House of Commons Hansard Debates for 24 May 1993

New clause 13

Transfers of franchise assets and shares

.--(1) It shall be the duty of the Franchising Director before entering into a franchise agreement to satisfy himself that if the franchise agreement is entered into--

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(a) the initial franchise assets (if any) for that franchise agreement will be vested in the person who is to be the franchise operator ; and

(b) if the franchise agreement is to be one under which the franchisee undertakes to secure that a wholly owned subsidiary of his provides the franchised services, that the franchise operator will be a wholly owned subsidiary of the franchisee.

(2) After a franchise agreement has been entered into, it shall be the duty of the Franchising Director before any property, rights or liabilities are subsequently designated as franchise assets in accordance with the terms of, or by amendment to, the franchise agreement, to satisfy himself that, if the property, rights or liabilities in question are so designated, they will be vested in the franchise operator.

(3) Without the consent of the Franchising Director, the franchise operator shall not--

(a) if and to the extent that the franchise assets are property or rights--

(i) transfer or agree to transfer, or create or agree to create any security over, any franchise assets or any interest in, or right over, any franchise assets ; or

(ii) create or extinguish, or agree to create or extinguish, any interest in, or right over, any franchise assets ; and

(b) if and to the extent that the franchise assets are liabilities, shall not enter into any agreement under which any such liability is released or discharged, or transferred to some other person. (4) Where the franchise agreement is one under which the franchisee undertakes to secure that a wholly owned subsidiary of his provides the franchised services, the franchisee shall not, without the consent of the Franchising Director, take any action which would result in the franchise operator ceasing to be a wholly owned subsidiary of his.

(5) In any case where--

(a) there are to be initial franchise assets in relation to a franchise agreement,

(b) a franchise agreement is to be one which provides for subsequent designation of property, rights or liabilities as franchise assets, or

(c) property, rights or liabilities are to be designated as franchise assets by an amendment made to a franchise agreement, the Franchising Director shall ensure that the franchise agreement includes provision specifying, or providing for the determination of, amounts to be paid in respect of the property, rights and liabilities which, immediately before the end of the franchise period, constitute the franchise assets in relation to that franchise agreement if and to the extent that they are transferred by transfer scheme at or after the end of that period.

(6) Without prejudice to the generality of the provisions that may be included in a franchise agreement with respect to the acquisition, provision, disposal or other transfer of property, rights or liabilities (whether franchise assets or not), the Franchising Director may undertake in a franchise agreement to exercise his powers under Part II below to transfer franchise assets to himself or another in such circumstances as may be specified in the franchise agreement.

(7) The Franchising Director shall ensure that every franchise agreement includes such provision (if any) as he may consider appropriate in the particular case for the purpose of securing-- (a) that the franchise assets are adequately maintained, protected and preserved ; and

(b) that, at the end of the franchise period, possession of such of the franchise assets as may be specified for the purpose in the agreement, or by the Franchising Director in accordance with the agreement, is delivered up to the Franchising Director or such other person as may be so specified.

(8) In this Part, "franchise assets", in relation to any franchise agreement, means--

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(a) any property, rights or liabilities which are designated as franchise assets in the franchise agreement as originally made (in this section referred to as the "initial franchise assets"), and (b) any property, rights or liabilities which, after the making of the franchise agreement, are designated as franchise assets in accordance with the terms of, or by an amendment made to, the franchise agreement,

but does not include any property, rights or liabilities which, in accordance with the terms of, or by an amendment made to, the franchise agreement, have for the time being ceased to be designated as franchise assets.

(9) No rights or liabilities under contracts of employment shall be designated as franchise assets.

(10) In this section "security" has the meaning given by section 248(b) of the Insolvency Act 1986.

(11) Any sums required by the Franchising Director for making payments for or in connection with the acquisition, transfer or disposal of property, rights or liabilities in pursuance of provisions contained in a franchise agreement shall be paid by the Secretary of State out of money provided by Parliament.

(12) Any sums received by the Franchising Director for or in connection with the acquisition, transfer or disposal of property, rights or liabilities in pursuance of provisions contained in a franchise agreement shall be paid into the Consolidated Fund.'.-- [Mr. Freeman.]

Brought up, read the First and Second time, and added to the Bill.

New clause 23

Powers of the Franchising Director to make transfer schemes

.--(1) The Franchising Director shall have power to make schemes for the transfer, at or after the end of the franchise period, of property, rights and liabilities which, immediately before the end of that period, are for the time being designated as franchise assets for the purposes of the franchise agreement in question to-- (a) the Franchising Director,

(b) a company which is wholly owned by the Franchising Director, or

(2) In the following provisions of this section--

(a) the "transferor" means the person from whom any such property, rights or liabilities as are mentioned in subsection (1) above are transferred by a scheme under this section ; and

(b) the "transferee" means the person to whom any such property, rights or liabilities are so transferred.

(3) Subject to any contrary agreement or arrangements which may be made between the transferor and the transferee, where any property, rights or liabilities are transferred by a scheme under this section, there shall be paid by the transferee to the transferor or, as the case may require, by the transferor to the transferee, on the day on which the scheme comes into force such sums as may be specified in, or determined in accordance with, the franchise agreement mentioned in subsection (1) above.

(4) Subject to the following provisions of this Part, on the day on which a scheme under this section comes into force, the property, rights and liabilities affected by the scheme shall, subject to section 85 below, be transferred and vest by virtue of and in accordance with the scheme.

(5) Except as otherwise provided by this Act--

(a) any reference in this Act to a "transfer scheme" shall be taken as including a reference to a scheme under this section ;

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(b) in the application of any provision of this Act in relation to a scheme under this section, any reference to the "transfer date" shall be taken as a reference to the date on which the scheme comes into force.

(6) In this section "franchise agreement", "franchise period" and "designated as franchise assets" have the same meaning as they have in Part I above.

(7) Any sums required by the Franchising Director for the purpose of making payments in respect of property, rights or liabilities transferred by a scheme under this section shall be paid by the Secretary of State out of money provided by Parliament.

(8) Any sums received by the Franchising Director in respect of property, rights or liabilities so transferred shall be paid into the Consolidated Fund.'.-- [Mr. Freeman.]

Brought up, read the First and Second time, and added to the Bill.

New clause 14

Powers of the Franchising Director to form and finance companies and to acquire and dispose of assets

.--(1) The Franchising Director may form companies for the purpose of facilitating the performance of any functions assigned or transferred to him under or by virtue of this Act.

(2) The Franchising Director may--

(a) hold interests in any company which he forms as mentioned in subsection (1) above ;

(b) exercise rights conferred by the holding of interests in any such company ; and

(c) provide financial or other assistance to or in respect of any such company, including assistance by way of guarantee of its obligations.

(3) The Franchising Director may (whether by exercising his powers to make a transfer scheme or otherwise and whether or not for any consideration) acquire or dispose of any property, rights or liabilities which have been, or which are intended to be, designated as franchise assets by or under any franchise agreement.

(4) Any sums required by the Franchising Director for making payments in consequence of the exercise of any such powers as are mentioned in this section shall be paid by the Secretary of State out of money provided by Parliament.

(5) Any sums received by the Franchising Director in consequence of the exercise of any such powers as are mentioned in this section shall be paid into the Consolidated Fund.'.-- [Mr. Freeman.] Brought up, and read the First time.

Mr. Freeman : I beg to move, That the clause be read a Second time.

Mr. Deputy Speaker : With this, it will be convenient to discuss at the same time the following : Government new clause 15-- Performance of Franchising Director's duties to secure the provision of services etc.

Government new clause 21-- Failure to secure subsequent franchise agreement.

Amendment (b) to new clause 21, leave out lines 9 to 11. Government amendments Nos. 160, 113 to 117, 121, 119, 120, 118, 122, 125, 123, 124, 126, 130, 148, 178, 176, 175, 71, 81 and 82.

Mr. Freeman : I will be brief but will explain the reasons for these amendments, which all relate to the franchising director's ability to form companies, to fulfil his duty-- [Interruption.]

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Mr. Deputy Speaker : Order. I ask right hon. and hon. Members who are leaving the Chamber to do so quietly--and those remaining to give the Minister a fair hearing.

Mr. Freeman : I was saying, Mr. Deputy Speaker, that Government new clause 14 and the other new clauses grouped with it relate to the ability of the franchising director to form companies so that the franchising director is able to ensure the continuation of rail passenger services, in the event of the early termination of a franchise or when a subsequent franchise competition, after the first one, results in failure to let a new franchise.

The first time round, if there are no acceptable competing bids, British Rail continues to run the service. In the event of a closure having been proposed but not yet approved, the franchising director has to ensure the continuation of the services for the time being. Government new clause 14 gives the franchising director powers to form and finance companies which will be wholly owned subsidiaries of the franchising director. The intention is that those companies should either themselves perform the service or contract with others to provide a rail passenger service. Government new clause 14 also gives powers to the franchising director to acquire and dispose of designated franchise assets. Our previous debate touched in part on the definition of designated franchise assets, including leased rolling stock.

Government new clause 15 enables the franchising director to perform his duties by securing the provision of services by agreement with others--for example, a neighbouring franchisee. The new clause gives the franchising director power to stipulate fares and, therefore, to control them.

Finally, Government new clause 21 places a duty on the franchising director to secure the continued provision of rail passenger services, except where he considers that there are satisfactory alternatives.

Mr. Wilson : I am sure that we could debate this new clause at great length and go over much of the ground that was covered in the last debate, but it is in nobody's interest to do so. Our views on the role of the frahemselves. Therefore, I shall concentrate my remarks on Government new clause 21--"Failure to secure subsequent franchise agreement." This is a significant new clause. It is the basis upon which a large number of services would be removed over a number of years.

The key words in the new clause are

"adequate alternative railway passenger services are available ;". The powers given by the new clause allow the franchising director to cease to provide services if, in his opinion, adequate alternative railway passenger services are available.

It is odd that the Government want to add this new clause to the Railways Bill. It deals specifically with circumstances where there are two operators running on the same routes. The most obvious example relates to those parts of the country where there are both InterCity services and Regional Railways services. That was the position on the routes to Blackpool, Clitheroe and a number of other places that have already lost their

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InterCity direct services. Much more pertinently, the new clause covers those routes that will lose their direct routes, if this legislation is passed.

If I may make so bold as even to refer to the place in present company, Hull is an obvious example. The services to Aberdeen and Inverness on the east coast main line and the services to Penzance on the Great Western line are other obvious examples. The new clause provides a mechanism by means of which these services can be withdrawn.

Nobody doubts that when the franchises are drawn up and advertised, amid much ballyhoo, every station on the railway map as it is at present will be there. But that is not what is at issue. What is at issue is what happens thereafter within a relatively short space of time. Logic suggests that one of the things that will happen is that InterCity--although it is wrong to talk about an entity called "InterCity" because it will no longer exist-- will start to rationalise its operations.

10.45 pm

The arguments should be familiar even if they are not. At present, InterCity is an extremely successful railway company. It is successful in that it records a small yearly profit. It does so on the basis of massive cross-subsidy within its own operations, but one of the Bill's specific purposes is to destroy InterCity and remove the possibility of cross- subsidy.

There is currently an entity called InterCity ; from next April, there might be the coaches painted in the livery of InterCity and the name may even be used as a marketing device, but the entity itself will have been splintered, not so much to the four winds but to six different profit centres around the country.

I do not pretend to have any insights into the Tory mentality, but, for the life of me, I cannot understand why any Conservative Member, any more than a Labour Member, should regard it as a great wheeze to destroy InterCity. I should have thought that InterCity was something of which people could be reasonably proud--a profitable railway, which is unique in Europe in that respect. For all the abuse that is hurled at it and all the denigration of British Rail, InterCity in my experience provides an absolutely first-class service on the basis of being an integrated, highly motivated entity. In any event, InterCity is to go. It will be no more, but will be divided among six profit centres and a range of separate franchises.

When cross-subsidy is removed, each section of what is now InterCity will be left to its own devices. Some will depend directly on subsidy and a few will be profitable, but we all know that even those that are profitable are not profitable to the extent required by the private sector. The Minister for Transport in London helpfully confirmed that in Committee. I said that even the profit made on the east coast main line, which is by far the most profitable sector of the British Rail network because of the investment that has been put into it, was nothing like what the private sector would want. The Minister readily agreed and said that the private sector would of course be looking for a far higher return and would get it through entrepreneurial flair and better marketing.

I do not think that many people with two brain cells to rub together would accuse InterCity of being deficient in marketing ability. The idea that the east coast main line

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will greatly increase its profits through better marketing is absurd. Every hon. Member knows that, but it is the basis on which InterCity is being broken up. What I have said applies to the most profitable route on the network, never mind the rest.

When the rubbish has been exposed and the east coast main line is not making the greatly enhanced profit which the Minister for Transport in London acknowledges will be required of it, the operators will be looking for other ways of increasing their profits. Even within the east coast main line, the Great Western line or some other sectors of InterCity, there is a great deal of cross-subsidy. It is an imprecise breakdown, but, by and large, where a route is electrified, it makes money, but because of the additional on-costs of diesel operation where the route is not electrified, it loses money. For example, the east coast main line is highly profitable overall, but north of Edinburgh it is a significant loss maker. In the case of the south-west, perhaps everything south-west of Plymouth is also a clear loss maker. Clearly, when a route is not making the required return, the operators or franchisees--if they ever exist--will look for ways of cutting or getting rid of loss-making routes. Nobody has suggested that places will be left without train services. The proposition being put forward, which all common sense suggests is what will happen, is that instead of having a choice of direct services to London, there will be feeder services into InterCity at the point at which InterCity becomes profitable. That is exactly what happened at Blackpool, at Clitheroe and at Stranraer a couple of years ago. We are not talking about a far wider range of direct services being threatened.

I ask Conservative Members to study new clause 21 and to ask themselves what other conceivable reason there could be for including it in the Bill, apart from the reason that I have given. People would not lose their trains, but it would be reasonably argued that it was adequate for them to be able to get a train from Aberdeen to Edinburgh to join InterCity there, to get a train from Inverness to Glasgow to join InterCity there or to get a train from Penzance to Plymouth to join InterCity there. It would be argued that there would still be a service with no loss of frequency. However, crucially what would be lost would be direct services.

New clause 21 fits that scenario exactly. The franchising director will be given the power not to say that lines will be closed--nothing as dramatic as that--but to say that adequate alternative railway passenger services are available. The franchising director will not be able to say that adequate bus services are available, but that adequate railway passenger services are available. In other words, the only scenario in which new clause 21 is applicable is one in which there are at present two types of railway operations--Regional Railways and InterCity. InterCity will go and Regional Railways will be left with feeder services.

The proposal makes sense for many other reasons. At present, InterCity travels for nothing on the stretches of line about which I am talking because the costs are borne by Regional Railways. It is a fairly ad hoc arrangement, but essentially both InterCity and Regional Railways are part of British Rail. Although there already are subdivisions--ludicrous in my opinion--and cost apportionment within British Rail, the organisations are part of one operation. That will not be the case in the brave new

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world that is envisaged. The operators will pay money to Railtrack and Railtrack will have a commercial imperative under the Bill to make a return from all operators.

Railtrack will not be able to say to InterCity, "You can ride for nothing and we shall put the entire burden of costs on to whichever ship that passes in the night happens to be running that sector of Regional Railways." There would be an outcry : "How can the guy who runs the Regional Railways sector make a profit when his competitor, InterCity, is riding on the tracks for nothing? "That would not be sustainable. However, the moment that one says that Railtrack will charge InterCity or its successor for operating on the tracks, one increases another burden, which is why those services will not be there for very long.

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New clause 21 will chop down the branches of InterCity, as experience will show. I do not expect much from most Conservative Members, although I expect a lot from some of them. I suggest that any Conservative Members who have an area served by InterCity which is a loss-making part of the InterCity network at present should look closely at new clause 21. If they can find a better explanation for giving the franchising director the right to cease to provide passenger services if, in his opinion, adequate alternative railway services are available, I should be interested to hear it.

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Mr. James Wallace (Orkney and Shetland) : Like the hon. Member for Cunninghame, North (Mr. Wilson), I think that new clause 21 is well worth examination. I also draw the House's attention to amendment (b), which stands in the name of my hon. Friend the Member for North Devon (Mr. Harvey), myself and others of my hon. Friends. The House is aware of the Government's prime argument for the Bill--that it introduces competition into the railway system. They say that it will lead to customers becoming winners, through lower costs, greater frequency and reliability of trains and a better overall service. That view has clearly been challenged. The key to better performance is not an argument over ownership ; it is the key question of investment.

We believe that privatisation is a smoke screen for the Government to hide behind and so avoid the charge of inadequate investment. New clause 21 is a classic example of such a smoke screen. On the face of it, it appears that the Government are trying to do something positive and helpful. It is a good longstop or safety net. If the franchisee ends the agreement, the franchising director will have a duty to secure the provision of the services that were secured under the franchise agreement until there is time for a new franchise agreement to be provided.

The rub comes in the phrase in new clause 21 :

"subject to subsection (2) below".

According to new clause 21 (2)(a), the franchising director does not have to

"secure that provision of any services, if and to the extent that, in his opinion, adequate alternative railway passenger services are available."

The hon. Member for Cunninghame, North has already described how that could be used to strip away the uneconomical parts of the InterCity service and to provide connecting feeder services that would downgrade many parts of the network.

That exemption and means of relieving the franchising director of a duty reduces competition. Far from promoting competition, it allows a service to be eliminated. Read in conjunction with clause 5, where the franchising director is required to follow the instructions of the Secretary of State, it is clear that services can be withdrawn, although at arms length so that the Government do not get their hands dirty. That is what the franchising director would be required to do.

Despite the rhetoric of competition and improved customer service, the effect of the new clause 21 would be to reduce services. That could apply in many places. The service between Carlisle and Glasgow is the main line from Carlisle to Lockerbie and Carstairs to Glasgow. The other line runs through Annan, Dumfries and Kilmarnock. That line provides a very important service, but it might be challenged with regard to new clause 21.

Scottish Members and Members in the north of England are concerned about how new clause 21 might place a question mark over the key connection of the west coast main line from London to Glasgow. Increasingly, that line is seen to be in competition with the east coast main line in respect of the number of trains linking through Edinburgh into Glasgow.

As the Select Committee on Scottish Affairs was recently informed, in European terms, the west coast main line is the third most important line in terms of traffic flow. The west coast main line and the east coast main line to Edinburgh are key arterial rail routes for Scotland. In its

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submission to the Select Committee, the CBI in Scotland stated that the "priority" in the rail privatisation exercise was to secure the "preservation of the East and West Coast Main Lines".

In its evidence to the Scottish Affairs Select Committee, the Department of Transport conceded that the west coast main line was "vital not just to Scotland's needs, but to that part of England through which it runs".

A survey of businesses in Carlisle carried out by Carlisle city council found that when 91 businesses were asked about rail issues, they stated that the priority to them was the upgrading and improvement of the west coast main line.

Ms Liz Lynne (Rochdale) : Does my hon. Friend also accept that it is vital for areas like mine and for the rest of the north-west that the west coast main line is protected? If we do not have money for that line and the Government use that as an excuse to run down the west coast main line by saying that the east coast main line will take the traffic, my constituency and many other constituencies in the north-west will suffer.

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Mr. Wallace : I endorse my hon. Friend's comments. It is not only a Scottish fear. It is a fear in many parts of the north-west of England. The west coast main line links five key conurbations--Greater London, the west midlands, Greater Manchester, Merseyside and Clydeside. Those are important links for the commercial and economic well-being of not only Scotland but of the whole United Kingdom. In addition, there are links into the west coast main line from north Wales, the Fylde coast, Cumbria, the Lake District and the south of Scotland.

So the west coast main line is a key line. We argue that it has been starved of necessary investment in the past 20 years since electrification was completed in 1974. There is a problem of underinvestment which gives rise to fears. The hon. Member for Cunninghame, North said that there could be a direct service from Glasgow to London, with routes feeding into that. It could be worse than that. Inter-city services could stop at Preston with only a regional route going to Carlisle.

That begs the question of what would happen to a station such as Lockerbie. I understand that in the previous debate my right hon. Friend the Member for Berwick-upon-Tweed (Mr. Beith) noted that Dunbar could no longer be served by ScotRail. According to the map of the franchise for ScotRail, Lockerbie would not be allowed to have a service provided by ScotRail. If the inter-city service excluded Lockerbie, what would happen to that important station for the south of Scotland?

I remember standing on a crowded Lockerbie station waiting for the train to Edinburgh on many Sunday evenings when I was a student. I understand from local sources that it is still a busy station. Potentially no provision is made for it. There is a need for investment in locomotives and carriages and to improve the reliability of the track and timetabling. In all those matters, the west coast main line has lagged behind the east coast main line. The trains and carriages on the west coast main line are mostly of a 1970s design. Even if the track were improved to allow greater speed, I understand that the trains and carriages would not allow it. Last year the tendering arrangements for a substantial investment by British Rail

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in new carriages and trains for the west coast main line were allowed to lapse because the resources were not there. BR was starved of resources and was unable to go ahead with that necessary investment.

The line is also in urgent need of investment to improve track and signalling systems. In a British Rail document which came into the public domain in February this year it was stated that, in addition to all the other investments, between £3 million and £5 million per annum would be needed every year until 2000 to restore signalling and telecommunications. It said that the track between Carlisle and Gretna in particular was in need of resignalling on safety grounds. We have poor rolling stock, a poor state of track and increasingly a limit on the high- speed performance of trains on the west coast main line, so it is less competitive than the east coast main line. A cursory look at the timetable shows that the Scottish Pullman takes four and a quarter hours from King's Cross to Edinburgh while the Royal Scot takes one minute short of five hours from Euston to Glasgow. What private company would be prepared to take on the London to Glasgow west coast franchise in the face of fierce competition from the east coast, especially when it is not allowed to compete on level terms?

Paragraph 45 of the Scottish Select Committee report said : "We wish to see the plan to invest £750 million in track improvements and new rolling stock implemented as soon as possible. This upgrading must not be delayed by uncertainties about rail privatisation and the transfer of responsibility to Railtrack." That view is certainly endorsed by Opposition Members. I hope that it will also find favour with Conservative Members who also want to see an improved rail network.

Investment is needed to improve and secure quality, enhance safety, reduce operating and maintenance costs, to be more environmentally reliable and, through the improvement of consumer choice, to increase usage and revenue. Investment, not the form of ownership, is the key to providing more effective competition and securing a better service for the customer. We believe that new clause 21(12)(a) is a Trojan horse which could be used to eliminate lines and reduce competition. I hope that the House will support the amendment which my hon. Friends and I have tabled to the new clause.

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