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


Supplementary memorandum by the Passenger Transport Executive Group (RI 16A)

POTENTIAL RISKS AFFECTING THE FUTURE INVESTMENT PLANS FOR THE UK RAIL NETWORK

GENERAL COMMENTS

  1.  The whole issue of investment and safety in the rail industry has unfortunately been re-emphasised again through the recent tragic events on the East Coast Main Line. This, being the third major rail safety incident in as many years, will inevitably significantly increase the focus on the safety of, and investment in, the rail network.

  Whilst it is not possible to quantify all the potential impacts on investment in the network at this stage it seems inevitable that such issues will become the subject of debate:

    —  The impact of additional costs through a greater focus on safety might divert resources away from network enhancements/expansion to additional safety measures (eg Railtrack's announcement on 19/10/00 that safety will take priority over punctuality and cost reductions).

    —  Possible changes in Government and regulatory control over Railtrack through greater intervention.

    —  Restructuring and reorganisation of the industry.

  2.  The City has many expectations of Railtrack and there are several issues that could affect its share price and ability to fulfil the investment plans, key issues include:

    —  The impact of additional regulation and/or safety requirements and the impact on Railtrack's ability to raise additional capital through a rights issue or additional borrowing.

    —  Being subject to a take-over due to weakness in its share price.

  3.  The industry is embarking upon an extensive rail investment programme which follows a lengthy hiatus in investment in the years preceding and following the privatisation process where a short-termism approach to investment became the norm. As a result the industry has become accustomed to dealing with significant levels of additional investment and may not be able to easily cope with such a rapid increase in spending.

  These fears were crystallised by recent events, such as those in early October where in response to criticism over the reductions in train performance and punctuality, etc, during summer 2000, Railtrack attributed much of the decline in train operating performance to the inability of the industry to cope with a large increase in the level of investment activity. Ensuring safety during this phase is, of course, paramount.

  Consequently PTEG has concerns over the ability of the rail industry to effectively carry out these large scale investment plans, in terms of:

    —  Disruption to existing services,

    —  The ability to work within agreed budgets and,

    —  To the intended specification and output levels.

  It is clearly of paramount importance that the lessons learned from this initial experience of increased level in investment are rapidly assimilated so that this does not recur. PTEG is not confident however that this will be the case.

  4.  PTEG consider that it would be helpful, and would give assurance and transparency over future rail investments, if a comprehensive risk/sensitivity analysis were to be performed and published on all aspects of the plans for future investment in the rail industry. This would give all interested parties the opportunity to contribute to the debate and for action plans to be developed where appropriate.

  5.  The taxpayer, through taxation, is funding the majority of the proposed improvements to the network. The ability of public funds to meet this commitment will be dependent to some degree on the general economic climate and ability of the economy to sustain investment at the levels proposed.

  6.  The current re-franchising round also carries its own set of inter-dependencies and risks that might affect the ability of franchises to fulfil their franchise commitments—these include mergers and take-overs between train operators and additional safety commitments.

  7.  Technical problems over the introduction of new rolling stock such as those affecting the use of Eurostar rolling stock on the UK network and approving new classes of rolling stock, may also be important considerations.

THE RAIL REGULATOR'S DRAFT CONCLUSIONS ON RAILTRACK'S TRACK ACCESS CHARGES

  8.  The Rail Regulator has recognised that "a great deal more work is needed" to address the under-investment in the rail network that preceded rail privatisation and which continued into the immediate post-privatisation years. Through increased track access charges and additional public funding the Regulator is seeking to redress this situation and Railtrack is being given access to substantial additional funding to enable it to improve the rail network.

  In PTEG's opinion the key issues arising from the Regulator's draft conclusions on Railtrack's Track Access Charges affecting the success of future rail investment include:

    —  A clear need for robust project management processes on behalf of Railtrack and its contractors to ensure that the various project milestones and deliverables are achieved. PTEG therefore fully supports the Regulator's:

    —  intention to establish detailed, clear and unambiguous specifications against which the delivery of Railtrack's investment performance will be measured; and

    —  decision to demand improved information from Railtrack via the publication of a supplement to the 2000 Network Management Statement.

  9.  PTEG, as stated in its previous evidence, has concerns over the potential impact on rail investment of the Regulator's various proposed changes to the basis of the Track Access Charges including the introduction of, capacity charging, incentive regime, etc and whether these will produce the intended overall results. Whilst the aim of these changes is to reduce the proportion of fixed charges PTEG is concerned over any potential detrimental interaction of these changes which, although subject to extensive modelling and consultation, have not been proven in practice and could have adverse financial impacts that may threaten rail investment.

  The new regime is also subject to potential uncertainties in the underlying assumptions that underpin the new regulatory regime, these are subject to numerous inter-dependencies and variations to these could also have a negative impact.

  10.  Specifically, the Regulator's conclusion (at the behest of the shadow Strategic Rail Authority) that a higher "societal value" of passengers' time should be introduced into the calculation of performance penalties payable between Railtrack and train operators under Schedule 8 of Track Access Agreements could potentially impact adversely on future investment in new service or service enhancements (including the provision of new stations) in two respects.

    —  In determining track access and train operating charges for such new or enhanced services, Railtrack and the train operating companies will factor in their additional financial exposure as a consequence of the higher Schedule 8 valuations they face. These costs will flow straight back to the service sponsor, so increasing the affordability hurdle to be overcome in justifying new or enhanced services. For example, under the existing Schedule 8 regime, one PTE has been quoted annual performance charges of £789,000 for a 50 per cent increase in frequency over part of a route. The increase attributable to the higher Schedule 8 rate has not yet been advised, but could well be sufficient to prevent the scheme from proceeding, even though it would give greatly needed additional capacity and would result in an overall improvement in services by enabling complementary express and stopping services to operate at regular intervals.

    —  There is no correlation between the "societal values" of time determined by sSRA and adopted by the Rail Regulator, and those which are promulgated by the Department of Environment, Transport and the Regions for the economic appraisal of transport schemes. sSRA uses a range of societal rates from 8.5p to 34p per passenger minute. The current version of Highways Economics Note 2 gives a resource value of non-working time (at 1994 values) of 315p per hour, or 5.25p per minute. The same source values rail passengers' working time at 27p per minute, again at 1994 prices. (In most passenger transport appraisals, it is the non-working value of time which predominates, since the majority of passenger trips are made by commuters or for social, recreational, educational or shopping purposes.) This lack of symmetry between the values of time used for railway performance payments and in standard transport appraisal models could penalise rail schemes in intermodal assessments. For example, a rail scheme which justified itself in cost-benefit terms through time savings to new and existing rail and highway users and through environmental benefits from reduced road traffic could prove unaffordable because of the higher values of time used in assessing potential delays to existing rail passengers.

  While the Regulator proposes that from 2002 a new capacity charge will take the place of the present negotiated charge for service enhancements, the Schedule 8 rates will feed into the calculation of specific capacity charges so that the end consequence is likely to be similar.

  11.  The appetite of the Civil Engineering industry for rail maintenance and investment work may diminish in light of the ever increasing pressures on contractors margins as a result of the need for Railtrack to achieve the Regulator's projected efficiency savings.

  This factor, together with the perceived high risk nature of such work as a result of potential financial penalties and costs of litigation that result from safety failures attributed to rail contractors, could exacerbate this situation.

  12.  The proposed improvements/enhancements are also subject to the impact of:

    —  Delays in the approval process especially planning delays, etc.

    —  Technical delays or problems in construction.

    —  Difficulties in estimating the costs of projects, eg the significant variations in the estimated costs of the West Coast Main Line Upgrade.

THE GOVERNMENT'S TRANSPORT PLANS OUTLINED IN TRANSPORT 2020: THE TEN YEAR PLAN

  13.  There is a lack of qualified engineers with rail engineering experience which may inhibit the ability of contractors to meet increased demand for rail investment. This is a result of a lack of people entering the Civil Engineering profession in the 1990's which is in turn a function of the lack of investment in the rail network over the past decade and consequent diminution in the skill base of rail-experienced engineers. Railtrack and their contractors need to address this urgently to deliver the required LTP programmes.

  14.  The hiatus in rail investment in the pre and post privatisation years also resulted in a decline in the development of rail engineering technologies with the consequent effect that, each £ of investment is likely to be less effective than if new and improved techniques and processes had been developed. A related issue is the adoption of easy "cheap quick fixes" at the expense of more expensive, but better overall value, options. PTEG has previously signalled its anxieties over this approach and, in particular, issues surrounding capacity problems in Greater Manchester and increased track capacity between Coventry and Birmingham. Whilst, in fairness, Railtrack has acknowledged these issues how such major schemes will be funded remains problematic.

  15.  Unless the current short life of current rail franchises is reversed by the sSRA TOC's will inevitably adopt a short-termist attitude to investment. Although the indications from the sSRA show that much longer franchises are likely (eg 20 years for the East Coast Main Line) this remains a potential threat.

  16.  It is widely accepted that Civil Engineering contracts are extremely complex and this complexity results in a potential source of delays as a large amount of time is often spent, pre and post contract acceptance, in negotiating contract terms and conditions. This is particularly pertinent to major projects such as the West Coast Upgrade.

  17.  To the extent that forecasts of predicted future passenger growth, and consequently revenues, are found to be inaccurate this may impinge on investment plans. The increased frequency of major rail accidents could, for example, lead to a general loss of faith in rail travel and the predicted increased in passenger numbers may not materialise.

  18.  Current plans are, with the exception of the CTRL, to regenerate the existing network instead of creating new lines. This may not necessarily by the most cost effective solution as there are inherent problems with both the quality of the track and the quality of the route (eg additional tighter curves and the proximity of built up areas which limits the maximum speed available).

  Virgin Rail has tried to address this issue by putting forward a proposed new 100 mile dedicated high-speed line from Peterborough to York which would save half an hour on the current journey time by increasing average speed to 200 mph from 125 mph. This new line would also allow a "better" train protection system to be designed compared to the alternative of having to retrofit around an existing system. Other options under discussion are the reopening of the Matlock-Buxton and Woodhead routes over the Pennines.

  19.  The Government's aims to develop trams and light rail transport may encounter difficulties if there were major safety concerns or if predicted usage levels on new projects, such as the Croydon project, did not materialise.

  20.  Over-emphasis on intercity investment at the expense of commuter investment would be detrimental to the Government's plans and the interests of the PTEs.

  21.  The partnerships that are anticipated to help fund the implementation of the Transport Plans may fail to materialise as expected and so detrimentally affect the extent of implementation of the plans. PTEG has previously emphasised the point that the Local Transport Plan is the vehicle for the delivery of integrated transport and that major rail schemes, in Metropolitan areas, should be funded through this vehicle in consultation with the sSRA rather than being the exclusive preserve of the sSRA which cannot because of its very nature take a "holistic" view of the public transport needs of major Metropolitan areas.

November 2000


 
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