Regulator lambasts Network Rail

Winsor warns £12bn cost explosion caused by absence of shareholders in government-backed body

The Rail Regulator Tom Winsor yesterday delivered a devastating attack on the Government-backed company which now runs the rail network, saying that lack of proper shareholder control over the business had led to a £12bn "explosion" in costs.

The indictment of Network Rail came as ministers prepare to order big increases in train fares to cover the costs of operating, maintaining and renewing the national rail system.

Network Rail, the not-for-profit entity which came into being last October, is asking Mr Winsor for £27.8bn to run the network for the five years to 2006 compared with the £16bn he had agreed to allow its predecessor Railtrack.

Mr Winsor said that the stewardship and performance of Network Rail had been "very far from satisfactory" adding that the "jury is still out" on whether it was any improvement on Railtrack, which was forced into administration by the former Transport Secretary Stephen Byers in October 2001.

"The main stewardship failure is the explosion in costs and the explosion in costs is a function of the fact that there is no shareholder equity any more," said Mr Winsor.

His comments strike at the heart of the Government's rationale for creating Network Rail, which was to improve train services by making the network operator accountable to passengers and not private shareholders.

Since it took over, however, standards of service have deteriorated with delays in the last 12 months rising by nine per cent despite Network Rail's costs spiralling out of control. In 2002-03 it overspent its £3.5bn budget by £1.5bn and now projects that spending will rise from £3bn a year, before the October 2000 Hatfield disaster, to £6.4bn by 2005-06.

Mr Winsor said that half the increase in costs was due to high levels of maintenance and renewal work--a legacy of "decades of under-investment and the incompetence of Railtrack". But the other 50 per cent was due to Network Rail's rising unit costs, he said.

Operating costs doubled in the last two years even though there had been no real increase in the number of signalmen and many of Network Rail's contractors were on cost-plus contracts. Meanwhile plans to cut 1,000 head-office jobs were scrapped as soon as Railtrack was placed in administration.

Mr Winsor said the absence of any equity in Network Rail made it much more difficult to incentivise the management because there were no shareholders to answer to if it were penalised for poor performance. He also poured scorn on the idea that Network Rail's 130-strong governing body could keep a check on its costs.

"Shareholders with money at stake are far more likely to be responsive than public interest members of a not-for-profit company with a pound each at stake," he said.

The regulator's comments make it clear that Mr Winsor will take a very tough line with Network Rail when he completes his interim determination in December of how much it should receive in "access charges" from train operating companies. Of the £5bn that Network Rail received last year roughly half came from passenger fares and half from Government subsidies.

Mr Winsor said that even if his interim review concluded that Network Rail needed more money, fares would not necessarily have to rise. That and the other options of closing lines or reducing services were questions for the new Transport Secretary Alastair Darling and the Strategic Rail Authority.

The Rail Regulator's own budget is increasing by 13 per cent this year to £14.8m to cover the cost of conducting the review. Outlook, page 17