Examination of Witnesses (Questions 260-280)|
WEDNESDAY 24 OCTOBER 2001
260. National Express, on Monday, announced
to the market-place that they were issuing a profit warning; what
happened to the shares?
(Mr Brown) Our shares, I am sorry to say, dropped
very substantially, in line with the reduction in profits we were
261. Given that fact, and given that you have
an interest in ScotRail, and there is a fairly strong proposal
on the question of vertical integration, does your company think
it can play a part in that?
(Mr Brown) If we are asked to, we will certainly be
very happy to play a part. We have been looking at ScotRail to
see what would be involved in vertical integration; we do believe
there would be operational benefits and benefits in terms of the
service to passengers. Clearly, the recent events at Railtrack
underline the importance, before we were able to commit our investors'
money to this, to understand, as Mr Ludeman says, the risks, the
liabilities, the responsibilities, that we would be taking on;
and we would envisage taking a lease on the infrastructure from
whatever the successor body to Railtrack is, we would not wish
to take over ownership, and obligations to maintain the network
to whatever standards they chose to set. But we would need to
understand in detail the condition of the infrastructure before
we could make any commitment.
262. Who would you prefer to be the funding
authority; would you want that money to go through the Scottish
Parliament, or would you want that money to come directly from
whatever the successor is to the STE?
(Mr Brown) I think we would envisage the funds coming
from two principal sources. ScotRail is currently grant-funded
through the Scottish Executive, and therefore the Scottish Parliament;
we would envisage that continuing, unless the Scottish Parliament
wished to change that, of course. But the other train operators
in Scotland, GNER/Virgin and, most importantly, EWS, pay access
charges to Railtrack in Scotland, and one would envisage they
would continue to pay access charges to either the new Railtrack
company or direct to the vertically-integrated operator. And,
of course, some of their funds would come from the SRA funding,
but most of them from real passengers and real freight customers.
263. Do you not see dangers in that, in that
it is a further stage in the bureaucracy and it is almost a fragmentation
on the Government side?
(Mr Brown) This was certainly one of the issues that
we have been looking at, in our look at how vertical integration
might work. Already, Railtrack has a detailed commercial relationship
with those companies and we would see that relationship merely
transferring across to a new, vertically-integrated body. What
gets eliminated is a very extensive interface between the current
train company and the Railtrack zone, which are co-terminus, and
both have management teams covering the whole of Scotland; and
there is clearly some duplication of effort there, which we believe
would be better directed potentially to looking after passengers.
264. There is also another source of money,
and that is the Passenger Transport Executive in Strathclyde.
Do you think it should continue to have a role?
(Mr Brown) I am sorry, I forgot to mention the money
that comes, because, of course, it is actually funded also by
the Scottish Executive; yes, we do believe they should have a
role, we have a good relationship with them. I think they have
an excellent understanding of the network in Strathclyde, and
if we were asked we believe that they should continue to have
that role for the Strathclyde services.
Chairman: You are quite tolerant about where
the money comes from as long as it comes.
265. Can I ask the witnesses, do you accept
that there are differences in the ability of different Train Operating
Companies to deliver on a short-term franchise?
(Mr Brown) I would certainly accept that there are
considerable differences between the circumstances of different
franchises; the current state of, are they very busy and experiencing
a lot of growth and needing more capacity, and what sort of capacity
do they need, and, therefore, what you do in different franchises,
will vary. And we were never comfortable with the `all franchises
need to be replaced by 20-year franchises' procedure, because
we did not think that was appropriate in every case and would
take too long.
(Mr Ludeman) I think, if I may add to that, it depends
on the individual circumstances, as my colleague has said, and
your question was the ability of Train Operating Companies in
delivering short franchise extensions. The question really is,
what can you do in two years, and, inevitably, it is a menu of
rolling-stock, stations, maybe car parking, staff, initiatives
to improve the service, and that investment is again reliant on
Government support, because who is going to fund a railway carriage
that costs nearly a million pounds with only two years to amortise
that investment over, and the Section 54, part of the 1993 Railways
Act, does allow that risk to be passed on, via the SRA, to future
potential franchisees. So each company has the ability, with the
assistance of Government, in implementing two-year extensions.
266. Can I just look at the area I know best,
and that is North Yorkshire. Arriva Northern Spirit had its franchise
extended for a further two years in February of this year; since
that time, I think it is generally recognised that the service
has deteriorated, and it is not the issues that Mr Ludeman referred
to, Chairman, it is simple things like not having enough train
drivers, and that is causing great concern to the passengers.
If you compare that with GNER, who actually we learned last week,
when we took evidence, Madam Chairman, that they were recommended
by the SRA for a 20-year increase, they got two years, they are
going to find it immensely difficult to get the return on their
investment for the rolling-stock they require?
(Mr Ludeman) I cannot comment for those two companies,
but I can make an observation. I suspect any additional rolling-stock
was dealt with through the Section 54 arrangement, which passes
on those trains to any future franchisee; and the issue of driver
shortages, in a company like Arriva Northern, which is a local
commuting operation where the drivers do not find it particularly
sexy to drive small commuter trains, stopping at every station,
even being occasionally assaulted by passengers.
267. I can assure you we are not like that in
the north of England.
(Mr Ludeman) It happens all over the country, regrettably;
and the attraction of driving a fast, glamorous train, where you
are locked away in the front, is a very different job. And so,
unfortunately, companies that are at the bottom of that ladder
are in a consistent process of losing staff. We have the same
problem in London.
Chairman: We will probably want to ask you,
very briefly, about regulation.
268. Two-year franchise extensions. One of the
comments that have been suggested to me is that you are going
to have great difficulty holding on to technical staff over the
two-year period, because they can get much longer-term or secure
jobs elsewhere in the industry. And also, on the question of investment,
Section 54 has only been used three times, to the best of my understanding.
So can you say to us, categorically, that two-year franchises
will not mean a two-year delay to the necessary investment and
improvement and service contracts?
(Mr Brown) First of all, the question about staff;
the staff employed by a train company are always expected to transfer
to the new franchisee, as and when a new franchisee comes along.
So job security for staff in the franchises is, genuinely, generally
not an issue; and certainly for a group of our size, even if it
were, there would be the opportunity to offer job opportunities
in other franchises. So we really do not see that as a problem.
Your other question; we would not see a two-year extension as
being appropriate on all routes, and if it meant delaying investment,
particularly major investment in infrastructure, then it would
not be appropriate. But, looking at a lot of franchises, there
is not yet a clear long-term investment strategy. If you take
our Silverlink franchise, for instance, it is not yet clear what
will happen on the West Coast, but the trains are getting very
busy, we have a problem with overcrowding, and we have put in
a proposal to extend the franchise by two years, in order, quite
frankly, to buy time whilst the longer-term strategy has become
clear, but also we have designed it in such a way that we believe
it will be absolutely complementary to any long-term investment;
lengthening platforms and buying more trains is hardly likely
to sort of close off any longer-term investment opportunities.
269. Will you be able, in those two years then,
to buy the trains that you need with the overcrowding?
(Mr Brown) Providing that we are able to get ahead
with an extension quickly, because the current franchise expires
in 2004; if we ordered the trains next year, and we would need
to have an extension this year to do that because of the timescales,
they would only just start arriving in late 2004. So we need to
get on with it, or one needs more than two years, but we would
prefer to get on with it because we have a problem carrying our
passengers and providing enough capacity currently.
270. Have you been given undertakings that Section
54 will apply?
(Mr Brown) We have been given no undertakings, and
we have not been given a green light that that franchise extension
will proceed; we have merely put in proposals. Our proposals do
include the need for some Section 54 directions, for very similar
reasons it existed on Midland Mainline, for instance.
271. Mr Ludeman, if you agree with that, do
you want to add anything?
(Mr Ludeman) If I may, Madam Chair, a couple of points.
Section 54 has not only been used for rolling-stock, we are about
to use it for some depot enhancements in South Central; so there
is another example. The issue about investment; in track, they
are unlikely to attract a Section 54 undertaking, and what we
need to invest in the track for is to deliver a more robust infrastructure
that drives more reliable timetables and delivers us a more reliable
service to customers, that is the absolute fundamental key for
this business for the future. We have got to spend money on the
track to make it more reliable, and we have also got to spend
money on the track to grow the capacity of it so we can run more
trains; but that will not be dealt with by two-year extensions,
that is where we do need longer periods of time, because it takes
a lot longer than two years to plan and implement that sort of
272. Is it your view, given what has happened
with Railtrack, that inevitably there will be a delay before it
is possible to progress SPVs, in whatever form the investment
is going to come in the future; do you now expect a delay in those
(Mr Ludeman) I am in the process of doing just that,
and we have had undertakings from the administrators that there
will be no delay or lack of money, so far as Railtrack is concerned,
in driving forward the work we have done; there are a whole range
of issues, both technical and commercial, that we need to resolve.
We need SRA and Government guidance on some of the technical issues,
and we need some discussion with Government on some of the commercial
risks and the back-stopping of some of those risks. But there
is no lack of energy in driving it forward. There is clearly a
question, on the design, build, finance and transfer model, with
an agreed price for that transfer, to whom do we transfer it now;
it is NewCo? Government have identified that one of the reasons
Railtrack got into trouble was the way in which they managed enhancements
and the way in which costs overran, and they have said that what
they would like to see in the future is enhancements managed by
SPVs. So we see the work we are doing now with Railtrack and our
other partner, Bechtel, as core for the future in structuring
how enhancements are run. And a lot of that is about bringing
expertise of programme management into this industry, from a variety
of different areas, though there is, as was mentioned, a model
for CTRL, there is also a model for Crossrail being developed,
these are financial structures, but principally they bring management
in that are good at organising big projects from a construction
point of view.
273. I was listening to Mr Brown. Mr Brown is
the first person I have heard who is accepting of short-term contracts
and accepting that they had a real value in the current situation.
Can I just put it to you, it is a slightly cynical view, that
the reason why you might say that is, from National Express's
point of view, from many operators' point of view, it represents
a tidy predictable profit in a world of uncertainty, whereas any
other kind of contract is likely to have investment strings attached
to it. And a willingness of some operating companies to go down
this road is because, at the moment, cash flows being what they
are, a two-year contract with very little investment attached
is a good proposition?
(Mr Brown) I would not agree with that proposition,
Madam Chairman. If I can come back to the Silverlink example,
we have genuine problems now with the capacity of the train service;
we do not need more track but we do need to be able to run longer
trains, we are constrained from being able to do that by the platform
lengths. We actually will be taking on quite significant risk
in buying new trains, which I am afraid the industry has proved
is not the simple process that maybe we naively thought it was
five years ago.
274. With what assurances?
(Mr Brown) And we are offering to invest in the platforms
as well, which is an investment risk, and a cost risk. Yes, we
are asking for some Section 54 undertakings, but we do not expect
for a moment to do an easy, cosy deal with the SRA, we would expect
them to drive a pretty hard bargain, as they have done elsewhere,
and expect us to give a lot for getting a two-year extension.
275. You expect that?
(Mr Brown) We do.
276. What changes would you like to see at the
(Mr Ludeman) Where would you like me to start, Madam
Chair. There are two jobs that the SRA do. One is the management
of franchises, and that is a contractual relationship and that
is generally managed satisfactorily, I think, from both parties'
points of view. The other process that they have been engaged
in is franchise replacement and renewal; and a certain gentleman
said that we will replace all the short-term franchises by the
end of 2001, I will have a small bet with you that will not happen.
It is in that part of the SRA we very much want to see some change.
And, I said in my opening remarks, the process of coming up with
good ideas and innovation in a vacuum, where Railtrack were not
involved in the process, has led us to negotiate committed outputs
that are then subsequently going to be quite difficult to implement,
because the other parties, Railtrack and others, were not aware
of what the SRA was doing. And that has led to unnecessary cost,
it has led to unnecessary development work and it has led to,
eventually, a process that has ground to a halt, and I think a
very necessary calling of a halt, and for a new approach to be
generated. And it is not just short-term franchises, we are talking
about a whole range of different lengths of potential franchises;
but it is that element of the SRA that we would like to see changed
and more of a command and control, as opposed to "Come up
with your ideas." We do not mind being told what to do, this
is a contractual relationship, in some respects we prefer to know
where we are; so that greater amount of direction is one that
we, as Train Operating Companies, are expecting.
277. Do you see these deficiencies to do with
the individuals running the SRA, or is it to do with their responsibilities?
(Mr Ludeman) I do not think it is for us to comment
on individual personalities. Clearly, the Chairman and the Chief
Executive set a certain way of doing things, and the Chairman
has resigned and there is a new Chairman coming along, and we
will have to see in what sort of direction he chooses to take
278. You said at the beginning, I think it was
Mr Ludeman who made the statement, that the failure of Railtrack
was a failure of management, not of the structures of the rail
(Mr Ludeman) In my view, yes.
279. Where are the new managers going to come
(Mr Ludeman) For SRA or for Railtrack?
280. For the whole of the rail industry?
(Mr Ludeman) There is, let us not forget, a very good
body of people in the railway industry, and what we are talking
about is those very good people, very professional people. And
I am a busman, I have only been in this industry three years,
but I have been impressed with the level of professionalism and
dedication to the railway business. And what the railway industry
needs is good leadership; so the choice for the people at the
top is very, very important, because the right leadership can
motivate a team of people. If there is consistency of direction
and consistency of policy, I think you will see quite substantial
change, both within NewCo, if the right people are chosen, and
within the SRA, where you have got a new person starting; let
us give the guy a chance to make a difference. But it is all about
Chairman: Thank you very much, gentlemen. You
have been very tolerant. I am very grateful to you.