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


Further memorandum by the London Transport Users Committee (PRF 34A)

PASSENGER RAIL FRANCHISING

  This supplementary memorandum offers brief comments on the topic raised by the Sub-Committee arising from Railtrack being placed into administration.

THE IMPACT OF RAILTRACK PLC BEING PLACED IN RAILWAY ADMINISTRATION ON THE GOVERNMENT'S FRANCHISING POLICY

    (a)  By switching the focus of franchising to the short term the Government's policy effectively buys time for the structure of the industry to be reviewed. If Railtrack had continued to exist in its previous form, its various legal, financial and other relationships with the many other players in the industry could have acted as a constraint on the extent to which any desired restructuring could be achieved in practice. The new position may therefore prove beneficial in that there will be fewer fixed points around which a new structure needs to be drawn.

    (b)  If this new found flexibility is to be realised, however, it is important that the position is not compromised by the administrators seeking to settle Railtrack's affairs solely in the interests of creditors and shareholders. As a passengers' organisation we have no knowledge of the legal duties placed on the administrators in this regard, but would suggest that this is a matter which should be urgently looked into.

THE FINANCIAL STRUCTURE OF RAILTRACK'S SUCCESSOR

    (c)  Perhaps with the benefit of hindsight one can see a fundamental problem faced by Railtrack. To raise capital for investment it needed to make profits on a par with other major companies. However, apart from property income, its revenues were fixed by the Regulator. This meant that profitability, at least in the short term, was largely a function of cost cutting.

    (d)  This regime led to the company establishing an organisation and culture which sought to minimise expenditure. The Hatfield accident showed that the fine judgement needed in such circumstances to keep on the right side of safety was lacking. The response, with the same culture having caused an exodus of experienced railway engineers, was to panic and (together with throwing the operation of the railway into chaos) lose control of costs for fear of another serious accident.

    (e)  It was of course the case that British Rail was always under strong pressure to minimise costs. However, the overall regime was such that if safety required that money be spent, then the work was done and the costs recouped by cuts elsewhere in the business. We cannot recall any significant accident on BR being caused by an error of judgement about safety versus expenditure on maintenance.

    (f)  We therefore consider that in establishing a successor (or successors?) it is essential that the financial structure, while plainly being one which encourages proper control of costs, should not be one which induces the same extreme organisational and cultural pressures as arose in Railtrack.

THE RELATIONSHIP OF RAILTRACK'S SUCCESSOR TO THE TRAIN OPERATING COMPANIES, THE RAILWAY REGULATORY BODIES, AND THE SRA

    (g)  This is a major issue, possibly the core of the railway problem. In our original memorandum to the Sub-Committee we indicated support for the view that the SRA needs to be transformed. The same can be said for the industry as a whole and we would suggest that the new situation—coupled with the recent publication of Lord Cullen's recommendations—creates a golden opportunity for all the structures to be reviewed. LTUC, as part of the RPC network, would wish to be party to such a debate and it is important that rushed decisions should be avoided.

    (h)  We would particularly commend that the proposal by Mr Kiley for direct Transport for London participation in the operation, maintenance and development of the national rail network in the London area should be given the most careful consideration. It may be that a single new body embracing responsibilities hitherto undertaken by both Railtrack and the SRA would be appropriate. One of the many issues to address would be the question of boundaries, as the TfL area does not correspond with railway operating geography and nor does it match the overall London travel to work area. Suffice to say here that the wider the boundaries of such an organisation, the greater the need for stakeholder representation which reflects the non-London interests of the counties, cities and towns within its area.

THE ALLOCATION OF RISK BETWEEN THE NEW COMPANY AND THE GOVERNMENT

    (i)  If there is to be a review of all the structures then it is perhaps jumping the gun to say that the railway infrastructure must be owned by a limited company.

    (j)  Whatever the structure and whatever the financial arrangements, both the manner of the ending of Railtrack and the manner in which weak TOC franchises (Prism and MTL) were eased out of the industry clearly support the truth of what Mr Kiley has said about London Underground—the railway must run, at the end of the day responsibility for this rests with Government so there can be no true transfer of risk. Although shareholders may lose all or part of their investments, all debt and on-going expenditure has to be picked up by the public sector.

    (k)  If, as is widely suggested, future maintenance and development of the railway infrastructure will have to be funded by bonds or some other Government backed securities, then the vital thing is to avoid the Treasury straitjacket which limited BR's ability to develop the network. This means finding a formula which keeps railway funding outside the scope of the Public Sector Borrowing Requirement.


 
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