Memorandum by Great North Eastern Railway
PASSENGER RAIL FRANCHISING
1.1 GNER welcomes the opportunity to respond
to this important consultation. GNER has intimate experience of
the franchising process to date, both before and after the creation
of the Strategic Rail Authority (SRA). In 1997, just one year
after starting its current seven-year franchise, GNER first submitted
an application to Government for a franchise extension to unlock
long-term investment to add capacity on the congested East Coast
Main Line (ECML).
1.2 In October 1999, at the invitation of
the then (Shadow) SRA, GNER applied for a new 20-year franchise.
A 21-month competition ensued. On 18 July 2001 the Secretary of
State rejected the SRA's recommendations for a controlled 20-year
tenure and, instead, invited GNER to negotiate exclusively with
the SRA for a two-year extension to its existing franchise (to
April 2005), without ruling out the possibility of a longer ECML
franchise once design and cost uncertainties regarding future
stages of the ECML upgrade had been resolved. These negotiations
are well underway.
1.3 GNER would welcome the opportunity of
being called as a witness to give further, oral evidence to this
Inquiry. (GNER has responded separatelyand via its trade
body, ATOCto newly-drafted Government directions and guidance
to the SRA).
2.1 The Committee states that its Inquiry
includes consideration of whether a "new approach" which
places "the emphasis on the negotiation of changes and short
extensions to existing franchises" is preferable to "the
awarding of long term contracts."
2.2 GNER, although fully understanding of
its present short-term position, is firmly of the view that only
longer-term contracts, within a long-term strategic vision for
the rail industry, can deliver substantial passenger benefits
through continuous, long-term investment. Such an approach is
key to the delivery of the Government's 10-Year Transport Targets
of a 50 per cent increase in rail passenger kilometres and an
80 per cent increase in freight kilometres, which will help to
reduce road congestion and associated pollution and improve the
quality of life for millions of people in Britain.
2.3 Train operating companies (TOCs) require
long-term planning horizons to unlock new, sustained investment
in new processes, systems and capital projects, many of which
are dependent on long lead times for delivery.
2.4 To date, there has been a lack of clarity
and strategic vision on the franchising process and comparative
assessments of differing bids. Bidders were invited to embark
on a costly journey without knowing the conditions of carriage
and unclear of the final destination. Uncertainty remains as to
how this process can be moved forward, which in turn is deterring
potential private investors from engaging as fully as they might.
2.5 In particular, even by using Section
54 powers, it is very difficult to get trains ordered, let alone
delivered, under a two-year franchise extension. Manufacturers
and bankers are reluctant to get involved, or offer sufficiently
attractive finance arrangements, when there is no certainty that
the franchisee will be present to test or take delivery of new
rolling stock, which is so essential to adding much-needed extra
2.6 Privatisation of the railways imposed
a typical Management Contract Model on TOCs. Since then, many
TOCs have struggled or failed to deliver, partly due to: an over-reliance
on third parties to perform effectively; changes to the political
and regulatory framework; and a complex and often unwieldy matrix
of contracts, processes and regulation.
GNER's response to the areas covered by the
Inquiry is as follows:
3. ENSURE THAT
3.1 Short-term franchise extensions do not
necessarily mean than either the scale or speed of delivery of
improvements will be any better than short-term benefits delivered
under a long-term franchise, as part of a rolling programme of
investment. Indeed, the opposite is a truer reflection of reality,
in that under short-term contracts train operators are much less
likely to be incentivised to address long-standing, deeply-entrenched
obstacles to improved performance. Underlying problems would therefore
3.2 In particular, there are long lead times
required to specify, cost, approve, test and deliver the sizeable
capital investments required to bring about these improvements
(ie in new rolling stock, infrastructure modernisation, train
protection warning systems etc).
3.3 A continuing short-termist approach,
for example, could jeopardise the delivery of Automatic Train
Protection systems by 2006, as recommended in Lord Cullen's report.
3.4 To improve train performance significantly,
two-year franchise extensions will do nothing to solve long-established
problems on the ECML such as lack of track capacity, a paucity
of diversionary routes and an insufficiently robust overhead power
supply. This national transport corridor is so busy that even
a relatively short or minor closure during peak hours causes serious
disruption for prolonged periods. No amount of extra rolling stock,
contingency planning, improved communications or customer care
will solve the problem if the track or overhead line damage is
on a section of two-track railway and there is no diversionary
route available. There is no quick fix.
3.5 Improved service frequency, and the
consequential increase in connection opportunities, is dependent
on there being sufficient track capacity to accommodate these
extra services. The ECML is currently at, or near, capacity. The
solution is the ECML upgrade, a long-term project which relieves
bottlenecks and creates a vastly enlarged route for both passenger
and freight rail services. Prior to the loss of rolling stock
at Hatfield, GNER was running 25 per cent more services than at
the start of its franchise. This required a high fleet utilisation,
which has to be balanced against ongoing maintenance requirements
and the imperative to improve train performance.
3.6 The comfort of passengers throughout
the journey experience is also crucial. GNER strongly advocates
the creation of a high quality railway in addition to a safe,
efficient and reliable one. Its business philosophy is based on
adding value to attract extra custom. Short extensions are less
likely substantially to enhance passenger comfort compared to
3.7 For example, although GNER plans to
refurbish its MkIV coaches on its electric IC225 fleet to a high
standard under a two-year extension, longer-term issues such as
the delivery of new rolling stock to add capacity and ease overcrowding,
major improvements to "ride quality" via track enhancements,
or the desire to introduce further station improvements such as
new lounges, escalators etc, are only likely to be realised under
a longer-term contract. The implementation timescale for the MkIV
refurbishment is likely to be no quicker under a two-year extension
than it would have been under a 20-year agreement.
3.8 In addition, short-term business horizons
mitigate against achieving long-term economic, social and operational
partnerships with suppliers, en-route communities, local authorities
and other transport providers. The web of inter-relationships
means that partners also become constrained by the short planning
horizons of short-tenure TOCs. An exciting array of potential
joint venture initiatives, such as steps to improve transport
integration, could be missed or deferred.
3.9 Also, short licences will not help towards
either attracting non-rail users onto the railways or in easing
issues of Social Exclusion. Intercity-type TOCs, in particular,
will continue to be incentivised to focus on higher-yield business
customers with deep(er) corporate pockets, rather than broadening
their appeal to wider sections of society.
4. SECURE INVESTMENT
4.1 It is unclear how the management and
procurement of large capital projects will be delivered in future.
The creation of significant extra capacity, in both short and
long-terms, will occur over a timeframe that is longer than a
two-year extension. The supply of extra capacity clearly needs
to be planned to meet expected demand from TOCs and FOCs (Railtrack's
customers). Yet, under a short-term tenure, TOCs find it difficult
to engage fully in the decision-making and developmental process
to ensure that route upgrades are customer-led projects. At present,
the passenger interest, via the TOC as tenant, lacks adequate
4.2 Railtrack's lack of financial standing
and its inability to commit to new expenditure, places TOC owners
centre stage with the SRA in determining new ways to lever in
substantial new investment, possibly under Special Purpose Vehicles
(SPVs), to create a railway of which Britain can be truly proud.
However, under short-term arrangements private investors will
be reluctant to take the necessary commercial risks. They require
comfort that any proposed investment is a sound one and allows
sufficient time to make an adequate return.
4.3 However, if major upgrades are to be
funded and delivered by the SRA, the TOC franchisee assumes the
role of tenant on the route and four or five-year extensions become
realistic, rather than longer horizons.
4.4 On rolling stock procurement, as stated
in the summary, it is proving to be extremely problematic to be
able to place early orders for new trains, even using Government
guarantees under Section 54 of the Transport Act, when the test
and delivery timescales go beyond the length of the two-year extended
franchise. Recent history also demonstrates a poor record in getting
new rolling stock into service quickly, with many new trains being
delayed as the necessary approvals and safety certifications are
4.5 It is difficult to assess the adequacy
of investment proposed since the 10-Year Transport Plan was published.
However, it is clear that the initial allocation of public funds
did not include the full and substantial costs of:
the Cullen and Cullen/Uff Reportsparticularly
the installation of ATP;
the Disabled Discrimination Act;
the effects of the Hatfield tragedy
and the ongoing costs of Railtrack;
the advancement of £1.5 billion
4.6 Therefore rigid adherence to the initial
funding allocation is not, in GNER's view, going to achieve the
necessary targets. Further funding is required to make up the
shortfall. The Hatfield tragedy demonstrated, in part, that Railtrack's
long-term spending on maintenance and renewal is/was inadequate.
Even with its new "back to basics" focus, it is highly
questionable whether Railtrack is sufficiently funded to perform
its core maintenance and renewal role, let alone a more expansionist
one in future. Indeed, it is predicting a borrowing requirement
of nearly £10 billion over the next five years.
4.7 Funding follows Vision. If the vision
has changed, or is about to change, future funding arrangements
should reflect this. Strong, clear leadership is required to determine
the way forward and to fill the current void of uncertainty.
5. PROVIDE THE
See 4 above.
5.1 Even before Railtrack's funding and
organisational problems emerged post-Hatfield, the SRA recognised
that Railtrack could not alone pay for, and deliver, the major
committed and planned infrastructure projects. Special Purpose
Vehicles were examined to attract extra commercial and skills
leverage from the private sector.
5.2 Post-Hatfield, when it was clear that
Railtrack was unable to commit to future phases of the ECML modernisation,
the SRA invited 20-year ECML franchise bidders to submit joint
venture arrangements to progress this important national project.
GNER assembled a close partnership with such engineering and construction
specialists as Fluor, Hochtief and Shepherd, who are experienced
in delivering complex public-private finance projects.
5.3 Such formidable alliances, underpinned
by the major banks, could have an important role to play in designing
and delivering 'new build' infrastructure projects. But, for reasons
stated earlier, participation is only likely if long-term returns
on investment are achievable.
5.4 The financial markets need to see risks
minimised. The Government could provide further guarantees to
underpin further private sector involvement. Such considerations
are, no doubt, "work in progress".
5.5 There have also been suggestions that
reverting to "vertical integration" on all, or parts,
of the rail network may be a solution to both improved operational
resilience and better management of new infrastructure schemes.
Whilst this may merit further examination, there would be significant
safety, cultural, operational, ownership and liability issues
to be resolved, particularly on a multi-user route such as the
ECML which has to accommodate many differing demands. Under short
franchise contracts it is highly questionable whether suitable
and equitable accommodations could be reached without causing
significant disruption and resentment. There is also EC Directive
91/440 to consider, which appears to prohibit vertical integration
in order to provide a better understanding of rail industry costs
versus other transport modes.
6.1 The short term, "quick win"
approach announced by the Government on 16 July and the subsequent
decision on 18 July on the ECML franchise (fully understandable
given prevailing circumstances), was in direct contrast to the
long-term approach being taken by the SRA, under its present chairman
Sir Alastair Morton. The impact was to throw the rail industry
into disarray and the consequences are currently being worked
through. The SRA's Strategic Plan, due to be published in November,
is keenly awaited. It is essential that the SRA aligns itself
with a clear Government policy.
6.2 Future refranchising needs to strike
the right balance between: encouraging innovation and imagination
from bidders; and being an auction for a public asset with an
accompanying specification, so that the bidding criteria are known
in advance. A laissez-faire, "let the market decide"
approach is a recipe for chaos and an abdication of strategic
6.3 The franchising process has to be undertaken
within a clear strategic framework, otherwise the energy and resources
of the industry end up being misdirected or wasted, potential
new entrants are deterred and projects with real passenger benefits
get delayed. The Office of the Rail Regulator has an important
role to play in ensuring "joined up" strategic thinking
with the SRA.
6.4 In GNER's experience, once the ECML
bidding process started, there was initially no apparent process
in place to direct or assess contrasting submissions. A set of
criteria was established, but there appeared to be no scale of
assessment to prioritise the relative merits or importance of
each element of the application. This prolonged the negotiations,
and creates amongst the incumbent TOC a state of "semi-permanent
hostile takeover", resultant staff uncertainty and cultural
6.5 The need for contestability, under European
law and to ensure value for money for the UK taxpayer, is well
recognised. However, it should be possible for the SRA to accept
outline applications from shortlisted bidders, but then engage
much earlier with a preferred bidder, rather than to "keep
two or more horses in the race" until the bitter end. The
length, uncertainty and tortuous nature of the bidding and decision-making
process for the proposed new ECML franchise was in no-ones' interests.
Opportunities are missed, train production slots go begging and
track upgrades get delayed. This only exacerbates the national
shortage of key railway resources and a woeful track record of
cost and time overruns on major infrastructure projects, with
associated planning blight.
6.6 Railtrack, as (initially) the principal
funder and manager of the ECML upgrade, was unable, or unwilling,
to engage fully with GNER until preferred bidder stage was reached.
This is understandable given that Railtrack was/is not funded
for the role of researching and costing a variety of differing
'wish lists' from bidders.
6.7 The protracted nature of the process
inevitably impacts on the workforce of, particularly, the incumbent
bidder, inhibiting career advancement and future training and
development in preparation for an enlarged railway. Again, there
are long lead times required in achieving significant cultural,
behavioural and attitudinal advances across a large and diverse
workforce, to ensure it is ready to face and manage new challenges
and ever higher passenger expectations under a shared vision.
6.8 The SRA's day-to-day management of franchises
is at the micro, rather than macro- level. The organisation is
over-populated with managers and operators, rather than strategists
or business planners with a clear grasp of passenger and political
agendas. This current set of skills and competencies duplicates,
or clashes with, those within TOCs. The SRA could secure more
technical input from external consultants to validate franchise
submissions, providing greater freedom and focus to examine and
develop the "bigger picture". Its role should be more
about Audit and Control.
6.9 The SRA is bound by rules which are
often outdated. This inhibits a more externally-focused and service-led
role. Its mindset becomes protection rather than promotion-driven.
A better balance needs to be struck between a protective, penalising
regime, which often automatically assumes industry failure, and
one which encourages added value and meaningful developments for
the passenger. For example, in the ECML franchise bid there was
more focus on the not unimportant issue of compensating passengers
for delayed services, to the detriment of accepting the passenger
benefits of new station lounges and other value added investments.
6.10 Using a locomotive analogy, it would
be fair to say that the motor, on what was welcomed by the industry
in 1999 as "an engine for growth", splutters all too
frequently and there is little current evidence of anyone in the
cab to lead it out of the tunnel for the longer term. Conversely,
it is equally fair to say that, as an organ of Government, the
SRA's performance has been affected by the vagaries of unpredictable
events and changing political imperatives.
6.11 During the ECML negotiations the pendulum
swung from an expansionist remit at the outset to a more risk
averse, utility-based agenda, as SRA funds were no doubt being
siphoned off to meet the demands of the Cullen Report, the impact
of the Hatfield tragedy and other unforeseen, uncosted scenarios.
Under such changing circumstances, GNER inevitably found it difficult
to pinpoint the expected winning criteria required to secure a
7. IMPROVE THE
7.1 There is a common, but often misplaced
perception, than an ongoing and acrimonious relationship between
the trade unions and TOCs is prevalent across the industry. This
perception of poor industrial relations is, in part, a legacy
of the divisions of the past and belies a more complicated picture
today. Indeed, there are increasing examples of good practice,
based on a long-term partnership approachfor example, GNER's
innovative drivers partnership agreement with ASLEF.
7.2 However, it is equally true that despite
this more enlightened age, in some parts of the rail industry
a culture of mutual mistrust still prevails between TOCs and trade
unions. Some TOCs believe that trade unions are out-of-touch with
their aspirations and must be fought to a standstill.
7.3 GNER's view and that of all progressive
TOCs, is that trade unions are, and should remain, long-term partners
in the industry, helping it to achieve modal shift and to become
7.4 The root problem of the prevailing malaise
of distrust and under-achievement is poor people management. Privatised
train operators inherited a traditional, utilitarian model of
"man management" whereby everyone knew their place based
on a rigid structure of hierarchies, rules and regulations. This
led to a defensive, confrontational mindset and a production-led
railway, where the passenger interest was largely ignored.
7.5 For those, like GNER, who believe in
a Pluralist society, the challenge is to create a market-led,
customer-facing industry by enabling railway staff to grow in
confidence and take on more devolved authority, supported by sound
business practices and a common vision. This requires significant
investment in people to ensure (a) that railways are viewed as
"employers of choice" by potential recruits, rather
than 'of last resort' and (b) that railway staff act as volunteers,
rather than conscripts, towards changing corporate cultures and
progressing the service-led agenda. Since 1996, the start of its
franchise, GNER has successfully restructured, with its trade
union partners, the terms and conditions of 90 per cent of its
3,000 people, without industrial disruption.
7.6 There is a danger that a continuation
of short-term franchises will only serve to perpetuate the IR
school of rancour, division and quick, but costly, fixes within
railway industrial relations. TOC and trade union will continue
to jockey for narrow, short-term advantage, rather than moving
towards a more mature, constructive dialogue of partnership. The
short-term approach becomes a tax upon the efficient operation
of the business. Conversely, under longer franchises TOCs are
encouraged to make the necessary investment in people with the
associated benefits of increased competencies and contribution
to company prosperity, and clear, long-term career paths.
7.7 Most of the railways problems are people-orientated
(eg the Hatfield tragedy). The people dimension to the future
of the industry is crucial. It is vital that Britain's railways
attract, retain and develop the very best people with appropriate
skills sets and behaviours to offer ever-higher standards of service.
This requires significant and continuing investment in recruitment
and selection and innovative training and development over prolonged
periods. Such investment in the development of "soft"
values, nonetheless provides hard, demonstrable outputs, such
as in improved train performance and higher passenger satisfaction
7.8 Cultural change does not, and cannot,
occur overnight. It requires long-term planning horizons. It takes
time to develop good managers, who are key to providing good industrial
relations. New managerial recruits require security beyond a two-year
7.9 Longer term security of tenure will
encourage TOCs to develop their hinterland beyond their operational
footprint and to contribute more fully to wider social and employment
initiatives (eg Lifelong Learning).
7.10 Importantly, in assessing the merits
of franchise bids there appears to be no validation of the people
dimension. Guidance on minimum thresholds for traditionally "soft"
investment is provided by the SRA, but no criteria is given on
how these are evaluated against "hard" investment in
track, trains and stations.
7.11 The SRA's strategic role in assessing
bids should be to help shape and identify coherent business plans
with a significant people component. Without falling prey to the
HR fads and fashions often aired by well-meaning HR consultants,
the SRA's role should be to shape and guide the industry, not
to micro-manage it. TOCs should be allowed to manage their own
people without undue outside interference.
7.12 There is considerable compatibility
between the aspirations of TOCs and trade unions. The opportunity
exists for all TOCs to develop a culture of consensus, not conflict.
However, true partnership, trust and joint problem-solving is
restricted by the conditions of short-term franchise extensions.
Under longer franchises, the likelihood of TOC/trade union partnerships
being allowed to flourish is considerably enhanced, bringing considerable
political, passenger and employee benefits.
14 This submission was drafted before Railtrack went
into Administration and the SRA's Strategic Plan was published.
In January 2002 GNER was granted a two-year extension to it's