Examination of Witness (Questions 740
WEDNESDAY 7 NOVEMBER 2001
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.
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 beenand 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 productiveI
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 Departmentand this was
at a time when I did not think they would appoint Richard Bowkeris
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
and most recently by Lord Macdonald on 5 April 2001.
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 questionhe signed this
letter as well, but they all signed ithave "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
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
bodyand the essential independence is described in that
letter and elsewherewith 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 afternoonsif
I may put it in a flippant way. Nor can you have a refereebecause
the independent status of the Regulator is essential in arbitral,
quasi-judicial and other functions which stand between the various
playersyou cannot have the referee in a football match
playing for one side. I think those analogies are fair ones.
745. There are sometimes suggestions that is
exactly what is happening.
(Mr Winsor) Not in Scotland.
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
(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 mattersdepending on what kind
or what flavour of vertical integration is being contemplated,
because there are all sorts of ways of doing thatis 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 operatorswho may be
very substantial companies in their own rightswould 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.
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
(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
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
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
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 moneythat is the financial mechanism
to bring forward the effect of grants from later onrising
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
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 laterthey 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 2000the
periodic reviewand 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".
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.
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
(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 duethe 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 hoursthat is immediately after
my meetingand 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-openerthe 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
Official Report (HL), Vol 624, 5 April 2001, col 976. Back
Note by witness: This letter was written on 12 October. Back