Select Committee on Transport Appendices to the Minutes of Evidence


Supplementary memorandum by the Strategic Rail Authority (SRA 08A)

VIRGIN RAIL GROUP INTERIM AGREEMENT

PURPOSE

  1.  This note describes the background and purpose of the interim agreement between the SRA and Virgin Rail Group announced to the Stock Exchange on Monday 22 July 2002.

BACKGROUND

  2.  The franchise agreement for Virgin West Coast which started in January 1997 provided for higher service levels, reduced journey times and new rolling stock to be delivered in two stages—the first in May 2002 and the second in 2005. The infrastructure improvements required to deliver this were contained in a contract between Virgin Trains and Railtrack—Passenger UpGrade Two (PUG2)—to be implemented in two phases, in 2002 and 2005.

  3.  The Virgin Cross Country franchise also depended in part for its delivery on the PUG2 outputs for those services from Coventry to Birmingham and the North West.

NEW TRAINS

  4.  Virgin Rail Group (a joint venture between Virgin Trains and Stagecoach) has fulfilled its franchise commitments to refurbish the existing fleet and procure new trains. It also established an effective procurement process which has delivered a total of 78 Voyager and Supervoyager trains for Cross Country now in public service. The first Pendolino trains for the West Coast will enter service in January 2003.

INFRASTRUCTURE

  5.  Late in 1999 it became likely that Railtrack would not be able to deliver all the planned outputs. At the same time, it was evident that the costs had risen (from £2.5 billion to £6.5 billion), and this was reflected in the Regulator's review in October 2000. A small proportion of this was in respect of enhancement—the bulk of the increase was in the backlog of renewals reflecting the state of the infrastructure inherited from BR. In 2001, it was evident that further delay and cost escalation was likely as detailed planning revealed the size of the task. Following the Railtrack Railway Administration Order in October 2001 it was evident that the SRA (which had not been a party to this contract) would have to take the lead. This was done through a detailed review involving Bechtel and the principal train operators on the route. The SRA issued a West Coast Strategy document for public consultation on 9 October 2002. The deadline for response is 16 December. A final Strategy for the route will be published in early 2003

FUNDING

  6.  The original Virgin Trains bid for the West Coast and Cross Country franchises were based on strong revenue growth from additional passengers attracted to use their services by the new trains, but particularly by the reduced journey times and increased service frequencies. It was the prospect of this strong growth which provided the basis on which Virgin Trains would be able to fund the operation of the two franchises while the works on upgrading the infrastructure took place. The first phase of those improvements was not delivered in May 2002, as contracted by Railtrack, and consequently the revenue growth has not taken place.

PASSENGER INTEREST

  7.  Holding the Virgin Rail Group strictly to the terms of its franchise agreements posed a risk that the company would be unable to complete the procurement programme for the new trains and might even wish to terminate one or both of its franchise agreements. Neither would be in the interests of passengers, as no other company could take over the responsibilities at this advanced stage without interruption to the delivery programme and considerable uncertainty for passengers and staff; and, had we terminated the Virgin franchise(s), any successor would have faced the same cashflow issues because they would have inherited the conditions that caused Virgin its problems in the first place. Replacement of either or both of the franchises at this stage would have incurred additional costs.

  8.  On this basis, the SRA took the decision to hold good the VRG businesses in the short term while long-term solutions were put in place. The Interim Agreement covers the period to the end of March 2003 and provides for additional franchise payments of up to £106 million. It delivers stability while the SRA works with Virgin Rail Group to identify and secure the best future for passenger service and delivery on the WCML and Cross Country routes. Provision is made, if required, for the franchises to be run beyond March 2003 under a management contract until new franchise terms are agreed.

SUMMARY

  9.  In reaching this decision, the SRA sought to secure the following:

    —  establishment of an upgrade programme for the West Coast Main Line which is deliverable and is value for money for the taxpayer;

    —  maintenance of VRG skills in train procurement, project management and service development;

    —  minimal disruption to passengers; and

    —  provision of a sound basis for restructuring of both VRG franchises.

SUPPLEMENTARY DETAIL

  10.  The Transport Select Committee's specific questions are answered as follows.

    —  The £106 million is a maximum additional payment facility; £39.5 million for West Coast Trains and £66.5 million for Cross Country Trains.

    —  Neither amount has yet been paid in full. £10 million in aggregate had been drawn down as at 13 December.

    —  The payment is a grant as all franchise payments are.

    —  None of the additional funding may be distributed to shareholders.

    —  Under the Interim Agreement with Virgin Rail, the grant may by recovered by the SRA in certain circumstances, including in the event of Virgin receiving any compensation from Railtrack (now Network Rail) other than under Section 8 of their track access agreements.

    —  There are no other sources of public support for the Virgin franchises.

    —  The SRA will take account of the amount of additional support provided to both Virgin Franchises in the renegotiation process.

  11.  Virgin is entitled to retain 10% of the proceeds of Liquidated Damages negotiated with Alstom for delays to delivery of the Pendolino trains and 10% of the benefits of any rescheduling of rolling stock lease payments negotiated with Angel Trains.

THE SRA's CONSIDERATION OF THE EFFECTS OF RAIL FARES ON ROAD CONGESTION

  1.  Fares changes are considered within a single forecasting framework. The approach to forecasting changes in the use of passenger rail services is based on an assessment of the overall cost of using rail compared with the cost of alternative modes of travel, growth in incomes and location of population and employment opportunities.

  2.  The overall cost of travel is sometimes known as its "generalised cost". For rail, this includes fares and other factors such as travel time and service quality. A change in fares would alter the generalised cost and lead to a demand response.

  3.  The response of passenger demand to changes in generalised cost is measured by elasticities. These take two forms. A "cross-elasticity" measures the consequence of a change in, say, rail fares on the demand for travel by rail and by an alternative mode. An "own-price" elasticity measures solely the impact of the change in fares on rail demand.

  4.  The Strategic Rail Authority has access to, or has developed, a range of models which permit testing the impact of changes in generalised cost on use of other modes of transport. The complexity of these models depends on their intended application.

  5.  For example, the Strategic Rail Authority has developed a model for analysing strategic routes. This model explicitly models the effect of changes in the generalised cost of rail travel on highways' travel and air travel.

  6.  The SRA would use a simpler, "own-price elasticity" approach for straightforward applications. This approach permits, for example, estimation of the direct effect of a fares change on use of rail services. However, the contribution of road users to the change on rail demand will vary, depending on the circumstances and is estimated from other data.

  7.  For example, a fares reduction may attract new travellers, travellers from roads and also open up new travel destinations for those travelling by rail. The proportion of new travellers diverting to rail from road would depend on market characteristics such as how large the fare reduction was in relation to the total generalised cost of travel on each mode. A forecast might be made comparing the new initiative with previous experience in similar markets.

  8.  An estimate would be made of the benefit of a decline in road congestion associated with a switch from road to rail. The estimated reduction in vehicle-mileage would be valued differently, depending on the levels of road congestion on relevant parts of the road network.

  9.  The Strategic Rail Authority therefore appraises the impact of fare changes on road congestion within an holistic approach to forecasting.

ACTION PROGRAMME FOR PASSENGER RAIL FRANCHISES
Franchise (Franchisee) Franchise Termination DateDescriptions Proposal
Anglia Railways
(GB Railways Plc)
April 2004Anglia Railways operate main line trains between London, Colchester, Ipswich and Norwich, local trains across Norfolk, Suffolk and parts of Cambridgeshire. Its trains mainly serve business and leisure travellers, as well as daily commuters into London. To form part of the "Greater Anglia" franchise from 2004. Tenders to be sought on
15 January 2003 for return 90 days later. This will be the first franchise competition to be undertaken under the new policy.
Arriva Trains Merseyside
(Arriva Trains Ltd)
February 2003Arriva Trains Merseyside operate passenger rail services between Liverpool and Southport, Ormskirk, Kirkby, Hunts Cross, New Brighton, West Kirby, Chester and Ellesmere Port. The greater part of Arriva Trains Merseyside's services are supported by, and operate to, the specification of, Merseytravel (Merseyside PTE). An Order has been placed before Parliament that, if approved, would enable Merseyside PTE to let a local concession. A joint re-letting process between the PTE and the SRA has been undertaken and final offers are due for return on 24 January 2003. It is intended that the existing arrangements will be extended to accommodate the process. The winning franchisee is expected to be announced in April 2003 and commence operations on 20 July 2003.
Arriva Trains Northern
(Arriva Trains Ltd)
February 2003Arriva Trains Northern operates rural, urban and inter-urban services throughout North East England, between destinations stretching from Chathill to Chesterfield and from Blackpool to Cleethorpes. Some of these services are supported by, and operate to the specification of, the West Yorkshire, South Yorkshire, Greater Manchester and Tyne and Wear (Nexus) PTEs. Regional services to form part of the Northern Rail franchise. Tenders will be sought for the Northern Rail Franchise at about the same time as the Greater Anglia Franchise. Trans Pennine services will be transferred to a new TransPennine Express franchise (franchising in progress). It is intended that an interim franchise agreement will be agreed with Arriva Trains Northern to ensure continuation of service provision.
C2C
(National Express Group)
May 2011 C2C operates an intensive, mainly commuter, service into London Fenchurch Street from South East Essex. No change currently proposed.
Central Trains
(National Express Group)
April 2004Central Trains operates an extensive network of rural, urban and inter-urban services right across the Midlands, North West England and into South Wales and East Anglia. In the West Midlands local services are supported by and operate to the specification of Centro (West Midlands PTE). Negotiations ongoing for a two-year franchise extension.
Chiltern Railways
(M40 Trains Ltd)
December 2021Chiltern Railways operate passenger train services throughout the M40 corridor between Birmingham and London. Their passengers are a mix of commuters, business and leisure travellers. On 16 February 2002 a new Franchise Agreement, for a period of up to 20 years, was signed with M40 Trains, and came into effect on 3 March 2002.
CrossCountry
(Virgin Trains)
March 2012 CrossCountry operates long distance services from Scotland, the North West and North East through Birmingham to the South Coast and South West of England. Franchise to be renegotiated by March 2004.
CTRL Domestic Services
(new franchise)
To be finalisedThe CTRL franchise will provide high-speed domestic services between Kent and London St Pancras via intermediate stations at Ebbsfleet and Stratford, following completion of the route in late 2006. Preparatory work on the franchise proposition is underway to facilitate the franchising process.
Gatwick Express
(National Express Group)
May 2011Gatwick Express operates frequent, high-speed, non-stop services between London Victoria and Gatwick Airport. No change currently proposed.
Great Eastern Railway
(First Group)
April 2004Great Eastern operates predominately commuter services from the Ilford, Romford, Southend, Chelmsford, Colchester, Clacton and Ipswich areas to London. To form part of the "Greater Anglia" franchise from 2004 (see above).
Great North Eastern Railway
(GNER Holdings, a subsidiary of Sea Containers)
April 2005Great North Eastern Railway operates a fast, frequent service linking London Kings Cross with parts of East Anglia and the East Midlands, Yorkshire, Humberside, the North East of England and Scotland. Two-year extension was agreed on 16 January 2002 negotiated until April 2005.
Great Western Trains
(Great Western Holdings a subsidiary of First Group)
February 2006Great Western operates high-speed train services between London Paddington, South Wales, the Cotswolds and the West Country. These routes serve a mix of commuting, business and leisure customers. The intention is to combine these services with the current Thames and Wessex franchises to form a Great Western franchise to let by February 2006.
Island Line
(Stagecoach Holdings)
September 2003Island Line operates trains on the Isle of Wight between Ryde Pier Head and Shanklin, and links with the ferries to Portsmouth and hovercraft to Southsea. Subject to Secretary of State endorsement through Section 26, arrangements will be agreed with Stagecoach to continue to operate the Island Line Franchise for a further three years and four months beyond the current end-date. This deal will be separate from the deal on SWT but will co-terminate with the SWT franchise.
Midland Mainline
(National Express Group)
April 2008Midland Mainline operates High Speed and Turbostar Train services along the M1 corridor between London, the East Midlands and South Yorkshire. There is a mixture of leisure, business and commuter travel. Two-year extension was agreed August 2000.
North Western Trains
(Great Western Holdings a subsidiary of First Group)
April 2004North Western Trains operate local and regional passenger rail services in North Western England and North Wales. In addition to inter-urban services between some of the larger towns and cities in the region. North Western Trains provides urban services around Manchester and Liverpool, and rural services in North Wales, Lancashire and Cumbria. Around half of the services are supported by, and operate to the specification of, one or more of the relevant PTES—Merseytravel, West Yorkshire, and Greater Manchester. North Wales services to form part of the Wales & Borders franchise. Some inter-urban services to be transferred to TransPennine Express (see above). Urban and regional services to form part of the Northern Rail franchise.
Northern Rail
(new franchise)
Yet to be awarded (5-8 years) Subsequent to the transfer of North Western services to Wales & Borders and inter-urban services to TransPennine Express, Northern Rail will operate urban and rural services previously operated by Arriva Trains Northern and North Western. Commence franchising process early in 2003. Anticipate commencing operations in Summer 2004.
ScotRail
(National Express Group)
April 2004ScotRail operates the vast majority of the passenger rail services in Scotland, and its services extend across the border to Carlisle. It also provides certain through services betwen Stranraer and Newcastle, and the Sleeper services between London Euston and Glasgow, Edinburgh, Inverness, Aberdeen and Fort William. In the Glasgow area, ScotRail operates passenger rail services on behalf of Strathclyde PTE. Expressions of interest were received on 11 November 2002. The form of the contract will be subject to discussions with the Scottish Executive who fund the franchise.
Silverlink
(National Express Group)
October 2004Silverlink County operates between London Euston, Milton Keynes and Birmingham New Street via Northampton, together with a branch to Bedford. Silverlink Metro services operate between Richmond and North Woolwich via Willesden and Stratford, together with branches linking Willesden Junction with Clapham Junction and Gospel Oak with Barking. Also local services from Watford Junction to London Euston with branch service between Watford Junction and St Albans Abbey. Possible two-year extension, with the aim of providing additional capacity, particularly on North London Line.
Possible future link of County services with West Coast franchise to be reviewed and consulted; Metro services may be combined with the East London Line (Orbirail).
South Central
(Govia—the Go-Ahead group and Keolis SA)
May 2003South Central operates predominantly commuter services to London from Surrey and Sussex, as well as services to Gatwick and Brighton and South Coast services between Bournemouth, Brighton, Hastings and Ashford. Negotiations ongoing for a franchise of up to seven years with Govia—but subject to the absolute right of the SRA to terminate the franchise at any point from December 2007, subject to 12 months prior notice being given to Govia.
South Eastern
(Connex Transport UK Ltd)
October 2011Connex South Eastern operates predominantly commuter services between central London and the South East London surburbs, the whole of Kent and part of Sussex. No change currently proposed. Longer-term strategy for rail development in Kent being considered in light of CTRL domestic franchise.
South West Trains
(Stagecoach Holdings)
February 2004South West Trains operate trains from London Waterloo to Woking, Basingstoke, Guildford, Southampton, Weymouth, Portsmouth, Exeter, Plymouth, Paignton and Reading, serving a mixture of longer distance and shorter distance travellers, with a high percentage of commuters. There will be a one-year extension of the present franchise to February 2004. SRA and Stagecoach are in negotiations for a three-year franchise from February 2004 to February 2007.
Thames Trains
(The Go Ahead Group)
April 2004Thames Trains operate services throughout the Thames Valley, the Kennet Valley, the Cotswolds, up to Stratford-upon-Avon, and on the North Downs line between Reading and Gatwick Airport. Passengers are a broad mix of commuters, business and leisure travellers (including tourists). Franchise expires in March 2004. It will be combined with Great Western and Wessex for replacement in 2006 as a Greater Western franchise. The SRA are considering the options for the future of Thames Trains between 2004 and 2006 and are in discussions with the existing Franchise Go-Ahead for a two-year franchise extension. The SRA have also received an unsolicited proposal from First Group to combine the Great Western and Thames Trains franchises in 2004. We will announce the chosen way forward in due course.
Thameslink Rail
(Govia—the Go-Ahead Group and Keolis SA)
April 2004Thameslink Rail Ltd operates trains between Bedford and Brighton via central London and also between Luton and Sutton via Wimbledon. Its north/south route serves five major stations in central London and two airports—Gatwick and Luton. Looking to re-let as a short franchise pending the outcome of the TL 2000 enquiry.
TransPennine Express
(new franchise)
Yet to be awardedThe longer distance interurban services currently operated by North Western and Arriva Trains Northern will be combined to form the new TransPennine Express franchise. The franchise will enhance rail passenger services between major centres of population, rail, air and road interchanges across the North of England. The SRA intends to announce the preferred bidder early in 2003.
Wales and Borders, formerly Cardiff Railway Company
(National Express Group)
April 2004Wales & Borders operates a mix of long distance regional and local rural services in South, West and Mid Wales. It also operates the Valley Lines network of services around Cardiff. The full Wales & Borders franchise will be completed with the migration of the current FNW services along the North Wales coast to W&B in September 2003.
Final offers for this combined franchise are due in February 2003 and it is expected that the successful Bidder will be announced in April 2003.
Wessex formerly Wales and West
(National Express Group)
April 2004Wessex operates a mix of long distance regional services and local urban and rural in the West and South West. The intention is to combine these services with the current Thames and Great Western franchises to form a Greater Western franchise to be let by February 2006.
The intention is to negotiate an extension of the current franchise until the combination takes place.
West Anglia Great Northern
(National Express Group)
April 2004WAGN serves the routes into London from Peterborough, Kings Lynn and Cambridge including a non-stop service between Cambridge and Kings Cross, plus frequent services from Hertford, Enfield and Chingford. It also operates the Liverpool Street to Stansted Airport services. It operates into three London termini—Kings Cross, Moorgate and Liverpool Street. West Anglia services (to/from Liverpool Street), including Stansted Express, to form part of the "Greater Anglia" franchise from 2004.
A longer-term strategy for Great Northern is being considered, including options for combination with another franchise.
West Coast Trains
(Virgin Trains)
March 2012West Coast Trains operate services between Glasgow, North West England, North Wales, the Midlands and London Euston. Franchise currently being renegotiated.


THE SRA'S CONSULTATION WITH PTEs AND WITH REGIONAL PLANNING BODIES

PTES

  1.  The SRA and PTEs, as co-signatories to the relevant franchise agreements, meet frequently to discuss matters relevant to the management and development of the operations of the franchise services. This practice will continue and develop within the forthcoming replacement franchises, particularly in the context of the annual review of service level commitments. This is a process in which the SRA, in consultation with other stakeholders including the PTEs, will determine the level and scope of future service levels, including consideration of the relief of constraints on achieving future demand and desired performance objectives.

  2.  In reviewing proposed investment in rolling stock and infrastructure, the SRA must ensure that any proposed investments are in accordance with the Department for Transport's 10-year Transport Plan and Directions and Guidance to the SRA. The SRA must also ensure that any increases in a franchise's long term lease or access charges provide value-for-money and are affordable within the SRA's overall budgetary constraints. This is particularly the case as the SRA is wholly responsible for funding the PTEs' procurement of franchises rail services.

  3.  The SRA's position is that of strategic specific of service requirements, with Network Rail and franchise operators as suppliers to our specifications. This clarity and certainty of roles and responsibilities will make it easier for PTEs to utilise other funding that may be available to them to spend.

REGIONAL PLANNING BODIES

  4.  SRA has engaged with all English Regional Planning Bodies in the development of Regional Planning Guidance, incorporating Regional Transport Strategies. SRA involvement has varied between regions, responding to the different arrangements established in each Region. Typically SRA has provided information in response to requests, participated in Regional working groups and commented on draft documents. Since its establishment in February 2001, the SRA has responded to all consultation drafts issued by Regional Planning Bodies or Government Regional Offices and has participated in Examinations in Public. SRA has engaged with and facilitated meetings of the English Regions Transport Officers Group (ERTOG). SRA has also provided information and advice to DfT's consultants preparing Guidance on the preparation of Regional Transport Strategies.

  5.  Broadly similar arrangements have been followed in respect of the devolved Governments in Scotland, Wales and London, where arrangements for dealing with spatial planning and transport strategies are slightly different.

  6.  The SRA is presently undertaking an internal re-structuring which will provide a between focus for national and regional rail planning issues. There will be an identified contact for each devolved government and English region within the newly esablished Planning Division, in addition to the existing staff dealing with stakeholder relations and town planning matters. The new team will work with national and regional bodies and the rail industry to develop realistic and affordable improvements to railway services and infrastructure in those areas, designed to meet the nation's and region's objectives for accessibility and sustainable development.

CONNEX SOUTH EASTERN

  1.  The South Eastern franchise was awarded to Connex in 1996 for a period of 15 years to 2011.

  2.  The agreement now made with Connex—and announced on 11 December 2002—provides an additional franchise payment of £58 million to stabilise the loss-making franchise during 2003 and for negotiations to take place to establish an amended agreement for Connex to operate services to end 2006. Their franchise would expire then and be replaced by an all-Kent franchise, to include high speed domestic services on the Channel Tunnel Rail Link to St Pancras, for which we plan to start a competition in 2004.

  3.  Connex has committed a further £11 million of its own equity to the South East franchise during 2003 in addition to the SRA investment of £58 million. None of the £58 million may be distributed to any other scenario.

  4.  It is our view that £58 million, as a minimum, would have been payable to any alternative operation in any other scenario.

  5.  The agreement includes continuing measures to improve punctuality and ensures delivery of the programme to replace all slam-door trains on Connex South Eastern routes.


 
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