Supplementary memorandum by the Passenger
Transport Executive Group (RI 16A)
POTENTIAL RISKS AFFECTING THE FUTURE INVESTMENT
PLANS FOR THE UK RAIL NETWORK
1. The whole issue of investment and safety
in the rail industry has unfortunately been re-emphasised again
through the recent tragic events on the East Coast Main Line.
This, being the third major rail safety incident in as many years,
will inevitably significantly increase the focus on the safety
of, and investment in, the rail network.
Whilst it is not possible to quantify all the
potential impacts on investment in the network at this stage it
seems inevitable that such issues will become the subject of debate:
The impact of additional costs through
a greater focus on safety might divert resources away from network
enhancements/expansion to additional safety measures (eg Railtrack's
announcement on 19/10/00 that safety will take priority over punctuality
and cost reductions).
Possible changes in Government and
regulatory control over Railtrack through greater intervention.
Restructuring and reorganisation
of the industry.
2. The City has many expectations of Railtrack
and there are several issues that could affect its share price
and ability to fulfil the investment plans, key issues include:
The impact of additional regulation
and/or safety requirements and the impact on Railtrack's ability
to raise additional capital through a rights issue or additional
Being subject to a take-over due
to weakness in its share price.
3. The industry is embarking upon an extensive
rail investment programme which follows a lengthy hiatus in investment
in the years preceding and following the privatisation process
where a short-termism approach to investment became the norm.
As a result the industry has become accustomed to dealing with
significant levels of additional investment and may not be able
to easily cope with such a rapid increase in spending.
These fears were crystallised by recent events,
such as those in early October where in response to criticism
over the reductions in train performance and punctuality, etc,
during summer 2000, Railtrack attributed much of the decline in
train operating performance to the inability of the industry to
cope with a large increase in the level of investment activity.
Ensuring safety during this phase is, of course, paramount.
Consequently PTEG has concerns over the ability
of the rail industry to effectively carry out these large scale
investment plans, in terms of:
Disruption to existing services,
The ability to work within agreed
To the intended specification and
It is clearly of paramount importance that the
lessons learned from this initial experience of increased level
in investment are rapidly assimilated so that this does not recur.
PTEG is not confident however that this will be the case.
4. PTEG consider that it would be helpful,
and would give assurance and transparency over future rail investments,
if a comprehensive risk/sensitivity analysis were to be performed
and published on all aspects of the plans for future investment
in the rail industry. This would give all interested parties the
opportunity to contribute to the debate and for action plans to
be developed where appropriate.
5. The taxpayer, through taxation, is funding
the majority of the proposed improvements to the network. The
ability of public funds to meet this commitment will be dependent
to some degree on the general economic climate and ability of
the economy to sustain investment at the levels proposed.
6. The current re-franchising round also
carries its own set of inter-dependencies and risks that might
affect the ability of franchises to fulfil their franchise commitmentsthese
include mergers and take-overs between train operators and additional
7. Technical problems over the introduction
of new rolling stock such as those affecting the use of Eurostar
rolling stock on the UK network and approving new classes of rolling
stock, may also be important considerations.
8. The Rail Regulator has recognised that
"a great deal more work is needed" to address the under-investment
in the rail network that preceded rail privatisation and which
continued into the immediate post-privatisation years. Through
increased track access charges and additional public funding the
Regulator is seeking to redress this situation and Railtrack is
being given access to substantial additional funding to enable
it to improve the rail network.
In PTEG's opinion the key issues arising from
the Regulator's draft conclusions on Railtrack's Track Access
Charges affecting the success of future rail investment include:
A clear need for robust project management
processes on behalf of Railtrack and its contractors to ensure
that the various project milestones and deliverables are achieved.
PTEG therefore fully supports the Regulator's:
intention to establish detailed,
clear and unambiguous specifications against which the delivery
of Railtrack's investment performance will be measured; and
decision to demand improved information
from Railtrack via the publication of a supplement to the 2000
Network Management Statement.
9. PTEG, as stated in its previous evidence,
has concerns over the potential impact on rail investment of the
Regulator's various proposed changes to the basis of the Track
Access Charges including the introduction of, capacity charging,
incentive regime, etc and whether these will produce the intended
overall results. Whilst the aim of these changes is to reduce
the proportion of fixed charges PTEG is concerned over any potential
detrimental interaction of these changes which, although subject
to extensive modelling and consultation, have not been proven
in practice and could have adverse financial impacts that may
threaten rail investment.
The new regime is also subject to potential
uncertainties in the underlying assumptions that underpin the
new regulatory regime, these are subject to numerous inter-dependencies
and variations to these could also have a negative impact.
10. Specifically, the Regulator's conclusion
(at the behest of the shadow Strategic Rail Authority) that a
higher "societal value" of passengers' time should be
introduced into the calculation of performance penalties payable
between Railtrack and train operators under Schedule 8 of Track
Access Agreements could potentially impact adversely on future
investment in new service or service enhancements (including the
provision of new stations) in two respects.
In determining track access and train
operating charges for such new or enhanced services, Railtrack
and the train operating companies will factor in their additional
financial exposure as a consequence of the higher Schedule 8 valuations
they face. These costs will flow straight back to the service
sponsor, so increasing the affordability hurdle to be overcome
in justifying new or enhanced services. For example, under the
existing Schedule 8 regime, one PTE has been quoted annual performance
charges of £789,000 for a 50 per cent increase in frequency
over part of a route. The increase attributable to the higher
Schedule 8 rate has not yet been advised, but could well be sufficient
to prevent the scheme from proceeding, even though it would give
greatly needed additional capacity and would result in an overall
improvement in services by enabling complementary express and
stopping services to operate at regular intervals.
There is no correlation between the
"societal values" of time determined by sSRA and adopted
by the Rail Regulator, and those which are promulgated by the
Department of Environment, Transport and the Regions for the economic
appraisal of transport schemes. sSRA uses a range of societal
rates from 8.5p to 34p per passenger minute. The current version
of Highways Economics Note 2 gives a resource value of non-working
time (at 1994 values) of 315p per hour, or 5.25p per minute. The
same source values rail passengers' working time at 27p per minute,
again at 1994 prices. (In most passenger transport appraisals,
it is the non-working value of time which predominates, since
the majority of passenger trips are made by commuters or for social,
recreational, educational or shopping purposes.) This lack of
symmetry between the values of time used for railway performance
payments and in standard transport appraisal models could penalise
rail schemes in intermodal assessments. For example, a rail scheme
which justified itself in cost-benefit terms through time savings
to new and existing rail and highway users and through environmental
benefits from reduced road traffic could prove unaffordable because
of the higher values of time used in assessing potential delays
to existing rail passengers.
While the Regulator proposes that from 2002
a new capacity charge will take the place of the present negotiated
charge for service enhancements, the Schedule 8 rates will feed
into the calculation of specific capacity charges so that the
end consequence is likely to be similar.
11. The appetite of the Civil Engineering
industry for rail maintenance and investment work may diminish
in light of the ever increasing pressures on contractors margins
as a result of the need for Railtrack to achieve the Regulator's
projected efficiency savings.
This factor, together with the perceived high
risk nature of such work as a result of potential financial penalties
and costs of litigation that result from safety failures attributed
to rail contractors, could exacerbate this situation.
12. The proposed improvements/enhancements
are also subject to the impact of:
Delays in the approval process especially
planning delays, etc.
Technical delays or problems in construction.
Difficulties in estimating the costs
of projects, eg the significant variations in the estimated costs
of the West Coast Main Line Upgrade.
TRANSPORT 2020: THE
13. There is a lack of qualified engineers
with rail engineering experience which may inhibit the ability
of contractors to meet increased demand for rail investment. This
is a result of a lack of people entering the Civil Engineering
profession in the 1990's which is in turn a function of the lack
of investment in the rail network over the past decade and consequent
diminution in the skill base of rail-experienced engineers. Railtrack
and their contractors need to address this urgently to deliver
the required LTP programmes.
14. The hiatus in rail investment in the
pre and post privatisation years also resulted in a decline in
the development of rail engineering technologies with the consequent
effect that, each £ of investment is likely to be less effective
than if new and improved techniques and processes had been developed.
A related issue is the adoption of easy "cheap quick fixes"
at the expense of more expensive, but better overall value, options.
PTEG has previously signalled its anxieties over this approach
and, in particular, issues surrounding capacity problems in Greater
Manchester and increased track capacity between Coventry and Birmingham.
Whilst, in fairness, Railtrack has acknowledged these issues how
such major schemes will be funded remains problematic.
15. Unless the current short life of current
rail franchises is reversed by the sSRA TOC's will inevitably
adopt a short-termist attitude to investment. Although the indications
from the sSRA show that much longer franchises are likely (eg
20 years for the East Coast Main Line) this remains a potential
16. It is widely accepted that Civil Engineering
contracts are extremely complex and this complexity results in
a potential source of delays as a large amount of time is often
spent, pre and post contract acceptance, in negotiating contract
terms and conditions. This is particularly pertinent to major
projects such as the West Coast Upgrade.
17. To the extent that forecasts of predicted
future passenger growth, and consequently revenues, are found
to be inaccurate this may impinge on investment plans. The increased
frequency of major rail accidents could, for example, lead to
a general loss of faith in rail travel and the predicted increased
in passenger numbers may not materialise.
18. Current plans are, with the exception
of the CTRL, to regenerate the existing network instead of creating
new lines. This may not necessarily by the most cost effective
solution as there are inherent problems with both the quality
of the track and the quality of the route (eg additional tighter
curves and the proximity of built up areas which limits the maximum
Virgin Rail has tried to address this issue
by putting forward a proposed new 100 mile dedicated high-speed
line from Peterborough to York which would save half an hour on
the current journey time by increasing average speed to 200 mph
from 125 mph. This new line would also allow a "better"
train protection system to be designed compared to the alternative
of having to retrofit around an existing system. Other options
under discussion are the reopening of the Matlock-Buxton and Woodhead
routes over the Pennines.
19. The Government's aims to develop trams
and light rail transport may encounter difficulties if there were
major safety concerns or if predicted usage levels on new projects,
such as the Croydon project, did not materialise.
20. Over-emphasis on intercity investment
at the expense of commuter investment would be detrimental to
the Government's plans and the interests of the PTEs.
21. The partnerships that are anticipated
to help fund the implementation of the Transport Plans may fail
to materialise as expected and so detrimentally affect the extent
of implementation of the plans. PTEG has previously emphasised
the point that the Local Transport Plan is the vehicle for the
delivery of integrated transport and that major rail schemes,
in Metropolitan areas, should be funded through this vehicle in
consultation with the sSRA rather than being the exclusive preserve
of the sSRA which cannot because of its very nature take a "holistic"
view of the public transport needs of major Metropolitan areas.