Select Committee on Transport, Local Government and the Regions Minutes of Evidence


Examination of Witnesses (Question Number 20-39)

WEDNESDAY 17 OCTOBER 2001

MR BOB LINNARD AND MR MARK COULSHED

Chairman

  20. That is a tiny bit disingenuous, is it not, Mr Coulshed? Bankers on the whole do not invest in new assets unless they know someone is going to give them a very good return.
  (Mr Coulshed) I was going to come on to that.

  21. Good.
  (Mr Coulshed) There is a power for the Secretary of State to give an assurance under s.54 of the 1993 Act which effectively assures the rolling stock company that at the end of a franchise, if that comes before the end of the lease period for rolling stock, the successor franchisee will be required to take on the terms of the lease. So one way or another, the length of the rolling stock leases does not have to constrain the length of franchises.

Mr O'Brien

  22. We are concerned primarily about customer service, and heaven knows the customers have suffered over these past 12 months. Has the Secretary of State issued that order, so there is this smooth transition? If not, when will he issue it to ensure the customer service we are all looking for?
  (Mr Coulshed) This is a customer service point? I am not sure I understood the first part of the question.

  23. I am talking about the customers who use the trains.
  (Mr Linnard) What we are saying on GNER, if I can step back a bit and look at the East Coast franchise, is that there was a proposition for a new 20-year franchise on the East Coast Mainline and there was competition, as is well known, between GNER, Sea Containers and the Virgin-Stagecoach Group. A central part of the refranchising proposition and part of the case for a long franchise was the need for a major up-grade of the East Coast Mainline serving freight as well as passengers. It became clear quite late in the refranchising process that the costs and certainty of delivery of that up-grade were very unclear indeed.

Chairman

  24. To whom?
  (Mr Linnard) To Railtrack actually.

  25. To Railtrack?
  (Mr Linnard) Yes.

  26. It came as a great surprise to them when they had to pay rather more for modernising the lines than they believed on their own calculations?
  (Mr Linnard) When it came to looking at the bids and trying to nail down the bids and turn those into what would be franchise agreements with subsidy going in which, among other things, would remunerate the cost of up-grading the line, it became clear to the SRA in discussion with Railtrack that there was insufficient confidence about what the up-grade would cost. Clearly, that is not a basis on which to sign a 20-year franchise, because if there is uncertainty about the cost there is simply too much risk about the cost escalating. Having seen what happened on the West Coast Line and the cost escalation on that, nobody wanted to get into that position again. So what we said, and what the Secretary of State announced a couple of months ago on East Coast, was that he would ask the Strategic Rail Authority to negotiate a two year extension with GNER, and the rationale for that is that a two year extension would allow two things to be done. First of all, it would allow the existing rolling stock on the line to be up-graded, refurbished, a major programme, and in some cases new rolling stock to be brought in. A two year extension would also provide sufficient time to get to the bottom of the cost figures of the infrastructure work so in three to four years' time a competition could be started for a new franchise, quite possibly a long franchise because, as I say, we have not ruled out franchises of up to 20 years' duration, on the basis of sufficiently detailed and firm cost estimates for the up-grade so that we would not be faced with a similar position that we have had to face on the West Coast Mainline.

Andrew Bennett

  27. Are GNER and Virgin going to get back the money they put up in their bids, or is it just hard luck?
  (Mr Linnard) There has been no agreement to pay their bidding costs.

  28. So it is hard luck?
  (Mr Linnard) Yes.

Mr O'Brien

  29. In view of what you have just said, would the delay not react against passenger services?
  (Mr Linnard) When we were looking at the information that the SRA had received from the bidders, it was clear that the customer service on the East Coast Mainline is actually very good at the moment in terms of the effort the franchisee puts in to dealing responsibly and well with customers. The problem is capacity. The SRA's analysis made it pretty clear that there were capacity issues which could be addressed in two stages, firstly rolling stock which could be done quickly, and secondly, line capacity which would take longer. But we do not think that a two year extension and therefore a delay of up to two years in the refranchising process will delay the introduction of new rolling stock or infrastructure capacity.

  Chairman: We can go on arguing this but I think we must move on.

Mr Donohoe

  30. There has been a fairly wide-ranging discussion about this issue since 7 October and there has been a proposal there should be in certain parts of the country vertical integration. Given what Mr O'Brien has just said, is it possible the delay of the contracts or the refranchising contracts was in part due to that possible proposal in the restructured Railtrack?
  (Mr Linnard) No, it was not, to be honest. The decisions on refranchising and the decisions on Railtrack are separate. The decision on Railtrack stemmed not from a ministerial view that Railtrack would be better off as a company limited by guarantee or as part of a vertically integrated railway. It stemmed from a request by Railtrack for substantial extra funding over and above the extra amounts which had been advanced on 2 April and from a view that the amount of extra funding asked for by Railtrack could not be quantified.

Chairman

  31. Could not be quantified? You mean they gave you a figure and you did not believe them?
  (Mr Linnard) No, what Railtrack were asking for essentially was what is called a cost-plus arrangement for a period of between three and five years, ie we would pay their costs plus, and ministers have called that a blank cheque.

Mr Donohoe

  32. But you have agreed there was fairly significant lobbying from the train operating companies themselves to have this form of vertical integration introduced. Stagecoach and Virgin have for months now been arguing there was agreement. If I could move on to the question as far as that is concerned, who will then have the ownership of the railway?
  (Mr Linnard) I will come on to that but I wanted to make it very clear that the decision on Railtrack funding was taken in the light of discussions with Railtrack about their financial position and the options around that, it was not taken to create some new structure. On vertical integration, Railtrack plc is in administration and the intention is that it will be taken out of administration as the single network provider, so the Railtrack which comes out of administration as a new company will own and operate the network assets and have initially at least the same licence obligations as Railtrack had before it went into administration. There is undoubtedly a question which will need to be addressed, and I am aware of the views of different train operators, some of whom are very keen on vertical integration, others are very cautious about it, but that is not a decision which is in itself affected by what has happened to Railtrack over the last ten days or so.

  33. What is the cost to the taxpayer going to be of this new arrangement?
  (Mr Linnard) What we hope is that Railtrack will come out of administration into a company limited by guarantee—

  34. When?
  (Mr Linnard) Within three to six months.—and that over time that will provide more efficiency, more control of costs and therefore the railway as a whole will be able to achieve more benefit from the funding which has been earmarked in the ten year plan.

  35. What direction is it going to take, if one takes the franchises in this new company, as far as numbers of companies themselves are concerned which are going to be operating on the railways? Are we going to see a massive reduction, or is that what the Department thinks will be the case, that there will be a massive reduction in the numbers of sub-contractors? Are there going to be massive reductions in the number of operators of the trains? What is it we are going to gain from this, after the nonsense there was with the fragmentation of the railways?
  (Mr Linnard) There is nothing that the decision on Railtrack necessarily means for the number of train operators. There has been some consolidation since privatisation. There are now some operating groups—for example National Express—with a substantial number of franchises. There may or may not be further moves in that direction, it depends on a range of issues which are not fundamentally connected with Railtrack's position.

  Chairman: We do not want to get too far into that particular one.

Mrs Ellman

  36. Will the proposals for enhanced companies and special purpose vehicles which were being developed to support infrastructural investment be continued under these new arrangements?
  (Mr Linnard) Yes, they will.

  37. You said a little earlier that you did not want to see a repeat of what had happened on the West Coast Mainline, how will the new arrangements improve infrastructural investment?
  (Mr Linnard) What we want to see are proposals for special purpose vehicles to take forward major up-grades—the East Coast Mainline, the up-grade that is associated with the South Central replacement franchise—which learn the lessons really from the West Coast and from elsewhere on the public finance initiative, which means proper allocation of risks, proper costing before contracts are signed, proper incentives to control costs and so forth. The problem with the West Coast up-grade is that it was committed to by Railtrack at a time when costs were not known and when enormous risks were taken on a new signalling system.

  Chairman: You mean they did not know what they were doing and they had to abandon that signalling system and start again. Thank you.

Mrs Ellman

  38. How is it going to be different now? Who is the "we", who is going to be responsible for delivering this?
  (Mr Linnard) It is the Strategic Rail Authority which will be in the lead in developing special purpose vehicles, and some of the detail of how those are going to be developed are going to be set out in the SRA strategic plan which is coming out next month.

Chairman

  39. They are aware of this, are they?
  (Mr Linnard) Yes.


 
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