Examination of Witnesses (Questions 260-275)
DR MARK
BROWN, MR
PETER NORGATE,
MR JOHN
SEGAL AND
DR NIGEL
G HARRIS
12 JULY 2006
Q260 Clive Efford: Transport for
London has suggested that a publicly and regionally based stakeholder
is better placed than private companies to manage revenue risks
in inner urban areas. Do you have a view on that?
Dr Harris: I have one particular
concern which is not with the actions of any particular local
area. The boundary issues which Mr Valk mentioned a bit in the
Netherlands are much more likely to be severe here. I think both
TFL and Merseytravel are paying in terms of subsidy per passenger
much more money per person than central government is for the
rest of the network and questions arise because you have people
with completely different objectives.
Q261 Chairman: Are you saying that
is because of this interface problem, because they have a restricted
area and their responsibilities do not go as wide as some of the
other railways?
Dr Harris: Yes. If central government
wishes to spend a pound per passenger and local people in Liverpool
vote for politicians who wish to spend five pounds that is fine
until you look at the detailed problems of what happens at the
boundary. If you look particularly in the north of England where
there are lots of PTEs, the fare system disintegrates somewhat
because fares for some quite short journeys are very cheap and
the next station two miles away has a very expensive fare because
it may be a link from one to the other. We have to be quite careful
about what happens at the margin. We may end up with a very poor
level of service being offered in the shire counties which generally
do not have the same views. This is the danger.
Q262 Clive Efford: That exists now
under the current franchise system. Even on the same lines you
can have quite significantly different ticket and fare charges
from one franchise company to another.
Dr Harris: Yes. You have to be
careful though as to which of those are genuine, deliberate responses
to passenger demand and which are just due to who happens to be
paying for which bit of the railway. The first of those there
may be a case for. I am worried about the second.
Q263 Mr Goodwill: We have been talking
about the franchising operations as if all of these were very
similar but there are dramatic differences, both in the size of
these businesses that have been franchised and even more markedly
between the ones which are bidding funds to have access to a profitable
business and those who are bidding for subsidies. Do you feel
there is a case for having different franchising templates for
the subsidy and non-subsidy franchises?
Dr Brown: Probably no. The objectives
of, on the one hand, value for money and, on the other hand, improving
various aspects of passenger service, whatever they are, to do
with network improvement, performance, reducing crowding, et cetera,
can all be covered within the same template. The key is what objective
you set for the franchise at the start of the process and from
that should trickle down the specification for that franchise.
The current process as a whole can accommodate a wide range of
specifications, in my opinion. It does not need a different process
to cover different needs and different specifications. Fundamentally,
the process is helping to drive greater value for money and I
think a single process is quite capable of doing that.
Q264 Mr Goodwill: We heard from the
operators of Northern Rail, when I asked them a question about
how they saw their role for identifying the most loss making parts
of the network, and the answer was, "It is not our job to
say it would be cheaper to put a taxi on to take people on that
particular journey." They said it was the job of government
and ministers to make these decisions. Do you feel there is a
role somewhere in these very highly subsidised franchises and
maybe the operators themselves should be looking at alternatives
to rail in some cases or even curtailment of services as part
of their job in delivering better value for money for the taxpayer?
Dr Harris: I need to challenge
the basis of that question. The fixed costs of infrastructure
are currently dealt with by Network Rail. If you look at what
a train operator does, although rural lines may have costs up
to about five times the passenger income, because there are not
many trains, the amount of money is not particularly great. What
you must realise is that a very large proportion of the national
rail subsidy goes into subsidising commuter operations in the
smaller urban areas. I am afraid that by "smaller" I
mean most urban areas, because commuter operations, despite what
we might understand, are not profitable because many of the resources
used do not make many journeys. A train may be used once in the
morning and once in the afternoon. Quite a big proportion of the
subsidy is going into the urban services in Leeds, Manchester
and Liverpool for getting people in those important cities to
work. I suspect as a country we would regard that as an important
thing to happen. We might save a million by taking off a couple
of trains but out of a five billion total that is not a great
deal.
Mr Segal: I think it is right
that it is a government decision. There are some rural lines which
do make a big loss, particularly taking into account the infrastructure
costs. Some very rural lines make a big loss. It is a government
decision whether it wishes to operate those services. It should
be able to ask the train operators what is the cost of this and
what are the revenues but it is clearly a government decision.
Q265 Chairman: Do you think the department's
views on franchises are driven primarily by wanting to minimise
subsidies and maximise premiums paid by train operators?
Mr Segal: The present franchising
process is if the bid meets a minimum quality threshold. It is
quite a high quality threshold but once you jump that threshold
the decision process is almost entirely on the subsidy premium
line.
Q266 Chairman: In a sense, quality
does not come very high on that scale.
Mr Segal: You have to meet a certain
threshold.
Q267 Chairman: That is a minimum.
Mr Segal: It is a moderately high
threshold but once you have met it it is no longer a distinguisher.
Somebody who is one inch above the threshold is just as likely
to get it as somebody who is a foot above the threshold.
Q268 Chairman: Do you think there
is a serious problem in over-zealous bidding?
Dr Brown: Time will tell.
Q269 Chairman: You are beginning
to sound like Ernest Bevin. As to that, we will have to think
about it.
Dr Brown: There is a rationale
for the process which Mr Segal has outlined. There is a desperate
need for greater funding and infrastructure enhancements. If an
argument could be constructed so that a franchisee that achieves
the minimum quality threshold, which I would agree is reasonably
high, there is an argument to go with the franchisee who offers
the least subsidy or the maximum premium because that is the best
way of improving the network in the long term.
Q270 Chairman: Some railway commentators
have said that firms use what they call "low ball" tactics
to underbid for contracts because they know they can come back
and have a second bite at the cherry. Is that right?
Mr Norgate: There have certainly
been examples of that in the rail franchising area in the last
few years. If you go back to the first round of franchises, in
the first two or three there were some very ambitious bids put
in with very high revenue forecasts that were never going to be
achievable and these bids were there to buy the franchises. My
understanding now is that the bids are coming in on a far more
consistent basis in terms of the relativities in the financials
and there is almost very little to choose sometimes between them.
Q271 Chairman: In other industries
such as local buses, contracting out has led to significant reductions
in operating costs but that has not happened with the franchising
of rail services. Why is that?
Dr Harris: You need to look at
where the money goes. If you run a bus company, a very high proportion
of the costs are going on drivers' wages and this kind of thing.
The railway is a capital intensive industry. Whilst British Rail
did a very good job, I think you yourself mentioned string and
Sellotape. You can only do this for a certain amount of time after
which, particularly if you have several years under Railtrack
where nothing much happens at all, you end up with a huge backlog
of infrastructure investment that you have to make. We have to
be careful. Comparing five times the subsidy now is not comparing
apples with apples. A lot of the costs are going into "catch
up" and improving the network.
Q272 Chairman: Train operators tend
to moan about Network Rail's escalating costs and say that is
a significant contributor to their own overheads. Is that a genuine
complaint or is it something that they are using to say the equivalent
of, "Not me, guv"?
Dr Harris: If we go back to a
few years ago, there were certainly cases where costs being quoted
were more than was reasonable. We are at a point in the railways
where we are now having to spend significant sums of money because
we are using up most of our capacity. All the cheap and easy things
we needed to do we have done. If you want to put an extra train
on now and that requires laying extra track, that is going to
cost you money. We are necessarily at an expensive point. Whether
that is directly related to franchising or not is not obvious.
Mr Segal: I agree with a lot of
what Dr Harris has said. British Rail was exceptionally good at
keeping costs down, which perhaps the bus industry had not been.
I was there at the time. The expectations for being able to cut
out costs were false. That is one of the reasons. Some of Network
Rail's costs that have been perhaps inherited from Railtrack were
too high. Because of the way of the process, it does not have
the integration which British Rail used to have to say, "How
can we modify the specifications to cut out the costs to get 80%
of the benefit for 20% of the cost?" That is not there so
easily and transparently in the process.
Q273 Chairman: When Mr Coucher says,
"We are taking consistently a certain amount of money out
each year" that is genuine?
Mr Segal: It is getting better,
yes.
Q274 Chairman: When somebody like
the National Express Group says, "If there was the same rigour
and competitive challenge to Network Rail the costs to the industry
would be lower" they are just doing the normal whinge bit,
are they?
Mr Segal: The rigour is coming
from Network Rail. Under Railtrack it went very bad. It is getting
better but I think it has quite a long way to go.
Q275 Clive Efford: 11 years after
privatisation, we are worse at keeping costs down than we were
under British Rail?
Mr Segal: Yes. That is the evidence.
Chairman: On that cheerful and interesting
note, can I thank you very warmly for coming, gentlemen. I am
grateful to you and you have been very patient.
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