Select Committee on Transport Written Evidence


Supplementary memorandum by the Department for Transport (FOR 77B)

THE FUTURE OF THE RAILWAYS

  In the letter of 10 December 2003, the Clerk to the Committee raises a number of supplementary questions, following the Minister for Transport's oral evidence session of 5 November. This supplementary memorandum seeks to answer those questions.

Q1.  The Committee heard evidence early in this inquiry that over the past five years, investments in roads have fallen by 30%; that investment in national rail has risen by 155%; that investment costs per unit of traffic carried in the railway five years ago was three times as high as in roads, and is now 10 times as high. Does the Department agree with these figures? If not, does the Department have alternative figures?

  A1.  Comparative figures for investment will depend on the exact coverage and definition of expenditure used and the period chosen. There is inevitably significant "lumpiness" in the spending profile year by year as particular major schemes go through—for example relating to the construction of the Channel Tunnel Rail Link. DfT's published transport statistics indicate a fall of around 5% in real terms in total road infrastructure investment from 1997-98 to 2001-02, whilst "national rail" infrastructure investment doubled and the wider measure of overall rail infrastructure investment (including in light rail and Tube) increased by some 40% over the same period. For the future, the latest allocations of public expenditure are set out in "Delivering Better transport: Progress Report" which was published in December 2002. This shows that expenditure on strategic roads is forecast to rise steadily from £1.6 billion in 2001-02 to £2.9 billion in 2010. It also shows that forecast public expenditure on rail is also set to rise sharply although unlike strategic roads, the profile is lumpy. Total public spending on rail was £2.1 billion in 2001-02 and is forecast to rise to a peak of £4.3 billion in 2005-06. This level of spend is forecast to reduce steadily to £2.8 billion in 2010-11.

Q2.  Is the Government contractually obliged to meet the financial terms of the Rail Regulators interim review settlement? (Q 1602, 1610)

  A2.  The Regulator determines the total level of Network Rail income and the balance between (a) track access charges and (b) grant paid by the SRA under section 211 of the Transport Act 2000 (network grant). In doing so, the Regulator is required to have regard to the budgetary position of the SRA. The SRA's budgets for 2004-05 and 2005-06 were fixed by the Department following the 2002 Spending Review, as was the balance between capital and revenue provision within those budgets. It was clear to the Regulator and the Department that the SRA could not accommodate substantial increases in track access charges (which score as revenue expenditure) within these budgets. It was likewise clear to the Regulator that Network Rail would require a very substantial increase in income in 2004-05 and 2005-06.

  The Regulator set out his proposals in Chapter 15 of the final conclusions of his access charges review. First, he concludes that it would be appropriate for him to allow a higher proportion of Network Rail's income to be provided in the form of network grant (para 15.10). Second, he makes provision for Network Rail to propose a reprofiling of grant income that would ease the pressure on SRA's budget up to, but not beyond 1 April 2006. On this basis, and subject to Network Rail bringing forward an acceptable proposal, the Department and SRA expect to be in a position to accommodate the outcome of the access charge review in 2004-05 and 2005-06. Funding for 2006-07 and beyond will be subject to decision, in the normal way, in the forthcoming spending review.

  The Regulator's decisions on track access charges are binding on the operators of passenger franchises. Under the terms of Clause 12.1 of their franchise agreement with the SRA, franchise-holders are indemnified against increases in track access charges resulting from a regulatory review. The cost of any increase in track access charges will therefore fall upon the SRA, and the Government has consistently made it clear that it stands fully behind financial commitments entered into by the SRA. In his final conclusions, the Regulator makes proposals to ensure that the fact that income is provided in the form of network grant rather than track access charge does not result in (a) any uncertainty as to Network Rail's entitlement to receive the income or (b) any additional cost to franchise-holders.

Q3.  The Minister offered to furnish the Committee with an indication of whether Government finance would be cheaper than private finance for Network Rail borrowing and, if so, what order of saving could be made. (Q 1612)

  A3.  As a private sector company, Network Rail (NR) does not have access to Government gilts to meet its borrowing requirements. However, through SRA support for NR's income requirement, either through support for Track Access Charges or payments of Network Grant, Government does indirectly meet the cost of NR's borrowing.

  NR's current short and medium term borrowings are supported by SRA standby credit facilities and comfort letters from the Department for Transport. Details of the support package are included in a minute to the House of Commons by the Secretary of State in June 2002. Some potential changes to the availability period of part of this support are currently being discussed. The SRA facilities allow NR to borrow for the short and medium term at very low rates, with a margin of around 35 basis points above gilts. (100 basis points being equal to 1 percentage point).

  In advance of the Government support for its short and medium term borrowing expiring, NR intends to provide its long term financing requirements through a securitisation of its income from Track Access Charges and other sources. Current plans are for this to be launched during 2004. The securitisation will refinance short and medium term borrowing and raise finance for renewals to the network. To provide comfort to investors about policy and related risks of investing in NR, Government intends to provide an indemnity to the company to meet a shortfall in its ability to meet debt service costs of the securitisation under certain circumstances. The Government's view is that the indemnity is very unlikely to be called on and that it will represent a contingent liability, subject to advice from the Department's accountants. As such the House of Commons, and Select Committee, will be notified in the normal way.

  Until the securitisation is launched, the cost of Network Rail's long term borrowing won't be finally known.

  It is standard practice for companies to borrow to finance improvements to the value of its assets, in particular to meet large peaks in investment needs.

  Borrowing benefits a company as it spreads the cost of improvements over a number of years, reducing the need to increases in current income to finance large scale. For long lived assets such as the rail network, borrowing is also fairer as those who benefit from the use of the asset in the future help pay for it, rather than only current users. This would be the case if borrowing was not used

  Network Rail is facing a peak in investment required to the rail network, following decades of under-investment. This has lead to a substantial backlog. The company is also faced with the need to renew a substantial number of assets installed in the 1970s that are coming to the end of their economically useful lives. Much of this work will improve the underlying value of the network, NR's key asset, so it is entirely appropriate that the company borrows to help finance it.

Q4.  Is the Minister in a position yet to confirm the current price per mile of the West Coast Main Line modernisation project; and also how that price compares with the previous East Coast Main Line modernisation? (Q 1624)

  A4.  The aggregate cost of the WCML project is projected, in the light of the Rail Regulator's Interim Review, to be of the order of £7.5 billion up to 2009. With a route-mileage of around 700 miles, that would imply a headline unit cost of some £10.7 million per route-mile, though that figure would be sensitive to the number of tracks and amount of work undertaken within each route-mile. Care needs to be taken in simple comparisons of the cost of different projects, given the widely differing scope of works and the different characteristics of lines and their geography. The West Coast project is primarily a rebuilding of the line, in places from the trackbed up, in addition to its upgrading for high speed operation. The primary purpose of the 1980s East Coast Main Line work was route electrification. I understand [from the Strategic Rail Authority] that the unit cost of electrification was some £1 million per mile at then current prices.

Q5  Will the recent changes to the Railways Directorate of the Department have any implications for the role of the SRA? (Q 1625)

  A5.  The purpose of the re-organisation of Railways Directorate was to ensure clearer focus on the two priorities of a) improving rail performance and b) achieving sustainable finances. There is no direct implication for the role of the SRA.

Q6.  The Minister indicated that he thought it worth assessing the cost of the Strategic Rail Authority (SRA) running the integrated Kent franchise as compared with the private sector. Would the Department confirm that it would be willing to share the results of any assessment with the Committee? (Q 1646)

  A6.  The subsidies paid to train operators—including Connex, who previously ran trains services in Kent—are published by the SRA as a matter of course, while the costs to the SRA of operating South Eastern Trains will appear in the SRA's own accounts. To that extent, therefore, the relative costs will be in the public domain. There might need to be further analysis to see whether there are lessons to be learned for when tenders are invited for the Integrated Kent Franchise. There would be no objection to sharing the results of that work with the Committee, though that would have to be subject to considerations of commercial confidentiality which might be especially important at a time when negotiations with potential franchise holders were in progress.

Q7.  The Minister indicated that a check was underway on whether contracts for train rolling stock placed in other European countries have been carried out in the country where orders have been generated. Could the Department please let the Committee know the results of this work? (Q 1658)

  A7.  Preliminary results from our own enquiries, supported by evidence provided by the Railway Industry Association, indicate that most European countries do import a proportion of their rolling stock from abroad. The countries for which figures are available and the percentage of vehicles supplied by foreign builders between 2000 and 2003 are : Denmark (100%); Sweden (52%); Belgium (42%); Italy (33%); Austria (32%); Switzerland (27%); Spain (17%); and Portugal (15%). France and Germany, by contrast, placed all their significant orders between 2000 and 2003 with domestic builders. We also understand that the Germans require regional, commuter and metro stock to be built in the Land in which it is to be used. In the UK during the same period, 1,193 vehicles were supplied by overseas builders. It should be noted that this comprised only 28% of the very large number of vehicles ordered for UK railways during this period; that over a thousand of the imports were of a single type (Siemens Desiros); and that there is considerable doubt about whether UK manufacturers had the capacity to meet an order of this size at the time.

Q8.  There has been a press report (Financial Times 17 November) indicating that Bombardier has approached the SRA seeking a rescheduling of rolling stock orders to assist the company's future order book profile. Is the Department in a position to update the Committee on this?

  A8.  Most of the vehicles concerned are replacements for slam door (Mark 1) trains used on lines south of the Thames. Because there is a statutory requirement that Mark 1 trains must be taken out of service for safety reasons by the end of 2004, the SRA has not been willing to agree any rescheduling which would affect the replacement programme. The SRA has, on the other hand, said that it would consider proposals for rescheduling which would allow Mark 1 replacement to go ahead as planned. I understand that Bombardier have recently put forward a package of this sort, concentrating on deferring delivery of around a hundred carriages which are not direct replacements for Mark 1 stock. The SRA is currently considering the details.

Q9.  What is the latest position on the Royal Mail's use of the railway to haul mail? (Q1661)

  A9.  The use of the railway to haul mail is a commercial matter between Royal Mail and the freight operating company EWS. We understand that Royal Mail had been trying to renegotiate its contract with EWS for a number of years and first announced its transport review in June 2001. In June 2003, Royal Mail announced that it would be withdrawing from its contract with EWS by 31 March 2004. Some rail mail services have already ceased and the phased cessation of the remaining services continues. The Department understands that Royal Mail have not ruled out a return to rail for some elements of mail distribution in the future.

Q10.  The Committee notes that urgent work is being done to assess Crossrail. It would be helpful to receive an update. (Q 1667)

  A10.  Cross-London Rail Links Ltd (CLRL) submitted its Business Case for the Crossrail project to the Department for Transport on 11 July 2003. CLRL is owned jointly, on a 50:50 basis, by Transport for London and the Strategic Rail Authority. A summary of CLRL's Business Case is available on its website (http://www.crossrail.co.uk).

  The Secretary of State announced in a written statement to the House on 14 July that while the Government is committed to the scheme in principle, it could not take final decisions before it had carried out a thorough review of CLRL's proposal. He explained then that he intended to establish an expert team to carry out this review. Adrian Montague was appointed to head this review team in September 2003. The terms of reference for the review are as follows:

  1.  To establish the full cost of Cross London Rail Link's July 2003 Crossrail Business Case proposals, and to assess:

    (a)  whether they are likely to deliver to time, scope and budget;

    (b)  whether the Business Case proposals will offer value for money;

    (c)  the extent of Government funding that can be justified; and

    (d)  the proportion of the funding required from non-Government sources.

  2.  To identify any means of delivering a Crossrail project which offer better performance than the Business Case proposals against tests at 1 (a)-(d) above.

  3.  To report to the Secretary of State as soon as practicable

  The Montague review is on schedule to report its conclusions to the Secretary of State around the end of January 2004. Its findings will be also published in due course.

Q11.  Were the Government consulted on Network rail's decision to remove rail maintenance from the private sector?

  A11.  Network Rail informed the Secretary of State in confidence that it was considering taking all maintenance work in house before the decision was made. The Secretary of State made it clear to Network Rail that this was a matter for them to decide.

Q12.  It appears from the Department's supplementary memorandum to the Secretary of State's evidence on 10 September that in 2001-02 and 2002-03 there was a total of £5,054 million private sector investment in rail infrastructure. Where in the UK was that investment made? What part of that investment was covered by Government guarantees and, if so, to what amount? The Department's memorandum states that a "small amount of investment" which is neither rolling stock nor infrastructure is included in the total of non-rolling stock totals. How much does this investment total; what is it for; and are you able to confirm that it is private sector investment?

  A12.  (a)  The investment data provided in the supplementary memorandum is collected by the Office of national statistics using private sector company accounts. For reasons of commercial confidentiality, they are unable to provide investment figures at sub national level.

  (b)  A total of £3.75 billion of Government Guaranteed Bonds were issued in 1999 and 2002 to finance London and Continental Railways' development of the Channel Tunnel Rail Link. In addition, the SRA provides credit support for Network Rail.

  (c)  The precise amount of investment which is neither rolling stock nor infrastructure cannot be desegregated from the total because of the commercial confidentiality reasons noted above. That said, this investment will be for assets such as plant and machinery which have a lifespan of over a year but are not permanent fixtures. This investment would be made by the private sector.

Q13.  It would be helpful to have a summary of the processes of cost benefit analysis as applied to road and rail projects highlighting what differences there are between them, if any, and what areas, for example, social, environmental, economic are covered

  A13.  Cost benefit analysis is a process that attempts to set out and appraise the social costs and benefits of investment projects to help decide whether or not the projects should be undertaken. The aim is to identify and quantify all gains and losses in economic welfare that would be incurred by society as a whole if the particular projects under consideration were undertaken.

  The Department's "New Approach to Transport Appraisal" (NATA) methodology which is used for all appraisal of major transport projects and is consistent across all modes, assesses the transport project against the Government's five key criteria of economy, environment, safety, accessibility and integration.

  In calculating the benefits of any new transport project, in addition to taking into account any revenues, from railway ticket sales or road tolls, account is taken of benefits such as the value of reductions in travelling time to users, congestion for motorists and overcrowding to rail users.

  Similarly, in calculating the costs of any new project, in addition to the costs of land acquisition, construction and operation DfT also take into account losses in welfare resulting from aircraft or vehicle noise, the increase in engine emissions of pollutant gases, the loss of areas of outstanding natural beauty or listing buildings.

  Some of these impacts are easy to measure. For example, time-savings can be measured in minutes, noise in decibels and gaseous emissions in tonnes of carbon etc. In order to solve the problem of combining impacts measured in minutes, decibels and tonnes etc economists try to reduce these to a common unit of account: money. Other impacts are harder to quantify, such as the value of the visual impact of areas of outstanding natural beauty or heritage sites.

  The benefit-cost ratio is based on the aggregation of this assessment of monetised impacts, which are currently: costs and revenues; time-savings and fatalities and injuries prevented. The complete transport appraisal, presented in the Appraisal Summary Table (AST) gives equal prominence to all significant impacts of a transport scheme whether monetised or not, thus including a number of factors that are not included in the benefit-cost ratio.

  The Department has been at the forefront of measuring transport impacts in monetary terms and continues to explore the scope to further extend the range of impacts assessed in monetary terms.

  As mentioned, the Government's appraisal methodology is consistent across all modes. However, there are some minor differences with respect to the components of the appraisal. Rail appraisals include two benefits that are not used in road appraisals. The time-savings to road users due to congestion relief that result from road-to-rail modal shift caused by a rail scheme are included in the benefit-cost ratio for rail schemes. Similarly, rail passenger crowding-relief from improved rail service quality is included as a welfare benefit in the benefit-cost ratio. It is not felt that analogous benefits derive from road schemes.

Q14.  Has the Government now notified the European Commission of implementation measures taken in respect of the First European Rail Package?

  A14.  The Commission has not yet been notified of implementation measures taken in respect of the First Package of Rail Infrastructure Directives. But there have been discussions with DGTREN on the considerable extent to which Britain already complies, such that the rail market liberalising objective of the Package is already met to a greater extent than elsewhere. However the Commission has launched infraction proceedings in the ECJ against the UK and a number of other Member States. The UK is concerned with three sets of implementation measures (Great Britain, Northern Ireland and the Channel Tunnel) and policy development for these is not yet complete.

Q15.  Finally, could the Department please provide details of the regulatory board structure which will replace the Rail Regulator next year. In particular, when will the board members be announced , and on what date will the new board begin work?

  A15.  The new Office of Rail Regulation's Board will comprise a Chair, a CEO, two/three Executive Directors and three/four Non Executive Directors (ie a majority of Non Executives). The new Board will begin work at the end of the current Rail Regulator's term on 5 July 2004. The Secretary of State announced the appointment of Chris Bolt as the Chairman on 8 January 2004. Tom Winsor, the current Rail Regulator, has invited Mr Bolt to join the Rail Regulator's advisory board as a non-executive director until he takes over as chairman in July. Mr Bolt is also helping the Department in the selection of the CEO and NED's. The Executive Directors will come from the Office of the Rail Regulator's existing advisory Board. The appointment of the Chair is for five years, the CEO will be for three years and the NED's for between two and five years, all with the possibility of renewal and also for the CEO appointment to be made permanent. It is hoped that the CEO and NED's can be announced in February or March 2004.

Department for Transport

February 2004


 
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