Memorandum by the Institute of Logistics
and Transport (PRF 10)
PASSENGER RAIL FRANCHISING
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
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
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
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
the new Hull Trains services provides
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
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
expendituresuch as improved facilities at stationscan
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
(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
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.
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
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
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 supervisiona
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.
WHICH SRA ASSESSES
The draft directions and guidance state that:
"The Authority should also ensure that a
proper basis has been established for competing proposals to be
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
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.