Select Committee on Transport Tenth Report

3  What's gone wrong?

29. As Mr Lingard of the National Audit Office told us, the light rail systems built so far "have realised quite a lot of benefits. They are fast, reliable, frequent, comfortable, and they have attracted people out of their cars. They have delivered lots of good benefits, it is just that their full potential has not been realised and that is where the value for money has been lacking."[58] What, then, has prevented the full benefits of light rail being realised, and why have costs escalated so much?


30. One of the key weaknesses identified by the National Audit Office was that ridership had been lower than forecast. There are many reasons for this optimism bias, but one is the extent which services are integrated with other parts of the public transport system. In principle, light rail can operate as the core of an integrated transport scheme. In practice, this has rarely been achieved.[59] Not only have patronage and revenues suffered as a result, such lack of integration may reduce the ability of light rail systems to persuade people from their cars into public transport. The separation of planning authorities and highways authorities, and the limited power of local authorities outside London to control bus services in their area have both hindered the development of integrated transport systems.

31. The promoters of Nottingham Express Transit, which has been an example of a successfully integrated system, had both planning powers and extensive control over the local bus network. Because the promoters, Nottingham City Council and Nottinghamshire County Council were planning authorities,[60] they were able to ensure that park and ride facilities were provided and vehicular access to the city centre restricted. In contrast, Croydon was unwilling to provide park and ride facilities for the Tramlink, and Transport for London had no powers to force them to do so; similarly, although Mr Hendy of Transport for London, hoped there would be park and ride facilities linked with new tram links or extensions, that depended on the willingness of local authorities to accept them.[61]

32. Nottingham City Council is part owner of the major bus operator in the area[62] and so was also able to ensure that bus systems complemented the tram. Other schemes have not been so successful. The Institution of Civil Engineers claimed "The UK is the only developed country in the world where light rail is expected to compete with bus and train services rather than form an essential part of an integrated network."[63] Certainly, outside London, local authorities have very limited control over the bus network. Councillor Leese told us that:

    Some of the things you need to do, like integrated ticketing, integrated timetabling and a measure of price stability in terms of fares, can only be done if you have a fully regulated system.[64]

Councillor Roger Jones, Chairman of the Greater Manchester Passenger Transport Authority, emphasised that:

    all the major cities outside London are at a massive disadvantage when it comes to the way buses operate. In Greater Manchester, at the last count I had there were 44 bus operators operating within the county. You have got two that dominate the market which never compete against one another and we have no regulatory powers whatsoever, as you know, to sort out the frequencies of the buses, the fares, the timetables and so on, so we are really in a mess when it comes to trying to make some sense of the bus.[65]

33. This lack of control means that buses can be run in competition with the light rail system.[66] It is notable that the Tyne and Wear Metro suffered a dramatic decrease in passengers after bus deregulation in 1985, and deregulation also badly affected the Sheffield Supertram.[67] Even in London, Tramtrack Croydon complained that Transport for London was now running more bus miles in the tram track area than when the contract was let.[68] Not only does bus competition reduce light rail patronage, uncertainty about the level of bus competition can lead to contractors pricing in more risk, driving costs higher.[69] Pteg considered that changes to the bus "quality contract" scheme might help but that although the Railways Bill would make it easier for PTEs to introduce such quality contracts to replace rail services, it would not "reduce any of the obstacles which stand in the way of quality contract proposals which are designed to complement a light rail scheme."[70]

34. It was notable that we received several submissions from Nottingham complaining that direct bus services had been replaced by feeder services to the tram. Hyson Green Traders' Association felt their area had not only lost custom during construction, but was no longer as well served as before.[71] We are not in a position to establish whether services have significantly deteriorated in any particular area, nor do we believe that this is an appropriate task for a select committee. However, it does raise a general point: although we consider bus services should be regulated so that they not compete directly with publicly funded light rail systems, we do not believe that the introduction of a tram system should mean that direct bus services are replaced by feeder services to light rail systems unless this results in overall benefits to the passenger.


35. The NAO recommendation that "The Department should seek efficiency savings by requiring promoters, as a condition of its grants, to demonstrate greater standardisation in the design of systems, vehicles and methods of construction"[72] echoes the recommendation made by our precursors in 2000 that the "Government bring together local authorities and other promoters of LRT projects to ensure that where possible vehicles and other equipment are standardised in order to realise economies of scale."[73] Clearly, little or no progress has been made. Lack of standardisation increases costs. Mr Ambrose of AEA Technology told us that there were economies of scale in buying large numbers of vehicles, and that continental systems which might order 100 vehicles at a time were at an advantage compared to the far smaller British systems.[74] There are some examples of unexpected co-operation: when we took evidence Mr Scales of Merseytravel told us: "we have actually agreed whilst sitting down here that when I order my 21 trams for Line 1 I will make 22 and we will do one for Croydon as well",[75] but little has been done to date.

36. Transport for London told us that a new body, UKTram, had been set up:

    to allow the tramway industry to develop a coordinated and unified front in dealing with government and statutory bodies. It seeks to develop national standards, reflecting an earlier recommendation made by the Committee, and best practice guidelines for the design, construction and operation of tramways and to provide a pool of technical and operational expertise that can be drawn upon at local, national or international government level. TfL (London Trams) is a founder member and administrator of UKTram. It is hoped that it will help to ease or remove some of the barriers that currently exist in developing light rail and tramway schemes, particularly those identified in the NAO report. DfT is supporting the work of UK Tram, and is a board observer.[76]

It was clear from the evidence we took from the Department that although the DfT might support UKTram it had not taken the initiative to set it up.[77] The Minister was lukewarm about standardisation:

    As far as you can standardise, in terms of best practice and all the other elements that UKTram may well give to promoters, that is perfectly fine; standardisation is not a magic bullet or panacea to try and solve many of the problems that have come up in the past for some of these projects.[78]

Cost escalation

37. Although central Government contributions to light rail schemes have ranged from 11% to 96% of the construction costs, the Department expects to pay not much more than around 75 percent.[79] While earlier light rail systems in the United Kingdom were generally built without requiring a higher contribution from government than planned, more recent schemes have significantly increased in cost during their planning period. The DfT told us public-sector contributions for Manchester Metrolink Phase 3, Leeds Supertram and South Hampshire Rapid Transit had all increased dramatically between their first approval and the point at which the Department revoked that approval in July 2004.Table 5: Cost escalation in schemes given DfT approval 2000-2004
July 2000
March 2001
December 2002
Manchester Metrolink Phase 3 £282m- £520m £900m
Leeds Supertram- £355m £500m
South Hampshire Rapid Transit £170m £270m

Source: LR 72

These are significant increases, and the Department is rightly concerned. The reasons for this cost escalation are complex and interdependent; we look at the Department's role in the approval processes in the next chapter; here we examine other factors involved in the increase.


38. While a variety of contract structures have been used to secure funding for light rail, past schemes have been procured in ways which attempted to transfer risk to the private sector. Until recently, the most favoured contract form was Design, Build, Operate and Maintain (DBOM), in which the private sector took over both the risk that construction would be delayed or over budget, and the risks that patronage, and accordingly revenues, would be lower than forecast. Initially at least, risks were successfully passed to the private sector. Although some schemes have operated at a profit, as the NAO report notes, "the Midland Metro, Manchester Metrolink and the Croydon Tramlink, all operated by private sector companies, made financial losses over the period 2000-2003"[80] and the private sector's "losses ranged from £200,000 on the Sheffield Supertram to £11.4 million on the Midland Metro."[81] In addition, the private sector bore cost overruns on the construction of some schemes, although in some cases these were borne by the builder of the system rather than the consortium with overall responsibility.[82]

39. We were told that at least 50% of the increase in costs had stemmed from the fact that the private sector had learned from these examples, and was now pricing in the risk.[83] even though at least two of the schemes mentioned in paragraph 39 are now making an operating profit. Mr Mulligan told us that it was not that the capital cost of light rail had trebled, but that the perception of risk had collapsed.[84] The equity the private sector was prepared to put into the Metrolink extension had shrunk from £252m to £60m.[85] Mr Ambrose told us that major vehicle manufacturers estimated that light rail cost 60 per cent more to procure in the United Kingdom than in other European countries, because "at the moment the winning consortium is expected to take all the risk, including things over which it has absolutely no control."[86] Revenue risk, in particular, is impossible for the private sector to control, both since the transport market is so little regulated, and since local authority planning decisions can have profound effects on patronage. Lenders are likely to require discounts of 30-40 per cent to be applied to such revenues.[87]

40. The Department's own appraisal criteria now cost in this risk. TfL told us:

    Serious concerns over escalating cost estimates for some light rail projects have resulted in the DfT requiring an 'optimism bias' loading of up to 57% on capital costs. This has for example resulted in the estimated cost for West London Tram increasing from £463m to £648m.[88]

Contract forms

41. Manchester was entirely clear that it had used DBOM because when Metrolink was first procured, it was a choice between that and the PFI favoured by the Treasury. Although a public-sector procurement might have been the most effective way of financing the Metrolink, it would not have been acceptable to central government.[89] Some witnesses considered that there were severe problems with the Design, Build, Operate and Maintain approach. AEA Technology (Rail) contended that a procurement process which relied on finding a single operator for the entire system limited the number of companies able to bid:

    Consortia will generally include a vehicle supplier and an operator. Following recent mergers there are only three major and about three smaller light rail vehicle suppliers in Europe, and a similar number of transport operating groups with light rail experience interested in bidding for UK work. There is a wider choice of civil construction firms, but few of these have experience of building light rail infrastructure. Since it is very difficult for a single bidder to participate in more than one consortium, public sector promoters seeking consortia to bid for a light rail scheme may face a limited choice of credible bidders and this lack of competition is likely to increase the price.[90]

D. Scott Hellewell, a transport consultant, considered that DBOM not only meant that expertise remained within the private companies which had been successful in bidding for contracts, but that that expertise became too expensive to use:

    Consortia who have subsequently built LRT systems or extensions in the UK have amassed a great deal of hard-won knowledge and experience. This they priced into subsequent LRT schemes for which they bid. However, this usually means that they are under-cut by an inexperienced 'new boy'. It is significant that every LRT scheme or extension in Britain has been built by a different contractor. There are a number of consequences of this: firstly, there is no transfer of experience from one project to another and the same costly mistakes are repeated. Secondly, there is no standardisation or commonality of large or small elements between the schemes. This leads to inflated costs, a perceived unacceptable degree of risk and hence the current situation.[91]

42. Mr Hendy believed that there was "an elegance in having the smallest number of people involved in service delivery" and found it helpful to have a single concessionaire responsible for delivering the service.[92] Nottingham felt that it wished to retain a single contract in which the consortium took the risk of ensuring that the various components of the system worked together.[93] Manchester considered that it was inappropriate to change its procurement approach so far into the process, both because the high risk premia were now a fact of the market, and were unlikely to be avoided by alternative procurement methods, and because:

    Fundamentally changing the contractual approach would involve long contract delays. A minimum delay of 24 months would be the outcome, which would cost a minimum increase in costs of £75m given construction industry inflation. This would mean the need for cost efficiencies in excess of 10% to be captured just to stand still - a very high-risk strategy given the dynamics of the market place now and for the foreseeable future.[94]

Nonetheless Manchester now considered that given the assumptions the private sector was now making about risk, and their appetite for that risk, it would be appropriate to review procurement options.[95]

43. Other promoters are already actively exploring new contract methods, which could bring down costs for them.[96] Merseytravel involved the private sector from a very early stage, and invested in ensuring that it could provide the private sector with the most advanced and accurate information relating to the project to give genuine cost certainty. At a late stage, it rejected the DBOM route, and decided to split up the contract into smaller separate contracts.[97]

44. Mr Hendy told us that one of the aims of UKTram was to "help Government feel more comfortable about the quoted costs and the quoted patronage" by "trying to establish better methods of procurement … reducing the risk premium particularly for construction and the equipment."[98] The Minister told us the Department had no preferred form of procurement:

    We have said, clearly, to Manchester and others: "come up a procurement scheme that works for you …". [99]

He went so far as to suggest that he would look at a public sector scheme "if it worked", but warned:

    In some of the cases where there has been a lot of work done over some of these extant schemes, part of the process has been simply to shift that private risk element to the public sector, and in some cases that may mean, as you work through the figures, no adjustment or increase in the costs in terms of the upfront element for the public sector, but down the line, in some five or ten years' time, a fairly substantial hit if the risk revenue formulae and speculation does not work. So it is about balance. If shifting all that risk revenue back to the public sector means, in cash terms, upfront and beyond upfront, significant increases in costs, then that is not achieving what we want …[100]

45. In principle, local authorities might shoulder more of the cost of light rail, but they do not appear willing to use their current powers to raise revenue to do so. Although local authorities have powers to spend money raised from congestion charging or workplace parking levies on public transport, none outside London has so far chosen to introduce such a large scale scheme. It is clear from our evidence and from the NAO report that local authorities in France or Germany have more power to raise funds for local transport systems.[101] Sir Howard Bernstein, the Chief Executive of Manchester City Council, thought that there would be scope for local business taxes to raise funding for light rail schemes, which are clearly supported by business.[102] Dr John Disney similarly suggested that rateable values might be increased along a light rail corridor, since the fixed route was an obvious benefit to the neighbouring property and businesses.[103]


46. Further expense is caused by the cost of diverting utilities when light rail schemes are constructed. Utility diversion is desirable both because work on utilities once a system is built will affect the system severely, and because it is intrinsically undesirable to have loose electric current close to gas or water pipes. The utilities effectively stipulate the level of diversion required, and carry out the work themselves.[104] The NAO said that utility companies might demand diversions which were not technically necessary, and promoters had not been sufficiently robust in questioning whether these diversions were really needed, or who should carry them out.[105] 92½ percent of the cost of the new infrastructure provided when utilities are diverted comes from the light rail scheme. Mr Hendy told us that this provided no incentive for utilities to try and minimise the amount of work necessary and that:

    I would be surprised if you could find anybody who has been involved in delivering one of these schemes in the last 25 years who did not find themselves in a position of believing that they paid for a lot of additional utilities work that in normal circumstances would have represented the maintenance and the renewal of utilities...[106]

In addition, a scheme or its promoters may also have to pay heavily simply to establish the precise location of the utility infrastructure.[107]

47. Our precursor committee, which reported before the utilities' share of the cost was reduced to 7½ per cent recommended that it should remain at 18%. Although the recommendation was not accepted at the time, when the Minister appeared before us there were indications that he was prepared to reconsider, although he stopped short of giving an undertaking to bring forward the necessary regulations.[108]


48. The National Audit Office recommended that more should be done to promote innovative light-rail technologies, and to assess whether conversion, track sharing or substitution of heavy rail by light rail would be possible. The Department has already removed the threshold of £5 million below which it would not support innovative schemes,[109] and Mr Hendy told us that the Department was co-operating with industry and promoters in looking at innovative forms of track which would reduce or eliminate the need to divert utilities.[110]

49. We received a certain amount of evidence from individuals or companies proposing new technology. The constraints on our time meant we were not able to consider these as thoroughly as we would have liked, but it was clear that there was frustration at the UK's lack of support for new technology and the regulatory barriers which hinder its speedy development.[111] We took evidence from JPM Parry & Associates, a company which has been involved in attempts to run a light-rail vehicle on a branch line on Sundays when the line is unused since 2001.[112] Although the vehicle had been passed as safe by the Railway Inspectorate in 2002,[113] after four years the company remained in negotiations to allow it to run its vehicle. We are not in a position to judge whether or not such permission should be granted; but we can say definitively that an answer should have been given years ago. Delays like this are not only frustrating, but they put at risk the commercial partnerships set up to support such innovation.[114] The Department should be prepared to intervene when non-financial barriers to innovation occur.

58   Q 84 Back

59   LR 50, LR 87 Back

60   Q 196 Back

61   QQ 214-216 Back

62   Q 221 Back

63   LR 91 Back

64   Q 315 Back

65   Q 313, see also Q221 Back

66   LR 26, LR 30, LR 35 Back

67   LR 46, LR 57 Back

68   Q 200 Back

69   LR 25, LR 55, LR 56 Back

70   LR 55 Back

71   LR 93 Back

72   HC (2003-04) 518, para 17 Back

73   HC (1999-2000) 153, para 64 Back

74   Q 158, see also LR 87 Back

75   Q 158 Back

76   LR 77 Back

77   Q 265 Back

78   Q 275 Back

79   HC (2003-04) 518, para 1.9 and Table 2 Back

80   HC (2003-04) 518, para 2.35 Back

81   HC (2003-04) 518, para 2.35 Back

82   Q 200 Back

83   Q 322 Back

84   Q 323 Back

85   Q 323 Back

86   Q143, see also LR 35 Back

87   LR 61 Back

88   LR 77 Back

89   Qq 328-331 Back

90   LR 57 Back

91   LR 25, see also LR 50, LR 57, LR 60 Back

92   Q 227 Back

93   Q 226 Back

94   LR 83 Back

95   Qq 324-5 Back

96   LR 69 Back

97   LR 78, LR 78A Back

98   Q 204 Back

99   Q 251 Back

100   Q 252 Back

101   Q 151 Back

102   Q 352 Back

103   LR 30, see also LR 64, LR 65, LR 68 Back

104   Qq 30-32 Back

105   Qq 29-30 Back

106   Q 233, see also LR 46 Back

107   LR 51 Back

108   Qq 288-9 Back

109   Q 134 Back

110   Q 233 Back

111   LR 94 Back

112   LR 80 Back

113   Q 397 Back

114   Q 370 Back

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