Select Committee on Environment, Transport and Regional Affairs Minutes of Evidence


Examination of Witness (Questions 900 - 919)

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 purse. Why?
  (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.

Chairman

  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 determination—I hesitate to say this—by 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—

Mr Stevenson

  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 SRA's?
  (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.

Mr Donaldson

  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.

Chairman

  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 Bennett

  919. When?
  (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 Committee—if 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.



 
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