Examination of Witnesses (Questions 200-210)
MR NEIL
SCALES, MR
ANTON VALK,
MR IAIN
COUCHER, MR
PETER SARGANT
AND MR
PETER FIELD
12 JULY 2006
Q200 Graham Stringer: I will put
it another way. There is a mystery, is there not? We look at the
net figures and it is £5 billion going into the railways
this year and everybody tells us their part of the system is ever
more efficient and effective, yet the bottom line is £5 billion.
Can you explain that?
Mr Coucher: Yes, there are day
to day efficiencies coming out of both the train operations, through
the franchising process; they negotiate hard and get efficient
costs out of the train operators and the costs are coming down,
although to some extent the variable element of a training operating
company's costs are quite small. They have a fixed number of drivers
to run a fixed service, you cannot take drivers out and you need
to provide a certain level of staffing; the train leasing costs
are largely fixed in the long-term and our track charges, as I
have explained remain constant. On the Network Rail side we are
saving a huge amount of money in the operating and maintenance
costs, which is our signals and our maintainers, and those have
come down by some £400 million. Where there has been a significant
increase in expenditure—expenditure not efficiency—is
we are dong three times the volume of work in renewing a very
tired and exhausted asset, so we are renewing some 800 miles a
year on track and in the last year with Railtrack we did 100 miles.
We are replacing signalling systems and we spent some several
billions of pounds investing in West Coast and Southern paths.
There is a lot of new money going in to provide better serviced
and that is where the increase in subsidy has come from.
Q201 Graham Stringer: There is a
tendency for franchises to get less long. You have given a preference
for seven years—and the government seem to want to have
shorter franchises. Mr Field, do you think that the cost of franchises,
which seem to be about £3 million for the bids, do you think
that is a reasonable cost to have? It would be smaller if the
franchises were longer? Is the taxpayer, the passenger getting
fair value for money out of that system?
Mr Coucher: I cannot comment on
the cost of bidding franchises.
Q202 Graham Stringer: Anybody else?
Mr Scales: I think the cost of
bidding franchises, if you do it properly you have to take a long
time, you have to do all the work so they do cost millions and
that is one of the reason we have gone for a long franchise because
we have sunk that cost now and we do not have to repay it every
year for 10 years. So I think if you do it once and you have a
long franchise, that is fine. That is part of the reason, Mr Stringer,
I disagree with short-term franchises because you have to get
the bidders on board and put in a lot of time and effort and it
does cost millions to mount one of these bids, and if the private
sector loses that money and it does not reinvest it in the railway.
Q203 Graham Stringer: Can somebody
square this circle for me before I finish? There is a stack of
arguments which say that the private sector will innovate and
change given the time and there will be efficiencies from that.
But when I listen carefully to what everybody has said today you
are talking about spending large amounts of time specifying the
franchises, leasing costs being constant, the costs of access
to the network being constant. How can I square that circle? It
seems that what is being offered is more like a licence rather
than a franchise and I cannot see, particularly after what Mr
Coucher said, how you can save money when anybody running a train
service has all those costs fixed. How can I marry those two views?
Mr Coucher: I am speaking from
the infrastructure side. We do quite a lot of innovation. We are
investing very significant amounts of taxpayers' money and we
know that we have a very significant responsibility—
Q204 Graham Stringer: Mr Coucher,
I accept that you are spending a great deal of money on signals
and the rest, but what I am really interested in is can the train
operating companies, given all those fixed costs, whether they
have a three-year, seven-year or 25-year license/franchise that
is very heavily specified, even to the level of catering, I understand,
in some cases on the trains, can they really make significant
savings, whether it is three or 25 years? I am perplexed by the
answers you are giving.
Mr Valk: A point there, of course,
is what do you expect from train operating companies? If you expect
innovation from train operating companies or even investment from
train operating companies then you should specify the franchise
in such a way that that is possible and not specify it in too
big detail because then you only execute a franchise. So that
is one. Secondly, if you need a period or a length of the franchise
where you can do that I think the length of the franchise is important
as long as there is continuous improvement. Railways need continuous
improvement, the passengers expect continuous improvement, and
the length of the franchise should be such and the conditions
should be such that it gives continuous improvement. That can
be long or it can be short, depending on the franchise. So I believe
very much that you need to give the room to the private sector
or to the operators to innovate, invest, otherwise you are getting
non-execution of contract.
Q205 Graham Stringer: In your experience,
Mr Valk, what is happening? Are you getting more detailed specification
in the bidding for the franchise, or are you being given more
space to innovate and change?
Mr Valk: The UK franchising regime
has come a long way since the beginning and at this moment in
time it is a very detailed franchise specification. In the Netherlands
the franchise specification is much less detailed, it is a much
shorter specification and therefore it allows much more room to
innovate and invest.
Q206 Graham Stringer: So you think
that moving more to a licensing system?
Mr Valk: In this way you do and
therefore you do not capture the innovation. Another thing, if
you will allow me to say, that the railway is the system and what
you get by not attracting innovation from the operators and keeping
them on a short-term licence situation, is that operators stop
thinking about the long-term any more. Therefore the railways
start to be very much driven from Network Rail or from the infrastructure,
and I believe that there should be a good balance between government
who specifies, the operators who are very close to the passengers
and the customers, and Network Rail, who is very good in the way
they are running the network. There should be an equal partnership,
an equal balance, and by shortening the franchise and by making
the train operating companies only executing you do not have balance
any more. In Holland that balance delivers good results in the
long-term. I mentioned in my note the long-term view in the Netherlands,
`Using and Building' which is developed in partnership by the
industry.
Q207 Mr Martlew: Just on that point,
surely if the government have put in £1 billion, and I think
it is due to go up to a £1.5 billion, into the companies
then the public are going to say to the government, "You
are paying the bills, you must have some say over the operation
of the timetable." So how do we get out of that particular
argument?
Mr Scales: You have directly accountable
politicians in my area that are accountable to the population
of Merseyside that have that very right to specify the timetable
on MerseyRail and that is why we have done it like that. So we
recognise the fact that the government is putting tens of millions
into our system and our local politicians have the last say on
what happens, and at the end of the day the operator of last resort
if anything goes wrong as well. That is one of the attractors
that my politicians and my Chairman went for.
Q208 Chairman: Mr Valk, I just want
to ask you one thing. You do say that in the ten-year framework
in the Netherlands there is an annual review and you think that
that stimulates flexibility, but does that also affect stability,
because you are making the point on the one hand that the franchise
has to be reasonably long, but if it is reviewed every year does
that not act as a counterbalance?
Mr Valk: No, because the framework
contract is giving the direction and every year the parties sit
together, including consulting with passenger organisations to
give the direction for the year. So it is not completely different
but it acts in such a way that you have next year plans which
are revised.
Q209 Clive Efford: Can I just go
back to Mr Scales, on the investment that you made in the rolling
stock? If you are investing in rolling stock is it not the rolling
stock companies that are investing the money and therefore taking
the risks? So why is it affected by the length of the contract
that the train operators hold?
Mr Scales: What we would like
to get to is that we are making the direct investment and buying
the vehicles ourselves because we are a local authority risk,
we can borrow money cheaper than a bank, so what we want to do
is have again local determination, local control because we have
no shareholders—we do not have to make a profit—we
have stakeholders. Anything that we make on the network on that
sort of arrangement we just reinvest for the benefit of the people
of Merseyside. So what we are trying to do is to again involve
local people—local solutions to local issues by local people
really—and the powers that we have as a PT under the 1968
Act probably give us the powers to put a person on the moon as
long as they start and end in Merseyside, so we have massive powers
still there. We do not have to make profits like a bank because
we have stakeholders rather than shareholders. It was no good
us getting to the point on MerseyRail Electrics, where we just
changed all the badges on the staff, we had to refurbish the rolling
stock as well and that is what we did, so they looked like new
vehicles, so you can see a step change. It has worked because
five years ago it was called "Misery Rail" and now it
is seem as an exemplar rather than a joke.
Q210 Clive Efford: This is a question
for all of you, about the transfer of risk. We have had evidence
suggests that the transfer of risk is only theoretical, from public
to private sector because the rail service is so essential to
the economy that the government could not allow the railway to
close down. Would you care to comment on that?
Mr Field: Certainly from the London
perspective you will know from the London Rail concession that
we intend to take revenue risks; we believe that the revenue generated
in suburban rail travel is London is large driven by the economy
and the success of the businesses in London. We believe, therefore,
that the risk transfer for suburban operation for the revenue
should clearly lie with London.
Chairman: The Committee is adjourned
for 10 minutes. Thank you very much gentlemen, I will allow you
all to escape.
The Committee suspended from 3.38 pm to
3.46 pm for a division in the House.
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