Select Committee on Transport Appendices to the Minutes of Evidence


Memorandum by the Strategic Rail Authority (SRA 08)

INTRODUCTION

  1.  The Strategic Rail Authority (SRA) was established on 1 February 2001 by the Transport Act 2000 as a Non-Departmental Public Body (NDPB) with no fewer than eight and no more than 15 members, including a chairman, to be appointed by the Secretary of State. The Authority appoints a chief executive with the approval of the Secretary of State. Currently the roles of Chairman and Chief Executive are combined in Richard Bowker's appointment. The Authority operates within a Financial Framework and under a Management Statement drawn up by the Department for Transport in consultation with the Authority. These set the rules and guidelines for the exercise of the Authority's functions, statutory duties and powers.

  2.  The purposes of the SRA are:

    —  to promote the use of the railway network for the carriage of passengers and goods;

    —  to secure the development of the railway network; and

    —  to contribute to the development of an integrated system of transport of passengers and goods.

  3.  The SRA seeks to fulfil these purposes, having regard to value for money and affordability, through the use of its powers which are to:

    —  develop and publish strategies;

    —  award and then enforce franchises for passenger rail services; and

    —  make grants, loans and provide other financial support.

  4.  The SRA uses these powers chiefly to:

    —  enter into franchises for delivery of passenger rail service across Great Britain;

    —  provide financial support to Network Rail and to passenger and freight Train Operating Companies; and

    —  provide grants for support of enhancement of the rail infrastructure.

  5.  The SRA's Annual report for 2001-02 was published on 18 July 2002. Copies were placed in the Library of the House.

  6.  Revised Directions and Guidance were issued to the Authority by the Secretary of State on 26 September 2002. These are available on the SRA's website, www.sra.gov.uk.

  7.  The primary objectives set the SRA by the Secretary of State's Directions and Guidance are:

    —  to deliver the targets in "Transport 2010—The 10-year Plan", published in July 2000, viz

    (1)  to increase rail use in Great Britain (measured in passenger kilometres) from 2000 levels by 50% by 2010, with investment in infrastructure and capacity, while at the same time securing improvements in punctuality, reliability and safety;

    (2)  to reduce overcrowding in London to meet SRA standards by 2010; and

    (3)  to achieve a significant increase in rail freight's share of the freight market by 2010, resulting in an increase of up to 80% in rail freight by 2010;

    —  to work with the rail industry to achieve substantial lasting improvements in performance in terms of punctuality and reliability of services; and

    —  to take all reasonable steps to ensure that Network Rail complies with the terms on which standby credit facilities have been granted to it by the Authority.

THE FINANCING OF THE RAIL INDUSTRY

  8.  The rail industry is funded from passenger fares, freight charges, ancillary income, for example from property development, retail activities and wayleaves and from Government support.

  9.  The costs of operations (including maintenance and renewals) and of remunerating investment capital has to equal the aggregate of income from fares and charges, and Government support.

  10.  Investment projects can be funded by capital raised solely from the private sector, solely from Government grant, or through joint ventures such as PPP, but the costs of paying for such capital have still to be met from sources of income set out in para 8.

  11.  The cost of both operating the railway, whether in terms of services or infrastructure, has risen since publication of the 10-year Transport Plan. The cost of projects to deliver upgrades and/or enhancements has also risen over the same period. Income from the farebox has been adversely impacted over the same period. Rail remains a fundamentally important part of delivering an integrated transport network in the UK but in order to reconcile the outputs required with the costs of provision, the SRA has set out in its Route Map to 2004 (attached as Annex A) an appropriate and robust plan to establish the case for rail as part of the Spending Review 2004.

  12.  The funding required to meet the objectives was set out in the first Strategic Plan published in January 2002. The basis of the assumptions were clearly defined, and explicitly excluded any change in costs relating to the operation, maintenance and renewal of the infrastructure since the Regulatory Determination in 2000 as well as the costs of implementing Uff/Cullen. The Strategic Plan also assumed that the cost of franchises would remain as originally bid.

  13.  Principal changes since the plan was published are:

    —  The financial settlement for Network Rail.

    —  Identification of the need for major power supply upgrade on Network Rail's Southern Region for the introduction of the new trains required to replace Mark I rolling stock and for growth.

    —  Cost escalation for both existing franchises and new projects.

  14.  A number of other changes will take place reflecting the policies which the SRA is currently developing including those on fares, capacity utilisation and franchising. A review of major projects is being undertaken, as well as other initiatives to reduce costs, and of the funding and risk structure. The external opportunities for growth, and the threats to achieving growth targets are also being analysed. These workstreams, together with the Regulator's interim review of track access charges and the review of the Government's 10-year Transport Plan are all being drawn together in an overall review of the value of rail which will inform the production of the 2004 Strategic plan, and the SRA's submission to the Government in advance of the Spending Review 2004.

  15.  Updated information on rail industry financing will be given in the 2003 Strategic Plan, with further information on completion of the work programme outlined.

THE FUTURE OF PASSENGER FRANCHISES AND INFRASTRUCTURE UPGRADES.

Passenger Franchises

  16.  The SRA has reviewed the experience of the first round of franchising and, following appropriate industry discussion, issued a franchising policy document ["Britain's Railway, Properly Delivered"] in November 2002. The essential changes are:

    —  key performance indicators on quality of service eg train and station cleanliness, passenger information, ease of ticket purchase, security;

    —  a revised risk allocation;

    —  measures to ensure contract variations can be made in a way that retains value for money;

    —  performance delivery to customers prioritised, with a revised incentive regime; and

    —  fresh incentives to make investments, including initiatives designed to reduce long term industry costs.

  17.  Further developments in franchise replacement were announced at the same time - the preferred bidders for the concluding stage of Transpennine Express; a new approach for South West Trains; and plans for the creation of a new Greater Western franchise. A forward programme will be announced shortly and will be further developed by the end of the year.

Infrastructure Upgrades

  18.  The programme of infrastructure investments identified in the SRA's first Strategic Plan, published in January 2002, has been reviewed.

  19.  Particular emphasis has been given to testing value for money and to the application of the capacity utilisation principles which are the subject of a separate consultation exercise. Account has also been taken of the emerging conclusions from the multi-modal studies.

  20.  Arising from this activity, some economies in the investment programme have been identified, and an updated investment programme will be published in the second Strategic Plan (January 2003).

RAIL FREIGHT POLICY

  21.  The SRA's Freight Strategy, first published in May 2001, aims to provide a framework within which the industry can develop and market services, facilities and equipment to meet customers' needs and to improve their quality and competitiveness thereby delivering a significant modal shift of freight from road to rail.

  22.  The key components of the Strategy are:

    —  investment in infrastructure to provide capacity, improve reliability, increase productivity and efficiency; reduce the cost and improve the quality and capability of freight movements on the network; and connect major sources of freight traffic to the network;

    —  targeted grant assistance and revenue support to assist with capital investment in new freight facilities; support the development of new freight interchanges; and secure, in the short and medium term, economically marginal but environmentally desirable traffics, such as intermodal movements on rail;

    —  support for innovation and short term assistance for start up operations; and

    —  reducing constraints on the effective working of the market such as restrictions on access to ports and terminals.

  23.  The SRA will shortly publish a Progress Report on what has been achieved on freight over the first eighteen months of the Government's 10 Year Transport Plan. The headline is that rail freight has grown by 49.2% (in net tonne kilometres) since 1994 and its market share has grown from 8.5% to 11.5% in that period.

CONCLUSIONS

  24.  Cost escalation threatens the 10 Year Plan outlook. Some increased costs reflect betterment—eg improved safety, access for disabled passengers—but it is a priority to get the inflationary element of costs back under control. One of the primary initiatives in this regard is the Regulator's Interim Review of Track Access Charges on which we will be working closely with both him and Network Rail. This will be a critical input to the Spending Review, 2004. To build on the Interim Review and make the value-for-money case to Government for funding under SR 2004 for rail services and the capital investment to support and develop rail services, we have embarked on the programme we have called "The Value of Rail: Route Map to 2004" which is fully described in Annex A. We will complete that programme of work by end 2003, in conjunction with the Interim Review of Track Access Charges.

  25.  The prospects for rail growth are good. Passenger demand is at its highest level since 1946 and rail freight has risen by a half and has increased its market share relative to road. The trends in road congestion and road transport costs, with improved rail services, are likely to maintain this growth.

  26.  Public/private partnerships are the best basis for developing the railway. The framework for encouraging private investment is being put in place through the SRA's strategies and policies, and consequent upon its role as "strategic specifier". The practical effect of the SRA carrying out this role is reflected in the new approach to franchising which we announced on 6 November. We want train operating companies to focus on providing reliable, consistent services to their customers, working in partnership with the SRA to develop and grow the railway sector. Infrastructure upgrades will be taken forward under the sponsorship of the SRA, in partnership with the private sector including Network Rail.

  27.  The rail industry has faced substantial upheaval since the accident at Hatfield including the placing of Railtrack in administration and its subsequent purchase by Network Rail. The last 12 months have focused on restoring stability to, and clarity of direction for, the industry. The necessary strategies and policies are now being put in place. The next 15-18 months will see intense activity, not just in terms of refranchisings and project development and implementation, but also in accordance with the Route Map to 2004 which, together with the Rail Regulator's Interim Review of Track Access Charges, will provide a robust case for Rail.

November 2002

Annex A

ROUTE MAP TO 2004

  In January 2002 when the SRA published its first Strategic Plan I said that I would make the case for rail and for investment in the rail industry. I have been doing so throughout the last nine months and we have both attracted new and consolidated existing investment through franchise deals and other grant and infrastructure investments. We have also laid a strong basis for future investment through the creation of Network Rail, its acquisition of Railtrack plc and the lifting of the railway administration order on Railtrack plc.

  This means that we have a strong basis on which to move forward. However, there remain major issues to address over the next 18 months or so including the specification of the standard of service required from the nation's rail infrastructure (the "outputs" of the network) and costs of providing those outputs competently and efficiently. The former will be the key SRA input to the Regulator's interim review of Network Rail's access charges and the latter will be determined by the Regulator in that review.

  In addition the SRA needs to determine the value of rail—to use public sector funds appropriately and to prioritise the franchise programme, infrastructure enhancement projects, and other financial support programmes.

  In order to do this effectively we have identified a series of steps covering the period to the next Government spending review in 2004. The steps are set out in the enclosed document. This Route Map will be reflected in our approach to franchising and our consideration of major investment projects. I hope that it is helpful to you to see our plans set out in this way and look forward to working with you as we go through each step along the Route.

Richard Bowker

Chairman

October 2002


 
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