Select Committee on Environment, Transport and Regional Affairs Appendices to the Minutes of Evidence

Memorandum by the Association of Train Operating Companies (ATOC)(RI 17)


  The Association of Train Operating Companies ("ATOC") acts as a trade association for the passenger railway industry and also manages various activities where franchised train operators act in concert (eg through-ticketing, revenue allocation, the National Rail Enquiry Service and a range of "network benefits", such as railcards).

  ATOC is pleased to have the opportunity to express its views on rail investment to the Transport Sub-Committee of the House of Commons Environment, Transport and Regional Affairs Committee. This response reflects the collective views of ATOC and its members. Some members may make additional responses of their own.


  Rail travel in Britain has seen unprecedented growth over the past five years. Passenger numbers are now higher than at any time since 1947. Since 1995 passenger numbers have grown by nearly 30 per cent.

  ATOC and Railtrack jointly forecast that rail travel will grow by a further 50 per cent by 2010. This will mean that between 1995 and 2010, passenger numbers will have doubled.

  Train miles have also increased by 16 per cent between 1995 and 2000. This is partly in response to this higher demand, and partly as a consequence of innovative marketing schemes to tap new markets.

  The table below shows the disaggregation of this growth between different types of train operator. The growth in services on Inter-city and Inter-urban routes is particularly marked.

Summer 2000Summer 1999 % Change
Summer 1995 % Change
Inter-City123,361121,245 +1.796,999+27.2
Inter-Urban206,196202,545 +1.8169,589+21.6
London Commuting268,114 264,858+1.2243,095 +10.3
Rural Services67,09766,149 +1.462,050+8.1
Non-London Urban139,127 135,486+2.7120,959 +15.0
TOTAL804,506790,263 +1.8692,692+16.1

  (Train miles on a typical weekday).

  At the same time the level of Government support to the rail industry has fallen by nearly £800m. Indeed, as the table below shows, the increases in passenger revenue which have come from increased patronage, has been entirely passed back to the Treasury through lower support payment.
Farebox Revenue (£m) Government Support (£m)Total Income
1996-972,5672,100 4,667
1997-982,8211,804 4,625
1998-993,0891,533 4,622
1999-20003,3781,342 4,720

  The combination of passenger growth; increased train services; little investment in new capacity; and revenue increases being taken by the Treasury, is at the heart of the investment and funding challenge currently facing the industry.


  The Report by the Comptroller and Auditor General on "Ensuring that Railtrack maintain and renew the rail network", provides an excellent overview of Railtrack's performance since privatisation.

  While not the only source of problems, the decline in track condition between 1994 and 1996 (when Railtrack was privatised) has led to a continual backlog of repair work which in turn has affected train service quality. Growing traffic volume has also increased maintenance requirements. Track condition is not expected to be restored to the 1994 level (90 per cent satisfactory or better) until April 2001, and this does not vouchsafe further improvements in track condition in future years.

  Railtrack acknowledge that it still does not know fully the condition of its structures, bridges, tunnels, stations and signalling equipment. In some cases this leads to large increases in scheme costs for investment, and has directly led to some delays and extra costs for TOCs in introducing new trains into service (examples needed, eg route gauging problems, cost variations).

  The welcome 10-year investment programme in the 2000 Network Management Statement, nominally costed at £52 billion, is an aspiration, not a guaranteed deliverable. The actual investment programme will continue to evolve, with financial inputs across the public and private sectors, but there will need to be greater certainty from Railtrack and its contractors about the availability of specialised staff and equipment resources to ensure timely and cost-effective delivery of the committed schemes. Processes must be established to ensure that major investment schemes do not "collide" in demanding resources simultaneously, or that lesser but equally important schemes for regions run the risk of deferral. Resourcing of projects is likely to be a key planning matter if the railway renaissance is to be delivered. In reality availability of specialised staff may be a critical limiting factor (eg signalling engineers who have TPWS installation as a top priority). Resourcing limits may be compounded where Railtrack does not fully know the condition of its assets.


  The Rail Regulator has a key role to play in developing the rail network. His principal contributions should be to:

    —  refine the track access charging structure, to:

    —  create certainty for the whole rail industry on the cost of track charges for the new investment cycle;

    —  shift traffic from road to rail through appropriate charging structures;

    —  create TOC interest in service innovation and service enhancements where capacity exists, through track access marginal charging arrangements;

    —  create greater private sector investment in necessary additional infrastructure capacity;

    —  work with the Health & Safety Executive and DETR, to secure:

    —  a joint and consistent approach with HSE to licensing rail safety standards across the industry;

    —  expert advice, in order to be able to inform the HSE to licensing rail safety standards across the industry;

    —  expert advice, in order to be able to inform the HSE and DETR about the additional costs that may need to be reflected in modified track access charges, if substantive additional safety investment were recommended following inquiries and investigations;

    —  tighten its supervisory function over Railtrack, to achieve strong and timely progress simultaneously on future developments and on management of the existing infrastructure, including:

    —  improvement of infrastructure asset health, against its licence commitment to maintain the asset base, embracing better-defined target setting, efficiency comparisons with other railways, performance monitoring, and penalties for poor performance;

    —  reviewing fair bases for TOC reimbursement where Railtrack causes TOCs to fail on their service delivery standards;

    —  monitoring closely Railtrack's delivery of its committed investment programme.


  There are two areas in the Rail Regulator's review of track access charges that ATOC wishes to bring to the attention of the Committee.

  The first is the terms of track access contract between a train operating company and Railtrack. The current track access agreements contain too few rights for train operators and too few obligations on Railtrack. TOCs must have a reasonable degree of assurance that they can expect and demand from Railtrack what should be available to them from a supplier of network services and be compensated if those things are not delivered.

  ATOC have provided extensive evidence to the Rail Regulator on this issue, and the Rail Regulator is due to publish his provisional conclusions on model clauses for track access later in June. This evidence is set out on the Rail Regulator's web-site.

  The second major area of concern is the structure of access charges. This covers the division of access charges between fixed charges, which do not change with volume, and variable charges which do. Currently charges are about 90 per cent fixed and 10 per cent variable. Under the Rail Regulator's latest proposals there would be a significant shift toward increased variable costs.

  This shift, combined with the additional value that is being placed on punctuality in the franchise replacement process, creates a concern that the current incentive on TOCs to seek more passengers and to run more trains will be blunted.

  ATOC has urged the Rail Regulator and the sSRA to avoid the inadvertent creation of perverse incentives.


  ATOC welcomes the franchise replacement process. The new franchises which are being offered will enable train operators to invest in enhancement capacity to meet the expected growth in demand for rail, and in improving standards of service to passengers.

  The sSRA has decided to award new franchises on a competitive basis, and our members are actively competing with one another and with potential new entrants to the industry to win new franchises. Bidders have been encouraged to be innovative.

  The criteria which the sSRA will use to judge bids has been made available to bidders, and published in the sSRA's recent guide to franchise replacement.

  What is welcome is the move away from "least cost bids win" which characterised much of the first round franchise awards in 1995 and 1996 and the sSRAs commitment to quality of service.

  Bids are however very expensive to mount. One of our members have already spent approaching £2 million to mount a bid. The challenge for train companies when bidding is to know what type of offer the sSRA are seeking and are able to afford. Unless this is clear—and for some of our members it is not sufficiently clear—bidders will become discouraged. While ATOC recognises that the process must to a degree be iterative, ATOC asks for early and clear statements of the business propositions the sSRA are seeking.


  ATOC and its members welcome the sSRA's wish to involve train operators in investment in infrastructure.

  The Special Purpose Vehicles (SPV's) proposed by the sSRA offer two big advantages:

    —   First, SPVs broaden the base for investment in the railways. Over the next 10 years, huge investments will be required. Railtrack is unlikely to be big enough to finance and build all of this new infrastructure.

    —  Secondly, SPV's offer the prospects of better value for money in that they introduce competition.

  Railtrack nevertheless has a significant advantage in being a regulated utility. As such, the Rail Regulator has a statutory obligation to ensure that they are able to finance their activities. The Regulator discharges this by establishing rules by which investment enters what is called the regulated asset base (the RAB), and then permitting Railtrack to earn a more or less guaranteed return on this investment. This makes the cost of raising equity and borrowing by Railtrack relatively inexpensive.

  If train companies and other parties are to become a real alternative to Railtrack in the financing and construction of infrastructure, consideration should be given to making comparable benefits available to them.

  The allocation of risk between train companies and the sSRA must also be considered if the best value for money is to be achieved. These risks divide into:

    —  cost estimation;

    —  construction risk;

    —  delivery risk;

    —  demand risk;

    —  output specification risk.

    —  end of period risk

  There is considerable experience of the advantages and disadvantages of allocating these risks to the various parties through experience of PFI's and regulated utilities. It is important that the allocation of risks envisaged by the sSRA draws appropriately on this experience.


  The Government's 10 year plan for transport is eagerly awaited by ATOC. ATOC believes that the quantity and quality of transport infrastructure must be improved if the economic growth is to be sustained, and if reasonable expectations for personal mobility are to be realised.

  To date growth in passenger numbers has been achieved with fixed network capacity. This capacity has now in many critical areas been exhausted.

  At the same time quality standards are being improved by the sSRA through the franchise replacement process, and fare levels are regulated on commuter flows.

  In the light of this, ATOC has undertaken an analysis of the scope for paying for the investment required to meet additional demand from farebox revenue and from efficiency. A good deal depends, of course, on the bids received as a part of the franchise replacement process. Our calculations suggest however that even with strong revenue growth, aggregate sSRA support must return to earlier levels of up to £2 billion a year.

June 2000

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