses if the infrastructure on which they depend is put into managed or unmanaged decline and neglect.

  Q1267 Clive Efford: In terms of Network Rail and the maintenance contracts, how do you view that in terms of its impact on your role in protecting and providing for operators and investors?

  Mr Winsor: There is a lot positive to be said about Network Rail's decision to take the maintenance of the railway in house. However, there are real concerns in the industry that too much has been done too fast. We and the company must be cautious that the senior supervisors and foremen who at the moment are in the contractors come across into Network Rail and are taken in house rather than being left in the maintenance companies. Network Rail will have a considerable headache if they intend to run the maintenance all in house without the benefit of those senior workers.

  Q1268 Clive Efford: Renewals still remain with private contractors. Is that the right decision? Do you have a view about whether there is that clear distinction between maintenance and renewals?

  Mr Winsor: There is a fairly clear distinction between maintenance and renewals and the company is right to say that renewal activity is easier to specify and police whether you are getting what you are paying for in terms of quality, timeliness and efficiency than maintenance work, because they are much more discrete projects. The position I take on maintenance and renewals is that this company, Network Rail, is the monopoly provider of an essential service. It has public interest obligations under its network licence. It has private law obligations under its contracts with its freight and passenger train operating companies and it must discharge all of those obligations whether it does this work in house or contracted out.

  Q1269 Mr Donohoe: Why is the railway still performing so badly?

  Mr Winsor: The railway is performing even worse than the last time you asked me this question. The railway is performing badly for a number of reasons, but let us consider how badly it is performing. Last year's achieved total of minutes delay attributable to the infrastructure was 14.7 million minutes. In October 2000, just before the Hatfield accident, the rate was 7.7 million minutes. Performance is therefore 92% worse than before Hatfield and yet costs of the running of the network have gone up by 100%. Therefore, we are concerned that performance should be brought back onto an even keel. Why is it so bad? It is bad because of the legacy of Railtrack with its policy of neglect and hostility that I mentioned. It is bad because of the lost year of the administration of Railtrack, when costs exploded and performance plummeted. It is bad because the company still has to regain operational competence in terms of the management of delay. The number of incidents of delay has not gone up by any appreciable amount in the last three years, but the amount of delay per incident has gone up by 65 or 70%-simple things like, when a particular piece of work has been done on the railway and there has been a diversion in place in order to enable that work to be done, the workers who have finished the work telling the signallers that the diversion can be taken off.

  Q1270 Mr Donohoe: What do you think the role of the Rail Regulator has been in that? Has it improved the situation or is it part of the problem?

  Mr Winsor: During the period of administration and indeed since Network Rail took over, the company has been trying to get a grip on the inheritance from Railtrack and we have been giving the company regulatory pressure, yes, but not enforcement action, at least not at present, because we were sympathetic with the inheritance that they had, but intolerant of any situation in which the company could make improvements and was not making improvements.

  Q1271 Mr Donohoe: Your particular post comes to an end on 4 July next year. Do you accept that that is a move in the right direction or in the opposite direction?

  Mr Winsor: That I should leave office?

  Q1272 Mr Donohoe: Not you personally, but that the post of the office of the Rail Regulator is changed. Do you think that is a good move? Do you think that will improve efficiency or do the exact opposite?

  Mr Winsor: It is hard to tell. The other regulatory authorities have had a mixed experience in moving from single person regulator to regulatory board. Parliament has already taken the decision that a regulatory board—

  Q1273 Mr Donohoe: You have played your part for some time in the post. Do you accept that the replacement to your post will improve the thing or not? You are freer than anyone else, I would suggest, to be able to give a good, solid, simple, straightforward answer to that. What is your answer? Do you believe that it will become better as a system or worse on your removal?

  Mr Winsor: A regulatory authority is not like a company. The diversity, complexity and urgency of the issues which we face are in many respects much greater than they are facing any public limited company. Therefore, a board structure has its drawbacks compared to the decisiveness of a single person regulator with a non-statutory board, which is how my organisation operates and has operated for the last ten years, including under my predecessor. That is inevitable, that we are more able to be more nimble in the present structure than possibly in the future structure.

  Q1274 Chairman: You said in January that you had put things right with the flaws in the regulatory regime.

  Mr Winsor: The flaws in the regulatory regime were in the financial framework, the contractual framework and the licensing matrix. Mr Dohohoe's questions I think are directed to the institutional and operational structure of the offices themselves.

  Q1275 Chairman: Do you think you have dealt with all the issues you set out in the statement in 2002?

  Mr Winsor: We have in large measure tackled the challenges which we felt were facing the network provider if it were taken over by Network Rail. We are now doing the access charges review which the company at first said would be unnecessary. Indeed, the Secretary of State for Transport at the time said it would be unnecessary because Network Rail would have to live within the existing regulatory settlement of approximately £3 billion a year. That has been shown to be unsustainable. We have made progress in terms of the access charges review, in terms of the accountability of the network operator to its dependent customers through the establishment last June of the model contract for access to the network, and we have made significant progress in terms of the reforms to the network licence, nine new licence conditions which we have intensified as a result of Network Rail taking over. We have done virtually all the things we said we would do last June.

  Q1276 Mr Donohoe: In terms of the evidence that we have from the Dutch railways, for instance, they argue that the idea of having the SRA or equivalent and a regulator diminishes the efficiencies within the railway. Would you agree with that?

  Mr Winsor: Were they talking about this country's railway?

  Q1277 Mr Donohoe: They were indicating, by virtue of their own experience, that if that were to be the situation in Holland the position would be a lot worse and that is in part the reason why our railway service, as you have indicated, is now worse than it was before the introduction of such a system.

  Mr Winsor: I do not know how it would work in Holland. The Dutch railways' experience of the UK system is of course quite short. There are many advocates of regulatory merger. They are not present in the room today, but there has been a debate on merging the ORR and the SRA for some time past. It was started by Mr Bowker's predecessor, Sir Alistair Morton, with whom I had very good relations. The debate is largely incoherent and largely based on ignorance or a deliberate misunderstanding of the facts.

  Q1278 Chairman: Surely not? In the rail industry?

  Mr Winsor: The answers that I gave to Mr Efford in relation to private investment in the railway I think demonstrate how important independent economic regulation is. There is a separate question as to the role of the Strategic Rail Authority and its relationship with the state, but that is not a matter for me.

  Q1279 Mrs Ellman: Could your decisions cause a rephasing of modernisation of the west coast main line, Norfolk to Crewe?

  Mr Winsor: Yes.


 
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