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


Memorandum by Go-Ahead (PRF 43)

1.  PASSENGER RAIL FRANCHISING

1.1  Background

  1.1.1  The agenda presented in the draft Policy Statement on Passenger Rail Franchising issued by the Secretary of State for Transport on 16 July and in the draft Directions and Guidance to the SRA issued by Secretary of State on 29 June, outlines a different agenda to that which was presented to Train Operators 18 months ago. It is not yet clear how different this approach will be until the SRA Strategic Plan is published in November.

  1.1.2  The views expressed below are therefore in the context of the above.

1.2  Necessity for a change of approach

  1.2.1  It is recognised that the SRA's previous policy of encouraging innovative thinking and inviting Franchise Replacement Bids on the basis of Core Franchise Propositions which were not backed up by detailed Engineering Feasibility work that had been signed off by Railtrack was flawed. Insufficient time was allowed within the bidding process for parties to conduct Due Diligence in relation to the assumptions made. The process inevitably generated uncertainty as to the deliverability of the Railtrack element of Committed Outputs that were to form part of the 20-year franchises. The process of bidding thus led to gaps between the innovative thinking and the reality of what was possible on the network.

  1.2.2  The process also required much effort and time on the behalf of management teams and consultants, and whilst companies organised their management in such a way as to not prejudice the safety and operation of their train services, it was inevitable that there was some loss of focus.

  1.2.3  There was also the issue of an impossible timescale—namely to replace all short-term franchises by the end of 2001—together with a shortage of available resources within the railway industry to subsequently implement the committed outputs entered into.

  1.2.4  Further significant events in the railway industry such as the accidents at Ladbroke Grove and Hatfield, and their impact on Railtrack and the subsequent degradation of the rail network, had a huge impact on the punctuality and reliability of train services and the benchmark from which future performance improvement can be realistically measured. The recommendations from the Inquiries, coupled with the need to rebuild the network, has meant that both resources and funding were diverted away from the Franchise Extension process.

  1.2.5  All of these factors combined to make a change of direction inevitable.

1.3  Lessons learnt from the refranchising process to date

  1.3.1  Train Operators must be more closely involved with the SRA in the development of strategy; other industry partners such as Railtrack and Freight Companies also need to be engaged.

  1.3.2  Project planning of the Franchise Extensions needs to be better organised by SRA, and the bidding framework should be more prescriptive.

  1.3.3  Human, technical and financial resources must be reviewed in light of the specific events which have occurred since the publication of the 10-Year Plan—namely extra money for Railtrack for network maintenance, DDA and significant additional safety requirements.

  1.3.4  The SRA must work more closely with the DTLR.

2.  SHORT EXTENSIONS TO EXISTING FRANCHISES

2.1  Safety, Reliability, Punctuality, Comfort and Frequency

  2.1.1  There will be no step-change improvements in frequency, reliability and punctuality with short-term extensions. Delivery will need to be founded on a realistic review of what the Network can be expected to reliably provide over the short-term.

  2.1.2  Changing maintenance regimes post Hatfield, which could include more intrusive possessions, may lead to lower levels of short-term performance. Further, any granting of new access rights without infrastructure investment could again lead to degradation of performance rather than improvement.

  2.1.3  The immediate priority is to allocate sufficient funding to allow the rail network to return to the levels of performance that were being achieved in the late nineties. Railtrack must, as a minimum be able to deliver Rules of the Route/Plan and be able to fulfil its obligations under Licence Condition 7.

  2.1.4  Subsequent improvements in frequency, reliability and punctuality will then be capable of delivery via a range of potential initiatives. The following issues will emerge:

  2.1.4.1  With limited resources, what parameters will be defined to evaluate the relative desirability of new infrastructure—will the focus be on capacity or reliability?

  2.1.4.2  Many infrastructure schemes will give rise to reduced performance levels whilst being constructed.

  2.1.4.3  The extent to which new infrastructure may be needed will be a factor of reviews of Passenger Service Requirements (PSRs), fares regulation and timetable capacity optimisation. (see 2.2.3).

  2.1.4.4  Current PIXC rules allow standing on any train for journeys stretching over 20 minutes. The standee targets tend to reduce value for money on vehicle utilisation when a small increase in passengers triggers the need for a new unit in advance of when it might be actually "necessary" when considering all available capacity.

  2.1.4.5  In defining the capacity of a unit considerable thought will have to be given to whether this is seats or floor space, especially relevant with the DDA guidelines for new fleet, and their applicability levels for refurbished fleet is considered.

  2.1.5  Safety enhancements are naturally to be welcomed, and are already being implemented, but it is possible that these may actually serve to reduce capacity and worsen performance. For example TPWS failures—on unit or infrastructure, will add to impact minutes and worsen punctuality. This clearly has to be set against the very significant benefit of a reduced likelihood of serious collision and accident.

  2.1.6  Safety enhancements on the railway are more likely to be driven by a legislative timescale, and whilst funding will be a core issue they should rightly be considered to be outwith any refranchising timescales.

2.2  Investment

  2.2.1  The shorter the franchise, the less private finance that will be available as:

  2.2.1.1  A short franchise term provides a very small window for financiers to recover their investment. This will mean that the SRA will have to make higher annual/periodic subsidy payments to the TOCs.

  2.2.1.2  Financiers need a "tail" beyond the target completion date for each infrastructure enhancement project, to allow scope for remedying any delay. In the absence of such "tail", financiers will only finance a more modest enhancement programme and demand a higher return.

  2.2.1.3  Economies of scale in terms of the set-up costs for putting together financing and legal contracts mean that short franchises with smaller capital expenditure requirements are unlikely to be economic. Finance could be raised on a corporate basis (ie where lenders have recourse to a Plc) for small projects, but this is more expensive in total and is limited to the larger Owning groups, thus potentially reducing competition.

  2.2.1.4  To the extent that HMG wish to maximise the amount of non/limited recourse finance from the private sector, the biggest source of funding is the capital markets, which offer best value at longer maturities (15 years+). Whilst the bank market is large and able to offer shorter maturities, HMG's requirement for private sector funding across the wider PFI/PPP arena, may present capacity constraints.

  2.2.2  In summary, short two year extensions to franchises are unlikely to deliver a significant step change that will result from longer term investment.

  2.2.3  Investment, however is only part of the solution. As indicated in 2.1.4 above. Capacity could be increased by widespread reviews of PSRs. These have ossified some service levels, often at a level not in tune with today's markets, or preventing expansion where required, and where relative benefits would be much greater for change. However, resistance to change will be significant and it will require consistency of policy purpose and adequate consultation with stakeholders to deliver it.

  2.2.4  Further, the current fares regulations prevent pricing being used to redistribute demand. As they exist for London, they will continue to lead to increasing peak numbers as fares fall in real terms. In time, they will also lead to defacto capping of off-peak fares, as off-peak fares have to retain their cheaper differential with peak fares.

  2.2.5  Alternatively, small fare increases in line with inflation could generate very significant revenue, which could be ploughed back into capital investment in railway infrastructure.

2.3  Framework for Major Infrastructure Enhancement Projects

  2.3.1  The current Railtrack/TOC "contractor" model has been shown to be seriously flawed, with serious project cost and timescale overruns, epitomised in the West Coast Mainline Upgrade project entered into by Railtrack and Virgin Trains.

  2.3.2  Short extensions to existing franchises will not provide the necessary timescales for a new approach—Special Purpose Vehicles (SPVs) to work.

  2.3.3  The Go-Ahead Group has been developing the SPV concept over the last 12 months with its partners in the South Central route upgrade, Railtrack and Bechtel.

  2.3.4  The SPV model is similar to the PFi model, but there are features specific to the rail industry which mean that modifications are required:

2.3.4.1  The complexity, number and consequential impact of the interfaces in the rail industry are significantly greater than in conventional PFI. For example, a small delay in a track possession on an operational railway during construction can have a very substantial knock-on effect and liability to pay financial compensation to other parties. These financial consequences are too great for a private sector party to bear.

2.3.4.2  The safety and operational requirements of a mainline railway network make it very difficult to provide funders with the normal rights to step-in and remedy a failure/mitigate loss.

2.3.4.3  The risk of change of law is more acute (and the consequences likely to be of a much greater financial quantum) in the railway sector than mainstream PFI, given the safety context.

2.3.4.4  To obtain cost-effective funding, there will need to be implicit, if not explicit, Government support to cover certain "extreme" events such as TOC or Railtrack insolvency or Force Majeure events. Such support should allow for a timely and orderly transfer to a replacement party and/or some form of stop-loss protection above certain threshold amounts.

  2.3.5.  For TOCs not already in the replacement process, SPVs will not be required and the current move towards extensions is a sensible, pragmatic interim step for the following reasons:

2.3.5.1  The current state of the industry, and particularly Railtrack, does not lend itself, especially when combined with possible spending constraints, to long-term commitments at reasonable value for money criteria.

2.3.5.2  Bidders only have finite resources, both financial and human, to undertake multi-bidding in parallel (and development of successful bids). A staged replacement programme will optimise quality.

2.3.5.3  A simultaneous programme of delivery for 20 year bids will overstretch the capability of the industry to fulfil obligations, will lead to increases in costs for programmes, and possible boom and bust in key supply chain elements (especially fleet).

2.3.5.4  It enables rational analysis of network requirements, prioritisation of need and time for the definition of the specification of future franchises.

2.3.6  However, this statement is made in the context of:

  2.3.6.1  There will be times and occasions where a logical length for an extension will be more than the two years currently allowed for in the Franchise Agreements.

2.3.6.2  The extension programme must be seen as an interim expedient. In the absence of wholesale revision of PSRs and fares increases step change improvements will only be brought about by major investment, requiring long franchise terms.

  2.3.7.  The granting of franchise extensions can provide breathing space to resolve some important issues for the next stage of development. These include:

2.3.7.1  Definition of reasonable targets, otherwise the inevitable result will be a translation of risk into higher costs, and reduce value for money.

2.3.7.2  Detailed definition of SRA requirements and specifications for each franchise to avoid wastage (both financial, time and human resources), and the avoidance of producing non-comparable bids.

2.3.7.3  A sensible, reasonable timetable for the overall replacement programme to ensure recognition of national priorities and the capability to effectively organise groups' resources.

2.4  SRA Leadership of the Industry

  2.4.1  Changing the period over which new franchises are competitively tendered/renegotiated in so far as they are introducing pragmatism, may bring about improvements in the SRA's position within the rail industry.

  2.4.2  However, there is a fundamental need to realign the many players within the industry and to learn the lessons (see 1.2/1.3) from the mistakes of the refranchising process to date.

  2.4.3  Bidders who have expended very considerable sums in development costs also need to be given the opportunity of amortising these over shorter franchise periods in order to ensure there is future private sector appetite to invest in further bid costs.

  2.4.4  Railtrack and the SRA, and to a lesser extent DTLR, are engaged in the strategic planning of the rail industry. This is largely carried out in isolation, each party showing much concern for "commercial confidentiality"—TOCs and FOCs are outwith the process. This leads to much duplication and abortive work. The new approach to franchising, including a more detailed and prescriptive Core Franchise proposition in so far as it will provide a consistency of strategic direction, will be welcome.

2.5  Industrial Relations

  2.5.1  Industrial Relations are much improved on the railways post-privatisation. Trade Union matters should rightly remain with the employers of railway staff—TOCs, FOCs and Railtrack, at a Company level.

  2.5.2  Returning to a round of national rail strikes, a feature of the pre-privatisation years, will reverse many years of progress.


 
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