Examination of Witnesses (Questions 1260-1279)|
29 OCTOBER 2003
Q1260 Chairman: We are all European now,
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 unusualand
I say there is nothing unusualbetween 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
arbitratorin this case the Regulatorbut 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
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
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
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
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
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
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
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
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
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
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
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.