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


Further memorandum by Grant Transport Strategy Ltd (PRF 41A)

PASSENGER RAIL FRANCHISING

  1.  This supplementary memorandum considers the impact of the decision of the Secretary of State for Transport to place Railtrack PLC in Railway Administration. It should be read in conjunction with my memorandum to the Transport Sub Committee dated 1 October.

  2.  Railtrack owned the national rail infrastructure but was out of touch with the customers—passengers and freight shippers—for whom the network exists. As a monopoly it could dictate whether it was willing to invest and, if so, at what cost. This undermined the SRA's recent strategy of seeking to put infrastructure investment risk on to TOCs. Railtrack's financial collapse has therefore removed a block on progress and represents an opportunity to put in place a less dysfunctional structure.

PLANNING, FUNDING AND DELIVERY IN THE NEW STRUCTURE

  3.  Many commentators have suggested that the City will be reluctant to invest in the rail industry in consequence of Railtrack's failure. There is no doubt that the event has upped the stakes for investors but I see no reason why the private sector should not continue to be willing to bear risks that they can control. In my view, the principal difference to investors' attitudes is that there will no longer be any implicit assumption of Government support; to the extent that the Government wishes to underwrite a risk this will need to be explicitly stated.

  4.  It is clear that the Government's proposed Government Limited by Guarantee (CLG) is not intended to plan, manage and deliver major enhancements. The industry must therefore be structured to enable TOCs and other parties to make these happen.

  5.  My previous memorandum supported the concept of "Railway Company" DBFO consortia to lease, maintain and enhance geographically coherent sections of the infrastructure (taking capital cost and time overrun risk) and operate the train services most affected by the upgrades (taking revenue and operating cost risk). In my view, the proposed replacement of Railtrack PLC with a CLG strengthens this case.

  6.  In addition, the financial collapse of Railtrack means that we have to re-examine the industry's finances. The 10 Year Transport Plan set objectives of a 50 per cent increase in passenger traffic and an 80 per cent increase in freight. It promised £14.7 billion of public sector investment and £11.3 billion of non-investment expenditure such as operating subsidies with a further £34 billion of investment to come from the private sector. Post Hatfield it seems that the true cost of maintaining the existing unenhanced railway infrastructure is higher than was allowed for in the Regulator's five-year review, but it is not clear by how much. The Uff/Cullen safety recommendations take no account of value for money and the cost of the European Train Control System is now thought to be in the range of £2 billion to £5 billion[23]. Against this background it is difficult to assess how much public sector money will be available for network enhancements.


  7.  The rail industry is substantially funded by taxpayer. Government needs to state clearly what it wants in return. The industry urgently needs the overdue SRA Strategic Plan as a framework within which the private sector can make specific proposals. Without this, money will continue to be wasted on abortive projects such as the East Coast Main Line refranchising exercise.

  8.  Given clear objectives and a broad strategy, TOCs can build specific business plans as the basis for franchise bids. The TOCs and the freight operators are the only bodies that are in a position to plan tactically on behalf of the industry as they integrate the infrastructure, the rolling stock and the channels of sale to market and deliver the railway service to the customer.

  9.  A key element of the TOCs business plans will be sources of funding. Ultimately, this boils down to one or more of three possibilities:

    —  Private sector capital investment paid down from future operating revenues.

    —  Private sector capital paid down by future operating subsidies.

    —  Public sector capital investment.

  It is, therefore, crucially important to know how much of what kind of investment the public sector is prepared to fund and what the Government expects as outputs for such publicly funded investment.

  10.  TOCs will take risk on their business plans—revenue and operating costs—provided the plan is not compromised by third parties. For example if a plan assumes revenue growth on the basis of a speed or frequency enhancement, the enhancement has to be in place on the due date. Similarly, the adverse impact on revenues and costs of disruption at the enhancement construction stage has to be factored in to the business plan at the outset.

  11.  To the extent that a train operator proposes an infrastructure enhancement and attributes additional revenue to it, the train operator should bear the risk that its proposal delivers the benefits it has claimed. But that guarantee cannot outlive the franchise. Either the franchise has to be long enough to pay down the investment or the SRA has to underwrite future payments to the investor.

  12.  The TOCs business plan and the provision and funding of infrastructure upgrades are therefore inextricably linked. That is why I believe that the TOC has to be part of the consortium delivering the upgrade. As best value for money is achieved when upgrades are planned in conjunction with maintenance and renewal, I believe that maintenance, too, should be part of the Railway Company function rather than being carried out by the CLG.

Stephen Grant

Grant Transport Strategy Ltd

26 October 2001


23   Rod Muttram, Railway Safety Chief Executive, as reported in "Rail Business Intelligence" no 160, 11 October 2001. Back


 
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