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

Memorandum by Strathclyde Passenger Transport Executive (PRF 56)


  1.  This memorandum is submitted by Strathclyde Passenger Transport Executive (SPTE) in response to the revised terms of reference of the Inquiry following the placing of Railtrack PLC in railway administration. It addresses only those additional items included in the sub-committee's press notice dated 18 October 2001: so far as the original remit of the sub-committee's inquiry is concerned, evidence has already been given by the Passenger Transport Executive Group on behalf of all seven PTEs.

  2.  The memorandum addresses the four specific additional items on which the sub-committee has sought views. SPTE would be happy to amplify these comments, either by way of further memoranda or in oral evidence.


  3.  The placing of Railtrack PLC in Railway Administration clearly introduces a major additional uncertainty into the refranchising process. Most fundamentally, until the status of Railtrack as the contractual party to future track access agreements can be clarified, prospective bidders for franchises cannot have any certainty as to the financial and other terms on which they can expect access rights.

  4.  In addition, until a new framework for delivering network enhancements is established, any business planning for new franchises which assumes the provision of new or enhanced infrastructure cannot proceed on a firm basis.

  5.  More generally, the perceived risk of investing in railways has been increased following the Railtrack administration order, and given the present uncertainties surrounding both the transport sector and the wider economy it is clear that the Government will be able to command less favourable terms for new or amended franchises than previously.


  6.  The Government's stated policy appears to be that the successor to Railtrack should be established on a commercial basis. From SPTE's perspective, this policy assumption raises more significant issues than the details of the company structure adopted for any successor. Given the past dependence of Railtrack PLC on the public funding that was channelled into it through the Train Operating Companies and the Strategic Rail Authority, and the inevitability that any successor company will also require public sector support for the foreseeable future, it is surely appropriate to ask whether a commercial model remains appropriate for the provision of so basic an element of the nation's economic infrastructure.

  7.  It is also arguable that many of the more contentious outcomes of the regulatory regime under which Railtrack has operated are a direct consequence of the previous Government's decision at the time of railway privatisation to require Railtrack to operate on a full cost recovery basis. This has had three significant adverse effects:

    —  It has increased the underlying level of track access charges.

    —  As a consequence, the rail mode has been crippled competitively in comparison with other forms of transport—notably road transport—which are not subject to the same financial discipline.

    —  The economic efficiency of the track access pricing mechanism has been blunted because it diverges so significantly from marginal cost principles.

  8.  The European Union has undertaken a substantial body of work on the policy approach which should underlie charging for the use of transport infrastructure in order to maximise economic efficiency and reduce the environmental and congestion impacts of transport. This work points clearly to the adoption of marginal cost pricing, and this is the basis of track access charging in at least one European comparator that has, like Great Britain, made significant progress in liberalising its rail transport market—the Netherlands.

  9.  It is also significant that the Rail Regulator's recent review of freight access charges has concluded that the Government's policy of seeking to transfer freight from road to rail cannot be delivered within the same financial parameters that apply to passenger access charges. Instead, he has determined that freight operators should meet only the avoidable costs they impose on the network, and that the gap between the revenue from these access charges and Railtrack's full cost recovery should be met by direct and indirect subsidy.

  10.  Because of the wider public policy context within which Railtrack provides its network services, SPTE considers that the placing of the company in railway administration provides an opportunity for a more fundamental review of the nature of these network services and the manner in which they should be provided. An alternative model already exists in the form of the Highways Agency in England and Wales, which is able to operate a mixed economy in the maintenance and enhancement of the trunk road network while maintaining the direct accountability to government which is appropriate for a publicly-funded strategic infrastructure provider.


  11.  Doubts about the appropriateness of the commercial form which is envisaged for Railtrack's successor are compounded by some of the current discussion about the composition of its board and its relationship with sponsoring bodies such as the SRA. It is difficult to see how an undertaking whose corporate governance is ultimately in the hands of external appointees can act in a truly commercial manner, especially if it will remain substantially dependent on public funding.

  12.  In SPTE's view, the potential ambiguity in the status that is envisaged for the successor to Railtrack reinforces, rather than diminishes, the requirement for independent public interest regulation. SPTE considers that the work of the Office of the Rail Regulator, and particularly the conduct of the first periodic review of Railtrack's access charges, have added considerable value to the railway industry, by bringing transparency and rigour of analysis and process to bear on the understanding of Railtrack's costs and cost causation, and by clarifying the basis of the contractual matrix between Railtrack, its TOC customers, and third parties such as the PTEs with a direct interest in the performance of the network.

  13.  So long as track access remains a commodity in short supply, it is crucial that there should be an independent public body to oversee its allocation and the terms on which it is allocated.

  14.  SPTE is however less convinced that the same rigour of approach and analysis exists within the safety regulatory body. While high-profile railway accidents have generated much of the current concern about the fitness for purpose of the present structure of the railway industry and Railtrack's role in particular, it is essential that the response to such events is proportionate and considered within the wider context. There is a real risk that over-prescriptive safety regulation of the railways will have the effect of diverting users to less safe modes of transport, with a consequent increase in total exposure to death or injury.

  15.  SPTE also considers that, in addition to the bodies mentioned in the question posed by the sub-committee, any realignment of the relations between Railtrack's successor and other industry parties should take special account of the situation in Scotland. The bulk of Railtrack's track access income in Scotland is ultimately derived from the Scottish Executive, rather than on SRA account. It is therefore important that there should be transparency and accountability for this funding, and SPTE is encouraged that the Secretary of State has suggested that bespoke successor arrangements might be adopted for different parts of the Railtrack network.

  16.  The Scottish Transport Minister has already initiated a dialogue on this subject, and the issue is one which warrants more detailed consideration before (for example) vertical integration of track and train operations can be identified as a preferred option in particular circumstances such as those in Scotland. Nevertheless, there are strong arguments for taking the opportunity provided by the current Railway Administration order to explore alternatives to a monolithic structure in replacing Railtrack.


  17.  SPTE has questioned above whether a commercial model remains appropriate for any successor organisation for Railtrack. The very availability of a Railway Administration Order is a factor which skews the normal allocation of risk between government and the private sector, and while in the short term Railtrack's shareholders have had to accept the financial consequences of the company's present situation, any restructuring of the company will depend ultimately on the Government's underwriting of risk and on a continuing injection of public funds, either directly or through the TOCs, to maintain operating income. Traditional risk allocation models therefore appear somewhat academic in these circumstances, and given that any successor network operator will have to live with the legacy of the events of 7 October, it is likely that the successor's future ability to bear commercial risk will remain impaired.

Strathclyde Passenger Transport Executive

13 November 2001

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