Examination of Witness (Questions 900
WEDNESDAY 6 DECEMBER 2000
MR T WINSOR
900. I am coming to that. I want to try to understand
your feeling. Here we have a project, £5.8 billion, which
started off at £2.3 billion. You were not consulted about
the decision to change that project, which more than doubled the
cost, yet a private monopoly company decided to do this, it landed
the decision on your doorstep and then for some reason, this is
what I want to get at, you decided one way or the other that four
fifths of the cost of that project would come from the public
(Mr Winsor) I did not decide that. The contracts which
the Franchising Director signed in 1995, 1996, 1997, with the
private sector companies using the West Coast Main Line contained
an automatic pass-through mechanism. What that said was that whatever
it takes to maintain and renew the network, including its enhancement,
subject to the independent review of the Regulator as to the efficiency
of those costs, will pass through automatically to the public
purse. So the Franchising Director in 1996-97 took the decision
that whatever the project costs, subject to review and satisfaction
by the Regulator, the public purse would pay.
901. And Railtrack knew this.
(Mr Winsor) Certainly they knew it. These are published
documents. They were published in 1997.
902. That is very interesting. You talked about
the SRA having a chequebook. It had better be a very thick chequebook.
(Mr Winsor) I believe that Sir Alastair Morton is
no stranger . . .
903. What incentive has Railtrack got to do
the job much better than it is doing, a lot better than it is
doing, when, when the pressure is on and it is on, it finds itself
in a position where the Government through one source or another
is pouring billions into a private monopoly company? What incentive
does that give them to say they have not got it quite right and
they had better do things better?
(Mr Winsor) Railtrack believe that West Coast Main
Line costs are £5.8 billion: I believe that they are £5
billion. There is an £800 million gap there and I can explain
how I have disallowed that £800 million. Railtrack has taken
an £800 million hit on the costs of the West Coast Main Line.
That money comes straight out of their shareholders' pockets because
the contract for the upgrade of the West Coast Main Line was in
part a fixed price contract and it is in that respect that Railtrack
take a hit, and in part it was an emerging costs contract which
the Government approved at the time. That does not mean to say
that the costs are whatever Railtrack chooses them to be. The
costs are what I determine to be the costs which will be incurred
by an efficient and competent operator. The decision for the change
in the signalling strategy, which is the main reason why the costs
went up, was not a decision for Railtrack alone to take, but they
believed and our consultants accepted this, that the move to what
is called moving block signalling, which would have been significantly
more advanced but also significantly cheaper, was a signalling
system too far. It was just a leap of faith and technology.
904. They knew that. It had never been used
on that kind of line. This Committee has evidence, this Committee
has actually commented on that in conclusions of various reports.
They knew right from the beginning that this was a system which
had never been used on a complex line like the West Coast Main
Line where there are constant crossings. It is all very well for
you to say that they decided to upgrade it: they did nothing of
the kind. They were given advice, they ignored the advice, they
came back with a much more expensive scheme and they expect the
taxpayer to cough up. That may be your idea of a good economic
deal: it seems to me like a bad one.
(Mr Winsor) It is not my idea of a good economic deal
but it was the determinationI hesitate to say thisby
my predecessor and by the Franchising Director at the time that
this was an acceptable signalling technology and that the Franchising
Director would sign up to a contract which would commit them for
the next 15 years to pay whatever it costs for the maintenance
and renewal of the network subject to the jurisdiction
905. Are you aware of evidence which Mr Marshall
gave to us last week? When asked about the cost of raising this
£4 billion on the capital markets, he admitted that to do
that Railtrack would have to issue a rights issue of £1 billion,
in other words it would cost them £1 billion to raise this
on the capital markets. Are you aware of that?
(Mr Winsor) Yes, he said that.
906. Did you take that into account when you
made your settlement?
(Mr Winsor) No, the settlement does not require Railtrack
to do a rights issue.
907. No; no. They would have to if that £4
billion were not there. Do you see the point I am getting at?
(Mr Winsor) Yes, I do see that. It is up to Railtrack
how it raises its capital. It may be that it finds it the most
economic way of doing it by doing it by way of a rights issue.
908. In July Mr Corbett told us that the most
effective way of raising private capital would be for the SRA
to take preference shares in Railtrack. That is what he told us
in July. We are still looking at that. Would you accept the proposition
that without this grant, this free, gratis, grant a £1 billion
rights issue would have to be organised by Railtrack?
(Mr Winsor) That is a judgement for the company to
make, but yes, they will have to raise the money elsewhere.
909. Last week Sir Alastair Morton in evidence
to us, when asked a question about this grant, said that it was
a grant, it was not a partnership. He said he understood the question
and it was a grant, a gift. That is Sir Alastair Morton, the one
with the chequebook; it is a gift. Do you agree with that?
(Mr Winsor) It is an amount of money which once paid
will not be returned, so in that sense it is a gift, but it is
a gift with some pretty significant strings attached to it.
910. What would the strings be?
(Mr Winsor) The accountability for Railtrack in relation
to the West Coast is going to be stronger than Railtrack's accountability
in relation to any aspect of the maintenance and renewal of any
other part of the network. May I summarise what the accountability
is? We shall require Railtrack to provide to us a detailed programme
of works for the West Coast. We shall establish milestones to
monitor progress. We shall appoint a separate reporter, a system
of checking on the actual work that Railtrack is doing, to look
at the West Coast. The SRA is considering appointing an independent
engineer to assess Railtrack's delivery and my reporter and their
engineer will work together. Stage payments will be made by the
SRA, in the grant, to Railtrack on the achievement of specific
milestones. A substantial proportion of the SRA's funding will
be retained until Railtrack has delivered on the commitments.
Railtrack will produce quarterly reports against the milestones
to both the SRA and to me. If I am not satisfied with the achievements
of milestones, I shall require an explanation and a remedial plan.
If I am not satisfied with that, then I shall take enforcement
action. That could be an enforcement order under section 55 of
the Railways Act to take a specific action which is a statutory
duty. I can adjust their funding in the third control period for
the periodic review, in other words claw the money back, or I
can impose a monetary penalty. Those powers of enforcement have
been significantly enhanced in the Transport Act 2000. Yes, there
are strings attached to them, but they are strings of steel.
911. If, as we hope not, I suppose, Railtrack
does not deliver, what would be your ultimate sanction?
(Mr Winsor) The ones I have mentioned.
912. Removing the licence.
(Mr Winsor) No, I am not empowered to remove their
licence; that is a matter for the Secretary of State.
913. Would it be on your recommendation or the
(Mr Winsor) I expect the Secretary of State would
ask for my opinion and that of the SRA but it is a matter for
him. Because the enforcement mechanism is as strong as it is in
the way I have described, as enhanced by the Transport Act, then
it seems to me that thoughts of taking away the licence need not
come into it because the enforcement powers are so good. Wait
until you see how we use them, if we do?
914. Yes, we do wait to see, with patience.
(Mr Winsor) I hope it will not be necessary.
915. The real point about that surely is that
if you know that and the Committee now knows that then Railtrack
knows that. They know they are not going to have their licence
taken away from them, do they not?
(Mr Winsor) They know that measures short of revoking
their licence, which they may think is such a nuclear option it
could never be used, those measures falling short of licence revocation
are so strong that they had better buck up and get on with the
project and do it well.
Chairman: It is nice to know that they are not
going to get so much of our money and you are going to claw it
back. That gives us great comfort.
916. Are you satisfied with the progress that
Railtrack is making with the development of its asset register?
When do you expect it to be completed?
(Mr Winsor) I am a bit disappointed with Railtrack's
attitude to the asset register. Railtrack has had three goes at
establishing an asset register and the one they are embarked upon
at the moment is the most promising. However, they have reacted
to my proposals to establish a licence condition requiring them
to build up the asset register in a somewhat negative way, which
I find disappointing but by no means the end of the story. The
asset register is perhaps the most important of the seven additional
network licence conditions that I am pursuing with the company.
If I do not get it, then I shall have to refer it to the Competition
Commission. The case for the company establishing a comprehensive
and reliable database of the condition, capability and capacity
of their assets post-Hatfield is overwhelming. I believe the company
will take that into consideration when they make their decision
as to whether or not to force me to go to the Competition Commission.
917. Why do you think they take a negative attitude
to the asset register?
(Mr Winsor) I think that it may be a hangover from
the old regime under the former chief executive, who regarded
regulation as a little bit of a nuisance.
918. For a while; yes. He revised his ideas
about a fortnight before he left.
(Mr Winsor) His opinions will live with us for a long
time. I hope the new approach by the company will be much more
positive. I am optimistic for a more positive response on the
asset register, but I am not going to hold back on this. We are
going to get this asset register by fair means or otherwise.
(Mr Winsor) The asset register licence condition was
published for informal consultation a number of months ago and
I believe that we sent a copy to each member of this Committeeif
we did not I apologise. It is published on our website. We have
very significant support for it from everybody except Railtrack,
particularly rolling stock manufacturers, but lots of other people.
If the company face us down on this then I shall refer the matter
to the Competition Commission. I am reluctant to do it because
it will take three to six months for the Competition Commission
to do the work in order to give me the necessary licence modification,
but I am not going to wait much longer. Having said that I would
have pressed this to a decision from Railtrack earlier than this
if it had not been for the Hatfield accident. We do not want to
overload them. They have their hands full at the moment and nothing
at the moment is more important than a safe network and getting
the recovery plan implemented.