Examination of Witnesses (Questions 240-259)|
WEDNESDAY 24 OCTOBER 2001
(Mr Ludeman) Possibly.
241. I think it did, Mr Ludeman, did it not?
Let us not be mealy-mouthed. You are quite straightforward.
(Mr Ludeman) It could well have done. And I think
it lost the ability to monitor those contractors on the network,
it did not consult adequately with Train Operating Companies,
there was no relationship between Train Operating Companies and
the maintainers, and an ability to manage possessions efficiently
was lost, basically a management failure as opposed to wheel-rail
interface failure. And that leads us to ask the sort of question
of son of Railtrack and what that should look like. There has
been discussion in this room about some regionalisation of Railtrack,
and we believe there is some merit in that, but let us not underestimate
the potential complication of making that work; and possibly a
structure where there is still some form of national facility,
dealing with purchasing, or where there are economies of scale,
for example, or giving network leadership on timetabling, we are
talking about freight and inter-city services where one body would
lead on these sorts of issues. But locally we need a management
focus that is concentrated on a particular market, and I believe
the benefits that we have seen in Train Operating Companies, with
local-focused management that has grown railway patronage by a
significant amount in five years, could also potentially be brought
to a disaggregated Railtrack.
242. So you think that the train operators could
operate not only in a different way but they could actually take
responsibility for the rail in their own area, and the enhancements
and the maintenance?
(Mr Ludeman) No, I did not say that. The issue of
vertical integration is another matter, and the big issue there
clearly is risk.
243. Well, tell me what part the train operators
would play then?
(Mr Ludeman) As was said by Mr Kiley, we do not know,
I do not think even Railtrack knows, what the condition of our
assets is and the cost that is needed to bring those assets up
to the sort of standard that is required to deliver Rules of the
244. Once that was known, what role would you
imagine for the Train Operating Companies?
(Mr Ludeman) We would be interested in exploring vertical
integration, but the contractual arrangements would have to be
right; there is big risk there.
245. What does that mean exactly?
(Mr Ludeman) Basically, there are issues of risk,
there are issues of who takes the liability on the condition of
the assets, and if they are not up to scratch who then pays the
money to bring those assets up to scratch.
246. Could you give us a wild guess of whom
you had in mind to take the responsibility for that?
(Mr Ludeman) Ultimately, Government takes the risk.
247. Ultimately, the Government takes the risk.
Should the opportunity be taken to restructure the rail industry,
apart from that?
(Mr Ludeman) Clearly, we are faced with a big challenge
in devising a successor to Railtrack. This is a complex industry
with a myriad of contractual relationships, and if we are going
to have the upheaval that we are clearly going to have we have
to get it right. So there is an opportunity here for reorganisation,
but again we have to get it right.
248. So, fewer companies are we talking about,
mainly Train Operating Companies with vertical integration, is
that what we are saying, organised on a regional basis?
(Mr Ludeman) We have 25 Train Operating Companies
now that have contracts; if Government wishes to negotiate a smaller
number of contracts then the industry will engage in that process.
249. No; what is your view, Mr Ludeman, of how
we should go?
(Mr Ludeman) We are quite happy with the three companies
we have at the moment, and they are slightly disaggregated around
London. And going to regional structures, vertically integrated,
there is, as I said before, a myriad of contractual relationships
that are complex, that need to be resolved and that have costs
associated with them. So at this stage I would prefer to tackle
those tasks which are achievable, which is setting up Railtrack
in some form or another, and in the medium term to move maybe
to a disaggregated structure on a regional basis.
Chairman: No doubt my companions will want to
ask you some questions.
250. Will not a disaggregated structure, as
you have envisaged, Mr Ludeman, mean that the dreaded blight of
fragmentation will not only remain but increase?
(Mr Ludeman) The parallel that one can draw is that
the Train Operating Companies are disaggregated and there are
25 of them; and I think even Mr Kylie, who wants only one Train
Operating Company, recognises that there have been some benefits
from small, local-focused, management teams that have generated
increases in patronage, that have put in marketing initiatives
and have improved the product. A Railtrack model that is disaggregated
to a local level has to have allied with it some national structure
to deal with national issues, like the operation of freight and
inter-city trains, like the purchase of material which would be
better on a national basis rather than a disaggregated basis.
So what I am suggesting is some hierarchy that sees a national
structure with regional, local-focused management related to Train
Operating Company boundaries, and it could be more than one Train
Operating Company within those areas.
251. Could I ask you, briefly, please, about
your attitude towards franchise extensions. Reading the evidence
from National Express, I am a little perplexed, you seem to be
in favour of early and quickly negotiated franchise extensions
but you do not seem to be in favour of short franchise extensions,
i.e. two years. Is that a fair assessment of your evidence?
(Mr Brown) Not quite. We do believe that short franchise
extensions, and two years are allowed within the franchise agreements,
on a number of franchises can achieve some early results. I quite
agree with my colleague, Mr Ludeman, that they will not transform
the service, but on those routes which are already very busy,
or need more capacity in the next two or three years, that is
enough to bring in new rolling-stock to allow you usually to run
longer trains. There may be circumstances where you need to have
specialist trains, or there is more investment, for instance,
needed to lengthen platforms to allow you to run those longer
trains, where you might need more than two years, and we would
therefore like to see two or more years considered as part of
252. But, in a case, whatever happens, it should
be early in the franchise, should it?
(Mr Brown) When we say `early', we mean soon, as of
today's date, because all of these franchises are approaching
their end and the fewer years you have left the harder it is to
be able to get the new rolling-stock in time before the extended
253. You cite Midland Mainline in your Appendix
as well as a good example of franchise extension generating investment,
but is it really a typical example? As I understand it, the franchise
was granted in 1996, it was a seven-year franchise, it was extended
to 2006, and now it has gone to 2008; but all that was done, as
I understand it, in 2000, in other words, reasonably early on,
in the context of what we are talking about now. So is that a
typical example of franchise extensions across the piece?
(Mr Brown) In the sense that it was a ten-year franchise
and therefore had three more years, two more years, left to run
than the seven-year franchises, no, it was not entirely typical,
but there are other ten-year franchises, like Great Western, which
might be extended. But it is typical in terms of the circumstances
where it is a rapidly-growing route, the existing trains are now
pretty much full, there is a need for more capacity on the trains,
to run longer trains, but we can provide that capacity without
actually having to invest extensively in the infrastructure. And
therefore one can make early, quick progress, that will not apply
on all routes, there are some routes, like the Brighton Mainline,
which undoubtedly need major infrastructure investment to provide
the additional capacity. So we do not see it as a cure-all, but
it has its place on a good number of franchises.
254. One more question, Mrs Dunwoody, if I might.
This Midland Mainline, according to your evidence, a £238
million investment package, big money; but it also goes on to
say: "To enable National Express to fund this programme,
the franchise premium payments which would originally have been
paid to the Treasury will now be re-invested by Midland Mainline
into the service." How much value to your company was that
(Mr Brown) Madam Chairman, forgive me, I do not have
that number in my head, but I would be more than happy to write
to you with that number. It is of the order of about £20
million, but I would rather give you the exact number.
255. Is that £20 million over the period
of the franchise, or is it £20 million per year; what is
(Mr Brown) No, that is the total value over the period
of the franchise; but I will need to confirm the figure.
256. So about 10 per cent of the cost of this
investment came directly from the Treasury?
(Mr Brown) Of that order, that is correct.
257. When you mention the 25 Operating Companies,
that is including companies within that formula that are jointly
owned by one operator; how many actual companies are there?
(Mr Ludeman) There are ten owning groups.
258. What would you envisage that figure to
be in another five years?
(Mr Ludeman) Ten.
259. You honestly believe that to be the case?
(Mr Ludeman) Really, I have no idea, it is just pure
speculation, is it not.
1 Note by witness: This figure is £31.7 million
at 2000 prices in total for the six years 2001 to 2006.