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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 874-ii
House of COMMONS
TAKEN BEFORE the
Monday 4 February 2013
Martin Griffiths, Graham Smith, Michael Roberts and Terence Watson
Anthony Smith, Geoff Inskip and Mike Brown
Rt Hon Patrick MCLoughlin MP and Clare Moriarty
Evidence heard in Public Questions 49 - 169
USE OF THE TRANSCRIPT
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Taken before the Transport Committee
on Monday 4 February 2013
Mrs Louise Ellman (Chair)
Examination of Witnesses
Witnesses: Martin Griffiths, member, Rail Delivery Group, Graham Smith, Secretary, Rail Delivery Group, Michael Roberts, Chief Executive, Association of Train Operating Companies, and Terence Watson, Managing Director, Alstom Transport, gave evidence.
Q49 Chair: Good afternoon, gentlemen. Welcome to the Transport Select Committee. Could I have your name and organisation, please?
Martin Griffiths: I am Martin Griffiths. I am a member of the Rail Delivery Group.
Graham Smith: I am Graham Smith, Secretary of the Rail Delivery Group.
Michael Roberts: I am Michael Roberts, Chief Executive of ATOC.
Terence Watson: I am Terence Watson, Managing Director of Alstom Transport UK.
Q50 Chair: Thank you. In Richard Brown’s review of franchising, he concluded that "There is no credible case for major structural change" in the rail industry. Do you agree with that statement? Who would like to tell me? Mr Roberts, do you agree with that?
Michael Roberts: We very much welcome what Richard Brown said in his review about what the benefits of franchising have brought to passengers. In that sense, although we believe there are improvements that can be made to the franchising process, as a fundamental approach to commissioning public passenger rail services, it is a proven good thing.
Q51 Chair: But you do not think there is a case for any major reform or change.
Michael Roberts: In terms of moving away from the concept of franchising for passenger services, no, we do not think there is a case for doing so. We think that improvements can be made to the process, many of which are captured in Richard Brown’s review, but the fundamental approach is sound.
Q52 Chair: Would anybody else like to give me a view on there being no major case for change?
Martin Griffiths: The other aspect of what Richard Brown covers in his report is that he talks about alliancing. There are certainly a number of industry players who would like to see a more joined-up approach to the management of train operations and infrastructure. There is no reason why that could not be accommodated largely within the existing model without necessarily having fundamental change.
Q53 Chair: Mr Watson, in Alstom’s evidence to us, you refer to a credibility problem, which you feel now affects franchising. Could you tell us what you mean by that? What is the credibility problem?
Terence Watson: The point we were making-and I think it is fair-is that most businesses are international now. Most businesses are not purely domestic. Half my job is to try and motivate international resources to work on a project or a bid. When that goes away, we have to re-motivate them. We are competing with other countries when we do that. Trying to make sure that the UK and its railway are sold inside our company is a major part of my job, and it is not to be underestimated. When there is a credibility gap emerging because projects that were supposed to take place don’t take place, we have sincerely to fill a factory and other things to do, so we have to get on with doing that. The job is then twice as hard the next time to convince people to come into the market. I think that is the same for all manufacturers.
Q54 Chair: Do you see a major problem at the moment in our railway and franchising system because of what has happened?
Terence Watson: No. My evidence states that we do not think it is broken. I agree and concur that the process is not broken. We are raising an alarm that the world is one small village now and we are working in a number of places at the same time. It is about mobilising resources. Every time something here does not go right, we can’t fix it here; it is part of a larger system.
Q55 Chair: With hindsight, do you think it was a major error to try to let a much longer franchise, which was linked to changes in GDP and the subordinated loan facilities linked to that, all at once and on a very complicated section of line? This is with hindsight.
Martin Griffiths: Yes, with hindsight, but people have got very fixated about the length of the franchise. There is no doubt that the further out you go, by its very nature, your ability to forecast is more judgmental. However, if there were the right checks and balances within the franchise in terms of the right risk allocation at the outset and a clear understanding of who bore what risks, and perhaps some rebasing at some point through the franchise, long franchises are not necessarily a bad thing. Long franchises can, of course, mean greater visibility for investment over a longer period of time. There is a danger that we just automatically assume that long franchises are now bad, when for a long time everyone was shouting that we needed longer franchises. What happened here was a combination of going for a long franchise, but a lot of some of the other things that needed to go along with it were not included in the West Coast franchise specification, which, with hindsight, as you have said, might have been better addressed.
Q56 Chair: Mr Roberts, ATOC has argued for longer franchises for a long time. How do you see this now? It is not necessarily to do with having longer franchises as an issue on its own, but linked to the other changes that were made.
Michael Roberts: Our position has been that reform of franchising to get a better deal for the passenger and the taxpayer needs to be done on a horses-for-courses approach. There is not a single one-size-fits-all approach that applies to all franchises, but within that we felt there was merit, where the circumstances were appropriate, in looking at longer franchises that would help incentivise operators, for example, to bring forward ideas and to invest in that particular part of the passenger rail market.
What Martin says is absolutely consistent with what we have argued for many years. The length of franchise needs to go together with other key aspects of the design of that franchise, such as the way risk is managed between the public sector client who is commissioning the service and the franchisee that is then running it. You also need to look at the way in which the franchise is specified. If any part of that package is inconsistent with the rest, if there is too much risk loaded on the operator-for example, an expectation to take on too much risk in terms of the outcome of the economy-if the specification is too tight so that the operator cannot respond to changes that happen over a period of time in demand, and if you do those things and link to them a long-term franchise, the proposition becomes unsustainable. In that way, Richard Brown has a really important message to policymakers within the Department, which is that reform needs to be seen as a package. All these elements-specification, risk allocation and length of franchise, among others-need to be seen as a whole.
Q57 Chair: Mr Watson, do you want to give any view on this?
Terence Watson: The franchise length that Mr Brown has commented on seems to make sense. The point is valid. If it is too long, people cannot estimate or evaluate the risk properly. If it is too short, nobody spends money on capital. Those are the two trade-offs. If I refer to the West Coast Main Line as an example, it was pretty lucky and I am very pleased to say that we are there as a maintainer. We have bridged this contract. As a maintainer, that means that the length of the franchise was of secondary importance to the fact that we had a sustainable service anyway.
Q58 Kwasi Kwarteng: You seem to take quite a relaxed view about the length of the franchise, but clearly it is very important in terms of investors. If you look at any kind of bond, most of the risk is related to duration, which is obviously a self-explanatory term. The Committee has been to Europe-Germany, Holland and Switzerland, in particular. There was a specific view about franchising that suggested that our franchises were too long, or the 15-year franchise was too long. This is a double-barrelled question. Do you think that there is an optimum franchise length? Do you think we should consider going back to a shorter franchise?
Martin Griffiths: Just to be clear, I am not relaxed about the franchise length. The point I was trying to make is that sometimes we have to be careful what we wish for. Don’t just look at the length of the franchise in isolation. As Michael has alluded to, there are a number of things you have to consider.
If you ask for my personal opinion, it is that 15 years is too long. If you look at the submission of the Rail Delivery Group, its position is that you have to look at them individually and on a horses-for-courses approach. Something akin to eight to 10 years, potentially with an ability to extend further in certain circumstances, seems to be more realistic given the model that we are pursuing at this point in time.
Q59 Kwasi Kwarteng: That is a very clear answer. Do you have any other suggestions?
Michael Roberts: I would very much support what Martin has said. I do not think you can broadly say that there is an optimum duration of franchise that applies irrespective of the individual franchising question. You need to look at each on its own merits.
Q60 Kwasi Kwarteng: You are not answering my question. You do not think there is an optimal length. Let me be more direct. Do you think that 15 years, on balance, is too long?
Michael Roberts: It really does depend on the package that is being put forward. You cannot answer that question rationally without asking what the deal is in terms of allocation of risk and managing economic risk, for example, or, indeed, in terms of the way in which the service is specified.
Q61 Kwasi Kwarteng: Clearly it is going to be very difficult for me to pin you down on this.
Martin Griffiths: I will answer it again. The answer is that you can have a 15-year franchise. I can see a circumstance where it is possible, with the right risk allocation, to have a 15-year franchise; but that, for me, would be less likely. For what we are looking at as a franchising proposition, eight to 10 years is going to be more realistic for the majority.
Kwasi Kwarteng: I will not press the members of the panel any more on that.
Q62 Karl McCartney: Will passengers benefit more than they do now from a 15-year franchise?
Martin Griffiths: Again, if we get the model right that drives the right level of investment to deliver passenger benefit, passengers should benefit from any sensible length of franchise, whether it is eight, 10 or 15 years.
Graham Smith: The Rail Delivery Group’s submission made it very clear that you could certainly have 15-year franchises. There are 15-year franchises, and the DFT is thinking of 15-year franchises in the future. But, as Martin said, it is much more likely that there will be a greater appetite among investors for an eight to 10-year franchise. Passengers’ interests have to be served and met, whatever the length of franchise.
Q63 Graham Stringer: The argument for longer franchises boils down to getting greater investment. What extra investment would you expect to see from a 15-year franchise as opposed to a five or 10-year franchise?
Graham Smith: The RDG submission to the Brown review, and the Brown review itself, makes quite a strong point on the residual value mechanism. If there is an effective residual value mechanism, the willingness to invest is less dependent on how long the franchise is going to be. It probably does not matter whether it is 15 years or 10 years if there is an effective residual value mechanism in place.
Q64 Graham Stringer: Let me try and unpick that. Are you saying that, if the contracts are constructed properly, there will be no difference in investment?
Graham Smith: There need not be any differences at all.
Q65 Graham Stringer: Does anybody agree or disagree with that? That rather knocks the ground away from the argument for longer contracts, apart from the potential dropping-off of quality of service towards the end of the contract, which I guess is true of any time-limited franchise.
Martin Griffiths: My personal view is that, if you have a major investment programme during the life of a franchise that is likely to go to the sorts of lengths you are talking about, it is beneficial for everybody if there is not a change in the middle of that process. Graham is right that you could deal with the mechanics of investment if you had the right residual value and what happens to assets at the end of a franchise, but, equally, if you are in the middle of a major refurbishment, upgrade on infrastructure, signalling or ticketing project, then, if that is let as part of a franchise programme, it would be beneficial for everyone-particularly passengers-for that to be as seamless as possible. That would be my view on that.
Q66 Graham Stringer: Brown comes out pretty strongly in favour of franchising, yet the things he talks about that are improving in the railways-passenger numbers, punctuality and safety-by and large are not anything to do with franchising, as far as I can see. How do you get the right criteria to judge where the public interest lies in deciding between franchising and letting management contracts?
Martin Griffiths: I am not sure I share your view that some of the things you have just talked about there are not benefits from the franchising process. A lot of the improvement in the railway, both commercially from the safety point of view and from a passenger benefit information point of view on ticketing, has been to do with franchising. I am not quite sure where your line of questioning is going.
Q67 Graham Stringer: The train protection warning systems were invested in immediately after Hatfield. Prescott made the decision to put those in. The relationship between both rail passenger miles and passengers follows, roughly, the curve of GDP. There is not a vast divergence. Even if that was not the case, I would like to know what the criteria are for deciding between management contracts and franchises. We are interested in the public interest and protecting the taxpayer. How do we decide between those two models on how best to protect the taxpayer?
Terence Watson: I will take a stab at that. The first point relates to the GDP tracking of the growth of the British railway. I have spent 14 years overseas. I have seen the GDPs of other countries grow and I have not seen the railway growth that we have seen in Britain. That is the first point.
As far as a management contract is concerned, I suppose what you are saying is that there is a reason for it, "management" meaning a fee to a company to operate a railway, perhaps with bonuses attached. If you have a big programme of capital investment, you have a big bridge to take on that capital investment and there is major change involved, I can imagine that there is sense in having a very short-term management contract-so special changed circumstances. Other than that, I cannot see very many reasons, from our point of view as a manufacturer, why a very short management fee-based contract would be advantageous.
Q68 Graham Stringer: I suppose what I am looking for is what will cost the taxpayer least between those two models. How can we eke that out?
Graham Smith: Brown makes the point that the concessions that exist in this country have come from when the concessioning authority has had the resources and skills to take the revenue risk and effectively set out the marketing and the approach to operating. That applies in London and on Merseyside. Elsewhere, franchising works because the revenue risk lies with the operator, who can identify the market more effectively than the Department for Transport can. It probably depends on which model the concessioning or franchising authority wants to take. Does it want to populate itself or have the skills sitting within the franchises?
Q69 Chair: In the announcement that came last week, the Minister said that the new Thameslink franchise would be, in his words, "more of a management contract". Do any of you have any information about what he actually means by that? Mr Roberts, do you know?
Michael Roberts: I think you need to direct your question to the Secretary of State.
Q70 Chair: We will be asking him, but have you had any discussion on what that might mean?
Martin Griffiths: I can answer that in terms of being one of the bidders for that franchise. There has been no discussion as yet as to what he means by that.
Chair: We will be asking him that question.
Q71 Iain Stewart: One of Brown’s recommendations on the length of franchising was that there should be a pre-contracted extension period of between three and five years. I would be interested in your perspective and how, in practice, you would see that working. What issues should the extension be judged on and what additional features do you see the extension providing?
Martin Griffiths: First of all, it is possible to do that. We already have pre-contracted extension periods, albeit for a shorter period of time, within the existing franchising system. It would be an interesting question for the Department for Transport, but, if it was me, I would like to see the ability for good operators to get their contracts extended if they have performed well against whatever the DFT thinks important. I would hope that would be around performance, customer satisfaction and delivery of your contractual obligations during the franchise period.
My personal view is that, at the moment, we have a model where 26% of incumbent franchise operators lose their franchise when it comes up for retender. That tells us we have got something wrong, because I do not believe that all those franchise operators are poor. The system is not rewarding those operators who have performed well.
Q72 Iain Stewart: Are there any differing views?
Michael Roberts: I very much support that view.
Terence Watson: Manufacturers would like more certainty. If performance is good on a railway and those measures are in place at the beginning of the franchise, extensions would be welcomed.
Graham Smith: The key is for there to be clarity beforehand as to what those criteria are, rather than a last-minute decision creating the kind of uncertainties that we have had in the franchising area in the last year or so.
Martin Griffiths: One option for that, for example, is that, if those criteria are important to the letting authority, particularly, say, over the last three years of a franchise, that means that you get the benefit of a good franchisee right the way through the contract because they are heavily incentivised to make sure that they deliver on all of the things that they were told were important to get that extension. That seems to me to work for taxpayers, customers and ultimately shareholders as well.
Q73 Iain Stewart: You may have already answered this in response to one of Mr Kwarteng’s questions. Is there a risk in terms of investment on an ongoing basis in a particular franchise if there is this break two thirds of the way through it? You would have an investment in the initial period but then just a steady-as-you-go in the remaining third. Is that a risk or would it really depend on the nature of the franchise?
Martin Griffiths: I think it would depend on the nature of the franchise and the contract terms, but that can be accommodated. A contract can cover any initial investment that has to be made. The contract can also be flexible enough to cover whether there is to be additional investment in any extended period if it is required. I do not believe that that is a risk that could not be managed or allocated between the parties.
Q74 Iain Stewart: Finally on this point, when I put the question to Richard Brown, he was very much of the view that this would not be an opportunity for an operating company to walk away from a contract two thirds of the way through. Is that something you are comfortable with?
Martin Griffiths: I am a taxpayer. I believe absolutely that we need to find a model that does protect the taxpayer. That is why we must make sure that we get the model right and get realistic bids. If a bidder has some unique selling proposition or comes up with some good ideas and they believe they can bid more aggressively than somebody else, if that bid is properly due diligenced and stands up to the test of evaluation that the Department for Transport puts in, they should win. The taxpayer should be protected because we should put up the right amount of capital so that, if it does go wrong, the taxpayer gets the right amount of protection. That is where West Coast went wrong.
You could argue that the model was stretched, but as a bidder on West Coast, while I would have been disappointed and I don’t think it would have been right for the taxpayer, had the capital that had been put up to protect the bid and protect the taxpayer been right, as a taxpayer, maybe the highest bid should win and that is the way we should work. We need to build a model where you cannot just walk away because you have had a couple of bad years. As an operator I passionately believe that. That would be wrong.
Q75 Lucy Powell: I have another question, but I want to carry on with that a little bit more. You describe quite an interesting model and one where I can see lots of benefits. There is an incumbency factor before it goes to a broader bidding process. That is not what we do across the whole of the public realm at the moment. Could you elaborate a bit more on what some of those criteria might be and how we might look at that model?
Martin Griffiths: To be clear, we have had an ability in the past to extend contracts on a bilateral basis, depending on both parties’ position at the time and particularly the DFT’s aspiration for the franchise. The Rail Delivery Group said in its submission that we would see it as an opportunity if we could largely pre-agree terms as part of the bidding process which said the contract is let for a specified period, but there is a right to extend that if certain performance and other criteria-which are laid down and, clearly, by their nature fully understood to be important-are met, including of course the financial parameters, but all the other things that would be important as well. That would give certainty to the operator. By its nature, if they are performing well, it should be good for the customer and the taxpayer. That is something that we think should be explored.
Q76 Lucy Powell: Moving to my main point, what has the impact been of the last year or so on the confidence of industry and investors in terms of the franchising process? Can you see any fall in confidence being quickly overcome by the measures that have been put in place?
Martin Griffiths: It doesn’t get much worse, does it? I probably should take this question because I speak to investors all the time. We make the case for UK rail. I am very positive and very bullish on UK rail, but we have come through a very difficult time. Investors will have been encouraged. We have seen Richard Brown’s report, and there has been some announcement from the Government that we plan to go forward. To rebuild investor confidence and to do that quickly, we will need to understand in detail what a new model is likely to look like. That is not just financial investors but the supplier community and other stakeholders. It is our passengers as well. I say that from experience on the West Coast Main Line. There is no doubt that, when the whole debacle was going on, it had an impact on the business, passenger morale and our staff morale. Getting something that we all think can work and move forward constructively and hopefully quickly is going to be important.
Q77 Lucy Powell: Do you think that applies to capacity to deliver that as well? We have discovered issues in this Committee around the DFT’s ability to deliver these things. It is one thing getting a new framework right, which can help with confidence. Do you think there is an issue there about confidence in the Department as well?
Graham Smith: Yes, absolutely. When the Rail Delivery Group put its submission together, we pulled together the views of the entirety of the RDG-all the owning groups, Network Rail and the freight operators-into a single submission. The one thing on which there was no disagreement at all was that the Department for Transport needed to be more professional and better resourced. It needed to have skills that it did not have at that time and is now procuring through the appointment of a franchising director. It is absolutely essential in any kind of contractual commercial negotiation that the person on the other side of the table understands what they are talking about, otherwise the end result is the fiasco that we have seen.
Terence Watson: I would add an adjacent point to do with technology. This, again, concerns confidence and credibility. It is very hard to get a supply chain to sort out and arrange itself appropriately with a random outcome. What we have found through this process is that a lot of our supply chain is asking us again to re-credibilise what we have been talking about for the last five years. There is a lack of trust, probably in us as well, to be able to deliver things for them to bother to come in to this market and work with us. It is a worldwide supply chain and not purely a British one.
From the supply chain point of view, there is an issue and it is going to take some time to build back. From a technology point of view, which has not really been addressed directly in Mr Brown’s report, where does technology sit and who owns it? Can it be ATOC? Is it ATOC? Should it be the Government? Where does that sit? It is a serious question for the supply chain to ask.
Q78 Chair: Is there a long-term impact for jobs and skills as a result of the cancellation of the intercity West Coast contract? I know there is an immediate impact, but is there a long-term impact?
Terence Watson: Yes. We must not cry crocodile tears here because franchising is only one part of the railway. Our company is quite successful at the moment, but we are having a hard time transferring skills from the north-west of Britain, where we are going to have impacts for this set of decisions that have recently been taken, and where we may need skills in maybe the London area in electrification, so, sadly, yes. To rebuild that and to let those people go and rebuild a trained in-house competence group is two to five years, not two to three months. That is real and serious here.
Michael Roberts: I want to add a couple of comments. It is worth recalling that the passenger rail market has been one that has experienced extraordinary growth in the last couple of decades. As an industry, we are looking forward over the next 20 years to a doubling of passenger demand in the GB rail market. This is a market with prospects. In that respect, bidders, owner groups, and the industry as a whole are not suddenly going to walk away from seeking to provide a decent service at the right price that customers want to use. There is no doubt that recent events around the handling of the franchising programme by the Department have dented confidence. The impact that has, classically, is to increase the perception of risk, particularly on the part of the bidding community. Classically, that translates into increased cost in providing services. Ultimately, that feeds through as a detriment to the taxpayer. Not only is there a risk downstream of the sort that Mr Watson was saying, but, ultimately, there is a negative impact to the taxpayer. That is one of the reasons why it is vitally important that the Department restores confidence among the bidder community that it has the right approach and that it can handle that approach.
The three elements of that are, first, about making sure it has the capability to manage franchising programmes. Secondly, it has to establish clarity about the pace with which it wants to restore the programme. Thirdly, it needs to continue to engage with the industry in how it follows up the Brown report. There is much that is very positive in the Brown report but there is quite a lot of detail to fill in as well. It is important in terms of that rebuilding of confidence that the Department works out how it takes forward many of the Brown recommendations and it does so in a spirit of partnership with the industry.
Q79 Mr Sanders: Brown also talked about trying to encourage new entrants. Apart from what has happened over the past few months, which presumably could put off new entrants, are there other barriers that you think keep away potential people from wanting to get involved?
Terence Watson: My take on this as a guy just back from 14 years away from Britain is that I think we have the lowest barriers to entry of any country in the world. That presents more issues and difficulties. We welcome competition, but the barriers to entry in the UK market are by far and away the lowest of any country I have ever been involved in.
Q80 Mr Sanders: But barriers are not just about the franchise, are they? What you are referring to is probably the taxation system and the regulatory framework. I am interested in the franchise barriers-if there are barriers to the franchise.
Terence Watson: I comment on behalf of my counterparts here. If you look at the international players that have entered the UK market and compare that with the foreign players entering other European markets, Britain is a leading advocate. That is simple.
Martin Griffiths: Britain is open for business. It is much harder to go and bid sensibly on a European railway as an operator than it is for European operators to come and bid on our railways. We should not be scared of competition. It is not for this Committee, but we should encourage a greater ability for British companies to be able to go and bid sensibly overseas.
Q81 Mr Sanders: Why do you think Brown was concerned about the need to remove barriers to new entrants?
Martin Griffiths: I don’t agree with him on that. I look at it as someone who has been involved in this for 15 years. If people want to come and bid on our railways and they can show the right level of technical competence, which we should have, then they can bid. You have seen that they have come and gone over a long period of time.
Chair: Are there any different views on that within the panel? No.
Q82 Sarah Champion: I went cold when I was listening to all of you talking about the damage this fiasco has done to our international and European reputation. Mr Roberts, you went some of the way towards giving some examples of how that reputation might be rebuilt by the Department for Transport. Could all of you give us some concrete ways that we could restore that trust, not only through the Department for Transport but maybe some things the Government could do?
Graham Smith: The industry has just issued a strategic business plan, which has a vision for the railway not only for the next five years in the control period but the years beyond that. That proposes a number of investments that will increase the capacity of the railway. The capacity will enable the railway to grow. Delivering those investments is essential.
There are also a number of ideas around, not just on the passenger side, but on encouraging freight growth. That comes through investment, regulation and charging. It is about creating the right environment for the railway industry to contribute to economic growth. The industry business plan is available to you. At RDG we have certainly given it our full support. We would see the support of the Government and the ORR of that plan as a way to restore confidence within the industry and outside and carry on growing.
Terence Watson: From a manufacturer’s point of view, we should stick to the plan. That is the first key point and it has always been the point. We need to remove uncertainty, which is an investor’s nightmare. For the manufacturer, there needs to be greater dialogue and understanding, and we are a hard group to understand. Most international markets have a national operator who has a phenomenal technical depth, presence and influence. We probably lack that a little bit in the UK by comparison. We gain in other areas, but that would be one area I would be concerned about.
Michael Roberts: By way of adding to my earlier comments, there is a lot that this industry can be proud of at the moment in terms of just delivering the product reliably, safely and at an affordable price to the customer. We are seeing that in the fact that, despite the toughest economic circumstances that this country has had in 70 years, there is strong and continued growth in the demand to use trains. A significant part of that is down to the industry-not just operators, but Network Rail as the infrastructure provider and our supply chain colleagues-day in, day out, in all types of weather, to get on and just deliver the product in the right sort of way, and not just in the right way operationally but at the right price.
We talked earlier about the merits of franchises versus concessions. One of the things about franchises, with the placing of revenue risk on the operator, is that it drives the operator to increase the market. That is a very strong dynamic, which continues. There is a very firm set of foundations for which we should be thankful, in a sense, and to give us hope that not everything is perhaps as dramatically bad as you have suggested. Notwithstanding that, there is a real need for the Department now to restore the franchising programme and show that it has the capability to be able to manage that programme and to continue to engage with the industry in making sure we have the right approach for the right franchises.
Q83 Karen Lumley: We have heard quite a lot about the new appointments being brought into the Department for Transport to strengthen the franchising process. Are you confident that they are now in a position to award the West Coast Main Line contract next year?
Martin Griffiths: It is early days. We are encouraged that they are moving forward. We saw the announcement last week. There have been some new appointments. We would need to see the detailed responses, as I am sure you would like to see, to the Brown report and what they lay out as the franchising programme, including, hopefully-and I say that as part-owner of the West Coast Main Line-where West Coast fits in to that retender programme. I think we have to see that.
Q84 Chair: The Brown report says that there should be three options for a franchise-awarding body: a unit in the Department, an Executive agency or a stand-alone body. Do any of you have any preference for any one of those?
Martin Griffiths: What we said in our response to the Brown review as the Rail Delivery Group was that the starting point needs to be to try and get going again. Ideally, the Department for Transport gets the resource in place, gets the proper process and structures in place and we move forward with that. If that wasn’t to happen or did not happen timeously, then we would all question whether we needed to look at an alternative structure, but, in the interests of moving forward, that was the preference.
Chair: Does anybody else want to make a comment on that? No.
Q85 Steve Baker: Mr Watson, when Alstom makes a major capital investment, over what kind of time periods are you looking to make a return? Is it the same sort of period as a franchise or is it rather longer?
Terence Watson: It is longer. If you take a technology investment as opposed to a product platform investment, it can be 15 to 20 years. A platform investment may be five to seven years. The question is: does it synchronise with the franchise? It does if the project we are capital-investing on is on the franchise, but, if it is a national or international railway product, then usually not and the investment cycle is usually greater than the franchise.
Q86 Steve Baker: To be honest, I was not looking to see if it was synchronised. What I was driving at is that you are investing for perhaps 20 years, whereas the franchises we are discussing may be eight to 10 years. I just wanted to draw out that your time horizon as an industrial investor is rather longer than that of the Department on a franchise, and that seems to be correct.
Terence Watson: It is. It has never been different though. I have to say that we are concerned about this because, depending upon the number of bids a manufacturer has to make, he is going to make qualitative judgments about what he should be bidding on, to whom and so on. There is a randomness of outcome there. If you get plenty of manufacturers bidding, you are not sure to win anything at all. That would be a really serious dilemma, especially as we have already put the casino money on the table five years before. Those are our dilemmas; that is a manufacturer’s dilemma. We do seek some consideration for that but I do not know how to express it in economic terms, which is why we expect to have a better dialogue with our colleagues here, and with the Department for Transport and the Government generally, because a technology investment is a long-term one. It is as simple as that.
Q87 Chair: Have any of you been given any reason for the cancellation of the Great Western competition? Has anybody been told anything?
Martin Griffiths: I have had a letter, again as a bidder, which does not really explain to our satisfaction why the contract has been cancelled. That will be something we will be taking up with the Department for Transport.
Q88 Chair: Are you able to tell us the reason it gives?
Martin Griffiths: The reason it gives is on the back of part of Richard Brown’s recommendation. It felt that the Department needed time to reconsider the franchising model and that it would not be appropriate to proceed with a franchise as long and as complex as First Great Western at this point in time.
Chair: Does anybody else have anything they want to add? Thank you very much for coming and answering our questions.
Examination of Witnesses
Witnesses: Anthony Smith, Chief Executive, Passenger Focus, Geoff Inskip, Lead on Rail Issues, pteg, and Mike Brown, Managing Director, London Underground and London Rail, Transport for London, gave evidence.
Q89 Chair: Good afternoon, gentlemen. Welcome to the Transport Select Committee. Could I have your name and organisation, please?
Anthony Smith: I am Anthony Smith, Chief Executive of Passenger Focus.
Mike Brown: I am Mike Brown, Managing Director for London Underground and London Rail, Transport for London.
Geoff Inskip: I am Geoff Inskip, Chief Executive, Centro, and lead director general for Rail for pteg.
Q90 Chair: Do you agree with Richard Brown’s conclusion that "There is no credible case for major structural change" in the rail industry? Would anyone like to give a view on that?
Geoff Inskip: I am happy to make a comment. It seems to me that they always say, "If it ain’t broke, don’t fix it", and Richard Brown spent 84 pages trying to fix it. By definition of that, there is quite a lot wrong with the current system, clearly. He also mentions things around the scope for management contracts, which I think are very different from the franchising model, which is interesting. While he also says that he feels the existing system works, he does not give a review of any alternatives. In the absence of any review of alternatives-for example, not-for-profit models or something like that-I am not quite sure how you can then just say that the existing system works.
Anthony Smith: As you know, we publish the National Rail Passenger Survey, the latest edition of which has just come out. Contained within the results of the more successful operators you have examples of concessions, long franchises, short franchises and all sorts of different arrangements. It goes to show that all sorts of structures can be made to work in the passenger interest. Mr Brown’s initial conclusion probably is right. However, I would agree with Mr Inskip that there is, obviously, clearly a lot that needs refocusing in terms of the franchise process and bringing it back to its original intention of underpinning quality, value-for-money, reliable train services that the passengers want to use, rather than a way of generating money out of the system. It is essential that that process is radically refocused.
Mike Brown: I would agree with pretty much everything that Mr Smith has said. The comment was made in the last panel in terms of horses for courses and how these arrangements are put together. I do think there are some fundamental differences in the economics of long-distance rail travel as opposed to suburban or urban rail travel in whether there is a difference, therefore, between the traditional franchise model or the management contract model that the Brown report outlines.
Q91 Chair: In the Brown report, it is suggested that management contracts might be appropriate in special cases such as London Overground and Merseyrail or where there are major works going on on the line. Would you all agree with that? Do you have a view about what gives best value for the passenger and the taxpayer? Is it franchises or management contracts?
Mike Brown: Certainly from the London perspective, London Overground is a real example where, since the management contract was awarded, it did not stifle any overseas involvement. It is a joint operational venture between Deutsche Bahn/Arriva and MTR from Hong Kong. Ridership has increased by 300% since the London Overground management contract was awarded. Train frequency has gone up from three/four trains an hour to eight trains an hour on the North London line route. All the passenger surveys, including Anthony’s sponsored surveys, have shown a remarkable increase to put what was an operator at the bottom of the league right up there at the top.
In the example of the London Overground, where you have an urban route-an inner London route in this case-where, arguably, the choice of the passenger as to whether or not to use railways to move about the city is much more limited than it might be in other parts of the country, with taking the revenue risk, as Transport for London has done in this case as opposed to the operator, I think that does, in my view, incentivise the operator to do the right thing. They are incentivised on performance-both operational performance and passenger service performance.
Q92 Chair: Transport for London wants to run more overland London services. What difference would that make? Do you think you have enough skilled resources to be able to manage that?
Mike Brown: We have shown that we have the ability to award management contracts very successfully. We have done it with the Overground and the Docklands Light Railway before that, and that continues. Indeed, we have done it with trams, and more recently with the cable car in London. So we have let management contracts all over the place. I think we do have the skills to do that. Our team, small though it is, is well placed to deliver that.
If I may correct your terminology, Chair, this is not about us running these operations. This is about us going out to the market to ensure that the correct private sector companies are properly incentivised to run these management contracts in the best interests of passengers.
Anthony Smith: You can see a role for management contracts where you have high-frequency urban-type operations, where you want a very high degree of specification, assuming of course that they are backed by investment. A management contract without investment is not going to produce very much. The London Overground benefited from the Mayor’s generosity for a number of years and the results are there to see, whereas, on something like the East Coast franchise, where you have a lot of passengers who have a choice about which way to travel, I do not think a management contract would be very appropriate. There is potentially a lot more profit there and a lot more private sector involvement that could probably be brought in.
Q93 Chair: In terms of passenger satisfaction, do you feel that management contracts are better or worse than conventional franchises?
Anthony Smith: It is absolutely horses for courses. The London Overground and the rail services in Merseyside get very high passenger satisfaction ratings; so does Virgin on the West Coast. It is hard to draw any conclusion from the inputs in that respect.
Q94 Chair: Mr Inskip, what types of devolution in rail services are you discussing with the Department now?
Geoff Inskip: There are two basic principles. The first is around revenue risk and whether or not it is appropriate to pass the revenue risk across the franchise table to the train operating company. In the West Midlands, the starting point is that the revenue risk will lie with us as the transport authority and not with the train operating company. For rail in the north, both options are still on the table, although at the moment the key parameter is around transferring the revenue risk; but there are different parameters in relation to that at this stage. There are certainly no decisions made one way or the other yet. It is still a discussion with the Department and those discussions are on an open basis.
Q95 Chair: Is more devolution likely to lead to more fragmentation of the rail service? Do you think that is a danger?
Geoff Inskip: No; we think it is quite the opposite. Greater devolution will, for example, ensure that the investment goes in to the right areas for our economic growth in our city regions. We want to make sure that the passenger comes out first in all considerations going forward. Therefore, we think the devolution, putting in hand the specification of the railway and also the management of that railway, is the right thing to do.
Q96 Chair: What role do you see for the Department in terms of devolved franchises?
Geoff Inskip: At this stage, clearly because there has not been a decision by the Secretary of State to devolve, we are going to have to go forward on any devolution proposition very much jointly and together. It is only when we know exactly when and how devolution and the transfer of funding and so on is going to take place that the transfer can then take place on a more permanent basis. At this stage, if we were going for something of the order of the shorter-term franchises of seven years, which is the proposition, it is after that first seven-year period that we would be on our own.
Q97 Chair: Mr Smith, in terms of passenger satisfaction, do you feel concerned that if there is a lot of devolution it could lead to more fragmentation, or do you see that as a beneficial thing?
Anthony Smith: As long as rail is always viewed as a national product and part of a national network, and any devolution fits in to that in an appropriate way, I think it can be done very successfully. Where we have seen devolution in London, on Merseyside and in Scotland it has been done very successfully. National Rail is still a product that people can recognise and it has a set of universal benefits that go with it, which are very useful. As long as those are not lost through ticketing and things like that, I do not see any problem.
Q98 Chair: Mr Brown, did you want to comment on this?
Mike Brown: There are certain things that the legislation prevents you from doing to disadvantage in any way any group of passengers using a newly devolved part of an existing franchise. For example, Transport for London is looking at parts of the Southeastern network and part of the Greater Anglia network. We believe that we will be able to enhance off-peak services. We will be able to staff-up and renovate stations. Eventually, with Southeastern, in particular, after the rebuilding of London Bridge, we will be able to increase peak-level services as well. It is no criticism of the existing incumbent, but it is a criticism of the existing franchise arrangements where there is not a commercial incentive for the existing franchisee to change those realities, whereas the management contract arrangement that we have applied elsewhere does incentivise those changes.
Q99 Chair: Mr Smith, you have expressed concerns about extending the franchises. Tell us what your concerns are.
Anthony Smith: In terms of overall franchise length?
Chair: Yes. I think you used the phrase "locking in inertia".
Anthony Smith: If you get a series of short-term franchise extensions, which we are potentially facing now, there is a concern that the passenger benefit is put on ice. On the West Coast, it is quite clear that the delay to the awarding of the new franchise has held up a whole host of passenger benefits, which, arguably, passengers have been paying for over the last 10 years. We are looking at at least a two-year delay unless the Department can get some value out of the two-year franchise extensions. It is in nobody’s interest to have a zombie train company running for two years.
Q100 Graham Stringer: Can you be specific about those benefits that passengers are missing out on?
Anthony Smith: If you look at what both of the main bidders were potentially offering in terms of smarter ticketing, more information, station upgrades-all sorts of good things which passengers would like to see-those are now all on ice. We would like to see them built in as soon as possible.
Q101 Mr Sanders: I want to come back to the decentralisation and devolution issue and where you draw the boundaries. Mr Brown, I think you have hinted at it in terms of Transport for London looking at some of the suburban services. How do you ensure that a franchise is flexible enough to go beyond those boundaries? Is that the job of the person bidding or something you have to work out in advance of the franchise being put up?
Mike Brown: To clarify that, do you mean in terms of geographical boundaries?
Mr Sanders: Yes.
Mike Brown: First of all, the construct of the railway itself gives you some natural places where you would configure that. Both for Southeastern and Greater Anglia those are fairly clear. It is also true to say that there has to be, clearly, some enshrined protection in place to ensure that the interests of those passengers using stations and services, in the case of London just beyond the GLA boundary, are properly protected. To be honest, Transport for London and its predecessor organisations have been running services beyond the London boundary for nearly 150 years in some cases, certainly up to Buckinghamshire and into Essex and everywhere else, with no evidence, ever, that we have inconvenienced or in any way discriminated against passengers in those areas.
We do have to be clear that the ORR process in terms of what you can operate on the line of route is very clear and would by statute prevent us from doing anything anyway that would disadvantage passengers in those areas beyond the particular boundary. We are talking at the margin here. The main line of route that we are concentrating on is, of course, within London. There is no intention, as far as I am aware, for the Mayor to make a bid for the West Coast Main Line or anything of that sort.
Anthony Smith: It is a very important question. What happens at the cliff face? That is a reality that passengers face. We see that at the moment. For example, you can get free car parking within a PTE area, but you suddenly go over the cliff face and then you are paying for car parking. You can see examples where Oyster extends to a number of stations down the line and it does not cover the last three. It is completely illogical and baffling to passengers. We need some very sophisticated mechanisms to make sure that it works for all passengers. As Mr Brown says, particularly in that regard, anyone living on the south coast of England does not want any train to stop within the M25; everybody living within the M25 wants every train to stop. How you balance that interest on a crowded network, where every one of your witnesses will say that passenger numbers are growing, is a very important point because those are very fine judgments, which can have a big effect on people’s lives.
Q102 Chair: How do you think that can be addressed, Mr Smith?
Anthony Smith: As Mr Brown says, it is partly addressed through the overarching role of the regulator, who has to sanction the allocation of capacity, and partly through passenger representation. You have to have a voice for passengers on the south coast and in London.
Q103 Lucy Powell: I do not know if you were in the room for our previous set of witnesses. An area being explored through Brown and those witnesses is the idea that you have shorter franchises, but then you have the possibility to extend those franchises for a number of years afterwards with criteria for that extension focused more on passenger approval and other issues, not just money to the taxpayer. What is your view of that proposal or idea?
Anthony Smith: It is very sensible. Having a shorter-term franchise where you can contain some of the risks and opportunities, and then having a potential extension based upon, we would hope, passenger satisfaction and hitting certain targets, is a very sensible way forward because it gives some certainty.
Q104 Lucy Powell: Are there any other criteria that you would like to see included in that extension period from the passenger point of view?
Anthony Smith: The basics have to be around performance, passenger satisfaction, obviously paying the money if any money is going to be paid over, and safety as a key component of performance. Those are the key things that matter to passengers.
Mike Brown: I would certainly agree with that. My judgment is that, again, for urban-type rail franchises, they should be at the shorter end. I think Brown concurred with that, so they would be of the order of seven to 10 years and possibly nearer seven than 10, in my judgment. Of course, there will always be the scope for some extensions. Indeed, we have just given a brief extension for the DLR franchise, so that is without this process. It is a similar example where we have demanded continuing levels of quality of service to be provided in that extended year in the case of the incumbent there.
Geoff Inskip: If you are going for a seven plus three, unless the plus three has some sort of automation behind it, you are not going to get the benefit of a longer-term franchise on that basis at all. It is just going to be seven years, because any franchisee looking at it will say, "I will get terminated after seven years and, therefore, that will be the end of it." If you are going to ask for some criteria around passenger satisfaction with the train operating companies matching the benchmarks that you have set, and you say that on the basis of that they can have a plus three years’ extension, that might be something as an authority you might want to do, but then you have to weigh against that the balance of what changes you also want to make in terms of the franchise specification at the same time. It is not quite as straightforward as saying, "Let’s have an option for the train operating company to have plus three"; it is a question of protecting the transport authority’s desire to ensure they get the specification they need after that seven-year period is up.
Q105 Graham Stringer: As I understand it, Brown is recommending devolution, and pteg and the northern authorities would like to amalgamate TransPennine and Northern. Could you tell the Committee what the benefits of that amalgamation would be?
Geoff Inskip: As far as Northern Rail is concerned, the benefits are very much in terms of the synergy of putting the transfer of mapping together so that there is one whole efficient operation, ensuring that there are benefits and that the route specification is done together rather than on a piecemeal basis. We have seen the submission by First/Keolis, which has talked about the benefits that they see. They say that they are doing quite a lot of the things that we would want them to do anyway. We think there are further benefits that will come through by merging. Certainly, talking to one or two of the other potential bidders, they also see that as well. These are efficiencies that will come through as a result, and we hope there will be a reduction in the cost to the taxpayer. That is the key issue for us.
Q106 Graham Stringer: Are you talking about efficiency of scale?
Geoff Inskip: Indeed-scale and also putting the two concessions, if you like, together.
Q107 Graham Stringer: Brown recommends having an amalgamation of two franchises and that that involving the transport authorities should be PTE-led. How would you take account of the other transport authorities-the county councils? How would they be involved?
Geoff Inskip: I thought what the Brown review talked about in that regard was quite interesting. I do not know whether he is talking about PTEs as shorthand for transport authorities; one hopes he is because certainly that is how we are reading it, on the basis that this is not about PTE areas but a much wider area anyway. As you know, for Rail in the North there was a meeting today covering 33 of the local transport authorities, which would cover both Northern and TP areas. It is important that all of the authorities work together. In the west midlands we have a wider West Midlands Regional Rail Group, which again covers all the local transport authorities in the area; all of the transport cabinet members for the transport authorities sit on that group and are all behind devolution. It is very important that this is not about PTE areas but the wider area and the wider region.
Q108 Graham Stringer: I have a final question. There is a move for more passenger surveys to see what people think. How do you balance up the results of those surveys against the harder measures of punctuality and very firm measures? Where would the balance of those two metrics lie within a new franchise?
Geoff Inskip: It is interesting as to whether or not you make passenger satisfaction surveys a contractual requirement and exactly how you benchmark against them. I do think passenger satisfaction is a very important part of the franchising process. As far as we are concerned, we would make it a commitment from the franchisee that they have to undertake those passenger satisfaction surveys.
We would also want them to prepare an improvement plan for the passenger to show each year how they can improve the passengers’ lot in terms of taking things forward. Quality and performance in reliability and punctuality are really important measures that we, as the transport authority, must also establish to make sure that the operators’ feet are held to the fire in those regards. In terms of the passenger, the passenger demands can change from time to time. Priorities can change for passengers-for example, fares. It is important that we work out how we can satisfy passengers’ requirements for affordable fares if they are moving in the wrong direction. It is also important to understand what passengers’ demands are in terms of integrated ticketing, for example. We would want to take those factors into account in coming up with an improvement plan that we would work with the franchise operator on every year to ensure that the passengers’ lot was improved.
Q109 Chair: Does that mean, Mr Inskip, that you would want to have the ability to set fares?
Geoff Inskip: Yes, indeed.
Q110 Chair: That is part of what you want.
Mr Smith, there is a lot of emphasis in the Brown report about passenger satisfaction measures being built in to franchises. From your experience what is the best way of doing that? Is the Southern franchise the right way of doing it?
Anthony Smith: The Southern franchise, which adopted the approach of penalties based around four specific areas that the franchisee had to reach in terms of station improvements and other things, was one way of doing it. You could look at incentivising improvements around passenger satisfaction. I accept what Mr Inskip says. It is not entirely obvious. You cannot always say that the two things are exactly linked in terms of improvements and satisfaction. There is a role for passenger satisfaction in the new franchises, and it would be very strange if there was not. If you said to a passenger, "We have just let a 10-year franchise with no role for your say in it," that would be extremely strange. You need a combination of measures, to pick up Mr Stringer’s point, in terms of the hard measures of the trains running on time and so on, but you also need to keep a very close eye on what passengers are saying about the service because they are the best judge.
Q111 Chair: Does that need new methods of establishing that?
Anthony Smith: We don’t think so. We think we have a pretty robust product here in the National Rail Passenger Survey. It covers about 60,000 passengers who take part every year at the moment. For it to have a greater role in franchising, you would need to make it bigger so that you could get down into more routes and increase the usefulness of it.
Q112 Kwasi Kwarteng: On this point, it seems unlikely to me that many passengers will take a direct interest in franchises, or am I mistaken in that?
Anthony Smith: No. I do not think it is seizing everyone on London Bridge as we speak.
Q113 Kwasi Kwarteng: Clearly, it is not enough simply to ask the passengers what they want because there are other issues relating to this subject.
Anthony Smith: No.
Kwasi Kwarteng: I just wanted to clarify that.
Anthony Smith: I think that is absolutely right. It has to be part of a suite of measures. If a passenger voice is not built in and built in in some contractual way, passengers on London Bridge would think that was rather odd.
Q114 Chair: Does Passenger Focus have sufficient resources to deal with this, if these criteria were to be built in to all new franchises?
Anthony Smith: Yes, we have sufficient resources for what we are trying to do at the moment. If our role was extended, we would have to ask where the extra money was coming from to fund that. These types of surveys are done professionally and they are not cheap, but they are gold-plated; nobody ever attacks the methodology, which is a relief. They may disagree with our interpretation of the results but the methodology is very broadly accepted.
Chair: Thank you very much.
Examination of Witnesses
Witnesses: Rt Hon Patrick McLoughlin MP, Secretary of State for Transport, and Clare Moriarty, Director General, Rail, gave evidence.
Q115 Chair: Good afternoon, Secretary of State. Welcome to the Transport Select Committee. You do not really need to introduce yourself, but perhaps you would like to introduce your companion.
Mr McLoughlin: Thank you, Chair. I introduce Clare Moriarty, who is the director general responsible for rail issues within the Department. If you would permit me, I would like to make a short opening statement.
The Department, I believe, is making good progress in building its capability to take forward the future franchising programme. A single director general with responsibility for rail and a director responsible for the franchising programme have been appointed. I will also be implementing Richard Brown’s recommendation to appoint a franchising advisory panel. Its role will be to advise, support and inform the Department on the work on the franchising programme. I will make a separate announcement once its members have been appointed.
I am focused at the moment on the future of the franchising programme. It was with this intention that I made the announcement on the three paused competitions last Thursday and, indeed, published the bit of the Richard Brown report which was redacted. Because those are now live procurements, there will be some areas where I may be limited for commercial or legal concerns when commenting on those particular franchises. I may have to exercise some caution in that.
Q116 Chair: Do you agree with the Brown report that long franchises without break clauses are "not sensible"?
Mr McLoughlin: I welcome Richard’s report. It is an important report. How I interpret Richard’s report in that area is that 15-year contracts are fine, but there should be a review period in them. If one looks at the Chiltern line franchise, that is a 20-year franchise. Certainly, when that policy was announced, it was generally welcomed by the industry, but, obviously, lessons have to be learned from experience.
Q117 Chair: Do you think one of the lessons is not to have long franchises without a break clause?
Mr McLoughlin: If I look at what we are doing on Essex Thameside-I have got to make sure I get all these different ones right-we are looking there at doing a 15-year contract. It is not that we are ruling out 15-year contracts but we will judge them individually.
Q118 Chair: What made you decide to do that? You are broadly welcoming the Brown report, though you have not been absolutely specific. This issue of the long franchises is clearly a key point of concern in that report.
Mr McLoughlin: The particular franchise we are talking about is an important franchise but it is a fairly small franchise in the overall size. It is very much a commuter franchise, and that was the best way we thought we could move forward on that. As I said, the longer one-the Chiltern line-is a 20-year franchise.
Q119 Chair: Have you made any assessment of the impact on the rail industry and the supply chain of the pauses in the new franchises as well as the cancellation of the West Coast one?
Mr McLoughlin: I realise it has been very unsettling for the rail industry and points have to be learned from that. When I have spoken to either the RDG or members of the RDG, I have also tried to say, "Look, we will learn the lessons of that." I was heartened by the fact that Richard Brown, in his report, actually said that franchising was the right way to move forward. He basically backed and recognised the great achievements that had been taking place under franchising.
Q120 Chair: You have referred to management contracts as being a possible way forward in certain circumstances. Indeed, on the enlarged Thameslink franchise, you have spoken about a management-style contract. Could you tell us what you mean by that?
Mr McLoughlin: There is a huge amount going on in that area with the redesign of London Bridge and all the consequences of that. That is why we think a managed contract in that particular period is right as far as that is concerned.
Q121 Chair: What is it that influences you in deciding if you think there should be a management-style contract?
Mr McLoughlin: Partly what influences me is the advice I get.
Q122 Chair: Without touching on a sensitive area, I think perhaps the advice needs to be considered.
Mr McLoughlin: That was the reason we took that particular process. That was thought to be right for that particular contract because of the amount of changes coming on board in due course.
Q123 Graham Stringer: Coming down on the West Coast Main Line this morning Mr Branson provided me with a glass of champagne. I think that was very nice of him.
Lucy Powell: I did not get one of those, but perhaps because I am pregnant.
Mr McLoughlin: You must have been travelling first class, Mr Stringer.
Q124 Graham Stringer: I was. I did not take it, but it was very nice for passengers on the train. Is that not an indication that-as Tom Bower, his own official biographer, said-he is using the West Coast Main Line franchise as a way of printing money?
Mr McLoughlin: Sorry?
Graham Stringer: Is it not an indication that the £200 million that The Guardian says he has taken out of that contract is too much and to the disbenefit of the taxpayer?
Mr McLoughlin: Well, I am not responsible for the last contract he had; I will be responsible for the present contract that he gets. It is important that we get the best deal we possibly can for the taxpayer. There has been a huge amount of investment on that line. What is true, however, is its popularity. When I addressed the House of Commons on the issue, many Labour Members were making the case that Virgin should keep that contract. One of the things that we were attempting to do, in blindsiding exactly where we were on the bids, was to show no favouritism whatsoever to any of the individual bidders.
Q125 Graham Stringer: I understand that, and the points you make are fair. What I am really trying to get at is what the Chair asked. How do you judge the different processes of getting people to run our rail system between the franchising and management contracts? Where does the interest of the taxpayer lie? Do you have evidence that franchising is better value for the taxpayer than management contracts?
Mr McLoughlin: Overall, yes, franchising is better value. We have seen, not just in my words but in fact in your last but one report, that the Committee itself recognised that there have been substantial benefits as far as franchising was concerned and substantial increases in passenger numbers-and competition between the various different outlets to try and attract passengers to the railways. That is certainly something that Virgin has done very well and other groups have too.
Q126 Graham Stringer: One can argue that passenger numbers have gone up with the increase in the gross domestic product and that safety has improved because John Prescott put in a lot of new safety measures after the accidents at the start of the century. I am interested in hard numbers as comparisons between management contracts and franchising so that you and this Committee can explain to the taxpayer that the £200 million that Mr Branson is taking out is good value for money. I have to say that in terms of the headlines that does not seem to me to be good value for money.
Mr McLoughlin: Obviously, when we have more management contracts, that will be something you will want to look at in more detail perhaps, but I certainly think that, overall, what we have seen with the investment levels generally concerned, and the passenger usage, and the huge amount of pressure we came under from the public as far as the West Coast Main Line when it was initially awarded to First Group-
Q127 Graham Stringer: Can you tell us whether any figures exist-do you have figures in the Department-that make those comparisons?
Mr McLoughlin: I do not have any figures that I can instantly give.
Clare Moriarty: The difficulty with making comparisons is that you have a different level of risk transfer. Essentially, the difference between a franchise with risk transfer and a management-style contract, which can be let as a franchise, is the amount of risk transfer. Obviously, with higher risk transfer goes the opportunity for the train operating company to introduce measures that will increase passenger numbers, passenger revenues and generate profit for them. There is not a direct like-for-like comparison because in a management contract, generally speaking, we are retaining more risk.
Q128 Graham Stringer: There may not be a like-for-like comparison but there is a cost to the taxpayer comparison. What I am trying to find out is whether you have used two models-one of a management contract and one of franchising-saying, "This will cost the taxpayer x and this will cost the taxpayer y." As a member of this Committee, I would like to know whether you have that and, if you do not have it, why not?
Clare Moriarty: We are certainly in the process of looking at the value for money in order to understand it in quite a broad context. You can look at individual contracts and ask what happens if you have a management contract with the risks retained by the Department and what do you have with a franchise when the risk is transferred. You have to make some assumptions then about what might happen and decide what value you attach to having a competitive market so that you have a number of different companies that have the motivation to bid for a contract.
Q129 Chair: At this stage have you actually worked out those models or is this just something you are aware of the need to do?
Clare Moriarty: What we are doing is looking at the overall arguments. Some of them boil down to things that you can express in a model and some of them are more qualitative arguments. It is a piece of work that is going on at the moment.
Q130 Chair: This is ongoing work rather than something that you can speak about.
Clare Moriarty: Yes.
Q131 Graham Stringer: What we are looking for is a baseline. The Guardian newspaper says that the subsidy per passenger mile on the West Coast Main Line is 3.6p, but it is only a seventh of that on the East Coast Main Line. First, do you recognise those figures that The Guardian has produced? Wouldn’t the East Coast Main Line franchise be a sensible benchmark to look at?
Mr McLoughlin: It is a variant on the kind of investment. I have not seen The Guardian article, so I cannot respond directly to the figures that you are quoting, but it will also depend upon the amount of investment which has already taken place. As you will be aware, the West Coast Main Line has had significant investment on it over the last number of years. It is fair to say that it is far more than the East Coast Main Line has had, which has not had the level of investment that the West Coast Main Line has had.
Q132 Graham Stringer: I do not quite understand that point in terms of subsidy to the franchise. The £9.5 billion that went into the West Coast Main Line landed in the public accounts. We are talking about franchisees here and the direct subsidy to the franchisee. According to The Guardian-I do not know if it is true and I would be interested if you could tell us now or in writing whether it is true-that is seven times the level per passenger mile on the East Coast Main Line.
Mr McLoughlin: I am certainly prepared to look at The Guardian article and write to you.
Chair: It might be helpful if you would look at the article referred to and give us your view on that.
Q133 Lucy Powell: I have a couple of slightly related points. The first goes back to the point the Chair was making earlier. In the session prior to this one we had representatives from the industry and manufacturing. It is fair to say that their response about confidence in the industry following on from the West Coast Main Line debacle is at an all-time low. That confidence, particularly among investors, relates to the policy framework. They see the Brown review as a step forward in that regard. It also relates to capacity within the Department to deliver any changes that you bring forward, but, also, that loss of confidence is having an impact on skills and other things within this country. Do you feel that things are moving quickly enough to restore that confidence? Can you explain to us what else you are doing to restore the confidence of the industry and investors in this process?
Mr McLoughlin: When you say "at an all-time low", it depends where they are talking about and from and to. There are other times when things have been at a fairly low ebb as far as the rail industry is concerned-following the Hatfield incident, for instance.
Lucy Powell: I mean with franchising and investment.
Mr McLoughlin: Certainly. I accept that there has been a serious knock to the industry and we are trying to re-establish that. The way in which I set up the two inquiries-and they responded relatively fast, although at some stages there was criticism from other sources that we were trying to ask for that too quickly-has gone some way to reassure the industry that we are determined to get to the bottom of this. I hope the changes that are talked about in both the Laidlaw and Brown reports have gone some way to restore the confidence in the industry, but that is a very important job for the Department to do.
Q134 Lucy Powell: Resourcing was an issue there as well. Do you feel that you are getting enough resources for the Department?
Mr McLoughlin: The simple fact is that all Government Departments at the moment are looking at their running costs. When the Permanent Secretary appeared at the last meeting we had, he was saying that one of the regrets was that some of the problems which were exposed as a result of Laidlaw were never moved up the chain. If they had been moved up the chain, other things could have taken place to avert those particular concerns. I will be told if there is a resources problem. At the moment both the Permanent Secretary and I believe that we have the right methods to be able to address the problems that have come out as a result of the two inquiries we have had.
Q135 Lucy Powell: I have another slightly different point. On this issue of franchising lengths, we are hearing-and it was mentioned in the Brown report as well-this idea of a shorter franchising term and putting in at the beginning an opportunity for the incumbent company to get a renewal on that franchise for x number of years thereafter. That re-letting may focus around things like passenger support and so on. What is your view of that? Is that something you think is an attractive model going forward?
Mr McLoughlin: I would want to look at it. At the end of the day, what is important for the job of the Department and for me as Secretary of State comes back to what Mr Stringer was saying just a few moments ago. It is to ensure that we get the best return we can for the taxpayer. As far as I am concerned, there should not be an automatic right of a continuation without being able to test that in the marketplace because, by testing it, we may get a better return for the taxpayer.
The truth is that the taxpayer is investing huge amounts of money maintaining the rail network, with the plans that we have announced between 2014 and 2019, with all the infrastructure changes that we have had. Indeed, the demands that we get from Members of Parliament to provide better and more services is one of the challenges that we have. It gives a chance for us to be able to fulfil some of those if we go out to competition. It is getting that balance right. In certain areas longer-term contracts are possible, and in other areas we perhaps should not look for those long-term contracts without that sort of break area somewhere in it.
Q136 Lucy Powell: So you think there should be free competition at that point rather than some kind of advantage for an incumbent operator to renew.
Mr McLoughlin: We have to look at each individual case separately. All I am saying is that, before I would be prepared to make that decision, I would want to make sure that we were getting the best deal we could for the taxpayer. In certain cases, on specific issues, I do not rule out doing something like that, but I would want to be assured that we had made the right financial decision as far as the taxpayer was concerned.
Q137 Chair: You have referred a number of times to getting value for the taxpayer. Where do ticket prices and fares come in on this? Are you also concerned about lower fares, or increases that are not as high as they have been? Is that a part of the consideration?
Mr McLoughlin: There is a fare review going on at the moment within the Department. I am very keen to try and understand the fare policy that is charged by different companies. There is a great variance in the way in which fares are presently done. If you turn up today at Euston Station to go to Manchester it is incredibly expensive, but if you managed to book your ticket a month in advance, and you can say which particular train you can go on, you can get a very reasonable deal. It is probably a deal cheaper than you would have got 20 years ago on the overall cost, certainly if you take inflation into account. The turn-up tickets are incredibly expensive. More and more people are now getting wise to that and booking their tickets in advance. That is allowing the rail operators to fill more of their unpopular trains. They do not have so many problems in filling the early morning trains, but they do have problems with the later trains. I want to look at that. The whole development of smart ticketing will dramatically change the way rail ticketing prices work out along the term.
But it is very, very expensive to invest in the railways, and sometimes you do not see that investment. I went on a trip just over Christmas to Shugborough tunnel on the West Coast Main Line. Before Christmas, trains were restricted there to 50 mph. The whole bed was dug up, rails were re-laid and drainage was improved. The cost was in the region of £2.5 million. It is not something you would see, but now trains can go back through that tunnel at 125 mph because of the improvement in the infrastructure.
Quite often you do not see all the programmes that we get involved in on the railways. They are very expensive and there has to be that sort of return to the taxpayer as well.
Q138 Mr Sanders: What led you to cancel the Great Western competition?
Mr McLoughlin: It was a result of some of the post-announcements. It was partly as a result of the Brown committee and the way in which we are remapping franchise size and length. It was a cancellation for those policy reasons.
Q139 Mr Sanders: Which elements of the Brown review convinced you of the need to cancel?
Mr McLoughlin: As I say, it was franchise size remapping and franchise length. For some of those reasons and because of some of the big changes that are taking place as far as the Great Western is concerned, it led us to those conclusions.
Q140 Mr Sanders: Was it due to a change of policy-i.e. the long franchise was unworkable-or was it because, as with the West Coast Main Line, officials made a mistake?
Mr McLoughlin: No, no. First and foremost we have not dealt with the length of that; that was not one of the reasons. It was policy developments and policy changes; and it was partly as a result of some of the policy decisions that came out of the Brown report.
Q141 Mr Sanders: The Department has agreed to refund bidders on the West Coast Main Line competition but has refused to do so for the cancelled Great Western competition. Why is that?
Mr McLoughlin: In the ITT-the invitation to tender-it was clear that bidders "shall be responsible" for the cost, expenses and liabilities incurred whether or not their bid is ultimately successful or the process is subsequently varied or terminated in any way. There have been other examples where Governments have taken the decision to cancel competitions and have not reimbursed bid costs. I have particularly in mind the 2001 Central Trains and Thameslink bid. That was stopped after pre-qualification. Wales and Borders was stopped after the submission of individual bids. That was because of a change in policy and the general election, even though the general election led to the same Government being returned after that election. In 2003, the Northern, Wessex and Great Anglia was stopped after pre-qualification. That is the history and I took the view that this came into a similar category.
Q142 Mr Sanders: If I come back to cost, is it not the case that the words in the invitation to tender were the same both for Great Western and for West Coast? When it is said that "each bidder shall be responsible for all costs…whether or not…the process is subsequently varied…or terminated", a judgment must have been taken to reimburse West Coast but not Great Western. Why the difference in policy?
Mr McLoughlin: I have just explained why there was a difference in policy. The other thing was that we had not come to the end of the Great Western decision-making process. There had been an end in the West Coast process, so therefore they were at different stages.
Q143 Mr Sanders: Costs were incurred in both the bidding processes, were they not?
Mr McLoughlin: But one had gone to its full length and, although a contract was not signed, a winner was declared and they incurred extra costs for that. I come back to the fact that what we had done previously was not to reimburse bid costs.
Q144 Kwasi Kwarteng: I was just thinking about franchises. Does the Department have a view with regard specifically to franchise lengths?
Mr McLoughlin: We have taken the view, as a result of the Richard Brown report and also listening to the industry, that we will vary the lengths of contracts. It is worth pointing out that the Chiltern line, which was signed some time ago, is a 20-year contract. There was a general move across the political parties up until the last general election that there should be longer franchise periods. We learn as a result of our experience. Richard Brown in his report does talk about 10 years and possibly a five-year plus, which is a 15-year period. I do not know whether Clare has any comments on that.
Clare Moriarty: As the Secretary of State says, what we are trying to do is to avoid being in a situation where we say, "This is the length of the franchise." It is very clear, and it is one of the very strong messages from Richard Brown’s report, that franchises are different and even the same geographical franchise can be in a different situation at different stages. For example, the Thameslink franchise is being let as a seven-year franchise and was always going to be let as a seven-year franchise, because a lot of change is going on with the infrastructure works and the rolling stock. It makes sense to have a seven-year franchise. What we are trying to move towards is a much more tailored approach, looking at all the circumstances and then looking at the parameters of franchising, whether that is length, risk transfer or the geographical area, to make sure we get the best solution in each case.
Q145 Kwasi Kwarteng: Presumably you are looking at the idea of having some sort of break clause in a longer franchise. If something is going to be over 10 years, are you looking at maybe having some sort of break clause in the longer franchise?
Clare Moriarty: As the Secretary of State said, that is one of Richard Brown’s recommendations. We clearly need to work through that with the industry. We are very keen to work with the industry to understand the issues, the concerns and the situations that are thrown up by different lengths of contract. We are taking all of Richard Brown’s recommendations, working through in detail what they might mean and engaging with the industry.
Q146 Kwasi Kwarteng: Do you agree with him when he said that having a longer franchise without the break clause was "not sensible"? He was pretty clear about what he thought about that. Do you have an opinion on what he said?
Clare Moriarty: We need to understand what the consequences are. There are a number of areas where he has made recommendations that are very helpful. We need to understand what the consequences of those will be.
Mr McLoughlin: Clare has answered the point. We have said on Thameside that we will look for a 15-year tender. There will be different lengths for different ones. It is worth remembering that the West Coast Main Line, for instance, when we were tendering on that, was not a 15-year contract. It was a 12-year contract because of the impact and consequences that HS2 would have. That was taking us up to when we first expected HS2 to be running up to Birmingham. It was not including, obviously, the two announcements that I made last week-Birmingham to Leeds and Birmingham to Manchester.
Q147 Kwasi Kwarteng: Richard Brown has been pretty clear about the desirability of having break clauses in longer franchises; he has been pretty explicit about that. Essentially, what you are saying is that you are going to look at everything and we could well end up in a situation where nothing has really changed on that.
Mr McLoughlin: No, I do not think I am saying that. I am saying that obviously I am grateful to Richard Brown. His report has been generally welcome. There will be certain cases where we will want to do other things, but we will be very much guided by what is in the Brown report and by talking to the industry as well. I would like to tell you that there is a great set of principles and I am not going to break any of them, Mr Kwarteng, but there are individual circumstances and, indeed, investment that is going on too.
As far as Great Western is concerned, the new development at Reading Station, which will be completed next year-although a good part of it will be done this Easter, the opening is the year after-will make a very significant difference to how that particular line will run because of the increased capacity through Reading.
Q148 Sarah Champion: Ms Powell mentioned the previous speakers who talked about the loss of trust and confidence, both nationally and internationally, because of the West Coast Main Line fiasco. Ms Moriarty, I am very keen to hear what specific plans you have in place to restore that trust and confidence in the Department.
Clare Moriarty: It is very important that we show the industry that we are listening to them, that we are really hearing what they say and that we are going to deliver on the promises we make. For me, the most important way of rebuilding confidence is for them to see that we are genuinely committed to partnership working and are not going to lock ourselves in a room, come up with the answer and then say, "It is like this."
I have spent a lot of the last couple of weeks talking to people from all the different owning groups, from Network Rail to the Rail Development Group. We are planning to have a session with them very early on for them to set out how they feel about the Brown recommendations. We have said to them that we are going to develop the detail of the franchise propositions in a collaborative manner, engaging with them. What we have to do is deliver on that. I am very committed to it. Peter Wilkinson, whom we have appointed as our interim franchising director, is very committed to that.
We also have to deliver on time scale. I am acutely aware, because I have heard it from all the owning groups, that they would like us to be moving as fast as we possibly can. They understand that it is important that we get things right and have a robust process. We have to be sure that when we say, "This is the time scale," we can keep to it. We also have to be clear that we are doing things as expeditiously as we can. The constant engagement, showing that we have understood, why we are doing the next thing and then delivering what we have said is what will rebuild confidence.
Q149 Sarah Champion: Do you feel that you now have the resources and capabilities to achieve that strategy?
Clare Moriarty: We are building them. I have only been in this post since the beginning of January. Peter joined us last week. We are in the process of putting the project teams in place that will be responsible for each of the individual franchises, which was a recommendation both of Sam Laidlaw and Richard Brown. I do not have every single post filled at the moment but I would not expect that at this stage, and we are concentrating on the high-priority areas so that we can move forward quickly.
Q150 Karen Lumley: Are you confident that the right sorts of people are out there and you can attract them at the right sort of pay?
Clare Moriarty: That is the challenge that we face at the moment. I think that the right sorts of people are out there. Clearly, there is quite a competitive market for them. We are engaging with colleagues inside the Department and in the Cabinet Office and Treasury to work out how we can ensure that we attract people.
Q151 Karen Lumley: Are you confident that, when the West Coast Main Line comes back up for competition, companies will enter that franchise? What are you doing to work with the franchisees to make sure that they are confident that they will get a fair deal this time?
Clare Moriarty: That is the challenge that we face. Again, it comes back to demonstrating that we are really engaged and that when issues are raised we are responding to them and dealing with bidders in a transparent way. It is not a difficult prescription. We just have to make sure that we follow it absolutely diligently.
Q152 Karen Lumley: I want to ask a cheeky question. How easy is it to terminate franchises for people who are not delivering the service that perhaps we might like them to deliver? The Secretary of State will know that I am talking about London Midland.
Mr McLoughlin: Yes; I know you are talking about London Midland. We have been in touch with them. Norman Baker made a statement to the House just before Christmas about some of the measures that we have required them to put into place. We are certainly watching that franchise incredibly closely and trying to make sure that your constituents and other people along that line are properly served by that company. There has not been the kind of service that we would expect.
Q153 Graham Stringer: How many franchises will be let by 2015?
Mr McLoughlin: It would be unwise of me to answer that question at the moment, Mr Stringer. However, what I have promised to do is to make a fuller statement later on as to the rest of the franchising programme and the timetable that we will adopt. It will have changed dramatically from what was published before.
Q154 Graham Stringer: That is not very clear, is it?
Mr McLoughlin: I think it is very clear, actually.
Q155 Chair: When will that statement be issued?
Mr McLoughlin: I do not want to put a specific date on it. What is absolutely right is that we get it right rather than rushing to make a decision. In the same way that I published the redacted elements of the Brown report last Thursday so that all the Brown report is published, I am very mindful that the industry wants to see that. I have got a date in my own mind but I would rather keep it in my own mind at the moment, but I hope it isn’t too-it will be some time in the spring.
Q156 Chair: What is the impact of the paused franchises on promised investment-for example, the timetabling of the Great Western electrification programme and deployment of the new Thameslink rolling stock? All these are promised improvements. Have they been set back by the current pauses that have been made?
Mr McLoughlin: I will take you, for instance, to the West Coast Main Line because we are still in negotiation with First Great Western. I did say at the time of the announcement of the two-year contract with First on the West Coast Main Line that we have come under immense pressure to give a service to Shrewsbury and Blackpool. I did say that we would want to see those implemented as soon as possible. Those negotiations are ongoing and I would look to see those service improvements, I hope, within the next year, when the availability comes, which is usually around the December process; and I would want to be looking at any other improvements.
The very fact that we have had to pause or that we have given two-year contracts should not delay some of the improvements that we want to see on those particular services. One of the things I will be talking about with officials in the Department is that, where there are desired changes, if they are possible to introduce within a two-year time frame where they are applicable, we would want to do that.
Q157 Chair: You may need to write to us on this, but we would like to know the specific impact on the timetabling of the Great Western electrification programme and on the deployment of the new Thameslink rolling stock.
Mr McLoughlin: I do not think it should have any impact on the Great Western electrification programme because it is more Network Rail that will be carrying that out rather than the actual company. I will write to you but I do not think there should be a problem. Obviously, there is a difference between what is expected from Network Rail and what we expect from the rail operators.
Q158 Chair: And the Thameslink rolling stock.
Clare Moriarty: There is no impact on the deployment of the Thameslink rolling stock. That will be a task for whoever is running the franchise at that time. There is a broader programme of both the infrastructure and rolling stock elements for Thameslink.
Q159 Graham Stringer: Are you going to tell us the cost to the Department of the retendering/refranchising process?
Mr McLoughlin: Of West Coast?
Graham Stringer: Of all the refranchising.
Mr McLoughlin: I am not sure I can give you that cost at the moment.
Q160 Graham Stringer: You should, because the Rail Minister has refused to give those costs.
Mr McLoughlin: I am always answerable to Parliament and will try and answer questions that are put to me in Parliament. One of the things I said when I was before you last was that I expect the franchising costs to be around £40 million. In the report that you issued last week you showed six or seven other areas where there have been costs for us. The present cost is around £49 million.
Q161 Graham Stringer: I think we are at cross-purposes and it may well be my fault. I am talking about the cost of going through the process of franchising across the Department. What you are talking about-but correct me if I am wrong-is the cost of compensation.
Mr McLoughlin: And some of the costs as well. I was talking about the costs of Laidlaw and Brown, and the costs of the first demobilisation-the DOR set-up costs.
Q162 Graham Stringer: I am trying to get to the costs for the Department of going through the tendering process-i.e. your staff, legal advice and accountancy advice. It is those costs to the Department.
Mr McLoughlin: It is very difficult to give those costs at the moment until we know-
Q163 Graham Stringer: Will you give the House of Commons those costs?
Mr McLoughlin: If they are costs which I can give the House of Commons, I will give them to them.
Q164 Graham Stringer: Will you give us the cost of the four extensions you have made on different franchises?
Mr McLoughlin: When you say "the costs", are you talking about the Department’s costs as far as manpower is concerned or the contracts?
Q165 Graham Stringer: No; that was in terms of letting new franchises.
Mr McLoughlin: Look, I will always be as open as I possibly can, but there will be some things that will be "commercial in confidence" and which I will not be able to give the Committee. All these contracts are always subject to the National Audit Office and its inspection, so there is nothing secret in those costs.
Q166 Graham Stringer: The cost of the extensions of the franchises should be publicly available. That surely can be given now. I accept that the departmental costs of going through a franchising process you may not know yet. Will you give this Committee those costs?
Clare Moriarty: The costs of the extensions in terms of revenue will depend on what happens in practice. For example, at the moment on the West Coast Main Line, the short-term contract with Virgin is on the basis that the Department bears costs and revenues, but that means we can know only in arrears what costs have been incurred and what revenues have been received. We do not have a baseline that says, "This is what it would have been otherwise."
Q167 Graham Stringer: Do you not have a budget?
Clare Moriarty: There is a budgetary process within the Department. To know the actual costs-they can be provided but only in arrears.
Chair: This is something that the Committee may well wish to pursue. It might be that at this moment you cannot produce that information.
Q168 Graham Stringer: Is it the same for Great Western and Thameslink? Are they unknown or do you know what the cost of those extensions will be?
Clare Moriarty: Those are extensions that are yet to be negotiated and so at the moment we do not know what those costs will be.
Q169 Graham Stringer: Will you tell this Committee and the House as soon as you do know?
Mr McLoughlin: Within the constraints that I have just said. We are answerable to the Committee and the Committee can ask us questions. Unless there are very good reasons not to do so, I will.
Chair: We will put these questions to you clearly and you can answer them when you are in a position to do so. If there are no questions from any other Members, I thank both of you very much for coming and answering our questions.