Select Committee on Transport, Local Government and the Regions Minutes of Evidence

Examination of Witnesses (Question Number 157-183)




  157. Gentlemen, may I begin by saying I am very sorry you have had to wait so long. I hope you understand the session today has been a slightly different one than the one we envisaged in the first instance. Life is full of these interesting little stimuli! Can I ask you first to identify yourselves.
  (Mr Preston) Kieran Preston, Chairman of the Passenger Transport Executive Group and Director General of West Yorkshire PTE.
  (Mr Wicks) I am Roy Wicks, Director General of South Yorkshire PTE.

  158. Are you pleased that the Government is taking action in regard to the ownership and operation of the rail network?

  (Mr Preston) Yes we are indeed. We believe that the Secretary of State's action—intervention—is better for the industry generally. Any company that can pay out £100 million in dividends to its shareholders at a time when it makes a £300 million loss clearly has not got the interests of the passengers as its priority. I am not saying that is necessarily wrong but we believe a not-for-profit company or a company limited by guarantee would be better for the passengers.[1]

  159. What do you think of the developments that will follow these changes?
  (Mr Preston) Listening to previous witnesses, what is clear is that there is an opportunity to take a careful look at how the industry can be restructured. If you look at the functions of the Regulator, the functions of Railtrack and the functions of the SRA, between them they have something like 30 key functions. It seems absolutely essential that before incremental action takes place that they get together. Most big organisations would have, I do not know, an "away day", or several away days on "what is it we are trying to achieve?" We have moved from a regulated industry that was absolutely essential in regulate to a private sector monopoly. If you look at the regime the Regulator had to manage, it was an extremely complex regime that meant that not only did he have to ensure that Railtrack had sufficient money to maintain and renew the network, but he also had to make sure that access charges played a proper role in allocating the scarce resources (in our case) of the networks. That position has changed and whilst we accept that there is a role for a Regulator in terms of perhaps licensing and arbitration, there is an opportunity for a very different kind of railway structure. We do think it is essential that these key functions are carefully looked at.

Helen Jackson

  160. My guess is that the passenger transport executives would, quite rightly, welcome the Secretary of State's drawing a line in the sand on this, as I believe most of the passenger travelling public do. Would you agree that there is a haunting concern at the back of all our minds that the quality that we look for is not just going to come out of the nice visions but is going to come from the correct degree and application of additional resources? I am sure you do agree with that but what are the passenger transport executives going to do in this crucial transition time to ensure that the transition from one not very satisfactory body to the new body is not going to result in cut-price terms for new franchises and so on?
  (Mr Preston) We have very clear views that there need to be adequate levels of funding within the industry and we are concerned that there certainly needs to be more clarity about how much money is available. If you look at the £60 billion that is available, is that £30 billion public and £30 billion private, and to what extent is that money available for investment for example in PTE areas? It was touched on with Sir Alastair's last statement. We are concerned. We are key drivers of the United Kingdom economy outside London. If you look at key cities like Leeds, Manchester, Birmingham it is absolutely essential they are free to operate and be free from congestion. Local rail services make an enormous contribution to that. We are concerned at the very crude targets that have now emerged in the draft instructions and guidance. For example, an increase of 50 per cent in passenger kilometres clearly weights investment towards London and the South East and Inter-City routes. Of course they need investment, but if you look at the shorter journeys made in our kind of metropolitan areas they play an absolutely essential role in keeping our cities moving. We are very, very concerned that from the original range of targets in the ten-year plan to get down to the three targets that Sir Alastair talked about earlier is far too crude and is not going to enable the Government to ensure that it is getting best value for money for its investment.

  161. What are you as a group of executives doing to get some clarity about what is needed? And what is your view of where there is a gap in resources, region by region by region, as you see the present franchising pattern going. Certainly we get it in South Yorkshire with the franchisees GNER, Midland Mainline and Trans-Pennine, and the worry about all of them is that the resources are got going to be there to deliver exactly what we as a travelling public want. But the clarity, I suspect, has to come from you. What steps are you taking?
  (Mr Wicks) One of the things that we are trying to do is get the Government to look at the directions and guidance that it is issuing. It you looked at that and gave SRA different objectives—


  162. You have specified that to the Government, have you?
  (Mr Wicks) We have said to them we are very concerned, as Mr Preston has said, that by selecting three particular objectives from the ten-year plan they have ignored other ones relating to commuter trains.

  163. Is there any reason why you should not give us a short note?
  (Mr Wicks) We would love to give you a short note. The second thing in response to the question is obviously—choosing my words carefully—there is a political issue here. Clearly what we want to do is act in concert with all the authorities that might be similarly affected. Things that affect South Yorkshire also affect Merseyside. Lack of investment in Birmingham, Leeds, Sheffield and Manchester is something that draws all of those authorities together and I am sure the Local Government Association, the PTAs and the MPs are increasingly concerned. What was not apparent in the first instance is that what started out as three objectives is now a combination of those three objectives and a lack of clarity on funding. As Sir Alastair said, you cannot do nothing, but you cannot even aspire to do the minimum.

Mr Stevenson

  164. Could I ask a quick question about the future shape of the industry. It is a general question, not specific to PTAs, but I would welcome your views as experts in the industry. You say you welcome the Secretary of State's action after the demise of Railtrack. We have heard from the Chair of the SRA, Sir Alastair Morton, that he believes that a large section of the Rail Regulator's responsibility on performance and access payments would be better placed with the SRA. What worries many of us is the issue of the fragmentation in the industry which has always been of concern. If I understand what is coming out now correctly, we could be faced with a replacement situation where we have a private monopoly Railtrack with double figures special purpose vehicles, five or six regional companies, and I am just wondering—and I really would welcome your views as professionals—how that is going to help the blight of fragmentation that has been applied to the industry for the last ten years.
  (Mr Preston) To give an example on that last point on the six regional "Newtracks". It does strike me as adding to the fragmentation. For example, I am not quite sure what a trial in ScotRail would demonstrate because you have got this degree of homogeneity , this one-to-one relationship and it would be more difficult to try and make something work in an area like West Yorkshire with five train operating companies each staking their claim. It would take quite a complex set of arrangements to make it work. It would be extremely complicated. You would certainly need very long-term franchises for it to be worth that effort, in my view. I can see how Newtrack can get on with operating and maintaining and renewing the railway. I think that could work. I think the SRA perhaps can take over most of the functions of the Regulator.

  165. Is not the reality in what we are facing here when we get down to it, putting all the politics to one side, that there is a clear logic that the infrastructure of our railways should be primarily the responsibility of the public sector and the operation of our trains should be the responsibility of the private sector? In your view, are we moving towards that sort of logic?
  (Mr Preston) I think we are moving to that kind of infrastructure, that kind of arrangement. We are bedevilled by the PSBR arrangements. They are a uniquely British institution. If you look at the lengths we have to go to gear in private sector funds, PTEs are well-used to this kind of arrangement because most of us are procuring light rail schemes so we understand how that works, off balance sheet deals. That is an important part of the issue. How do you gear in private sector funding? Otherwise I do not think my colleagues would hesitate to say a public corporation managing the infrastructure, managing the strategic direction, and with direction from government would be the most appropriate way forward.

Chris Grayling

  166. Can I start by just taking you back to your comments about Railtrack at the start and profit for shareholders. Given the relatively small amount of money that ended up going out Railtrack as dividend payments by comparison with the capital requirements of network, can you give me a sense of why you think a not for profit company would be better placed to make the investment that is necessary in the network?
  (Mr Preston) I think it is about culture at the end of the day and an organisation being geared to deliver. Our organisations are geared to deliver for the passenger. Even now Railtrack and its lawyers and advisers are concerned with protecting the interests of its shareholders. It is not concerned with, for example, the transfer of its rights and responsibilities and ensuring that happens in the most efficient way possible; it is concerned with its shareholders. Again, as I said at the beginning, I am not saying that is wrong, I just do not think it is best for passengers and any leakage out of the system, £300 million in three years for dividend payments for example, is £300 million that could have been invested in new trains in West Yorkshire or Newtrack in West Yorkshire.

  167. Could I touch on a couple of technical points. I noticed in the audience earlier when I was referring to the issue of retaining technical expertise in the TOCs, you were nodding behind the civil servant who was scratching his head. Can you say a little about your perspective on that problem.
  (Mr Preston) In both our regions we have experienced significant problems in getting services delivered by Arriva trains. They themselves are the subject of a two-year franchise extension and it is our belief that that degree of uncertainly significantly impacts on a whole range of staff and how they see their future prospects with that company. Arriva have never been able to achieve a full establishment of drivers. They are three figures away. We are experiencing ten per cent cancellations every single day.

  Andrew Bennett: They are the worst payers.


  168. It is not unconnected with the terms and conditions?
  (Mr Preston) I think, Chairman, you are quite right, £23,000 salary compared to £33,000 for a longer route kind of driver is an issue. If you are retaining the people who understand the business and can make best use of scarce resources, that is a key issue and those kinds of people, I believe, have been affected by the short-termism approach to franchising in our part of the world.

Chris Grayling

  169. Given that, does that rule out vertical integration as an option for the industry, in the sense that the expertise does not exist within the train operating companies to manage the infrastructure, it is not there to deal with what they have today? Is it not inconceivable that one of the options open to the Government could be vertical integration given the staff situation?
  (Mr Preston) I suspect it may vary from region to region to some extent. The massive problem I see with vertical integration is sorting out equity and Virgin giving preference to GNER, if they were managing a bit of the network, or GNER giving preference to Trans-Pennine if they were managing a bit of the network. I think that is a very real problem. I also think the train operating companies would be very reluctant indeed to accept responsibility for the network and the liabilities associated with it.

  170. Lastly can I ask you about SPVs. One of my anxieties is that SPVs are being seen as a solution to relatively small investment support. What is your perspective on SPVs as a vehicle to deliver the investment that you are talking about needing in your own particular areas?
  (Mr Preston) We think they can work. There needs to be absolute clarity about the funding available from the public sector purse. I would very much like to understand in relation to private sector funding how the £34 billion figure was determined in the past and how the current presumption of £30 billion is determined. I wonder if there is not to some extent there is some double counting. Private sector SPVs will bring innovation, ability and expertise to the party. That is very welcome but they also need to know that they are going to get paid.

  Chairman: None of us imagine they are going to go into it if they are not going to get paid. Mr Grayling, was there anything else? Mr Donohoe?

Mr Donohoe

  171. How confident are you that, given the events of 7 October, you have a future?
  (Mr Wicks) I am confident because I think the Passenger Transport Authorities do provide a vital function. They look across the conurbation rather than across one part of the conurbation and recognise that travel and is not confined by boundaries. We have a record of achievement and I think, in particular, certainly in South Yorkshire and I think in most of the other Passenger Transport Authority areas, are taking on a wider role as we grapple with some of the issues in our areas. After all, we are not there dealing with transport for the sake of the service, we are there to achieve the wider social, economic and environmental aims.

  172. Do you see any merit in there being an enlargement of that role? After all, the Government suggests it has a strategic transport policy which attempts to embrace some of the elements where you have the responsibility.
  (Mr Wicks) I think there is a debate to be had particularly about the Government's regional policy and about how the Passenger Transport Authority areas align in the same regional areas with each other. In our case we are in one region but we have two Passenger Transport Authority areas, in Glasgow or Birmingham you have one. That is certainly an issue. I certainly think the Government is looking at Passenger Transport Authorities in other areas. The Welsh Assembly is certainly actively looking at that in Wales.

  173. Is it not an opportune moment, given the events of recent weeks, for you to be making representations to Government? Have you done that at this stage?
  (Mr Wicks) We are cautious about encouraging the Government to set up more PTAs. What we are encouraging the Government to do is use the PTAs that exist to the full. If we go on to how we take franchising forward we are very keen that we will have business units within those franchises and those business units will have a degree of autonomy in those franchises perhaps outside their geographic area.


  174. Are saying "we are the good guys, we know we are doing, but do not set up any more"?
  (Mr Wicks) I am not saying do not set up any more. I am saying be a bit careful about saying they would be the right solution for other areas. It is an issue of self-determination

Mr Donohoe

  175. If you take Scotland as an example and the Strathclyde Passenger Transport Executive, if that were part of this proposal that seems to be gathering a lot of pace that we should have this vertical integration, and if you were to say Strathclyde Passenger Transport Executive should be extended to the whole of the ScotRail responsibilities, would that make sense?
  (Mr Wicks) On a personal view, I think Passenger Transport Authority areas have got to relate to a coherent area and I would have thought that one single PTA area across the whole of Scotland might be too big. You might want a separate one to cover the Edinburgh region. Whether you would want any more than that is probably unlikely. I am not saying they should expand to a massive area, they have got to expand to the appropriate area over which you have logical travel-to-work patterns and coherent economic and social units.

  176. Do you expect the private sector to meet its share of private investment as expected in the ten-year plan.
  (Mr Wicks) I have two views on that. Certainly if we persist with short-term franchise extensions we will not optimise the private sector investment we could get from the train operating companies. I have been surprised by the extent to which you can still pick up interest from some of the larger private sector interests who do believe there is sufficient interest in transport generally to want to be actively involved. So I think you can get the two on the same course if you give investors confidence that there is commitment to long-term investment in the railway. By addressing the franchising issue so you maximise it because most of the train operating companies are very big groups these days and if you can maximise their enthusiasm and enhancement you could get interest back. Certainly there are those around, for instance the CBI, who still believe that most of that money is still available if we can get the conditions and economy right.

  177. So you do accept that the money that is going to be required through the ten-year plan of £30 billion is achievable from the private sector against the background of the events of 7th October? You expect that to be possible? Can you tell us how you see the additional funding being raised in these circumstances?
  (Mr Wicks) I think it is possible if you do other things as well. If things stay as they are with uncertainties, fragmentation, short-term extension, you will not. If you can change some of those you will. I think it comes down to two main factors. One of your colleagues referred to the amount of money companies have sunk into abortive bids. There is a total lack of confidence in the train operating companies about investing in franchises and somehow you have got to bring them back into the fold and then you will have access to substantial funds. They will invest in rolling stock, probably contrary to what was said earlier outside the ROSCOs. Most of the train operating companies are interested in taking control of the trains themselves and in that way, as Mr Preston has said, you can start to get some of the SPVs to deal with some of the major investment which is needed which will bring other private sector investment in. There is massive public sector investment that has got to go on alongside.

Mrs Ellman

  178. What should the role of the Strategic Rail Authority be?
  (Mr Wicks) At this particular moment, leadership. Certainly we would say that there ought to be one body giving strategic direction to rail in this country and there should not be two, so between the SRA and government they have got to resolve it. They both have a role but they have got to resolve their roles. I share Sir Alastair's views that the SRA must be allowed to get on with job with the normal checks and balances in there. I think that role is investment and development of the network.
  (Mr Preston) I really do think, going back to the kind of rough and ready targets I talked about previously, there is a key role for the SRA to identify the priorities for investment on the network. As somebody said, I do not think there will be more than a dozen or so major infrastructure projects. If you look at the kind of projects that need to be developed, it is essential that costs and benefits are probably evaluated by the SRA with key priorities established because then the market-place can take a look at what is available and if you have a proper model determined for the SPVs, eg Design, Build, Finance and Transfer, clear models, clear signals about where the risk transfer will lie, then I think there is a genuine opportunity for the SRA to deliver that leadership role and also, as Mr Donohoe was enquiring, to attract the kind of private sector investment that we know we need.

  179. Who should be responsible for ensuring those private sector needs are delivered?
  (Mr Preston) That clearly has to be the SRA. That is the direction the Government seemed to wish the Strategic Rail Authority to take. They have to take that leadership role. They have to set out the picture of what they want to see delivered and they have to make sure that it is delivered.[2]

Andrew Bennett

  180. You heard Sir Alastair claiming credit for winding you up about resources for PTA areas. I thought you had been wound up for the last ten years virtually! What are you doing to make this a bit more effective? It seems that you always have second best both in the Government's proposals and in the allocation of resources.
  (Mr Wicks) I did part answer this to Helen Jackson earlier. It is an issue because I think we did feel, to be fair (and we are wound up often) 18 months/ two years ago that things were different. We saw the prospect of a 20-year Trans-Pennine franchise, and the commitment to 15- to 20-year franchises for Northern, Central Trains and Strathclyde, which are areas we represent. It appears we have won the battle but not the war, and we have got to go back and start to win the argument again. That comes back to one simple point. We have got to win the argument about what is the benefit of public investment in the railways in this country? If we do not demonstrate that the Treasury, the DEAR and the SRA are getting value-for-money investment in conurbations, we will not get the investment in the rail network.

  181. I understand that the Strategic Rail Authority did a survey about travel needs in Greater Birmingham and that was quite successful and came up with a set of recommendations. A rather watered down version was done for Manchester, and I understand that the process has now been stopped on the advice of the Treasury. Does this mean we are not going to look at the conurbations' strategic needs?
  (Mr Wicks) I think that is true. There are two problems. I understand in Birmingham that the first phase of the work has been funded, but the work has now stopped and there is no clarity on how Manchester will go forward. Alongside that, the Government does have a problem in that it has taken on board a lot of multi-modal studies across most of the conurbations which are coming back with 10 or 20-year strategies about which we are quite concerned because they are certainly not built into Government and SRA plans. They are now recommending that to solve a lot of the problems on the motorway network in those conurbations you need to invest in the rail network. I think that will put this issue very much back on the Government's agenda.

  182. Last week you were upset because Arriva only got a short extension to the franchise. Was that not good news because they have proved they cannot hack it, so there is very little chance of them fulfilling a long-term franchise.
  (Mr Preston) I do not think we were upset they got a short- term extension. We very much hoped that we would get a replacement to the franchise. I think the SRA is very upset because for the amount of money they put into the franchise they have not seen the results delivered. What we are anxious to a avoid is another short-term extension. We want the long-term confidence of working with a partner who wants to invest in those services.

  183. Should not the Rail Regulator be getting most of that money back from Arriva because of poor performance?
  (Mr Wicks) The Treasury may well get a fair share of that money back but most of it will go to the SRA rather than the Rail Regulator because it will either go in fines or in penalties imposed upon them. At present not all those are retained within the SRA, some of the are, and some of them can get back to the Treasury.

  Chairman: That is the point which you are making quite strongly to the Government. Thank you both very much. You have been very tolerant. I am sorry we made you wait.

1   Note by witness: The Group welcome the Secretary of State's approach regarding industry representation on the Board of the new company. PTAs/PTEs play a key role in delivering Government's objectives, such as economic regeneration, social inclusion and sustainable development in Metropolitan areas. We apply and co-ordinate transport provision for more than 12 million people and we are determined to deliver best value for the investment made by Government. We would very much like to play a part in this new company helping to insure it truly focuses on passengers and delivering the Government's Rail Agenda. Back

2   Note by witness: Whilst it is essential that the SRA take the lead through SPVs on major infrastructure investment this must take place outside of franchise agreements. Franchises would focus on operational matters. There would be some investment, for example station enhancements and indeed in rolling stock. However, short-term franchises would not facilitate even this level of investment by the franchisee and the SRA would either need to under-write any significant investment or ensure more realistic periods for franchises, at least seven years, to enable pay-back on any investment made by the franchisee. Back

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