Supplementary memorandum by the Association
of Train Operating Companies (ATOC) (RI 17A)
In the evidence that ATOC gave to the Select
Committee in July we:
pointed out that between 1966-67
and 1999-2000, the considerable increases in rail revenue which
had occurred had been taken by the Treasury in the form of lower
support payments to rail;
welcomed the Railtrack Network Management
Statement but warned of shortages of critical resources to deliver
noted that Railtrack did not know
the condition of its infrastructure;
asked that the allocation of risk
in the new replacement franchises should draw up best practice
from PFI's and regulated industries;
asked that there should be greater
clarity from the SSRA on the franchise bids they wished to see;
commended innovative ways of getting
additional investment into the rail;
commented that changes to the structure
of track access charges by the Rail Regulator should not blunt
the incentive that train operators have to attract additional
customers and run more trains.
Since then a good deal has happened, albeit
rather more slowly in some cases than was envisaged during the
First, the Government has published
its 10 year transport plan. This is a most welcome statement of
the Government's commitment to a vision of integrated transport
policy and to the need to ensure that the resources to deliver
the vision will be available. The Treasury will stop taking additional
passenger revenue in the form of lower support for the rail industry,
and will instead plough it back into investment in rail.
Secondly, the Rail Regulator has
issued his final conclusions on the revenue requirements of Railtrack,
and some aspects of track charges. Finance is now available to
Railtrack to find enhancements repair and maintenance and safety.
Railtrack will receive over £4 billion in grants from the
SSRA over the next five years in addition to their revenue from
Thirdly, preferred bidders have been
selected for two replacement rail franchises. M40 Trains are the
preferred bidders for Chiltern, and Go Via are the preferred bidders
for Connex South Central. The preferred bidder for the East Coast
Main Line is expected shortly. The SSRA has also negotiated an
extension to the Midland Main Line franchise. The creative approach
shown by the SSRA in this negotiation is welcome.
But there remain key aspects of policy which
have not been completed. For example, we have yet to see a version
of the franchise template agreement which is more recent than
July, and we have yet to see the translation of the principles
expressed in the Rail Regulator's Final Conclusions into track
charges for train operators.
2. ARE RESOURCES
The Government's ten-year plan has made available
significant amounts of funding for rail. The first fruits of this
are contained in the Rail Regulator's final conclusions. It should
be noted however that the Regulator's settlement gives Railtrack
around £800 million more than was included in his draft conclusions.
These differences between the Regulator's draft conclusions and
his final conclusions are a lower target for efficiency (3.6 per
cent each year vs. 4.2 per cent); a higher rate of return on capital;
and a higher regulated asset base. This additional expenditure
is to be funded by additional grants from the SSRA to Railtrack.
In aggregate there will be £8 billion of
enhancements. This level of expenditure includes the following:
over £800 million for safety
related issues including stepping distances.
£400 million for enhancements
through the IOS programme.
At the same time TOCS have shown their commitment
to invest in rail through the franchise replacement programme.
The Midland Main Line and the short listed bidders for Chiltern
and South central have significant investment programmes.
The money appears therefore to be in place.
What is now needed is enough skilled resources to deliver the
programme of infrastructure enhancements.
3. ARE THE
In our evidence to the first part of the Committee's
inquiry we expressed concern about the increase in the cost of
additional train paths following the decision of the SSRA to double
the final penalties associated with trains which are late. The
reason that this feeds through into track charges is that more
trains means more congestion, and more congestion means worsening
punctuality; worsening punctuality means higher compensation payments
by Railtrack which must be compensated for by higher track charges.
If the value placed on punctuality doubles this has the effect
of increasing the cost of train paths. It is the equivalent of
a congestion tax on the rail network.
We also objected to any revenue sharing arrangements
between train companies and Railtrack, arguing that increasing
Railtrack's incentive through revenue sharing, dilutes the incentive
The Rail Regulator listened to what we said
on both counts. We are pleased to say that he has in his final
conclusions neutralised the adverse effect on track access variable
charges, and also neutralised the effect of giving Railtrack a
share in additional passenger revenue. Both decisions are most
welcome and allow train operators to increase services without
encountering artificially high track charges.
The very high value that will be attached to
punctuality in 2001 and beyond nonetheless remains. The incentives
will be twice as large as they are today. Train companies acknowledge
that incentives and penalties are important, but it would be wrong
to automatically conclude that because punctuality is not improving
as fast as everyone wishes that the right solution is to supercharge
The right approach depends on the proper diagnosis
of the problem. The principal causes of poorer than hoped for
punctuality is inadequate infrastructure to deal with the additional
trains which now run; new trains arriving late which required
old and unreliable trains to be retained; new trains not operating
at sufficiently high levels of reliability; and more extreme weather.
Doubling the financial incentives for punctuality is a roundabout
way of curing any of these problems given the already high levels
of penalties and rewards for punctuality.
Train operators believe therefore that the new
performance regime proposed by the SSRA should be pitched at a
more sensible level.
4. IS THE
In the evidence that we gave in July we said
that TOCs have too few rights and inadequate remedies if things
go wrong in the Track Access Agreements between TOCs and Railtrack.
The importance of good agreements has been highlighted by the
consequences of the tragic incident at Hatfield.
Discussions on the Model Track Access Agreements
which are taking place under the aegis of the Rail Regulator are
still underway, and we remain some way from a conclusion.
5. IS THE
Any industry accepts financial risk as a normal
part of its activities. Train operators are no different from
others in being willing to do this.
Train operators are however different from many
industries in having price regulation applied to much of its output
(around 40 per cent of fares are regulated); and for being unable
to reduce its output. They are also facing a monopolistRailtrackfor
the supply of track access, and the Strategic Rail Authority who
requires commitment to investment and performance.
All of this we accept. But in doing so we wish
to see the allocation of risk being based on best practice from
PFI contracts and from regulated utilities. While no other industry
is an exact match for the passenger rail industry, transferable
lessons have been learned in other contexts.
With long franchiseswhich we welcomethe
risks are multiplied. What we seek from the SSRA is an explanation
of the criteria that they are applying to risk allocation, and
an explanation of why the allocation of particular risks to each
party accords with best practice. Such policy statements are available
for PFI deals in general, and are regularly debated and decided
upon by utility regulators.
We believe that the SSRA should emulate best
practice in this area and expose its thinking to public and industry
6. ARE THERE
Train operators and the rail industry generally
are required to address four objectives:
To run the rail network safely.
To seek more passengers.
To improve train performance, particularly
but not exclusively punctuality.
To enhance the rail network through
Questions have been raised as to whether some
or any of these objectives are in conflict with one another, or
whether there are any unintended consequences of policies which
are being pursued which create conflicts.
We do not believe that there are inherent long-term
conflicts between these objectives. Investment will improve performance
and safety. Better performance will attract more customers.
As we have said above, the concern that we have
on the size of the incentives associated with performance is not
due to a concern that this will prejudice safety, but rather that
it is disproportionate.
In the Spring when the Select Committee started
its inquiry it was reasonable to expect that by November the critical
foundations of the rail industry would be complete. There would
be a 10 year Government plan for transport; the Rail Regulator
would have completed his periodic review and the associated strands
of policy, and that the franchise proposition would be clear.
The good news is that the financial resources
are now largely in place. But there remains much to be done, particularly
on the contractual relationship between TOCs and Railtrack, the
incentive framework, and on risk allocation.