House of Commons - Transport - Written Evidence

Select Committee on Transport Written Evidence

Memorandum submitted by Greater Manchester Passenger Transport Authority and Executive (LR 83)

INTEGRATED TRANSPORT: THE FUTURE OF LIGHT RAIL AND MODERN TRAMS IN BRITAIN

INTRODUCTION

Greater Manchester Passenger Transport Authority and Greater Manchester Passenger Transport Executive welcome the opportunity to submit to the Transport Select Committee its views on the future of light rail.

In July 2000, GMPTA/E published its plans to develop a countywide, high quality, integrated transport network which had three components:

— a heavy rail strategy—upgrading the overall quality of services across the conurbation;

— a quality bus corridor strategy—extending a 200km quality bus network across Greater Manchester; and

— a light rail strategy—building on the success of Phases 1 and 2 of Metrolink.

All three strategies are essential in delivering a fully integrated network which meets the needs of the conurbation and the local business community and which will deliver a high quality attractive public transport alternative to encourage significant modal shift.

An integrated public transport system needs at its core the existence of a system of fast, frequent, high capacity public transport links supported by feeder services at a number of interchange points. For Greater Manchester the Metrolink system will create this central spinal network providing a step change in quality and capacity. It will provide a fast, high capacity network giving a high quality, frequent service, attracting people out of their cars, boosting regeneration and reducing social inclusion.

1. THE COSTS AND BENEFITS OF LIGHT RAIL

The benefits of Metrolink in Greater Manchester have been demonstrated for almost 13 years and are considerable. Metrolink delivers fast, frequent, fully accessible and reliable services providing a comfortable and safe journey. The Metrolink system is flexible, attractive, penetrates the regional (Manchester city) centre, linking the two main heavy rail stations at Victoria and Piccadilly, connects with new centres of economic activity and has been and can be installed at a far lower cost than heavy rail. Metrolink's advantage is that it operates at high speed on segregated track and then changes to operate on-street as a tram, ideal for giving good access into urban centres. The system has demonstrated its ability to generate substantial modal shift and to support regeneration. The system is popular with local residents and businesses and further extensions will help provide greater operational effectiveness and wider journey opportunities.

Metrolink already carries 19 million passengers per year, having experienced steady patronage growth in a declining public transport market and suffers from overcrowding, especially in the peak periods. But for Metrolink some 3.5 million of these journeys would have been made by car, with the roads running parallel to Metrolink having seen traffic reductions of up to 10%. Within an area of 2km of the line between 14% and 50% of car trips to destinations served by Metrolink have switched to Metrolink.

The capital costs of light rail, whilst high, remain lower than those of heavy rail or road construction. On heavily used corridors, however, the benefits outweigh these costs. The three lines of the phase 3 extensions to Metrolink were anticipated to be delivered under a single contract, however the respective costs and economic benefits of each line can be summarised as follows:


	Capital Cost	Length	Forecast Patronage	Car journeys Saved	Accident Savings	Benefit to Cost Appraisal
	£m	km	M	m	£m	£m

Oldham/Rochdale	276	24	6.4	1.5	6.4	2.5:1
Ashton	205	10	5.4	2.0	9.6	2.1:1
South Manchester	283	21	6.2	2.1	11.9	2.7:1
Total	764	55	17.9	5.6	27.9	2.6:1

The existing Metrolink system is 37km in length, carries 19 million passengers per year and takes £3.5 million journeys off the road each year. To put this into context, Metrolink carries more passengers than the whole of the local (180km) heavy rail network—with only a fraction of the rolling stock capacity.

Greater Manchester has shown through Phase 1 and 2 of Metrolink that high quality public transport is essential to improve the accessibility of town and city centres, attracting development and stimulating investment into local communities. The Salford Quays extension for example cost £150 million but created over 3,000 permanent jobs, stimulated £60 million of investment by business and boosted the economy of Greater Manchester by £70 million per year.

In 2004 GMPTE commissioned further independent research that showed that Metrolink will enhance the economic competitiveness of the region, securing regeneration and increasing the economic output (GDP) of Greater Manchester by £1.4 billion per annum. Metrolink will benefit the most deprived areas by permanently extending the geographical limits of residents search for employment and training opportunities, thereby leading to reduced unemployment and increased rate of economic activity. Metrolink will also improve the operational efficiency of businesses, giving them permanent access to a larger labour market (thereby reducing costs and improving productivity) as well as a larger customer catchment. By extending Metrolink the public sector is sending a potent signal to the investment market of its long-term commitment to securing urban revival.

The regeneration and social inclusion impacts of Metrolink future expansion can be demonstrated as follows:


	No of Residents
	Within 800m of stop	Without car	Within 800m of stop in Deprived Areas	Development sites	Numbers of Jobs Created (range)
	No's		No's

Oldham/Rochdale	113,000	54%	53,000	58	5,600-	6,400
Ashton	51,000	56%	20,000	23	3,200-	5,500
South Manchester	97,000	53%	33,000	23	5,500-	8,600
	261,000	54%	10,6000	104	14300-	20,500

It is also important to emphasise the ongoing savings to the Treasury of converting heavy rail lines to Metrolink, through replacement of subsidised heavy rail services with unsubsidised, privately (and profitably) operated tram services, as the successful conversion of the Altrincham and Bury heavy rail lines for Metrolink Phases 1/2 demonstrates. The conversion of Oldham and Rochdale heavy rail lines as part of the Phase 3 package will save the Treasury about £125 million in subsidy over 25 years (currently about £5 million pa within the Northern Franchise) and up to £60 million in infrastructure renewals that will be required if Metrolink conversion does not take place.

2. WHAT LIGHT RAIL SYSTEMS NEED TO BE SUCCESSFUL

The existing Metrolink lines are successful because they:

— Serve a major urban conurbation.

— Have major traffic attractions at the end of routes.

— Serve corridors with significant volumes of traffic.

— Offer a service competitive with other competing modes.

Furthermore it is successful because it has a number of features delivering benefits to users and potential users:

(a) Competitive journey times compared to other modes (car and bus).

(b) It delivers a level of predictable regular and reliable journey time and service patterns using a high degree of segregation from traffic, with priority at junctions.

(d) Good key interchanges with other modes eg several park and ride, bus interchanges at Altrincham, Bury, Piccadilly and train interchanges at Piccadilly and Victoria.

The three lines comprising Phase 3 also have these same characteristics. Integration of the tram network with either existing public transport services (bus and rail) is also a prerequisite for success. That is why Metrolink will not only provide key interchanges with bus and rail, but why we will aim to redesign bus routes and services to operate in a complementary fashion through feeder services, integrated timetables and easy to purchase tickets.

3. HOW EFFECTIVELY IS LIGHT RAIL USED AS PART OF AN INTEGRATED TRANSPORT SYSTEM

Any successful integrated transport system is dependent upon the existence of a fast, frequent, high capacity public transport system as its core network. In the case of Greater Manchester, Metrolink will provide this spinal network, complemented by improved interchange facilities between train, rail and bus services.

There are four aspects of integration—integration between modes, through integrated ticketing and information, integration at stations, and co-ordination between modes. The future phases of Metrolink will provide the following integration with other modes and integration and stations:

Air—Provides potential for direct Metrolink services to Manchester Airport from east, north-east and south Greater Manchester corridors.

Rail—Direct services to Manchester Piccadilly, Victoria, Manchester Airport, Rochdale and Ashton for the national and regional trains and in addition Deansgate and Baguley will provide links to the regional rail network.

Bus—Bus/Metrolink interchange facilities will be provided at Ashton, Oldham Mumps and Rochdale. In addition improved facilities will be provided at Manchester Piccadilly Gardens, Manchester Shudehill, Chorlton, Hardy Farm, Northern Moor, Wythenshawe Park, Baguley, Roundthorn, Wythenshawe Centre, Benchill and Manchester Airport.

Park and Ride—New Park and Ride sites provided at Ashton West (Ashton & M60 Jct 23), Derker (East Oldham, Royton Lees & Springhead) and Hollinwood (South Oldham, North Manchester & M60)

Walking/Cycling—Increased likelihood of walking and cycling interchange with new stops located to serve new catchment areas.

Greater Manchester Passenger Transport Executive has a comprehensive information service across all modes for planning your journey and has also a good range of multi-modal tickets, through the voluntary partnership of bus, rail and tram operators.

With regard to integration of services certain of the Greater Manchester Quality Bus Corridors have the potentil to provide high frequency, high quality services to feed Metrolink:

— The section of the Bolton-Bury-Rochdale corridor serving Rochdale.

— The sections of the Rochdale-Oldham-Ashton-Hyde corridor serving Rochdale, Oldham and Ashton town centres.

— The section of the corridor east of Oldham that serves Oldham with an interchange at Oldham Mumps stop.

— The section of the Stalybridge-Ashton-Manchester corridor between Stalybridge and Ashton serving Ashton town centre.

— The network or corridors feeding Metrolink in the Wythenshawe area.

The Transport Act 2000 gave transport authorities outside London powers to introduce a form of regulation of bus services through Quality Bus Contracts (QCs). DfT contends that this has the potential for improving the justification for integration of light rail services with other modes, where bus competition prevents co-ordination of services and GMPTA/E is investigating the use of QCs in terms of Metrolink Phase 3. However, it must be emphasised that QCs are currently untested and far from straightforward in terms of implementation. While the reduction of the minimum statutory period from approval to introduction from 21 to six months announced in the 2004 White Paper is welcomed, DfT's newly-published guidance suggests the practicability test remains a complex and potentially very lengthy process. This, coupled with uncertainty on delivery is not conducive to decisive, confident planning of services and routes.

Scope may, however, exist to provide or strengthen networks of high quality feeder services to Metrolink at Rochdale, Oldham, Ashton, Wythenshawe, Manchester Airport interchanges and at other points on the lines where there is potential for bus feeders. This could potentially be achieved in some circumstances using existing Quality Partnerships or by the use of the PTA's tendering powers. In other circumstances, Quality Contracts may be necessary:

— If it becomes essential to protect such services from competition from other services that may affect their viability.

— To ensure that the tram and bus timetables allow passengers to make connections. The latter point may be important in the evenings and at other times of day when services are less frequent.

— If it is necessary to ensure that particular types of vehicle are provided on a consistent basis (eg fully accessible buses) where this could not be achieved through a quality partnership scheme.

— To ensure that the services are operated to an enhance standard of reliability.

Quality Contracts may also be required to protect the investment in the Metrolink network as a whole, or individual parts of it, from excessive competition from bus services and/or predatory pricing by bus operators. While this has not been a significant problem on Metrolink 1 & 2, there is at least one incidence of a major bus operator specifically targeting resources, including the newest buses in their fleet, to compete against Metrolink.

4. BARRIERS TO THE DEVELOPMENT OF LIGHT RAIL

One of the key barriers to the implementation of any light rail scheme is delay by Government in making funding decisions. While accepting that, where public money is being spent, Government has a duty to ensure it is getting value for money, undue delays are being experienced. For example, it took from April 2002 to December 2002 for DfT to give the go-ahead to proceed to the BAFO bidding stage of Metrolink Phase 3. Following receipt of those bids, it took from December 2003 to July 2004 for DfT to make a decision; this despite DfT being made aware of the scale of increase of grant requirement as early as July 2003 and a meeting between officials and the Transport Minister in February 2004 at which officials believed agreement had finally been reached on a way forward. However, no further contact was made between February 2004 and the unexpected announcement by the Secretary of State in July 2004 that the scheme was "not approved" and previously agreed funding had been withdrawn. Such delays, particularly in the absence of any explanation for months of inaction, are not acceptable. During these delays no allowance is made of escalating costs or changes in market conditions in the approved level of grant. In the case of Metrolink had due allowance been made the £520 million approved grant is estimated to have escalated by over £60 million.

The National Audit Office (NAO) raised a number of concerns over the development of light rail. GMPTA/E's response to these concerns are as follows:

— The NAO report notes that European comparison schemes benefit from a greater number of stops and vehicles, which maximises the patronage base. The Phase 3 proposal has been developed exactly on this basis, by seeking to deliver a larger fleet of vehicles to serve an expanded network of stops, including potential new stops on existing lines.

— The NAO report highlights the need for light rail schemes to be delivered in areas of maximum activity. The Phase 3 lines meet this challenge by linking three major town centres and the region's international airport with Manchester city centre, as well as major residential areas and key areas of projected future regeneration and economic growth, such as Central Park, Kingsway and Ashton Moss.

— The NAO report also highlights the importance of fare levels in maximising patronage. Under the single contract, it is proposed to monitor fare levels to ensure that they are competitive with alternatives including car travel and revenue risk sharing will provide additional opportunities to influence operational outcomes. We have already implemented a Ticketing Scheme under the Transport Act 2000, which will be used to ensure that through fares are provided between bus and Metrolink. We already have through rail-Metrolink fares throughout Greater Manchester and rail tickets to central Manchester from within the county include free Metrolink use in the central zone as part of the ticket price. These measures will help to maximise patronage.

— The NAO report discusses the importance of delivering schemes that integrate with wider local transport networks. The Phase 3 proposal seeks to maximise the network's future patronage levels by utilising all integration tools. Integration is facilitated by the design of the network, which interchanges with heavy rail and bus networks at key town/city centre facilities. Elsewhere, we will support the network by complementary bus measures through the Quality Bus Corridor network, quality partnership arrangements and, if necessary and possible, Quality Contracts. This is discussed in greater detail in the "White Paper Policies" commentary below.

— Finally, the NAO report highlights the role of park and ride. The Metrolink Phase 3 proposal seeks to maximise the potential that light rail holds for park and ride. Up to 1,000 dedicated spaces are proposed for the new Phase 3 lines, in addition to additional parking facilities to be provided along the existing Bury, Altrincham and Eccles lines. Park and Ride is already a key feature of the existing system with 3,500 spaces at rail or Metrolink stations. A strategic approach to park and ride is being developed, which overall could potentially double the number of spaces through the implementation of our second LTP.

5. THE EFFECT OF DIFFERENT FINANCING ARRANGEMENTS (PUBLIC/PRIVATE) ON THE OVERALL COST OF LIGHT RAIL SYSTEMS

Greater Manchester Passenger Transport Executive embarked on its procurement of the Metrolink expansion as a Design Build Fund Operate contract in accordance with PFI/PPP principles as determined by Government's, national procurement policy for light rail schemes. This form of contract transfers the risks of design, construction, operation and maintenance to the private sector. It is worth noting that when Metrolink procurement was first considered, in 1988, independent analysis concluded that separation of the contracts to design and build and then operate and maintain by the public sector, where the public sector took the revenue risk, would offer the opportunity to reduce the costs of the scheme, but this approach was rejected by the then Government.

The public sector funding requirement has increased through the various stages of the bid process as follows:


	Initial Funding Approval (July 2000)	Invitation to Bid (Jan 02)	Final Bids Best and Final (Oct 03)

Capital cost of 3 lines (inclusive of risk allowance)	513	667	764
Phase 1/2 Renewals	13	38	60
	526	705	824
Less Funded by:
Private Sector	216	252	60
Cash Flows from Operation	58	(23)	23
Manchester Airport	50	36	36
	324	36	119
Grant Requirement	202	440	705
Compensation to outgoing Concessionaire	80	80	80
Total Public Sector Requirement	282	520	785

Between 2002 and Mid 2003 it seemed apparent that funders, sponsors, etc were seeking greater certainty of profits and had become more risk averse. This was consistent with the negative published research and articles on rail and light rail at this time eg Standard and Poors, Carillion's losses on NET (and their announcement of their withdrawal from light rail), Network Rail financing and the enforced restructuring of Croydon Tram link. Furthermore with alternative contracts in other PFI sectors being offered by Government, light rail was seen as being less attractive, exacerbated by light rail bids being the only sector where sponsors and banks needed to take any material volume (revenue) risk. This significant change in market sentiment was manifesting itself with prices coming in from suppliers for equipment and infrastructure works much higher than previously given.

Sponsors and funders were taking a rather more pessimistic view of Phase 3 revenues than previously and taking a cautious view on operating costs, especially with respect to maintenance and renewal costs. Hence the reduction in concession funding was explained by a reduction in the cautious view being taken of the cashflows being generated from Operations.

This view was independently confirmed by NM Rothschild & Sons who concluded that after the funding decision had been made in December 2002 there had been a significant downturn in the private sector's appetite for light rail sector risk. This had led to the banks discounting revenues by 30-40% and generally making a cautious assessment of the project's economics ie higher capital costs, higher operating costs and lower revenues. Hence the amount of private finance reduced and the amount of funding required from the public sector increased.

The existing procurement process followed in Greater Manchester has been conducted by a very experienced team. Competition has been strong through all stages, with four bidders down-selected to two in December 2002 in order for BAFO to proceed. There is also little doubt that bidder groups were, and remain extremely keen, to "win the contract".

The key issue is whether the Concession structure, remains the most appropriate procurement route and, in particular, whether the concessionaire has the potential to make excessive profits, the extent to which the Construction Joint Venture can inflate costs unreasonably and, finally, whether a single contract approach offers the opportunity for prudent pricing of risk. On the first issue, a concern would be that the Concessionaire could make "super-profits", having taken a cautious approach to revenues and to operational and maintenance expenditure, albeit bidders have operations expenditure costs in line with our own expectations and have base case revenues higher than our own advisers, hence the opportunity for earning excessive profits is not considered great. To protect, in any event, the public sector interest, GMPTE have included two mechanisms in the Concession Agreement, which will to a large degree, ensure "super-profits" are not all taken by the private sector, in the event that the out-turns are much better than expected. The first mechanism is a profit sharing clause where profits above the sponsors agreed return are shared 80:20 (compared to the more typical solution of 50:50). The second mechanism is through the capturing of refinancing gains of which at least 50% is to accrue to the public sector.

On the issue of construction prices, GMPTE's consultant have made diligent enquiry into the capital expenditure with each bidder and have also made their own independent assessment of the level of capex on the bids. They consider that after making due allowance for risk they believe that the capital costs are realistic and further the construction joint venture is not making excessive profits. It has also been agreed with bidders that where contingency sums had been included these would be shared to the extent they were unused at the end of the construction period.

The final question with regard to the PFI/PPP structure relates to whether value is being distorted by integrating the construction and operational risk profile, in one single contractual approach. Whilst conventional wisdom has been that the public sector secures best value by requesting those who build the system to then operate it, it is possible that in a market with little appetite for risk, values are being driven down by the overall risk profile of the project. The true answer to the question is that no-one knows, but the way to protect the public sector in the future is through a condition in the Contract Documents—as is the case with Metrolink Phase 3—to enforce a re-financing of the concession at a later date. In this way the public sector will have the capacity to capture in full the benefits of an "easing" of the risk profile (after construction) and when operations are fully bedded in.

In addition to undertaking the above analysis, alternative procurement strategies have been considered to see whether these may offer a better deal for the public sector. These alternatives range from looking at shorter term concessions, revenue risk sharing and to considering the DLR (Docklands Light Rail) model and rebidding a Design and Construct Contract separately from a new concession to Operate.

On the face of it the option that may offer best value for the public sector is to fundamentally change the procurement approach and move towards separate construction and operations contracts. The advantages are more illusory than real however.

(i) There is now no such thing in the present market place as a complete risk transfer in relation to constructing and delivering rail projects "without having to pay high premiums". There is therefore no evidence to suggest that a separate design and build contract would involve lower costs to the public sector than the present procurement method.

(ii) Only by eliminating construction risk, and the public sector assuming this entirely for itself, would costs be reduced in the first instance. Public policy recognises however the problems of this approach and questions whether in fact reductions would be achieved once the costs of the risk had emerged, in the final out-turn price.

(iii) 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.

The key issue for GMPTA/E and DfT was whether the cost profile of the bids was reasonable having regard to the risk profile the bidders are assuming. The view of the PTA/PTE, with support from its specialist advisers, is that it is reasonable and unlikely to be significantly better if an alternative procurement approach is pursued. Only by changing fundamentally the risk profile of the project would this conclusion tend to change without any certainty that cost benefits would ultimately be captured by the public sector.

6. THE PRACTICALITY OF ALTERNATIVES TO LIGHT RAIL SUCH AS INCREASED INVESTMENT IN BUSES

A feature of light rail is its ability to carry significantly more passengers than conventional or other bus based alternatives. Furthermore any bus-based system will exacerbate congestion caused by the already large numbers of buses congregating in city centres, where there is little or no spare capacity for buses to terminate.

There is also evidence that developers are reluctant to commit to major regeneration schemes on the basis of bus based transport links serving the area.

It should be noted that the range of bus alternatives to light rail that are operationally and/or technically proven is very small. However, it is also the case that the alternatives have a lower capacity than light rail and therefore their main application is in offering a system (including guidance and/or extend power supply) where demand does not justify light rail. The small capacity of buses is inadequate where there is likely to be high traffic volumes, as in the case of Metrolink.

In passenger demand terms there is very little evidence as to whether these bus based systems will achieve significant modal shift and attract patronage especially from the car, and therefore, the extent to which they can be as effective as light rail in this regard. Typically light rail will attract 15%-20% modal transfer compared to bus at 4%-6%. Overall passenger forecasts for bus alternatives are 25% lower than those for Metrolink. Therefore the scale of benefits will be significantly lower than those of light rail. In addition, with regard to capital costs, whichever mode is used to provide the quality and capacity, certain costs (land acquisition, statutory undertaking service diversions, bridges and tunnels) will be incurred. This means that bus based systems also have a high cost of delivery—and the more "tram-like" the bus system, the more tram-like are the costs.

Journey times are an important issue for passengers and potential passengers. Buses do not perform as well due to their journey times being longer than light rail. Some examples of journeys where Metrolink out performs the bus alternative are shown below:


	Bus	Metrolink

Oldham—City Centre	42	33
Wythenshawe—Airport	30	21
Chorlton—City Centre	36	21
Ashton—City Centre	44	36
Droylsden—City Centre	23	16

On the basis of the work done by GMPTE, none of the bus alternatives in any of the three Phase 3 corridors delivered the scale of benefits of light rail, as shown below:


	Metrolink Phase 3	All Bus

Operational Commencement	2009-10	2012-13
Capital Costs	£764 million	£527 million
Annual Revenues pa	20.0	15.4
Operating Costs pa	17.1	16.1
Passenger Journey per Annum	18.0 million	13.4 million
Car Journeys Removed per Annum	5.6m	2m
User Benefits	1,143	364
Non User Benefits	502	226
Total Benefits	1,645	590
Benefit Cost Ratio	2.6	1.91

The above clearly demonstrates that Metrolink has:

— A superior benefit to cost ratio

— Total benefits nearly three times those of Bus

— Will carry 25% more passengers than Bus

— Will take 3.6 million journeys off the road each year.

— Will generate an operating surplus where the bus alternative will require a Council Tax subsidy, contrary to Government policy

CONCLUSIONS

Increasingly, the evidence shows that the best performing economies are those that are underpinned by modern, dynamic public transport systems, which provide fast, convenient and reliable services. There is no doubt that connectivity is critical to economic and social success.

What the evidence also shows is that there is no substitute for long term and integrated planning; where regeneration frameworks drive economic and social performance, and where mainstream transport and other programmes drive public sector inputs to those regeneration frameworks. This is how Greater Manchester is being transformed into a world class regional capital city . . . one which is increasingly categorised as a Place of Opportunity rather than a centre of decline.

Whilst what you can spend is of course a reflection of resource availability, the important point in strategic planning terms is never to lose sight of the goals providing they are relevant and appropriate to deliver the economic transformation that is being sought. Resource pressures should determine the pace—not the scale of change—which over time is required.

Metrolink has been a key factor in Greater Manchester's recent economic revival and it has a critical role to play in securing ongoing private sector investment to support regeneration strategies, particularly in areas that are still economically fragile. Metrolink will therefore continue to form the cornerstone of Greater Manchester's integrated public transport strategy.

February 2004



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