Examination of Witnesses (Questions 220-239)
DR MARK
BROWN, MR
PETER NORGATE,
MR JOHN
SEGAL AND
DR NIGEL
G HARRIS
12 JULY 2006
Q220 Chairman: How many of those?
Dr Brown: I am aware of one or
two, and part of the point is that the measures are focused on
particular market segments, whereas in the past marketing was
largely at a national level and did not allow for particular market
segments or particular regional operators to target particular
market segments.
Q221 Chairman: Does anybody have
any other examples of innovation or responses?
Dr Harris: Can I express a slightly
different view? I think you have to judge railway privatisation,
or indeed any policy on the basis of knowing what your objectives
are, and I think that one of the whole weaknesses of the system
we have is that many of us are not entirely sure what this week's
objectives are, and if someone would care to define what the strategic
overview was and what those objectives are then I am sure we could
answer your question more carefully.
Q222 Chairman: I think that sounds
like a very revolutionary idea and we cannot possible follow that!
Mr Segal?
Mr Segal: I think I would not
be quite so positive. There has been some innovation, quite clearly,
but one of the key reasons demand increased was that fares were
held down. Had fares been held down under British Rail then some
of the demand growth would have happened without that. You have
to balance the innovation, something that is good—and the
introduction of single priced advance purchase tickets has been
quite a good strong innovation—against some of the diversity
and confusion that is caused amongst the public with fares levels.
It is a balance, which I think is probably being addressed now.
Q223 Chairman: Is there a difference
in objectives between the present system and the previous state-run
railway? And, if so, what is it?
Mr Segal: I think the previous
state-run railway was probably to maximise some sorts of benefits
in terms of passenger miles within the given budgetary constraint.
I think the current one tends to set a very fixed—and I
overheard people talk about "detailed specification"—specification,
and I suspect that the franchises are almost too detailed now
because it actually restricts the innovation ability of the private
sector in some areas.
Q224 Chairman: There was not a lot
of innovation when they were not restricted was there, Mr Segal?
Do not misunderstand me, I am very anxious to learn about all
this innovation but so far all we have heard about are taxis.
I am sure I am missing something.
Mr Segal: There has been some
innovation in terms of timetable increases in numbers of trains.
The Midland Mainline was mentioned, and there is a huge increase
in the number of trains. The cross-country network was completely
re-written and substantively improved in terms of the frequency
of services. There have been some quite substantial ones in the
past, and it has always been fairly well specified, fairly detailed.
Q225 Chairman: So we are not really
doing anything that we were not doing at the beginning of the
franchise? We might be doing it slightly more perceptively but
not noticeably, is that right?
Mr Segal: The detailed timetable
specifications today for franchises are extremely detailed and
in fact one of the weaknesses of the franchise process today is
that it is only your response to that detailed specification which
is taken into account. If you have some great brilliant idea which
is not quite formally compliant it technically does not form part
of the evaluation process.
Q226 Chairman: What would you advise
somebody who had some brilliant idea, great light bulbs come on
and suddenly we are responsive to the customers and we are looking
at really expanding the service, really doing something that has
not been done before. How would I then deal with that, if I were
in that position?
Mr Segal: The government has full
ability to evaluate that through its evaluation process and to
determine whether it is a good idea, but I have known cases where
evaluations have not been done even though the government adviser
implied, "Yes, we think this is a good idea, but it cannot
be part of our evaluation process because our evaluation process
is set down beforehand on this basis."
Mr Norgate: I am very concerned
that the industry is operating very much within a straitjacket
these days. An example of that is the trade off between performance
and capacity on the network. The network is in many places operating
at or, we could argue, at beyond capacity. We have seen examples
over the last two or three years where operators have introduced
new timetables that reduce capacity but improve performance. I
am very concerned about the route utilisation strategy process
going forward within Network Rail as to whether that will really
deal with the trade off of performance versus capacity. Unless
that is addressed through the franchise process, we have some
big problems ahead of us.
Q227 Chairman: Are you saying that
you do not necessarily approve of the trade off between performance
and restriction on development?
Mr Norgate: No. There is a very
important trade off to be made on service quality. Either we offer
a high level of performance, which is the way the industry currently
is going, or we offer more capacity.
Q228 Chairman: Are you saying that,
at the moment, that decision has not been made and they are trying
to do both?
Mr Norgate: No. At the moment,
the decision is very firmly on the side of performance and not
on capacity for growth.
Q229 Chairman: You feel that capacity
is the concern?
Mr Norgate: I firmly believe that
the economic growth of the UK is being constrained and will be
constrained more and more if we cannot get more capacity back
in.
Q230 Chairman: To be devil's advocate
for a minute, you are not advocating we have more and more trains
and the conditions on them get worse and worse, are you?
Mr Norgate: No. I am advocating
more trains on the existing infrastructure but that will compromise
to some degree the level of performance of the network and I think
that is a better approach.
Q231 Mr Martlew: Surely one of the
problems is that there is more than one franchise running over
the same track? That is why you have to have a prescribed timetable.
The essence is that because more than one franchise runs on the
track that inhibits innovation by a particular franchisee. The
individual franchisee is only concerned about that and will be
giving scant regard to freight, for example. Is that not the reason
why you have a very prescribed timetable now, to suit everybody?
Mr Norgate: That was one of the
things I was listening to in the debate you just had with the
PTEs, on the level of involvement of specification by the PTEs
into the local network. My concern with a higher level of local
specification is getting this balance right between the local,
regional services, the intercity services and, as you rightly
say, freight services. There has to be oversight for the whole
network. The timetable development has to be coordinated, but
there is a mechanism for franchisees to bid for changes to the
timetable today and that process works reasonably well.
Dr Brown: There is certainly a
trade off between allowing the operators to be excessively innovative
and the need to optimise what is a very scarce resource, which
is network capacity. That is something I hope to have a chance
to speak about at some point. Four or five years ago, Alistair
Morton and the Strategic Rail Authority as it then was did encourage
a great deal of innovation in the private sector to come forward
with what in some cases were quite large infrastructure schemes
to help develop the routes on which their trains ran. This process,
whilst it was looking to elicit innovative bids including funding
from the private sector, failed. One of the reasons it failed
was a lack of public sector leadership. I do not think we can
overlook the need for clear public sector leadership in setting
objectives for a very complex system like a railway and just leave
it to the private sector to innovate. The private sector has certain
things to bring, including efficiency of operations, but unless
we have some form of over-arching coordination at the moment we
probably have clearer objectives for each franchise than we have
had over the last 10 years from the public sector. Unless we have
these kinds of objectives we are not going to be able to optimise
the scarce resource.
Q232 Mr Martlew: Can I come to the
length of the franchises? Recently, the franchises have been eight
to 10 years with a possible extension. What do you think is the
best length of time for the taxpayer and for the passenger?
Mr Segal: I feel that is probably
about right.
Q233 Chairman: Which one of those?
Mr Segal: About eight to 10 years.
The first thing to note is that franchisees do not have huge amounts
of capital. Some of the owning companies may have a lot of capital
but the capital tied up in a franchise is typically only £10
million or £20 million. If big investment is to be made,
it has to be made outside that structure and there is no reason
it cannot continue on, beyond the length of the franchise, if
some sort of mechanism can be found. The government needs to be
involved in that, in saying, "Yes, we will support that investment
which will last 30 years and include it as a franchise asset."
There is no reason for investment to have longer franchises. Therefore,
it is just a balance between the costs of franchises, the cost
of the bidding process and the costs of management change at the
time versus the ability to innovate, which is principally at the
beginning of the franchise. There is a bit of an argument about
that. If it is going to be eight to 10 years, there need to be
some break points earlier on which are not just on financial issues
but on quality issues, to ensure that the franchisees keep up
to scratch. Another area which would be important to incentivise
franchisees to offer good quality as well as to make capital for
their shareholders is if their past performance in previous franchises
was taken into account in the franchise evaluation process. That
does not have a major part in today's evaluation process. Against
that you have to allow new entries into the market. Just because
somebody has not had an opportunity to demonstrate good performance,
you need to take into account how they perform in some other environment.
I think we had somebody from NedRailways here in the previous
session. They can probably offer quite a lot to the UK franchising
market. It is good to have Dutch experience in. We would like
to involve some other countries as well perhaps.
Dr Harris: Again referring to
the previous session, Merseytravel had a 25 year franchise on
offer. Some of us get involved in the science and possibly art
of demand forecasting. It is extremely difficult to be able to
look into the future, 25 years out, and give any client advice
about what might be happening. The only response therefore a bidder
can have is through the price mechanism, to say, "If you
want me to operate this 25 years in advance, I do not want to
go bankrupt. Therefore, I will be looking for more money in the
future." Something that did not come out earlier was the
amount of risk. We all have a reasonable chance of understanding
what a five year outline would look like or even a 10 but if we
look back 25 years and see what we might have forecast for now
in 1980 most of us would have been wrong.
Q234 Chairman: Could you not deal
with that through a break clause though? The point that Mr Valk
was making was that there is an annual assessment of performance,
precisely the point that you are making. If you had a 25 year
with five year break clauses, would that not deal with the problem?
Dr Harris: I am not sure at whose
expense. As I suggested in my written evidence, if you are in
an area where things are going extremely badly, you might as a
franchisee want to exit the process. The government is in a strange
position where an alternative company might need even more money
than the current people. Break points might be good for the franchisee.
I am not convinced it is the best policy for the government.
Q235 Mr Martlew: What we have had
said so far is that long franchises do not bring extra investment,
which the TOCs disagree with, and that the companies do not want
long franchises because they cannot guess that far into the future.
Dr Harris: They might want them
but the only way they can do that is by saying they will need
more money. The companies might want a long franchise but I am
suggesting that it might not be—
Q236 Mr Martlew: It might not be
a good idea for the passenger and the taxpayer?
Dr Harris: Yes.
Mr Segal: The alternative is that
some companies might choose to buy the franchise in the knowledge
that they could walk away after five or 10 years with some money
in their pocket and leave the problem with the government. There
is always a temptation to do that.
Q237 Chairman: It has been known.
Dr Brown: There is a strong argument
in favour of shorter franchises and that maximises competition
amongst bidders. It is healthy for the government in terms of
generating maximum value for money from a franchise, minimum subsidy
or maximising premium payments to maximise the amount of competition
within the bidding forum. Long and larger franchises undoubtedly
bring benefits in terms of economies of scale, greater investment
from the franchisees, but those have to be weighed against—
Q238 Chairman: Are you saying eight
to 10? What are you saying exactly?
Dr Brown: I think the current
seven to 10 is about right. I would be quite concerned about longer
franchises because there would be a significant loss of competition.
There would be fewer bidders and fewer opportunities to throw
out poorly performing franchisees and to take account of the latest
economic forecasts and the latest economic situation and get a
revised bidding line from bidders which would maximise value for
money for the country.
Q239 Mrs Ellman: We are told that
it costs the operators between £3 million and £5 million
to bid for a franchise. Do you think that is excessive?
Dr Harris: That sort of money
involves several things. I would like to give a different answer
for the different categories. One of the things involved is a
form filling process which probably does not add a great deal
of value. Most franchise bids more recently have involved substantial
programmes of research, either looking at the demand forecasting
consequences of putting new trains on or detailed ways of operating
the railway. We would hope that that sort of thing was done for
each part of the network every few years anyway. Your question
should really be: which part of that is wasted. A nationalised
railway would say, "Let us look at East Anglia and see what
we can do with East Anglia. We might be there for five or 10 years."
That stays the same. It is a question of whether the administrative
bits are too much and that is not quite the same question.
Mr Norgate: One point that concerns
me is that we are all consultants. We regularly have to tender
for work, not at this level, and many organisations have a framework
association and you have to qualify onto that framework. Then
you are invited to tender for specifics. If there was that sort
of parallel process in rail franchising, it could save a lot of
form filling.
| 
