Examination of Witnesses (Question 1-19)
MR CHRIS
AUSTIN, MR
PAUL FURZE-WADDOCK,
MR JONATHAN
METCALFE, MR
TOM SMITH,
MR DAVID
FRANKS AND
MR ADRIAN
LYONS
5 JULY 2006
Chairman: Good afternoon, gentlemen.
You are most warmly welcome to this session. Before I begin, there
are some bits of housekeeping. Members having an interest to declare?
Mr Martlew: I am a member of the Transport
and General and General and Municipal Workers' Union.
Clive Efford: I am a member of the Transport
and General Workers' Union.
Graham Stringer: I am a member of Amicus.
Chairman: Gwyneth Dunwoody, ASLEF.
Mrs Ellman: I am a member of the Transport
and General Workers' Union.
Q1 Chairman: Before I start, I would
like to remind everybody that when we hear evidence in public
we are bound by the resolutions of the House of Commons of 15
November 2001 that no matter currently before a court of law should
be debated. There is a case currently before the courts concerning
open access on the rail network. I wish to make it clear I shall
allow no reference whatsoever to this case in the forthcoming
evidence session. Gentlemen, may I ask you first to identify yourselves
for the record?
Mr Lyons: Adrian Lyons, Director
General of the Railway Forum.
Mr Franks: David Franks, National
Express Group.
Mr Smith: Tom Smith, Govia.
Mr Metcalfe: Jonathan Metcalfe,
GNER.
Mr Furze-Waddock: Paul Furze-Waddock,
First Group.
Mr Austin: Chris Austin, Association
of Train Operating Companies.
Q2 Chairman: Does anybody have any
general points to make before we go into questions?
Mr Austin: No.
Q3 Chairman: In what ways is the
current franchise system better than a unified, state run railway
system?
Mr Austin: One of the benefits
for passengers is that train operating companies focus on passengers.
That is what we deal with. We do not deal with engineering; we
deal with serving passengers. I think the benefit for the government
is that it provides regularly a competitive process to ensure
that the services it is specifying and paying for offer best value
for money. Those are two initial thoughts.
Q4 Chairman: Anybody else?
Mr Franks: It has certainly enabled
much more innovation to be brought into franchising.
Q5 Chairman: What specifically?
Mr Franks: There are a number
of issues. Perhaps I will touch on a very simple one. Revenue
protection for me is a good example. I recall as a managing director
of one of the franchises the ability, as a manager in the private
sector, just to literally put £1 million on the table to
put additional resources in place to manage revenue protection
and drive the revenue at risk element.
Q6 Chairman: How often did you do
that?
Mr Franks: That is an example.
There are a number of examples in terms of how we have invested
in the railway to drive up customer benefits.
Mr Metcalfe: I would agree with
the point about innovation and the other thing I would add is
about culture. We have worked very hard in GNER to train staff
and we very much focus on customer service. I think that has been
partially a contribution towards the numbers.
Mr Smith: Everyone of the four
TOC representatives here has had the experience of losing a franchise.
Q7 Chairman: Is this part of your
training? One of the advantages of the franchise system is that
you lose your franchise and you are better next time.
Mr Smith: Exactly. That is the
point. It really does spur you on to make improvements and to
offer something that is going to beat the others next time.
Q8 Chairman: You think these objectives
are different from a unified state system. You do not think the
state run system is interested in its customers or you do not
think that they train people?
Mr Smith: I was not seeking to
make that point. The absence of competition within a unified state
system is a marked, factual difference.
Q9 Chairman: The Association of Transport
Coordinating Officers said that franchises are not putting passengers'
interests first; they are driven by financial objectives and are
constrained severely so that the specifications from the Department
for Transport restrict innovative thinking. Do you recognise that?
Mr Franks: I certainly do not
recognise a number of the points made there. The purpose of the
franchise is to grow the railway in a way so that we get more
customers and happier customers travelling with us. If you then
look back and see what has been achieved in the last 10 years,
I will quote an example of one of our franchises on National Express.
Midland Mainline have seen 92% revenue growth on that business.
It has seen twice as many trains operating than at privatisation.
If I am right that the purpose is to grow the railway in a way
that makes people happy, Midland Mainline is a very good example
of it.
Q10 Clive Efford: On the length of
rail franchises, the average length has been eight to 10 years
on the most recent franchises that have been issued. How do we
strike the balance between the need to deliver an efficient service,
get value for money for taxpayers and the need to encourage innovation
and investment in our railways? Perhaps Mr Austin would like to
start.
Mr Austin: On franchise length,
we would certainly support a move from the norm which has been
five to seven years with the possibility of extension to something
closer to 10 because it gives a much better chance for you then
to invest and for investments to come through in the period of
the franchise. Also, picking up Mr Metcalfe's point, it gives
you a chance really to focus on serving customers' needs, particularly
in terms of staff training and motivation. For all of those things
you need slightly longer than the current franchise length allows.
Q11 Clive Efford: I have heard that
said a lot. Exactly what investment are we talking about? What
would we miss out on if the contract length were too short?
Mr Metcalfe: I do not think there
is one single answer to this. The franchise length may vary from
one franchise to another, dependent on the nature of the investment
required. In a big franchise that requires a lot of investment,
that is where I think a longer franchise of 10 to 12 years is
more sensible because it gives the ability for the franchisee
to make that sort of investment. In our case we have brought in
all the refurbishment of the rolling stock and major redevelopment
of stations at around £140 million in the first franchise
and about £125 million committed in this franchise. With
a shorter franchise we certainly could not have done that. I think
there is also more that could be done.
Q12 Clive Efford: You have invested
in the infrastructure in railway stations and also in the rolling
stock. The rolling stock is not owned by your company. Can you
tell us a little bit more about how the length of contract affects
your investment in that?
Mr Metcalfe: The way it works
is that we agree the level of investment—for example, a
complete refurbishment of a particular set of rolling stock. We
then enter into an arrangement with the ROSCOs who own the trains
to repay that investment over the duration of the franchise. The
longer the duration of the franchise the more able to accommodate
a greater slice of investment we are.
Q13 Clive Efford: The lifetime of
the rolling stock may go well beyond the length of the contract.
How reasonable is it of a ROSCO to expect you to repay that investment
during the course of the lifetime of your contract?
Mr Metcalfe: It depends on the
size of the investment. The system has changed. In the earlier
franchises there was not a great deal of investment and it rolled
over the end of the contracts. In the current round there is now
the arrangement whereby the investment can continue into a future
franchise so it is spread over a longer term.
Q14 Clive Efford: This issue about
investment in rolling stock is a bit of a red herring?
Mr Furze-Waddock: In the First
Great Western franchise we have just committed to an investment
profile of 220 million. Over half of that is in rolling stock.
That is predominantly rolling stock assets in the form of the
high speed trains which are coming to the end of their life and
we are into life extension. That investment is something that
First Group has primed the pot with. There is a joint contribution,
some going in from the ROSCO of about 40 million but over 60 million
is being injected by First Group.
Q15 Clive Efford: You are only going
to invest in that for the length of time that you are likely to
be using that rolling stock. You are not going to make a donation
to someone who is going to use it later on.
Mr Furze-Waddock: It needs to
be amortised over a reasonable period of time so that you can
keep the cost to a reasonable level, so that you are not faced
with trying to recover it over a very short period of time which
would result in having to put fares up to passengers if you are
trying to recover a huge investment like that over too short a
period.
Q16 Clive Efford: I am still not
clear. It is not your worry, is it? You need to pay the ROSCOs
for the length of time that you use the rolling stock. It is the
problem of the ROSCOs as to whether they get the return on their
investment, is it not?
Mr Furze-Waddock: In this case
this was our worry because we had difficulties getting a competitive
quote from one of the ROSCOs in question and so First Group made
the decision to put its own money in.
Q17 Chairman: It was your decision
for your own personal financing reasons, not something directly
connected with the government's grant of a particular franchise.
Mr Furze-Waddock: No, quite the
reverse. It was designed so that we could put in the most competitive,
lowest price bid and pass on all of those benefits to the department.
Q18 Chairman: Which would be normal
commercial practice because you wanted the franchise.
Mr Furze-Waddock: Yes.
Mr Lyons: It is not just about
cash investment; it is about investment in the people who run
the franchise and the inevitably lengthy process involved with
all infrastructure to get change achieved. You have a large number
of stakeholders, not just Network Rail. You have local authorities
and other groups. Five years is just too short. The process of
bidding for franchises is both exhaustive and exhausting and takes
a great deal of time. If you are in a relatively short cycle franchise
you will probably your team is already thinking about the next
bidding process a few months into the franchise. What we need
is a sufficient length of time that allows the owner, when he
takes over the franchise, to invest in the people who are really
going to make an improvement. I am convinced that a longer period
of franchise has a better chance of achieving that.
Q19 Mr Martlew: I can see why you
gentlemen would want longer franchises because they are better
and give you more security. It does not seem in the interests
of the passenger. The reality is you have all had the shock of
losing a franchise. The longer the franchise is the more comfortable
the companies will be. To disagree with Mr Lyons, a short franchise
means that you have to train your staff up to a peak very quickly.
Is there not the view that if you get a longer franchise at the
beginning of it, at the very least, you can be complacent? Is
it not against the passengers' interests to have long franchises?
Mr Metcalfe: I really do not believe
so. If we take the train refurbishments as an example, those things
take about two to three years for all the design, the rolling
stock and specification changes and approvals and then taking
the trains out of work to have them rebuilt. The purpose of doing
that is to give the passengers a better train. Hopefully by giving
them a better train and upgrading something that is 15 or 20 years
old and starting to look very tired and old, that is going to
attract more passengers, more patronage and grow the railway.
I think passengers do benefit enormously by having that earlier,
up front investment. The longer it is left into the franchise
with a few years remaining, they get fewer benefits.
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