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

Memorandum by The Department for Transport, Local Government and the Regions (PRF 35)



  1.  On 29 June the Secretary of State published for consultation draft Directions and Guidance for the Strategic Rail Authority (SRA). The Government plans to set the SRA 12 new objectives which cover the need to concentrate on delivering the Government's 10-Year Plan for Transport, driving up standards of punctuality, safety and comfort across all franchised services and a much clearer and more focussed approach to franchising. The draft Directions and Guidance make it clear that the top priority is delivering the key targets set out in the 10-Year Plan: an increase in passenger rail use of 50 per cent by 2010, a reduction in overcrowding to meet SRA standards by 2010, and a significant increase in rail freight's share of the freight market by 2010.

  2.  On 16 July the Secretary of State issued for consultation a draft policy statement, "Passenger Rail Franchising." The franchising policy statement has two purposes: to provide more detail of the revised approach to franchising which is outlined in the draft Directions and Guidance, and to satisfy a statutory requirement. The first part of the draft outlines the Government's priorities for the passenger railway, and builds on the objectives and processes proposed in the draft Directions and Guidance. The statement makes clear that the SRA should do whatever is most appropriate to obtain benefits for passengers, in the short as well as the longer term—whether that is through agreed enhancements or extensions of existing franchises, or by replacing them early or in the normal course of events.

  3.  The Government regrets that the draft statement has been misunderstood or misrepresented as narrowly focused on franchise extension, or as an abandonment of the long term. It is neither of these things: it specifically allows for a range of approaches, whatever is most appropriate in the particular case. No doubt different approaches will be appropriate in different cases. Where franchises are replaced it will be for consideration what the duration of the new franchise should be.

  4.  For some franchises (eg South Central, Chiltern, South West Trains), heads of terms have already been agreed for early replacement franchises. For Midland Mainline an extension has already been signed, and for GNER negotiations are currently under way. Passenger benefits can be obtained in these or other ways, such as by agreement under current franchise deals or through replacement of a franchise either early or on expiry in the normal way.

  5.  The aim is to see early improvements in safety, punctuality and comfort across all franchised services, with new passenger performance targets, investment in additional services, improvements to rolling stock and improved passenger facilities. This is additional to, not instead of, long-term investment.

  6.  The second part of the draft franchising statement sets out the Secretary of State's proposed policy towards the use of the power in section 26 of the Railways Act to set aside the precise tendering process which otherwise precedes the award of a franchise. Where the SRA seeks to replace an existing franchise early, the Secretary of State expects it to do so through an exercise which is very close in substance to the tendering process laid down in the Act. However, where there are several years to run on an existing franchise, the SRA may not formally be able to seek invitations to tender and the process, although fully competitive, may not comply with the requirements of section 26. The Secretary of State has a duty to undertake appropriate consultation when preparing a statement relating to section 26.

  7.  The consultation period for both documents ends on 21 September, which makes it difficult to respond to the Committee in detail. The Government will consider the responses received before publishing the final franchising statement, and Directions and Guidance to the SRA.


  8.  The Hatfield accident demonstrated that the backlog of investment on the railways is more pervasive and deeper than anyone had realised. Among the consequences has been that Railtrack needs for the time being to concentrate on its "day job" of operating and maintaining the railway. New major infrastructure projects, to add to the massive West Coast project already under way, are not top of its agenda—in the Government's view, rightly so. Long term investment to improve the railway remains the Government's objective, but a different approach will be needed to the major infrastructure projects which must be a part of that objective. Against that background there has to be some decoupling of the franchise programme and major infrastructure investment.

  9.  Nevertheless, several long-term multi-billion pound enhancement schemes are already happening on the railway—the West Coast upgrade, the Channel Tunnel rail link and implementation of the Train Protection and Warning System (TPWS). The Government is ready through its 10 Year Plan to fund further major schemes just as soon as the Strategic Rail Authority can finalise the new franchises.

  10.  The first phase of the East Coast upgrade is also under way. But by common consent there are two more years of detailed preparatory work to be done before decisions can be taken on the next phase. Other significant infrastructure enhancements may face similar delay, which will unavoidably have an impact on when the capacity and performance benefits from infrastructure are delivered.

  11.  The Government is looking to attract new sources of finance from third parties to take forward additional major enhancement projects. The Department, SRA, Treasury and Railtrack are currently developing proposals for Special Purpose Vehicles (SPVs), new investment vehicles designed to attract private sector finance and to deliver the completed enhancements. Details of potential structures will be outlined in the SRA's Strategic Plan.

  12.  Investment in new rolling stock can and will continue to be led by the rolling stock leasing companies (the ROSCOs). That requires a long-term commitment to the railway, but it does not in itself require new long-term operating franchises.

  13.  Meanwhile passengers deserve more than promises. The Secretary of State's draft guidance to the SRA, his new franchising policy and his decision on the East Coast franchise are all aimed at achieving early improvements in the quality of services. That is additional to, not instead of, long-term investment.


  14.  The Secretary of State has asked the SRA to take a fresh look at what can be achieved within existing franchises to drive up safety, punctuality and comfort across all franchised services.

  15.  The Government wants to see improvements in existing franchises which include:

    —  New passenger performance targets.

    —  Investment in additional services.

    —  Improvements to rolling stock.

    —  Improved passenger facilities.

  16.  The Government's aim is to deliver the following benefits. Not all of these will necessarily arise on any given franchise. Some of these benefits may be deliverable through existing franchises or extensions of them but others may require selective early replacement of a franchise.

    —  Better punctuality and reliability eg tougher performance targets, extra drivers, spare trains for emergency use, enhanced maintenance cover, better arrangements for dealing with disrupted services.

    —  Reductions in overcrowding eg extra rolling stock, additional services and longer trains.

    —  Improved personal security eg more CCTV at stations and on trains, secure parking, more accreditation under the Secure Stations initiative and extended staffing hours.

    —  Integrated transport measures eg integrated public transport information systems; better and safer interchange at and access to stations by local public transport, by car, cycle and on foot; and new park and ride stations.

    —  Improved accessibility for disabled people eg at stations and on trains.

    —  Putting passengers first eg better compensation when things go wrong, no quibble refunds, and a greater voice for passengers in the level and standard of services.

    —  Improved station facilities eg signage, information, waiting rooms, and ticket offices.

    —  Improved passenger information and retailing eg real time travel information and Internet ticket sales.

  17.  The need for the safe operation of the railway is a given. The Government has never suggested that performance be at the expense of safety, and believes that the two go hand in hand. On safety, the SRA has a duty to take into account the need to protect all persons from dangers arising from the operation of the railways, taking into account, in particular any advice given to the SRA by the HSE. The draft Directions and Guidance say that the SRA should ensure that HSE is fully consulted whenever railway safety may be at issue, and that it should be guided by the advice of HSC/HSE on all health and safety issues.

  18.  Franchising is not the only tool available to the SRA. The Rail Passenger Partnership scheme provides funding to assist the provision of new or enhanced local and regional services that cannot be justified on financial grounds but which contribute to the Government's wider objectives for rail. The SRA has streamlined the assessment process for smaller schemes. This will ensure that successful projects are appraised more quickly and the benefits felt by passengers sooner.


  19.  The Government is not abandoning the long term. But it does not want to be so focused on the long term that it neglects the need to make improvements now. The daily reality also needs attention.

  20.  The problems which Railtrack has itself acknowledged have affected the picture on infrastructure investment. Since Hatfield, Railtrack has rightly said it needs to concentrate for now on maintaining and operating the existing network. That will change; but meanwhile, improvements depending on major investment in infrastructure are going to take longer to deliver. So the SRA needs to concentrate on other types of improvements.

  21.  Investors in enhancement projects need clearly developed and fully costed projects before they are willing to put up capital. The Government has no reason to believe that private capital will not be available for sound well-costed projects. In some cases the investment might come from train operators, and might form part of the overall business case which would justify a long (up to 20 years) franchise.

  22.  Investment in rolling stock is now mainly undertaken by the rolling stock leasing companies. So long as the railways have a healthy future—and the number of passengers is continuing to rise—the rolling stock companies will continue to invest. The SRA can require new trains to be used by the replacement franchise, thus producing a longer guaranteed lease income period. But in principle it should not need to do so. If the trains are satisfactory in service, a business risk which the leasing companies should be prepared to undertake, there should be a ready market for them, whoever the franchisee.

  23.  So there may still be cases where the award of 15 to 20 year franchises may be justified in order to allow a reasonable opportunity to the train operator to make a return. But this will not be so in every case.

  24.  The 10 Year Plan provided for an aggregate £63 billion of public expenditure and private investment for railways—33 per cent of total Plan funding. This was made up of just over £34 billion of investment funded by the private sector, and £29 billion of public support. (The latter includes £3 billion of revenue support for privately funded infrastructure enhancements other than the CTRL, which is usually omitted from the total to avoid double counting—hence the widely quoted total of £60 billion.). The majority of the £34 billion of private investment is not affected by Railtrack's financing problems, and comprises spending on the CTRL, passenger and freight rolling stock, and infrastructure renewals.

  25.  The Government is fully committed to delivering the key growth targets for the railway in the 10 Year Plan (50 per cent passenger growth, reduced overcrowding and up to 80 per cent freight growth provided the rail freight companies can deliver improvements in performance and efficiency). But not everything can be done at once. The SRA's strategic plan will show how priorities can be addressed, and will map out how passenger benefits and future growth are to be achieved. New pressures have of course arisen since the 10 Year Plan was published. But the Plan will be reviewed in conjunction with next year's review of public spending.


  26.  In April 2001, Railtrack agreed in a Statement of Principles with Government to focus its activities on maintenance and renewal of the core network, working with joint venture third parties to take forward future major enhancements. It also agreed to appoint, following consultation with Government, a public interest non-executive director to its main board.

  27.  The new approach to providing enhancement projects will involve establishing joint ventures involving third-party providers of project finance and project management/delivery skills. This will enable Railtrack to give more attention to management of the core network. Railtrack's participation in the development projects will be crucial, along with train operating companies, construction consortia and financial institutions.

  28.  Translating the April agreement in principle into workable structures is a major and crucial task. The aim is to determine what forms of special corporate financing structures will be best suited to the major rail projects coming up. The SRA are developing a structure for how this third party financing will work, to be outlined in the Strategic Plan.

  29.  In order to maintain the advantages of a unified network, it is anticipated that the enhanced asset will transfer to Railtrack on completion—either through full ownership or, at least, through responsibility for operating and maintaining the asset. Public funds provided by the SRA will play a vital role in making the new structures happen. These funds will not only be able to provide risk-bearing equity through direct participation in joint ventures or SPVs, but could also be used for post-completion refinancing.


  30.  The draft Directions and Guidance make it clear that the SRA is the strategic, planning and co-ordinating body for the rail industry and the guardian of the interests of rail users. It acts as the purchaser of train services and railway infrastructure on behalf of the Secretary of State. The Government looks to the SRA to provide leadership and a clear strategic direction for rail transport in Great Britain, through partnership with key organisations. Prioritising programmes is a key element of the SRA's leadership role. But the role goes much wider. For example, it includes promoting an understanding and mitigation of long-term supply constraints on the capacity of the industry.

  31.  The draft Directions and Guidance also emphasise the importance of day to day franchise management by the SRA, to protect the interests of rail users and public finances. The SRA will require robust commitments to continuous improvement in performance in replacement franchise agreements. A revised performance regime will be put in place which will progressively reflect the benefits resulting from increased investment. The SRA will expect train operators to build in sufficient operational resilience to their plans to deal with problems that are reasonably foreseeable such as staff shortages, and the vulnerability that stems from regular, prolonged overtime working. New franchise agreements will provide for closer scrutiny by the SRA, particularly on performance and the delivery of other franchise obligations. The more timely and effective enforcement provisions under the Transport Act 2000 will enable the SRA to take a robust and proportionate approach to breaches, or likely breaches, of franchise agreements.

  32.  In 1999, the SRA started to replace the shorter franchises, although not due to expire until 2003 and 2004, to secure additional investment and passenger benefits; in some areas the franchise map is being redrawn to create fewer, stronger franchises. This was judged by the SRA to be the best way to secure additional investment and passenger benefits.

  33.  However the franchise replacement programme now needs realigning. There is concern about the slow pace of the programme, the length and complexity of bidding rounds and the absence of clear guidance about the nature of the bids. The "bottom-up" approach adopted by the SRA until now has largely left it to bidders to make proposals on issues such as customer service, infrastructure and rolling stock. Train operators are indeed best placed to identify innovative solutions and to take the commercial decisions involved, but this approach has generated contrasting bids which are difficult to evaluate and involve a wide range of potential costs. The process has left the SRA unable to combine elements to form the best overall value for money or operational solution; it can only accept or reject the offers made.

  34.  The SRA is therefore now looking at a more structured approach that focuses on clearly defined output specifications. There would be a core proposal that the SRA would definitely purchase, and a menu of "optional extra" enhancements—including suggestions by bidders—that the SRA has an option to take up during the franchise, according to circumstances then prevailing.

  35.  This should speed up the process, and should also help to ensure that the franchise replacement programme delivers the best overall value for money, taking into account a range of factors including safety, regional development, social inclusion and other objectives.

September 2001

September 2001

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