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Independence - Her Majesty’s Inspectorate of Constabulary (HMIC)

The independence of regulatory bodies and inspectorates has been established – and must always be protected – for sound reasons. Perhaps the high-water mark of this not being understood by government, and independence being disgracefully assaulted, is the case of Railtrack in 2001. It is that tale which should be told even today, and never forgotten.

When Britain’s railway was restructured for privatisation, it was realised – as with the other networks such as water, gas and electricity – that the industry’s infrastructure had to be maintained and renewed according to economic rather than political criteria. Political horizons are far shorter than transport planning ones, with the result that, during periods of state ownership, networks had been starved of essential cash and put into serious decline. With that history, if the railway was to get and keep private investment, critical decisions such as the funding of the infrastructure on which everyone and everything relied had to have the politics taken out of them. A simple example: who would buy (or finance) a new fleet of sophisticated high-speed trains if the network beneath their wheels was being allowed to deteriorate because finance ministers decided that it should? Trains and track are intensely interdependent; their stewardship must be in harmony.

And so an independent economic regulator was set up with the power to assess network condition, the demands made on it and the efficiency of its operator, and to set the access charges which its users – the train operators - would have to pay. It is called a regulatory review. It is what every economic regulator does. However, if, as was very likely, the regulator decided the infrastructure needed more spent on it on an efficient, long-term, economically sustainable basis – to recover from years of neglect and to cope with increased traffic - the train operators – ‘thinly capitalised equity profiteers of the worst kind’, in the view of one member of the Treasury’s Council of Economic Advisers – could be faced with potentially huge increases in access charges. Not wishing to see its privatisation stalled or fares rocket, the Government decided by contract – not legislation – to indemnify the train operators against any regulatory increase in charges. Thus protected, private investors came in, and a lot of money was spent.

But then came the Hatfield crash in October 2000, when a rail broke under a long-distance passenger train at 115 mph. Railtrack threw on hundreds of emergency speed restrictions all over its network because it did not have adequate knowledge of its assets’ condition and feared where track defects might cause another crash. All this led to the rapid realisation that the network would need even more money than the regulator had previously determined. On 15 January and again on 24 May 2001, the regulator publicly announced that he would be sympathetic to carrying out an interim regulatory review to deal with these unforeseen consequences, although the immediate costs of Hatfield attributable to Railtrack’s incompetence were down to its shareholders. That regulatory power could raise access charges payable by the train operators even further. And if the train operators had to pay more, as was very likely, the indemnities – which the post-1997 Government had continued to sign – would be triggered. Even after shareholder pain, the state was facing a potentially big bill. If the Government refused to pay up, the train operators would of course sue for the recovery of a simple (large) debt, and they would win. After all, a contract to pay money is just that. And contracts must be honoured; otherwise what is the point of them? Governments are expected to perform their contractual obligations just as much as any other person under the law. They are not above it.

So, even when Ministers refused Railtrack’s pleas for more money direct from the Government, it had an alternative source of finance, one that could – and in December 2003 did – lead to the company (by then renamed Network Rail) having its income increased by a further £7.4 billion to £22.2 billion over five years, despite Ministerial pressure for much less.

If Railtrack was to go into administration, this regulatory financial lifeline was a problem. Ministers knew they could not dishonour the indemnities, but nor could they neutralise the regulator in time. But if the system worked as it had been designed, their plans to put the company into administration – to "take the company back” as one Minister subsequently put it; to "reverse the privatisation of Railtrack”– would suffer a fatal blow. Tricky and risky. A few days before the administration decision, a Treasury special adviser e-mailed her colleagues: "[The regulator] is the total wild card. I hope we are all aware of the risks here. … We cannot silence him over the weekend [between his being informed of the Government’s plans for Railtrack’s administration and their being carried out] and if he stands up and says he has a grand plan which could keep the company solvent we’re up the creek.”

Emergency legislation had been secretly prepared to take the regulator under direct political control, to prevent his providing, as another civil servant put it, an "escape route” for Railtrack. He could "thwart us”. "Short Bill to take [regulator] out” and "PM wants regulator out of it”, recorded another meeting note. But without the legislation passed, Railtrack still had potential access to over £7 billion in extra funding. On Friday 5 October 2001, having until then been kept completely in the dark about the company’s financial condition and the Government’s elaborate plans, the regulator was for the first time told that the Government thought Railtrack was bust and on Sunday 7 October 2001 the Minister would ask a High Court judge to put the company into administration. He pointed to Railtrack’s financial lifeline, backed by government indemnities in private law contracts. Of course they would use it, he told the Minister. Why would they not? The Secretary of State reacted with a threat to sever the lifeline with emergency primary legislation. If the regulator intervened, the Minister said he had the authority of the prime minister and the Chancellor to get Parliament to extinguish the regulator's independence. The regulator warned of severe constitutional and market implications of such a step, but the Minister was unmoved. It had been decided. An hour later, Railtrack’s chairman was told.

The plan worked, but not quite as intended. Railtrack treated the legislation as good as passed, even though it would probably have taken the Parliament Act and more than a year to force through the Lords. Despite the regulator’s Saturday night offer to Railtrack to put the wheels in motion for the immediate announcement of an interim financial review and enable Railtrack to tell the judge that it was under way, the company refused. The lifebelt was there, but by then the drowning man had already given up the will to live. The next day, Railtrack quietly took the fatal blow. The Minister subsequently told Parliament that if the administration judge had known that a regulatory review was under way, he would probably not have made the order. And in court in 2005, the counsel for the Government accepted it too.

Railtrack’s lifeline was protected by iron-clad contracts of indemnity between the state and the private sector. Legislation to neutralise those indemnities would carry serious problems over interference in private contractual rights, and might not pass at all. In court, the defence dismissed my objections to such legislation, saying: "Most of the heat surrounding this issue has been generated by … the former Rail Regulator … who has always been the strongest public supporter of the notion of an independent regulator with a right to force expenditure on the consolidated fund which he regarded as appropriate regardless of the views of Ministers responsible to Parliament.” In this, he was dead wrong. The public expenditure consequences of a regulatory determination were a function of the Government’s own contractual obligations, not legislation. Government must honour all its contracts, even those it later finds inconvenient or expensive. Moreover, like an arbitrator, the regulator was determining a question in which government, by virtue of its contracts with the private sector, had a major financial interest. Who would enter into a contract with a state which, faced with the possibility of an arbitration outcome not to its liking, is prepared to use its legislative power to take the tribunal under direct political control to ensure the case is decided in its own favour? Such are the practices of governments of the third world, not the first.

Did Ministers really appreciate the implications of their proposed legislation to destroy an essential foundation on which major investment decisions had been made? Some years later, I asked a former Cabinet Minister why government had been prepared to legislate in the face of such profound consequences. He replied: "Tom, in the 17th century Parliament fought a bloody civil war to gain control of public expenditure, and we weren’t about to give it up to you.” Not even when the supposed surrender of control was something government does every day - honouring a simple promise to pay money in a contract which it has voluntarily signed? The seven-year old Railtrack may have been finished anyway. But surely several centuries of the sanctity of contract and the rule of law count for rather more.

Even in the advanced democracy of the United Kingdom, very strange things can happen; no-one should assume that our long traditions of fairness will always cause determined politicians to stay their 'eager hands', especially when power is vested in independent institutions which will not bend to their will.

Sir Thomas Winsor

Her Majesty's Chief Inspector of Constabulary
In October 2012, Sir Thomas was appointed as Her Majesty’s Chief Inspector of Constabulary. He is the first holder of that office to come from a non-policing background.

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