Examination of Witnesses (Questions 480-499)
DEREK TWIGG,
MR MARK
LAMBIRTH AND
MR ROGER
JONES
19 JULY 2006
Q480 Chairman: You are starting as
a Department to what?
Derek Twigg: The franchises that
we are responsible for from start to finish, of which the first
one is the South West, and currently the East Midlands, the West
Midlands and the Cross Country.
Q481 Chairman: There is still very
considerable criticism and confusion about the clarity of what
you are doing and the criteria you are using. You would not accept
that?
Mr Lambirth: If I could supplement
that, what Mr Twigg has said, we have placed on the website both
the seven-page summary guide to precisely how we set about running
the pre-qualification exercise, what are the criteria we apply
there, and what are the criteria that we apply at award, and we
supplemented that by putting on to the website our internal procurement
manual. I think it is as transparent a process as we can possibly
manage.
Q482 Chairman: Do you ever change
the franchise specifications during negotiations?
Mr Lambirth: We cannot change
a specification during a negotiation. You can accept an offer
from a franchisee to provide additional services. "Negotiation"
is an odd word to use there, but you can accept proposals to provide
additional services.
Q483 Chairman: Additional services?
So it is not correct that First Group was able to negotiate advantageous
changes to the cap and collar regime in return for reinstating
Cornish branch line services? That is not true?
Derek Twigg: There is commercial
confidentiality in terms of the way the bid is dealt with.
Q484 Chairman: All you have to tell
us is whether it is true or not. We are not being anti-social
about it, nor do we really want to know how much it cost. Did
you do it or did you not do it? Forgive me. I rather think that
you have said to us one set of circumstances is operating here,
and then you have said "except when we want to do something
else". I understand that. That is the idea which I have always
operated in politics, but I did not think it was common.
Mr Lambirth: Whether or not there
was a negotiation on cap and collar—and I am sorry if I
am treading very carefully here—what I was saying is we
would not accept a negotiation which resulted in a reduction in
the level of service provided to the travelling public below what
was in the franchise specification.
Derek Twigg: There clearly have
been extensive discussions with First in terms of . . .
Q485 Chairman: I asked did you change
the franchise specifications, and is it possible for people to
renegotiate the deal? All we are trying to work out is whether
that is the case or not. You have told us no.
Derek Twigg: We certainly have
had discussions and negotiations. There had been an increased
number of services or stops as part of the agreement and negotiation
took place on that. I cannot go into the details because of commercial
confidentiality, Mrs Dunwoody.
Q486 Chairman: Is over-zealous bidding
where the bidder accepts less subsidy or greater premia than are
realistic a serious problem?
Mr Lambirth: We see it as a potentially
serious risk, and the system we have described in the guidance
that we placed on the website is one in which firstly we ask the
train operating companies who are bidding, starting with the South
Western franchise, to provide us with their three principal delivery
plans: how they would set about increasing revenue, how they would
set about reducing costs and how they would set about improving
reliability. Then the assessment work that is done internally
on that is aimed at establishing what risks are there associated
with those bids, and we are trying to draw a distinction there,
a fairly hard-nosed distinction, between the risk of a purely
financial failure, ie the TOC merely cannot deliver on price and
we go back to where we were earlier; it may wish to surrender
the franchise and so forth, versus a much more serious risk, which
is that it does something which has a direct adverse impact on
the travelling public, on the value of the franchise. So that
is the risk assessment that we are making going forward, starting
with South West, which, as I say, is explained in our guidance
note on the website.
Q487 Chairman: Are you aware of any
incident of over-zealous bidding? (No reply) Do you have
a difficulty with over-ambitious bids?
Derek Twigg: In a sense, in terms
of the bidding process, a judgement has to be made in terms of
what is deliverable. That is the key thing in terms of us as Ministers,
on price as well, but deliverability is the key thing. I cannot
say that I have come across any particular problems in recent
franchises.
Q488 Chairman: Do you think it is
right that firms use low-ball tactics, under-bidding for contracts,
knowing they can be renegotiated at a later stage? We have established
over-bidding; now we are on to under-bidding.
Mr Lambirth: I think this goes
back to the point that has come up quite often, what happens if
a train operating company gets into financial difficulty. Does
it expect that it will succeed in renegotiating the contract or
does it expect that it will be held to the contract?
Q489 Chairman: That is the situation,
but what I am asking you is something different. Are you aware
of firms that treat things in this way because they know they
can come back and renegotiate?
Mr Lambirth: No, there cannot
be such firms because they do not "know" that they can
come back and renegotiate. When you listened to them giving evidence,
I think you found distinct nervousness on their part . . .
Q490 Chairman: Nervousness is not
unusual in my witnesses, Mr Lambirth. How many contracts have
been renegotiated?
Mr Lambirth: Obviously none under
the Department of Transport.
Q491 Chairman: There is a nice question.
Mr Lambirth: I do not know whether
Roger Jones has the answer.
Q492 Chairman: Mr Jones, how many
before you got your hands on the system?
Mr Jones: In truth, I do not know
the exact number either.
Q493 Chairman: But you are going
to tell me, are you not, in a little note, which would be very
helpful?
Mr Jones: Yes.
Mr Lambirth: It definitely happened
if you go back to OPRAF. There were definite rescues.
Chairman: Let us by all means go back
to OPRAF and you will give it to me in writing.
Q494 Clive Efford: On a separate
issue, we have seen large profits for ROSCOs and I wonder if the
Department has a view on that and whether they have actually shouldered
enough risk in providing rolling stock for the train network.
Derek Twigg: We obviously have
concerns about whether the taxpayer is getting best value for
money and that is why we have now referred them to the ORR because
that is now being looked at by them. I would not want to say too
much more than what we have said already in terms of that.
Q495 Clive Efford: Earlier on Mr
Martlew raised the issue of the length of contracts. Just how
much is the length of a contract affected by the provision of
rolling stock, given that the rolling stock is not owned by the
train operating company but by the ROSCO, therefore should they
not be shouldering the risk? How does that impact on the length
of the contract?
Mr Jones: It does not impact on
the length of the contract. The contract length for the franchise
is patently set at the point at which we issue the ITT. The bidders
then go and talk to the rolling stock companies for rolling stock
leases to cover that period, so it does not in any way reflect
on the provision of rolling stock.
Q496 Clive Efford: When we have asked
this question before, particularly of the train operating companies,
about the length of contracts, we have been told it is about rolling
stock.
Mr Jones: I am not sure that we
accept that, because the rolling stock is owned by the rolling
stock lease companies and the bidders negotiate in their bid preparation
with the rolling stock companies for the provision of that rolling
stock, and the successful bidder then signs those agreements for
the length of the franchise.
Derek Twigg: There might also
be an argument that some operators might want to have a longer
contract anyway. It might be a nice argument to say this is why
we should have it, but if you look currently TransPennine Express
have new stock going in, as I said before, South West Trains 17
four-car trains, and I know at least one other train operating
company is considering how they might invest and get new rolling
stock. I do not think there is any evidence to suggest that that
is the case. It may be that some TOCs would like longer franchises,
but I do not think it is actually the case that rolling stock
cannot be improved as a result of the current franchise policy.
I do not see any evidence for that.
Q497 Chairman: Through 2005-06 and
2006-07 government support for franchises is forecast to increase
by over 40% in cash terms. Does that not suggest franchising is
failing to deliver value for money?
Mr Lambirth: I think that figure
must include track access charges, and it relates to the cost
of the infrastructure which we talked about earlier. When he conducted
his periodic review in 2003 the then rail regulator said that
this would be the financial year in which the track access charge
went up.
Q498 Chairman: So it is as simple
as that. Nevertheless, the fact that it is so, is it still delivering
value for money? Is the whole system of franchising working?
Derek Twigg: I think it absolutely
is, Mrs Dunwoody, as I tried to explain before, in terms of the
actual increase in passengers, the fare box revenue, the increased
kilometres travelled, the investment that has taken place, the
improvement in many areas in customer service in terms of passenger
information, in terms of configuration of trains, in terms of
refreshment of carriages. Take, for instance, Great Western's
plans now to invest over £200 million, of which a lot will
go to improving, refreshing, carriages, and of course trains and
of course new engines. So I think significant value for money.
We must not forget, of course, the West Coast main line that has
been massively invested in, and of course the Channel Tunnel rail
link. There are significant benefits to passengers. I accept that
much of the increase is down to the improvement of the economy
but I think a lot of it is also down the value added by train
operating companies and the investment that has taken place.
Q499 Chairman: You are committed
not to renegotiate franchise contracts if the train operating
companies come cap in hand. What are you going to do if there
is a multiple franchise failure during an economic downturn?
Derek Twigg: In terms of what
may or may not happen, it is interesting speculation, but clearly,
in terms of meeting the franchise obligations, if they are in
breach of that, clearly we would have to re-franchise, but in
terms of a significant drop in the economy, it does not necessarily
mean that would happen. This would actually be an interesting
point in terms of what added value train operating companies have
put on in terms of attracting additional passengers to the railway
as well.
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