Examination of Witnesses (Questions 1
- 19)
WEDNESDAY 11 MARCH 1998
Mr Jamie Mortimer, Treasury Officer of Accounts,
further examined.
Chairman
1. This afternoon we are considering the
Comptroller and Auditor General's Report on Class V, Vote 7: Passenger
Rail Services. The main witness is Mr John O'Brien, the Franchising
Director of the Office of Passenger Rail Franchising. Good afternoon,
Mr O'Brien, and welcome. Could you for the benefit of the Committee
start by introducing your colleagues.
(Mr O'Brien) On my left is Mr Chris
Stokes who is my Deputy, and on my right is David Revolta who
is Principal Finance and Establishment Officer.
2. Thank you very much. We will go straight
into the questions. The Committee of Public Accounts has previously
commented on the importance of monitoring franchise operators'
performance against their contractual obligations. Now that all
the franchise agreements are in operation, what procedures have
you put in place to ensure that train operating companies meet
their contractual obligations before franchise payments are made?
(Mr O'Brien) We have in place a
variety of measurements to ensure that we pay operators in line
with what they should expect to receive. First of all, we have
a franchise agreement which governs the contractual relationship
between ourselves and each of the 25 train companies and that
franchise agreement lays down as a matter of contract how much
each of these companies should receive over time in return for
providing the level of service specified in that agreement. To
ensure that people do what they are supposed to do we have in
place our own compliance team which visits each train company
every six months to ensure that they are complying with their
franchise agreement. We have internally a franchise management
team which is in touch with the relevant companies on a virtually
daily basis making sure they deliver on their commitments. We
ensure that every period we pay out monies due to the operator
not only under the contractual subsidy commitments but also under
any performance incentives based on information that we extract
from our own in-house systems which are largely driven by Railtrack
systems.
3. Thank you. What action do you take to
ensure a suitably rigorous response to any failure by train operating
companies to make sure they meet their contractual obligations?
(Mr O'Brien) In the year in question
the amount of money that was paid to the passenger railways, both
franchise operators and British Rail, was £1.8 billion. If
you take out the amount which is not comparable year on year and
then compare that with what we are likely to pay this year, this
year we will see a reduction of approximately £300 million
on what we paid last year and the year after that, next year,
is likely to see another £250 million reduction.
4. What action do you take to ensure a suitably
rigorous response?
(Mr O'Brien) In terms of policy
we want people to do what they say they are going to do. That
means every period we monitor their performance against the level
of performance we expect them to produce. For example, we expect
them to run a level of service such that they only cancel no more
than a certain number of trains. Probably the best example I can
give you is the South West Trains situation a year ago where the
operator was not allowed to find themselves cancelling more than
1.5 per cent of their trains in any four-week period. In the event
they did cancel more than 1.5 per cent that meant they breached
what is called the "call-in level". That is simply the
level at which we can call in the operator and say, "Please
explain what has happened." In the event this happens three
times and they get three call-ins we have the right to call that
a breach and that is in fact what we did with South West Trains
a year ago. We monitor the performance of the train companies
every period to make sure that they actually deliver what they
are supposed to.
5. When it is deemed a breach what happens
then?
(Mr O'Brien) What happened then
was that we issued an enforcement order which we proposed to make
which said that if this was not rectified within the next four
weeks (during April 1997 in fact) we would then confirm the enforcement
order, levy a penalty of a million pounds and then take what other
action we felt was necessary to ensure the operator complied.
6. And what happened?
(Mr O'Brien) They complied. In that
four-week period the level of service that they ran was well within
the tolerances that they had to comply with. That was not the
only test they had to pass on. They also had to convince me that
it was unlikely to recur. What I did not want to find was that
we were in a position where for one four-week period there is
a snapshot where the operator meets the targets by doing whatever
they had to do and the next month it falls over again. So we had
to make sure there was a genuine solution in place. I formed the
view based on what evidence they gave me that there was and actually
that has been borne out by the facts. They have not been above
the call-in level since.
7. I am quite sure others will want to raise
some of these practical matters later on. I want to press on a
little bit. Why did you not act earlier to obtain independent
assurance of the integrity of performance information provided
by the train operators themselves? How did this failure to appreciate
a factor so significant for your independent regulation of the
industry come about?
(Mr O'Brien) The people providing
the information is in fact Railtrack directly through their train-running
system. What we did there was to put in place a multi-party audit
where all the people who had an interest in those systems agreed
the terms of reference to ensure that the information coming out
of those systems was such that it could be relied upon. We approached
an independent firm of accountants who conducted a risk assessment
study which identified two main areas where they suggested we
should ask them to target their work. That was towards the detection
of potential fraud and the error potentially inherent in the systems.
They produced a report, in fact it was 15 volumes long, which
looked at the adequacy of the train running system which with
some minor exceptions produced a conclusion that suggested we
could rely on it for reliable information.
8. Again we may come back to it. Paragraphs
24 and 29 of the Comptroller and Auditor General's Report refer
to the operation of OPRAF's compliance team. Do you consider that
an opportunity was missed to gain more robust assurance about
train operators' activities, given the lack of direct testing
of systems and operations in the compliance team's initial programme?
(Mr O'Brien) I do accept the fact
that it is important to have adequate assurance to enable me to
be able to say that the accounts are properly stated and that
is the view that I formed. For the reasons I said before on the
train running systems I did not believe at that stage it was necessary
to ask our own compliance team to do further work. However, we
are going to be embarking on another multi-party audit this year
to ensure that everything is as we hope it is.
9. When do you think you will have an adequate
level of independent assurance on performance information provided
by the train operating companies and Railtrack which the Comptroller
and Auditor General may take into account in forming his own opinion
on OPRAF's accounts?
(Mr O'Brien) First of all, I believe
that the information that we provided in terms of the accounts
up to March last year was sufficient that enabled the Auditor
General to be able to give us a clean audit opinion for that year.
I also want to make sure that I am able to say I am happy with
the accounts for this year. We are currently in discussions with
interested parties to set up the necessary review this year. We
have, of course, discussed that with the NAO and we would ensure
that that is completed before the NAO have to report on the accounts
for this year.
10. C&AG, I wonder if you can give us
a view for the benefit of the Committee as to your judgment of
the reliability of the compliance levels of these figures.
(Sir John Bourn) Chairman, the point
of concern to us was that the information necessary for the Franchising
Director to carry out his duties is information which is fundamentally
under the control of the providers of the services so it is the
people who are providing the services who provide the information
on the extent and quality and the Franchising Director relies
on that. In that sense he is relying on information provided by
those he regulates and we had a concern about this and I am glad
that the regulator reports that he is concerned about this and
is examining it and wants to discuss it with us. That is the fundamental
difficulty that we had found in the present arrangements.
11. Good. I want finally before opening
the questions up to the Committee to make one more point to you.
It relates to the difficulty of obtaining information in this
area. Do you accept that for Parliament to obtain a proper view
on the operating of franchising arrangements and OPRAF's performance,
particularly with regard to the propriety of payments made by
OPRAF, it is necessary for the Comptroller and Auditor General
to have access to systems and data by the train operating companies
and Railtrack?
(Mr O'Brien) From my perspective
we put together the franchise agreements in the light of what
the law is at the time and, as I understand it, the access that
the NAO has is to our own books and records and I believe we have
given full access to that and we are very happy about that. In
terms of going directly to the train companies I believe that
is something that should be addressed by Parliament if they wanted
to widen the remit of the NAO.
12. I asked for your opinion.
(Mr O'Brien) As a statutory officer
my job is to implement the law as it stands.
13. You have no judgment on that?
(Mr O'Brien) I am not expressing
a view.
Chairman: We will no doubt come to
that. Let's open it up. Mr Charles Wardle?
Mr Wardle
14. Mr O'Brien, you said that your job was
to see that the franchise operators do what they say they are
going to do.
(Mr O'Brien) Yes.
15. How do you really know that that is
the case? Are you not in the position of the gamekeeper who is
asking the poacher to provide the evidence of whether or not they
have been poaching?
(Mr O'Brien) It is certainly true
that they provide the evidence but we do not just take it at face
value. As I said before, we embarked during the course of the
year on a multi- party audit which involved all the people who
had an interest in this train running system. I think it is worth
pointing out that this train running information provides the
information that enables the train companies and Railtrack to
attribute faults for delays between themselves and, frankly, a
gain for one is going to be a cost to the other. There is a clear
commercial tension between them.
16. Between the franchisees as opposed to
Railtrack or anyone else?
(Mr O'Brien) No, between the franchise
operators and Railtrack. They have the job of ensuring they pick
up the least number of faults possible.
17. This is the independent review by the
firm of accountants. We will come back to that in a moment. From
the answer you have just given would it not be the case that if
one of the franchise operators or, heaven forbid, Railtrack got
a little smarter than the rest they could pull the wool over the
others' eyes and you would not know? You might not be charging
the right penalties or providing the right payment action.
(Mr O'Brien) I do not believe that
is the case.
18. Why not?
(Mr O'Brien) First of all, if one
were being smarter than the other what that would mean is that
one of the two parties is getting the other party to agree that
something which did not happen did happen or vice versa.
19. If they managed to persuade them by
fraudulent means, again heaven forfend but supposing they did,
surely it is not enough to say you as the umpire, you as the gamekeeper
are content that the taxpayer is not paying out a net amount more
than the taxpayer should? Surely you should also be concerned
that the system works equitably. What proof have you got? It seems
to me from the notes in the preface to the accounts from the C&AG
that you have to rely on your discretion an awful lot, or theoretically
you do?
(Mr O'Brien) I think what we have
to do is rely, as the C&AG said earlier on, on what type of
independent verification is available generally. In the same way
it is available to the C&AG it is available to me.
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