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

Memorandum by Great North Eastern Railway (PRF 33)



  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 separately—and via its trade body, ATOC—to 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 capacity.

  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:


  3.1  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 remain unresolved.

  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 longer contracts.

  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.


  4.1  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 representation.

  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 awaited.

  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 Reports—particularly 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 for Railtrack.

  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.


  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 responsibility.

  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 erosion.

  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 20-year agreement.


  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 approach—for 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 more customer-led.

  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 scores.

  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 timeframe.

  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]


September 2001

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 franchise. Back

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