Memorandum submitted by Professor Chris
Nash, Institute for Transport Studies, University of Leeds and
Rail Research UK
1. My colleague Dr Andrew Smith and I recently
reviewed the British experience of Passenger Rail Franchising
for a conference organised by the European Conference of Ministers
of Transport. I have also recently reviewed Europe wide experience
of rail reform and presented the results in another conference
paper.
2. I see the aim of franchising as being
to use the forces of competition for the franchise to achieve
the best value for money possible for the money made available
for passenger rail subsidies. Broadly we found that a number of
different approaches to franchising has already been attempted
in Great Britain, but that there was not really sufficient evidence
to determine their relative success.
3. In the first years of passenger rail
franchising it appeared that the process was being very successful,
with passenger traffic rising faster than would have been expected
simply from the favourable economic conditions at the time, and
with costs and subsidies falling. More recently costs have grown
substantially however, offsetting all the early benefits. This
remains true even after allowing for changes in track access charges
and in payments to ROSCOs. There are many possible explanations
for this increase in costs, including more tightly defined quality
standards in franchises, the costs of introducing new more sophisticated
rolling stock, including a period when it would inevitably be
running in parallel with the old stock, increased pensions liabilities
and the costs of running services on infrastructure which was
subject to a very high level of renewal activity and therefore
disruption. We have been unable to quantify these effects from
published data and therefore are unable to say whether this cost
increase is due to factors outside the control of the operators
or whether it reveals a failure of the franchising process over
this period.
4. It has been suggested that one cause
of the cost increase has been the willingness of the Strategic
Rail Authority to place operators on management contracts or otherwise
to renegotiate franchises where operators have hit financial problems.
We found no evidence that the cost increases had been any greater
for these operators. However, whilst this approach may have been
necessary in some cases in the circumstances following the Hatfield
accident, I welcome the statement from DfT that it does not intend
to follow this approach in future except in clearly defined circumstances.
5. Broadly we see two approaches to franchising.
In the first, the franchisee is charged with operating a clearly
defined set of services to fairly precisely set out specifications
and heavily regulated fares. This has been the general approach
in those continental European countries where franchising has
been (generally successfully) used, and is essentially the current
approach in Britain. With this approach, it is clear that the
franchising authority is taking the key decisions regarding services,
and therefore it should also be responsible for key investment
decisions, including rolling stock, and for bearing a large part
of the revenue risk (although obviously incentives must be built
in to the franchise agreement for the operator to deliver high
quality services and seek to attract maximum patronage).
6. In these circumstances franchises may
be relatively short (certainly less than 10 years) in order to
keep up the competitive pressure. Such franchises are most appropriate
for urban or regional services, which are generally unprofitable,
and where integration into the transport network as a whole is
an important factor.
7. Under the second approach, the franchisee
would have much more freedom to develop services, subject to minimum
requirements. The franchisee in this case may be responsible for
rolling stock investment, and indeed for negotiating over infrastructure
developments. In this case a long franchise, at least 20 years
(with appropriate break points for poor performance) is appropriate
to provide adequate incentives for the long term development of
services, and it is appropriate for the franchisee to bear a greater
part of the revenue risk. However, difficulties would still occur
should there be a significant downturn in the state of the economy
in that time; I suggest that this risk should still be borne by
the franchising authority, using an agreed formula to explain
the impact of GDP on traffic. This approach may be more appropriate
on inter city services, where services are largely profitable
and where commercial approaches to yield management are an important
part of providing a good quality service with little or no subsidy.
8. European evidence suggests that there
are costs associated with vertical separation but that there are
benefits associated with competition. I do not believe that it
is possible to secure competition in the freight market and competition
for passenger franchises without a degree of vertical separation
of infrastructure from operations. However, this might be compatible
with a much closer relationship between regional passenger operators
and the infrastructure manager, possibly even extending to the
operators taking responsibility for day to day operations and
signalling. I see this as the most problematic area for vertical
separation, and do not consider that third party operators would
necessarily suffer seriously from such an arrangement provided
that strong regulatory control was maintained. It would also be
sensible to align such operations with a reform of infrastructure
charges, whereby franchisees with long franchisees were charged
essentially the "prime user" costs of the infrastructure
they use (with other users simply being charged avoidable costs)
and were in the lead on issues of how the infrastructure should
be developed over time).
9. I consider that in general open access
in passenger operations is unlikely to secure significant benefits
and could lead to poor utilisation of track capacity and increases
in subsidies as competitors seek to abstract revenue from franchisees.
However, I believe it is appropriate for open access entry to
remain possible in cases where the entrant can show that its services
represent a good use of track capacity and will mainly offer improved
services for particular groups of customers rather than abstract
revenue from existing operators. They should however pay an access
charge which reflects not just the marginal wear and tear costs
they impose but also the opportunity cost of any track capacity
they use which is desired by existing operators.
20 June 2006
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