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

Memorandum by the Institute of Logistics and Transport (PRF 10)



  The Transport Sub-Committee of the Transport, Local Government and the Regions Committee have called for memoranda to be submitted by Monday 17th September on the above matter and have set out their terms of reference for the inquiry in a press release issued on 23rd July 2001.

  The Institute of Logistics and Transport (ILT) is the leading professional body for transport, logistics and integrated supply-chain management. It aims to be the focus for professional excellence and the development of the most modern techniques in logistics and transport and encourage the adoption of policies that are both efficient and sustainable. ILT has over 22,000 members involved in all sectors of transport, in logistics service provision and in the supply-chain functions of manufacturing and retail, including related consultancies, national government and local authority departments, universities and research establishments. The ILT's members include many industry leaders and its views are often sought by government and other decision making bodies.

  The Institute of Logistics and Transport (ILT) has allocated the task of responding to the Transport Sub-Committee to its Strategic Rail Working Party, whose members have a wide range of experience in the Railway Industry.


  The ILT was initially concerned by the apparent retrenchment on the length of franchise replacements essentially freezing all franchise renewals, it seemed that the Government was unnecessarily subjecting the rail industry to yet more uncertainty and worse still, paralysing desperately needed investment in new rolling stock and other upgrades.

  More mature consideration of the problems of ensuring delivery of higher standards of safety, reliability and service generally has suggested that it may be of benefit for there to be a period for reassessment, particularly of just how new private sector money can be injected into the rail industry in the most effective way.

  What is however vital is that the policy framework from now on properly embraces and binds together the primary enablers such as HMG (DTLR), the Strategic Rail Authority, PTEs, the Rail Regulator, the Scottish Executive and Welsh Assembly, Railtrack and of course the passenger operators, in an administrative model which is designed to make decisions quickly and efficiently with transparent rules and procedures which are easily understood. This will not be easy.

  There are a number of formidable difficulties to overcome, not least the ability of the various bodies to work together to deliver agreed outcomes. And the "breathing space", if that is what the 2 year franchise extension is to become, must provide answers to issues which so far the Government and the SRA have not really focused on. These include the shape and direction of the rail industry; the priorities to be accorded freight within an essentially passenger focused network, and the number of franchises to be carried forward (should there be fewer?).

  In addition, a number of other issues have to be sorted out and agreement reached on a conflict free way forward. These include major changes to the performance regime: currently one blockage has been the cost of the review (and any TOC rebates) which would have to been borne by OPRAF, now the SRA under the franchise agreement.

  Another such difficulty lies in the confusion and potential conflict of roles which the SRA appears to have. Not only is it expected to be a purchaser of services, but it also has to be the day to day manager of franchise concessions with all that implies for input regulation. As if this were not enough it also has to assess and award new extended franchises.

  There is also a need for a rethink on the role of the Rail Regulator given that the SRA has been given further regulatory responsibilities itself. The ILT believes that the Rail Regulator could usefully work on competition issues related to restructuring particularly where these relate to redrawing the Franchise Map. In addition, the Rail Regulator should look carefully at competition issues which relate to Railtrack's existing monopoly rights over the network (fortified as they are by Railtrack's regulatory and safety obligations), and the role of the new infrastructure providers if they are to be joint venture partners whether in pure infrastructure modernisation schemes or as part of a consortium to a DBFO type of investment, such as that envisaged for a new East Coast Mainline Franchise.

  Above all, the whole industry, public sector and private, needs to find an acceptable way forward to deliver the substantial sums of money from the private sector needed and the improved levels of industry performance to implement the ten year plan.

  The ILT is concerned that while the draft instructions and guidance refer to the Government's and SRA's objective to significantly increase rail freight's share of the freight market the detailed focus is on passenger franchising and within that there is no discernible emphasis on balancing the operational and investment needs of freight with those of the passenger industry. Indeed, there is no specific reference to EU developments in the field of interoperability, or then new Marco Polo programme, successor to the PACT programme, which is targeted at shifting road freight to other modes.

  The ILT has assumed, that as indicated in the draft instructions and guidance, the Government remains committed to the 10 year spending plan. We would hope that the Committee will press officials and Ministers extremely hard to ensure that the Government remains committed.

  ILT as a body of industry professionals has responded in detail to the structural issues contained in points 2 to 4 of the Committee's press release and in brief to point 5, believing that point 1 is better addressed by the operators.

  Secure investment in additional network capacity and other improvements to meet both the long and short-term needs of the railways

  Additional network capacity can be provided by a number of means, often in combination:—

    —  provision of additional capacity as a result of running longer trains, often in combination with the lengthening of station platforms and associated signalling changes;

    —  there are examples of this being included in franchise extensions to short franchises, not only Midland Main Line;

    —  creation of new train paths/services which may involve both additional rolling stock and changes to existing infrastructure;

    —  the new Hull Trains services provides an example;

    —  better use of existing capacity by the modification of existing track access rights of trains operators and the grant of new rights.

  This generally involves co-operation between Railtrack and more than one other operator. Existing franchise agreements do not give SRA the powers to require train operators to give up existing rights, whereas the proposed long term franchise agreements would in defined circumstances. The Rail Regulator has also proposed that some access rights would be subject to "use it or lose it" provisions, but these would generally only apply under new track access agreements expected to be entered into for new long term franchises.

  The grant of extensions to existing franchises of up to 2 years may achieve the type of additional network capacity referred to above. The extent of private sector capital funding available will be determined by key factors such as:

    —  the overall length of the extended franchise;

    —  forecast passenger revenues as a result of the provision of the capacity;

    —  the capital cost of the works;

    —  the planning or other consents (including possessions) required for the works and the length of time needed to complete and commission them.

  Much will depend on SRA's view of the benefits to be achieved both during the extended franchise and subsequently.

  Proposals made by train operator groups who have sought to extend franchises due to expire in 2003-4 suggest that significant additional capacity is not likely to be funded in this context, but some useful increases could be achieved:

    —  Other improvements, involving capital expenditure—such as improved facilities at stations—can also be delivered in the context of these short extensions.

    —  There is also some evidence that rolling stock leasing companies will be prepared to take residual value risk on smaller new trains procurements (eg First Great Eastern's recent procurement funded by Angel Trains), but the long period for building and commissioning means that in some circumstances SRA may be required to use its underwriting powers contained in s54 of The Railways Act 1993 if new trains are to be introduced close to the expiry of a short, extended franchise.

    —  Soft quality areas such as customer service and aspects of improved performance can reasonably be expected to be achieved in 2 year extensions.

  The draft policy is however unlikely to secure substantial investment, in contrast to that committed by Govia Limited, in respect of the South Central, or Stagecoach, in respect of the South West Trains, replacement franchises.

  There have been a number of significant events affecting specifically the rail industry since publication of the ten year plan in July 2000:

    (1)  Finalisation of the Regulator's review of Railtrack's access charges resulting in substantial increases in the cost of access from April 2001. The increases are contractually required to be funded by the SRA under the existing franchise agreements. They will also impact on the operating expenses of extended and replacement franchises.

    (2)  Increased concerns as to the current state and condition of Railtrack's infrastructure. The incidence of broken rails had increased prior to the Hatfield accident and the Regulator is requiring Railtrack to establish a register of its assets which will, it is expected, highlight their condition. These matters suggest increased costs for network enhancement (eg in upgrading power supply), while maintenance costs should be covered within the Regulator's review.

    (3)  The publication of the Uff/Cullen report and anticipated mandatory requirements for train protection systems over extensive parts of the network, requiring expenditure on both infrastructure and trains.

    (4)  The increasing costs of the West Coast Main Line Route Modernisation Programme.

    (5)  new Railway Group Standards have been introduced in response to the Ladbroke Grove Southall and Hatfield accidents which may have the effect of increasing costs of construction and/or maintenance.

    (6)  The loss of confidence in Railtrack associated with the Hatfield accident in October 2000 resulting in a marked decline in its market capitalisation and also in lender confidence.

  Many of these factors will result in increases to the operating costs of train operators (passenger and freight) in advance of any increase in revenue which may follow increased investment in maintenance and infrastructure enhancement. The SRA's budget has been materially affected by items (1); (2) and (4) above. The reduced ability of Railtrack to raise capital may be offset by the involvement of other private sector investors and funders, but it must be recognised that the actual cost of constructing railway infrastructure is now greater. Also the margin required by financiers and the equity return required may well be greater than that anticipated where capital was to be raised by Railtrack before its financial position deteriorated.

  Provide the framework for major infrastructure enhancement projects to be taken forward now that Railtrack is to focus on maintenance and renewal of the existing network.

  Well before the events following the Hatfield accident the Chairman of the SRA, Sir Alastair Morton, had identified that Railtrack was not capitalised or managed with a view to carrying out major infrastructure enhancement, although that appears as one of its responsibilities under its licence. Railtrack was reluctant to co-operate in finding other solutions to funding and building enhancements.

  The coming into force of the Transport Act 2000, giving increased statutory powers to require development of the railway, combined with Railtrack's acknowledgement in April 2001 of its inability to deal with infrastructure enhancements has eased the way for new techniques and capital providers.

  The Government is focused on streamlining the planning process. Greater emphasis should be placed on SRA having responsibilities to fast-track the obtaining of Transport Work Act (TWA) orders or planning consent generally for railway enhancements.

  The experience of one of the preferred bidder groups in developing a special purpose vehicle (SPV) structure for Design, Construction and Financing of enhancements to the rail network in co-operation with Railtrack, suggests that there are major difficulties for DTLR and SRA in using the replacement franchise route as a major source of infrastructure enhancement. These include:

    —  the output specification for the infrastructure derives from the private sector bidding process, rather than from the SRA's strategy;

    —  prioritisation of schemes is driven by the replacement franchising programme rather than by a programme which looks at the relative merits of schemes and the likely implementation timescale;

    —  the absence of adequate powers for a franchise group to obtain the co-operation of Railtrack, which is essential for almost all schemes;

    —  the timescale and risks associated with the obtaining of TWA orders and/or planning consents are likely to lengthen the time before the new franchises can be signed and the passenger benefits realised;

    —  the private sector is being required to devote considerable time and money to structuring and developing a range of schemes, where better value may be obtained from development and structuring carried out by SRA.

  There must therefore be reservations as to the efficiency and value for money to be achieved by this method.

  The draft policy suggests that SRA will receive guidance from DTLR as to the structure for enhancement schemes and we understand that SRA has been working on these for many months.

  A framework for such projects is certainly required. Based on the South Central experience, there is evidence that such schemes inevitably require a long development period before TWA orders or planning consents can be obtained. There may will be advantages in more of the structuring and development being undertaken by the public sector through SRA, as was the case in relation to the development work carried out by Union Railways, whilst in public ownership, for the Channel Tunnel Rail Link.

  This is likely to result in a clearer definition of scope, time scales, consents and costs and thus lead to a more transparent competition, when tendered, than has been the case with the franchise replacement process.

  Transform the SRA's leadership of the industry, its day to day management of franchises and the way in which it assesses and awards new and extended contracts for passenger services


  The 5 main features of the draft directions and guidance combined with the draft policy statement are:

    —  emphasis on SRA's duty to publish its strategy and to keep it under review;

    —  a shift from long term replacement of franchises due to expire in 2003-4 to extension (up to 2 years);

    —  emphasis on the objective of achieving the Government's 10 year transport spending plan targets for growth in the railway industry;

    —  a duty to work within the SRA's significant public budget and to secure value for money;

    —  a requirement to obtain directions or consent from the Secretary of State for all significant decisions.

  We believe that there should additionally be emphasis on the SRA having responsibility to fast-track the TWA/planning process for infrastructure.

These features are likely to affect the SRA's leadership of the industry by:—

    —  giving greater transparency to the framework and criteria within which it must work, which will, ILT consider, be generally welcomed by the private sector;

    —  reducing the discretion and decision making powers of the SRA which will be subject to direct involvement of the Secretary of State and DTLR in many instances. This aspect may be less welcome since it appears that SRA will have more of the characteristics of an agency of the Department than being a non-ministerial government body.

  While welcoming the greater transparency we have concerns that the increased involvement of the Department will mean that the industry becomes subject to too much bureaucracy.


  The tenor of the draft directions and guidance and policy statement on the enforcement of existing franchises suggests that SRA will become preoccupied with day to day supervision—a trend which would in fact be reinforced by the terms of the template franchise agreement provided by SRA for the purposes of replacement franchising. ILT entirely supports the importance of franchised passenger operators observing the terms of their franchise agreements and, beyond that, aiming to improve the quality of passenger services. However we have reservations over the increased involvement of SRA likely to be promoted by the draft directions and guidance. Our concerns centre on:

    —  the blurring of the responsibility of the private sector operators as a result of more intrusive franchise management by the public sector which makes it more difficult to hold operators accountable for failure;

    —  increased cost and resources for both the SRA and franchised operators put into the management and supervision process;

    —  the potential for an adversarial rather than a co-operative or partnering approach by SRA if it is encouraged by the new directions and guidance to look for franchise breaches which it can then use as a lever to require franchisees to provide increased passenger benefits. We would in contrast advocate more focus on co-operation between franchise groups and the SRA to improve the service to railway users.


  The draft directions and guidance state that:

    "The Authority should also ensure that a proper basis has been established for competing proposals to be fairly evaluated"

  and goes on to refer to the need for clear information as to the scope of the core specification and what improvements to existing infrastructure are likely to be required.

  There is also a clear set of evaluation criteria which are themselves consistent with the stated objectives of the government and those set for the SRA.

  ILT strongly support this approach to the conduct of future competitions and to franchise extension, which is a marked improvement on the processes and procedures of SRA to date. Considerable concern has been expressed that given the lack of specificity in the instructions to counterparties and associated documentation issued by the SRA it has been difficult for bidders to know whether their submissions meet the basic or reference criteria of SRA and it must have been equally difficult for SRA to evaluate on the basis of a comparison of reference bids. The process has been in marked contrast to that normally adopted for PFI and PPP transactions. Treasury Task Force Guidance for the latter encourages a clear approach by the public sector as a means to producing real competition and therefore value for money and we would have expected similar consideration to apply to the SRA.

  We are reasonably certain that potential bidders will welcome the proposed change and that it will encourage competitive bids.

  Franchise extension rather than replacement is more problematic in the sense that it does not result from competitive bidding, but from a negotiation between SRA and the existing franchisee. Here too a clear scope and evaluation criteria will enable the use of a public sector comparator against which the bid can be benchmarked. Transparency as to SRA's requirements and criteria will also assist franchisees in understanding what is required and save the cost and other resources which have been put into abortive negotiations for extensions.


  It must be understood that the background to the organisation and structure of the industry was a national agreement. This was broken up as a result of the new industry structure. ILT feel that one of the more unhelpful aspects of emphasising short term extensions will be to cement the existing position as far as concerns industrial relations. Lack of funding to address a change in structure and lack of time to reap the commercial benefit will not incentivise franchisees to change. Nor would further potential changes of ownership and uncertainty as to the shape and strength of new franchises encourage the rail unions to restructure their organisations to meet the requirements of privatised operation.

September 2001

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