Examination of Witnesses (Questions 263-279)
MR NICK
NEWTON AND
MR JIM
STEER
WEDNESDAY 26 JUNE 2002
Chairman: Do Members have anything to declare?
Mr Stevenson: Member of Transport and General
Workers Union.
Helen Jackson: Member of Transport and General
Workers Union
Chairman: Member of the Rail Maritime Trade
Union.
Miss McIntosh: Interest in Eurotunnel, FirstGroup,
Railtrack and the RAC.
Mrs Ellman: Member of the Transport and General
Workers Union.
Chairman
263. Gentleman, can I welcome you to the Committee
this afternoon and ask you firstly to identify yourselves.
(Mr Steer) I am Jim Steer; I am Managing Director
Strategic Planning at the SRA.
(Mr Newton) I am Nick Newton, Chief Operating Officer
at the SRA.
264. Mr Steer, do you have something that you
want to say to us before we begin?
(Mr Steer) Yes, very briefly. We, the SRA, have a
very strong commitment to railways in the north of England with
major investment, as I am sure the Committee will be aware, taking
place and further planning to take place over the mainline serving
the region, and investment as well on freight routes to ports,
particularly for South Humberside, and a set of smaller investments
made available to the North of England and, through the various
funding regimes, the SRA has established: rail passenger partnership,
rail performance fund and freight facility grants. We do plan
to deliver big improvements for the north with schemes, some of
which have pretty much come to final fruition. Leeds first: new
services between Leeds and London; new trains and extended trains
on the Airedale and Wharfdale lines across Yorkshire; Pendolino
trains, of course not in passenger service yet but they are coming;
and a new cross-country timetable later this year. We do realise
that a great deal remains to be done, but we are resolute in our
determination to deliver the strategic plan to benefit the north
of the country, just as much as we are elsewhere.
265. You accept that there are such close relationships
between the constituent services of the Trans-Pennine and Northern
franchises but the Committee would like to hear from you why you
have decided to award franchises of different lengths.
(Mr Steer) The presumption, I think you can take it
in terms of franchise length, is that the SRA is to favour longer
franchises, 15 years for example, with appropriate review mechanisms
unless there is some other good reason to perhaps consider a medium
term length. In this instance, there was a view that, with the
Trans-Pennine Express franchise, it would be helpful to be able
to look at a successor to the new Trans-Pennine Express franchise,
if you will, at around the same time as both the West Coast and
the CrossCountry franchises are due to terminate. That would give
flexibility and options for the next set of franchises which,
if we did not arrange those times to be coincident, we would not
have.
266. And you think that that will provide sufficient
benefit to justify splitting them?
(Mr Steer) No. I think the question of splitting the
two franchises is a very different question. That goes to the
question of whether it is right—and the SRA believes that
it is right—to specify a franchise which is focused on the
particular opportunity that we believe the Trans-Pennine Express
franchise represents as distinct from the region, which is to
provide a very high quality intercity service between the major
cities across the north of England.
Mr O'Brien
267. Northern Spirit had a shocking record of
providing a service to the customers in the north of England.
Were the problems with Northern Spirit properly understood by
the SRA when it was re-let to Arriva? If so, why were better recovery
partners not put in place?
(Mr Newton) It is true to say that the full range
of the problems were not fully understood; I do not think they
were understood by Arriva or the SRA or SSRA as we were at the
time. I think the priority in that situation was that we were
faced with the imminent financial collapse of the existing franchisee
and it was fortunate, in that context, that Arriva were able to
move in and take over at relatively short notice but also maintain
the then current funding level for at least a 12 month period.
At the time, the prospect was that that 12 month period would
be sufficient for us to put in place a revised alternative franchise
as a policy developed in the concept of Trans-Pennine and Northern
separate franchises, but that did not materialise and I think
it was over that period that Arriva really started to address—
268. Why did it not materialise?
(Mr Newton) Because the concept of a separate Trans-Pennine
and also, as far as I am concerned, the strategic planning of
creating a Northern without Trans-Pennine with building the business
units around the conurbations—
269. The franchise did not only apply to Trans-Pennine,
did it? It applied to a number of services in the north; so to
say that it was because of Trans-Pennine that it created a problem
... I am putting to you that there were other issues that ought
to have been assessed when Northern Spirit was failing to provide
a service.
(Mr Newton) I am sorry, I did not say just Trans-Pennine,
I said Trans-Pennine and the strategic planning with just as important
creation of a Northern focused on the conurbation through the
business units.
270. Is it not right that due diligence should
be paid to the assessment of the business before it is undertaken?
Arriva complained after they took over the franchise that there
was a driver shortage; there were several shortages of other staff
including conductors; there were insufficient driver training
resources with a new programme being set out to recruit new drivers;
and the franchise had access to insufficient rolling stock. All
these issues impacted upon the lack of service to people in the
north of England. Why were the SRA not aware of these issues?
(Mr Newton) We were not aware of them but they contributed
to the failure of MTL.
271. Why were you not aware of them, Mr Newton?
Tell us.
(Mr Newton) Because the original policy which surrounded
the original franchises was very much an arm's length policy,
to place a contract or place a franchise at minimum cost and to
stand back to a great extent and leave the franchisee to deliver
the service. The situation when Arriva took over was that the
key objective was to actually rescue the franchise from imminent
financial collapse. It was an acquisition by Arriva of MTL and
part of that process was their due diligence of the business they
bought. It was not only Northern Spirit, it was Merseyrail and
also Bus Businesses.
272. I put it to you that the contracts were
changed to cost-plus contracts in 2001. Why did you not put that
in for the year 2002? If you understood the problems then, why
did you not introduce the cost-plus contracts in 2000 instead
of waiting until 2001?
(Mr Newton) Because the proposition made to us by
Arriva was that they would step in and assume the franchise responsibilities
at no additional cost to the SRA. They would assume the subsidy
profile that MTL enjoyed for a 12 month period. In terms of public
expenditure, that was an attractive financial deal to us. When
we realised that we needed to sit down with Arriva and extend
the franchise, what became clear was that they having now taken
over and assessed the real situation in the franchise, they negotiated
that they were only prepared to continue on a cost-plus basis,
which was a sensible thing to do under the circumstances. However,
to have done that from the onset would have been to incur additional
public expenditure when Arriva were not seeking to.
Chairman
273. Mr Newton, let me get it quite clear. You
are saying that you did know and that you thought it was very
difficult but, because Arriva had not done its homework properly
before it took the franchise on and because to have pointed it
out to them would have meant that you would have had to spend
a great deal more money, you were prepared to go along with it
but you were not surprised when they kicked up a fuss afterwards.
(Mr Newton) No, Madam Chairman. What I said was that
the problems were beginning to emerge around our dealing with
the imminent financial collapse of MTL. Arriva came along with
MTL and said —
274. You said that, but what I am asking you
is, are you really telling us that you knew that one of the reasons
why MTL had got itself into all these difficulties was because
of the business case and because of the problems but that you
did not think it was your business to discuss this with Arriva
because they were quite happy to take it on in the way that it
was?
(Mr Newton) Arriva were quite content and they, as
far as we were concerned, reflected in their valuation of the
MTL business the problems that were clear in MTL, which was the
reason for the financial collapse.
275. Arriva was asked last week whether it was
anything to do with the business case assessment and they said
that they did not know until they took it on what a mess it was
in, and I do paraphrase; they were not quite as clear as that.
(Mr Newton) Yes, but they conducted due diligence.
They were keen on other parts of the MTL business as far as our
perception went.
276. So, you were convinced that they were perfectly
well aware of what they were taking on?
(Mr Newton) Yes.
Mr O'Brien
277. What material advantage have the passengers
of Arriva received due to the financial penalties imposed by the
SRA?
(Mr Newton) I think the material benefit they have
received is that it stressed the fact that it is a serious situation
and we expected Arriva, as the management of the company, to address
and, subsequently, the structure of the penalty arrangement has
resulted in a major improvement in the recruitment of drivers
which was a key problem.
278. But we are having more services interrupted
now than ever before. So, where is the action taken by the SRA
to improve the services in the north?
(Mr Newton) The cause of the service interruption
now is industrial action. The driver shortage is less of a problem
than it was when we took the action.
279. Yes, but what benefit have the people received?
The benefit is non-existent. The SRA have failed the people in
the north of England in the way they have handled this matter.
(Mr Newton) But the benefit to the passengers is that
there are fewer cancellations as a consequence of driver shortage.
There are other cancellations for other reasons, particularly
around industrial relations at the moment, but our view is that
without taking that enforcement action, we would not have put
in place via Arriva a process to recruit more drivers and address
the driver shortage.
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