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


Examination of Witness (Questions 740 - 759)

WEDNESDAY 7 NOVEMBER 2001

MR TOM WINSOR

Mr O'Brien

  740. Arriva. They took over the franchise of Northern Spirit in 2000, were granted a two-year extension of their licence and received a substantial amount of money. The people of West Yorkshire feel they have been short changed: we have a reduction in services. What assurances can we have that this will not happen elsewhere in the country and that we can have a review of what is happening in West Yorkshire?
  (Mr Winsor) I am afraid I have no jurisdiction in relation to these matters. They are entirely for the Strategic Rail Authority as to who should be the holder of a franchise and the terms on which the franchise is granted, including the duration.

  741. What about it happening somewhere else in the country?
  (Mr Winsor) I have no jurisdiction in relation to franchising anywhere in the country.

  742. None whatsoever.
  (Mr Winsor) None.

Mr Donohoe

  743. As far as the situation is concerned, with all the different factions, yourself as the Regulator, the Strategic Rail Authority, the train operating companies, do you not think that perhaps this is the moment for a fundamental change and that the Office of the Regulator should be merged with the Strategic Rail Authority itself?
  (Mr Winsor) I am interested you characterise them as factions. I believe—

  744. They are certainly not partners.
  (Mr Winsor) I may differ from you on that, if I may. The impression may have been given in the past that the Office of the Rail Regulator and the Strategic Rail Authority did not get on. Whatever that may have been—and I would contest that in almost every respect, I believe that we had a good working relationship in many respects and it was constructive and productive—I do believe that the appointment of Richard Bowker, with whom I have worked and whom I have known for a number of years, provides a very significant opportunity for a real constructive dialogue, a release of creative energy in the two organisations which has not been seen in the past. He and I have discussed these things on many occasions before he was appointed and since, and I believe that offers a very real prospect for future improvement of the railway. What I have said to the Department—and this was at a time when I did not think they would appoint Richard Bowker—is that they do not need to alter the jurisdictions of the Office of the Rail Regulator and the Strategic Rail Authority. In fact the jurisdictions of the two organisations were considered at great length by Parliament and by this Committee and by others and the railway industry and the overlapping jurisdictions and the points of tension and friction and ambiguity were sorted out in the Transport Bill 2000 which received Royal Assent less than one year ago. Parliament spent a very long time dealing with that legislation and I believe it got it right. The two organisations have very different jurisdictions. They are not in conflict, they do not overlap. This was asserted by Ministers as the Bill went through the House of Commons[1] and most recently by Lord Macdonald on 5 April 2001[2]. The organisations should operate on a separate basis for a number of reasons and I shall come to them if I may in a minute. I should mention that Mr Bowker has stated in writing twice this year that the Office of the Rail Regulator must remain independent and he has published his views that an ORR/SRA merger would harm investor confidence. I agree with him in every respect. Before Mr Bowker was appointed as Chairman of the Strategic Rail Authority, he was the author of a letter signed by all of the owners of the franchised passenger services and EWS, the freight company, in which he said that the companies in question—he signed this letter as well, but they all signed it—have "grave concerns" about "legislation which may affect the independence of the regulatory regime". They said that "certain principles were established at privatisation which [they] believe must be preserved. These principles are fundamental to the commercial stability of the industry and the long-term availability, sustainability and cost of finance". They are a part of "the strong checks and balances inherent in the industry structure. It is essential that those checks and balances remain. Given the events of last week[3] it is even more important that financial markets remain confident in the future of rail investment. Among the most fundamental of these principles is that the industry is subject to regulation that is independent of Government". "This independence is . . . fundamental in preserving the commercial balance of risk". It is "a cornerstone of Government policy" and they urge the Government "not to propose legislation which affects the independence of the regulatory regime". They described it as "an essential component of the industry structure going forward". I agree with everything that Mr Bowker wrote and which all the passenger train operators and EWS signed. For that reason, I believe that a merger of the ORR and the SRA cannot, as proposed, take place because you cannot merge an independent body—and the essential independence is described in that letter and elsewhere—with a non-independent body and still preserve independence. You cannot do that any more than you could for example as a single authority be independent in the afternoons—if I may put it in a flippant way. Nor can you have a referee—because the independent status of the Regulator is essential in arbitral, quasi-judicial and other functions which stand between the various players—you cannot have the referee in a football match playing for one side. I think those analogies are fair ones.



Chairman

  745. There are sometimes suggestions that is exactly what is happening.
  (Mr Winsor) Not in Scotland.

Mr Donohoe

  746. In your fairly lengthy response to the question at one point you gave the impression that part of the problem was personalities. That was perhaps at the very base of what was wrong. Where would you say was that fault?
  (Mr Winsor) I am reluctant to get into a discussion of personalities, save only to say that Sir Alastair Morton is a man for whom I have very considerable respect and as an individual I like him very much. He and I took diametrically opposing views on a number of matters, including the matters I have just described, and however much I tried to persuade him of the alternative view I was unable to do so.

  747. On a scale of one to ten, how do you think you are placed as far as having a future as Regulator is concern?
  (Mr Winsor) What is one and what is ten?

  748. One is that you are not going to be there very much longer. Ten is that you have a secure future.
  (Mr Winsor) The answer is that I do not know, but I can offer you some observations. I have been appointed as Regulator under section 1 of the Railways Act 1993 for a five-year term. I am less than half way through that term of office. I intend to serve only one term of office. I may be removed on the grounds of incapacity or misbehaviour, which are the same grounds of removal as a High Court judge, and until I commit one of those offences or one of those circumstances befalls me then I have no present expectation of leaving office early. However, it is possible for Parliament to legislate me out of existence. I believe that Parliament will not do that, but that is for you not for me.

  749. I am grateful for that answer. May I turn your attention to some of the other elements which are of concern to the Committee and to me and that is the question of the vertical integration? What are your views on the idea of having a trial or a test in Scotland? Would you be a supporter of that or would you see that as rather likely to lead to further problems and fragmentation?
  (Mr Winsor) I believe that the railway industry should of course keep an open mind in relation to any serious proposal which is likely to improve its efficiency, its performance and the service to passengers and freight customers. Therefore I believe that if a trial of these matters—depending on what kind or what flavour of vertical integration is being contemplated, because there are all sorts of ways of doing that—is proposed, Scotland may be regarded as a natural place for it to take place, but it is not the only place. For example, in the area of the country covered by South West Trains they are by far the predominant train operator in that part of the country (although not the only one) and it might work there; it might work in East Anglia, particularly if the Great Eastern and Anglia franchises were to be merged. There are drawbacks to vertical integration. There are advantages as well, advantages in relation to the train operator actually having a direct handle on what happens to the maintenance and renewal of the infrastructure on which he depends. A great deal has been said about the disadvantages of separating the wheel and the track. I understand that. I believe that we can overcome these difficulties in other ways but vertical integration is an available option. However, some people regard Scotland as a simple case, but in fact there are six train operators in Scotland. ScotRail is only one. There are five secondary users there: Freightliner, EWS, Virgin, GNER and so on. Those operators would need additional protection against discriminatory behaviour if there were vertical integration in Scotland. To give you a simple example, what would be the case, how would you operate, how would you design management and operational practices so that a signaller, when he is faced with operational disruption, perhaps in a congested part of the network at a busy time of the day and there is pressure to take decisions very, very quickly as these professionals do, what are we going to do, how are we going to design things so that the signaller does not have an instinctive and natural reaction to say that is not his company train and he is going to disadvantage it? You would never be able to prove that that decision had been taken for that reason. The secondary operators—who may be very substantial companies in their own rights—would be very concerned about that.

  750. Would you see a difficulty with the Strathclyde Passenger Transport Executive as part of that?
  (Mr Winsor) Strathclyde PTE ought to be very closely involved and consulted in the design of such a trial.

Miss McIntosh

  751. From your evidence you clearly place great value on the fact that your role is that of an independent regulator. If your independence were compromised in any way, would you tender your resignation?
  (Mr Winsor) It would depend how it was compromised. I believe that if my independence is to be taken away, it should be taken away with the authority of Parliament and only in that way. After all it was conferred with the authority of Parliament and in legislative terms that is the only way it could be taken away.

  752. Do you stand by the remarks you made in your press notice of 12 June 2001 in which you declared, "Railtrack now has the environment to confound its critics and succeed".
  (Mr Winsor) No, because the company is in administration. The company has been declared by the High Court on 7 October 2001 to be insolvent. It does not now have that environment: its financial position has changed radically. The fundamental point is that when I made that statement on 12 June and indeed right up to 5 October 2001 I did not know that the company was claiming to Government that it was in serious financial difficulties. The periodic review provided the company with a 50 per cent increase in its revenues. The company's representations to my office were all consistent with the company having enough money to keep going until an interim review in relation to the outcome of Hatfield some time in summer 2002. Until 5 October, I had no reason to believe that was not the case. The company should have informed me if it was in such serious difficulties.

  753. Is it not the case that the Government was due to make the next tranche of the regular subsidy on 1 October which would have carried the company over? The company was solvent until 1 October, at which time the Government pushed it into insolvency because it withheld the £445 million due on 1 October?
  (Mr Winsor) I think the position was a little different from that.

  754. That is the evidence we took and was confirmed in a statement by Stephen Byers, the Secretary of State to this House. Are you contradicting both those sets of evidence?
  (Mr Winsor) No. The company's financial position on 5 October 2001 was that it had a £1 billion uncommitted and undrawn loan facility and it had a right to £0.5 billion of what is called Renewco money—that is the financial mechanism to bring forward the effect of grants from later on—rising to £0.7 billion by March 2002. This was money which was committed to by the Strategic Rail Authority in a legally binding agreement signed in April. When the Government decided not to proceed with the Renewco arrangements, the company had a right of redress which according to the information which I have seen it did not exercise. Under paragraph 3.3 of the contract between the Strategic Rail Authority and Railtrack, signed on 1 April 2001, the Renewco arrangements, this financing structure, had to be set up by 30 June 2001. If it was not set up by that date, then the company had an additional 21 days during which the SRA and Railtrack would consult to seek an acceptable alternative financing scheme. If at the end of those 21 days there was still no alternative financing scheme, the company had the right to apply to me for an interim review to restore its cashflow position. I do not know why the company did not enforce that contract.

  755. I put it to you today that you have just given us evidence this afternoon that the company did come to you, they called on you on Saturday, 6 October, that you were in fact minded to make such an interim review but you were told by the Secretary of State privately that if you were to do that he would block that by rushing emergency legislation through the House of Commons. Can you confirm or deny that?
  (Mr Winsor) I think you are a little wrong but broadly you are right. May I say what did happen? On the evening of Saturday 6 October, I took a telephone call from Mr Marshall, the Chief Executive, and Mr Robinson, the Chairman of Railtrack. If I may consult my contemporaneous notes of the call, they rang me at approximately ten minutes past seven on Saturday night and I returned their call about ten minutes later—they paged me. When they came on the line, Mr Robinson explained that it was a conference call and that Steve Marshall was with him. I was not aware that anyone else was there; not that I object. The Railtrack board was meeting and they had stepped out to talk to me. Mr Marshall said that they were making the call to me, in his terms, "as a matter of due diligence", by which, from the remainder of the conversation, it was clear to me that they were merely going through the motions of discussing an interim review with me. It was very apparent, from the tone used by both of them and the course of the conversation, that they had no expectation that I would be able to provide them with any cause for hope that they might escape their present predicament.

  Mr Marshall did not apply for an interim review. He asked whether, if the company made an application for an interim review, there was any prospect of my carrying it out by Sunday evening, 24 hours. I asked what the grounds for the interim review would be, how much money they needed and by when they needed it. I was told by Mr Marshall that he could think of only two grounds, namely the material shortfall between the company's actual revenue requirements and the regulatory settlement of October 2000—the periodic review—and the impact of Hatfield which has been very severe for the company. He said that they were nowhere near ready to make a properly justified application on either ground.

  Mr Robinson indicated that he believed that I would have neither the means nor the will to carry out an interim review. I disagreed with him. I said that if an application were made to me I would consider it on its individual merits, but I needed to have more information from them. I also said that it would be possible, if an appropriate case were made, for me immediately and publicly to announce the initiation of an interim review, but I did not think it would be possible for me to complete it in 24 hours over a weekend. I asked what the grounds were. They told me what they were. They did not at that time say that it was because the Renewco arrangements had been denied to them. My recollection is that the Renewco arrangements being denied were a byproduct of the major financial difficulties I have mentioned. I asked how much money they needed. Mr Robinson said hundreds of millions of pounds.

  756. Four hundred and forty-five million.
  (Mr Winsor) He said "hundreds of millions". I asked how many hundreds. He said that he did not know. He just said that it would be hundreds of millions. I asked when they needed the money. He said "Monday".

Chairman

  757. Is that the end of that conversation?
  (Mr Winsor) By no means because it comes to the Secretary of State's possibility of legislation which I think you want me to come to.

Miss McIntosh

  758. That is very helpful. May I just press you on the point? Had the Secretary of State already told you that if you applied for an interim review he would push through emergency legislation to block such a review?
  (Mr Winsor) Broadly yes.

  759. Could you give us the details please, because it is extremely important that we place this on the record this afternoon?
  (Mr Winsor) Yes, without difficulty. I met the Secretary of State at 4 pm on Friday 5 October. I did not know what the meeting was about and I went prepared for a different meeting. It was immediately apparent to me that they wanted to talk about the financial predicament of Railtrack. Mr Byers told me that the Chairman of Railtrack went to see him at the end of July to explain that the company's financial position was far worse than they had expected and that special measures would be required to restore its viability. Railtrack had been advised by Crédit Suisse First Boston (CSFB) and they had produced three options which Mr Robinson had then put to Mr Byers. They said there were three Rs: renationalisation, restructuring or receivership. Mr Robinson's proposition also involved a three to four-year suspension of the regulatory regime and a number of other measures. The Government did not find those measures attractive. I was not surprised that they would not.

  Mr Byers said instead that the Government had decided to put the company into railway administration that weekend. They had decided that there would be no more financial support for Railtrack and that would mean that the Renewco arrangement would not also proceed. Mr Byers explained that the company was insolvent, its liabilities outstripped its assets and it was unlikely to be able to pay its debts as they became due—the two statutory tests of insolvency as you will realise. Mr David Rowlands, a senior civil servant at the Department of Transport, was also present. He explained that the affairs of the company had been very thoroughly examined by the Government's financial advisers, Schroders Salomon Smith Barney, and they had been working on this possibility for the last two months. Schroders' analysis had been that the company was insolvent because it would be unable to draw down on its £1.56 billion credit facility or get away its intended bond issue and that was because in both cases the company needed to be on a going-concern basis and the directors would need to make a declaration to that effect. Railtrack's interim accounts due on 8 November 2001 were likely also to be qualified on the going-concern grounds. Mr Byers said that for this reason, the inability to make the going-concern declaration, the Government had decided to turn off the money supply, which meant allowing no more funds above the regulatory settlement and accordingly the Renewco arrangements would not proceed. Mr Robinson was due to meet Mr Byers at 16.45 hours—that is immediately after my meeting—and he would be told that then.

  I said that I was very surprised at the circumstances as they explained them to me and the suddenness of the decision on railway administration. I explained that we at ORR had had no indication of any imminent insolvency from the company. I said that by virtue of the periodic review they had a 50 per cent increase in their revenue and that in the absence of any justified application to the contrary we had told the company that that would be enough to keep going until the Hatfield re-opener—the interim review; some time in summer 2002 was the present expectation. With that new regime having kicked in only on 1 April 2001, I said that it was remarkable that the company's financial predicament should be considered to be so serious so suddenly and why, if things were that bad, had the company not informed the Regulator? I said that it would have been incumbent on the company to approach the Regulator if its finances were so precarious. Neither the Secretary of State nor Mr Rowlands gave me any answer to this question. It was apparent to me that the company had been making its case for additional financial support only to the Government and that it had been deliberately keeping the Regulator in the dark about its view of its financial position.


1   Official Report (HC), Vol 349, 10 May 2000, cols 907 and 919-921. Back

2   Official Report (HL), Vol 624, 5 April 2001, col 976. Back

3   Note by witness: This letter was written on 12 October. Back


 
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