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
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
|Summer 2000||Summer 1999
(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|
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
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,
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
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
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 clearand for some of our members it is not sufficiently
clearbidders 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
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:
output specification 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.
GOVERNMENT 10 YEAR
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.