Further memorandum by Grant Transport
Strategy Ltd (PRF 41A)
PASSENGER RAIL FRANCHISING
1. This supplementary memorandum considers
the impact of the decision of the Secretary of State for Transport
to place Railtrack PLC in Railway Administration. It should be
read in conjunction with my memorandum to the Transport Sub Committee
dated 1 October.
2. Railtrack owned the national rail infrastructure
but was out of touch with the customerspassengers and freight
shippersfor whom the network exists. As a monopoly it could
dictate whether it was willing to invest and, if so, at what cost.
This undermined the SRA's recent strategy of seeking to put infrastructure
investment risk on to TOCs. Railtrack's financial collapse has
therefore removed a block on progress and represents an opportunity
to put in place a less dysfunctional structure.
3. Many commentators have suggested that
the City will be reluctant to invest in the rail industry in consequence
of Railtrack's failure. There is no doubt that the event has upped
the stakes for investors but I see no reason why the private sector
should not continue to be willing to bear risks that they can
control. In my view, the principal difference to investors' attitudes
is that there will no longer be any implicit assumption of Government
support; to the extent that the Government wishes to underwrite
a risk this will need to be explicitly stated.
4. It is clear that the Government's proposed
Government Limited by Guarantee (CLG) is not intended to plan,
manage and deliver major enhancements. The industry must therefore
be structured to enable TOCs and other parties to make these happen.
5. My previous memorandum supported the
concept of "Railway Company" DBFO consortia to lease,
maintain and enhance geographically coherent sections of the infrastructure
(taking capital cost and time overrun risk) and operate the train
services most affected by the upgrades (taking revenue and operating
cost risk). In my view, the proposed replacement of Railtrack
PLC with a CLG strengthens this case.
6. In addition, the financial collapse of
Railtrack means that we have to re-examine the industry's finances.
The 10 Year Transport Plan set objectives of a 50 per cent increase
in passenger traffic and an 80 per cent increase in freight. It
promised £14.7 billion of public sector investment and £11.3
billion of non-investment expenditure such as operating subsidies
with a further £34 billion of investment to come from the
private sector. Post Hatfield it seems that the true cost of maintaining
the existing unenhanced railway infrastructure is higher than
was allowed for in the Regulator's five-year review, but it is
not clear by how much. The Uff/Cullen safety recommendations take
no account of value for money and the cost of the European Train
Control System is now thought to be in the range of £2 billion
to £5 billion.
Against this background it is difficult to assess how much public
sector money will be available for network enhancements.
7. The rail industry is substantially funded
by taxpayer. Government needs to state clearly what it wants in
return. The industry urgently needs the overdue SRA Strategic
Plan as a framework within which the private sector can make specific
proposals. Without this, money will continue to be wasted on abortive
projects such as the East Coast Main Line refranchising exercise.
8. Given clear objectives and a broad strategy,
TOCs can build specific business plans as the basis for franchise
bids. The TOCs and the freight operators are the only bodies that
are in a position to plan tactically on behalf of the industry
as they integrate the infrastructure, the rolling stock and the
channels of sale to market and deliver the railway service to
9. A key element of the TOCs business plans
will be sources of funding. Ultimately, this boils down to one
or more of three possibilities:
Private sector capital investment
paid down from future operating revenues.
Private sector capital paid down
by future operating subsidies.
Public sector capital investment.
It is, therefore, crucially important to know
how much of what kind of investment the public sector is prepared
to fund and what the Government expects as outputs for such publicly
10. TOCs will take risk on their business
plansrevenue and operating costsprovided the plan
is not compromised by third parties. For example if a plan assumes
revenue growth on the basis of a speed or frequency enhancement,
the enhancement has to be in place on the due date. Similarly,
the adverse impact on revenues and costs of disruption at the
enhancement construction stage has to be factored in to the business
plan at the outset.
11. To the extent that a train operator
proposes an infrastructure enhancement and attributes additional
revenue to it, the train operator should bear the risk that its
proposal delivers the benefits it has claimed. But that guarantee
cannot outlive the franchise. Either the franchise has to be long
enough to pay down the investment or the SRA has to underwrite
future payments to the investor.
12. The TOCs business plan and the provision
and funding of infrastructure upgrades are therefore inextricably
linked. That is why I believe that the TOC has to be part of the
consortium delivering the upgrade. As best value for money is
achieved when upgrades are planned in conjunction with maintenance
and renewal, I believe that maintenance, too, should be part of
the Railway Company function rather than being carried out by
Grant Transport Strategy Ltd
26 October 2001
23 Rod Muttram, Railway Safety Chief Executive, as
reported in "Rail Business Intelligence" no 160, 11
October 2001. Back