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

Supplementary memorandum by the Association of Train Operating Companies (ATOC) (RI 17A)


  In the evidence that ATOC gave to the Select Committee in July we:

    —  pointed out that between 1966-67 and 1999-2000, the considerable increases in rail revenue which had occurred had been taken by the Treasury in the form of lower support payments to rail;

    —  welcomed the Railtrack Network Management Statement but warned of shortages of critical resources to deliver the programme;

    —  noted that Railtrack did not know the condition of its infrastructure;

    —  asked that the allocation of risk in the new replacement franchises should draw up best practice from PFI's and regulated industries;

    —  asked that there should be greater clarity from the SSRA on the franchise bids they wished to see;

    —  commended innovative ways of getting additional investment into the rail;

    —  commented that changes to the structure of track access charges by the Rail Regulator should not blunt the incentive that train operators have to attract additional customers and run more trains.

  Since then a good deal has happened, albeit rather more slowly in some cases than was envisaged during the summer:

    —  First, the Government has published its 10 year transport plan. This is a most welcome statement of the Government's commitment to a vision of integrated transport policy and to the need to ensure that the resources to deliver the vision will be available. The Treasury will stop taking additional passenger revenue in the form of lower support for the rail industry, and will instead plough it back into investment in rail.

    —  Secondly, the Rail Regulator has issued his final conclusions on the revenue requirements of Railtrack, and some aspects of track charges. Finance is now available to Railtrack to find enhancements repair and maintenance and safety. Railtrack will receive over £4 billion in grants from the SSRA over the next five years in addition to their revenue from track access.

    —  Thirdly, preferred bidders have been selected for two replacement rail franchises. M40 Trains are the preferred bidders for Chiltern, and Go Via are the preferred bidders for Connex South Central. The preferred bidder for the East Coast Main Line is expected shortly. The SSRA has also negotiated an extension to the Midland Main Line franchise. The creative approach shown by the SSRA in this negotiation is welcome.

  But there remain key aspects of policy which have not been completed. For example, we have yet to see a version of the franchise template agreement which is more recent than July, and we have yet to see the translation of the principles expressed in the Rail Regulator's Final Conclusions into track charges for train operators.


  The Government's ten-year plan has made available significant amounts of funding for rail. The first fruits of this are contained in the Rail Regulator's final conclusions. It should be noted however that the Regulator's settlement gives Railtrack around £800 million more than was included in his draft conclusions. These differences between the Regulator's draft conclusions and his final conclusions are a lower target for efficiency (3.6 per cent each year vs. 4.2 per cent); a higher rate of return on capital; and a higher regulated asset base. This additional expenditure is to be funded by additional grants from the SSRA to Railtrack.

  In aggregate there will be £8 billion of enhancements. This level of expenditure includes the following:

    —  over £800 million for safety related issues including stepping distances.

    —  £400 million for enhancements through the IOS programme.

  At the same time TOCS have shown their commitment to invest in rail through the franchise replacement programme. The Midland Main Line and the short listed bidders for Chiltern and South central have significant investment programmes.

  The money appears therefore to be in place. What is now needed is enough skilled resources to deliver the programme of infrastructure enhancements.


  In our evidence to the first part of the Committee's inquiry we expressed concern about the increase in the cost of additional train paths following the decision of the SSRA to double the final penalties associated with trains which are late. The reason that this feeds through into track charges is that more trains means more congestion, and more congestion means worsening punctuality; worsening punctuality means higher compensation payments by Railtrack which must be compensated for by higher track charges. If the value placed on punctuality doubles this has the effect of increasing the cost of train paths. It is the equivalent of a congestion tax on the rail network.

  We also objected to any revenue sharing arrangements between train companies and Railtrack, arguing that increasing Railtrack's incentive through revenue sharing, dilutes the incentive on TOCs.

  The Rail Regulator listened to what we said on both counts. We are pleased to say that he has in his final conclusions neutralised the adverse effect on track access variable charges, and also neutralised the effect of giving Railtrack a share in additional passenger revenue. Both decisions are most welcome and allow train operators to increase services without encountering artificially high track charges.

  The very high value that will be attached to punctuality in 2001 and beyond nonetheless remains. The incentives will be twice as large as they are today. Train companies acknowledge that incentives and penalties are important, but it would be wrong to automatically conclude that because punctuality is not improving as fast as everyone wishes that the right solution is to supercharge the incentives.

  The right approach depends on the proper diagnosis of the problem. The principal causes of poorer than hoped for punctuality is inadequate infrastructure to deal with the additional trains which now run; new trains arriving late which required old and unreliable trains to be retained; new trains not operating at sufficiently high levels of reliability; and more extreme weather. Doubling the financial incentives for punctuality is a roundabout way of curing any of these problems given the already high levels of penalties and rewards for punctuality.

  Train operators believe therefore that the new performance regime proposed by the SSRA should be pitched at a more sensible level.


  In the evidence that we gave in July we said that TOCs have too few rights and inadequate remedies if things go wrong in the Track Access Agreements between TOCs and Railtrack. The importance of good agreements has been highlighted by the consequences of the tragic incident at Hatfield.

  Discussions on the Model Track Access Agreements which are taking place under the aegis of the Rail Regulator are still underway, and we remain some way from a conclusion.


  Any industry accepts financial risk as a normal part of its activities. Train operators are no different from others in being willing to do this.

  Train operators are however different from many industries in having price regulation applied to much of its output (around 40 per cent of fares are regulated); and for being unable to reduce its output. They are also facing a monopolist—Railtrack—for the supply of track access, and the Strategic Rail Authority who requires commitment to investment and performance.

  All of this we accept. But in doing so we wish to see the allocation of risk being based on best practice from PFI contracts and from regulated utilities. While no other industry is an exact match for the passenger rail industry, transferable lessons have been learned in other contexts.

  With long franchises—which we welcome—the risks are multiplied. What we seek from the SSRA is an explanation of the criteria that they are applying to risk allocation, and an explanation of why the allocation of particular risks to each party accords with best practice. Such policy statements are available for PFI deals in general, and are regularly debated and decided upon by utility regulators.

  We believe that the SSRA should emulate best practice in this area and expose its thinking to public and industry scrutiny.


  Train operators and the rail industry generally are required to address four objectives:

    —  To run the rail network safely.

    —  To seek more passengers.

    —  To improve train performance, particularly but not exclusively punctuality.

    —  To enhance the rail network through investment.

  Questions have been raised as to whether some or any of these objectives are in conflict with one another, or whether there are any unintended consequences of policies which are being pursued which create conflicts.

  We do not believe that there are inherent long-term conflicts between these objectives. Investment will improve performance and safety. Better performance will attract more customers.

  As we have said above, the concern that we have on the size of the incentives associated with performance is not due to a concern that this will prejudice safety, but rather that it is disproportionate.


  In the Spring when the Select Committee started its inquiry it was reasonable to expect that by November the critical foundations of the rail industry would be complete. There would be a 10 year Government plan for transport; the Rail Regulator would have completed his periodic review and the associated strands of policy, and that the franchise proposition would be clear.

  The good news is that the financial resources are now largely in place. But there remains much to be done, particularly on the contractual relationship between TOCs and Railtrack, the incentive framework, and on risk allocation.

November 2000

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