Written evidence from Freightliner Group
Limited (TE 81)
1. EXECUTIVE
SUMMARY
1.1 The rail freight sector is a crucial part
of the UK's transport solution and delivers significant carbon,
congestion, road infrastructure and safety benefits to the UK
economy. Rail freight is a strategically critical player in various
UK markets including power generation, construction, retail, manufacturing,
heavy industry and waste management.
1.2 The freight transport sector is now recovering
from the recent recession, and the long term forecasts of GDP
and freight growth are still valid as are the conclusions reached
by the Eddington study of 2006, particularly the need to make
the most efficient use of existing assets and transport networks.
1.3 In these difficult economic times, additional
scrutiny of capital spending is needed to ensure that investments
are deliverable and the returns are realistic and achievable.
Focus on incremental schemes that are affordable and can be undertaken
in steps rather than "landmark" schemes should bring
a faster return.
1.4 When evaluating spending, consideration should
be given to schemes that put in place the right conditions to
trigger parallel private sector investments.
1.5 Mode Shift Revenue Support ("MSRS")
grant is pivotal to maintaining rail's ability to compete with
road; it warrants continued support to underpin infrastructure
investment and further modal shift.
1.6 The current appraisal methodology undervalues
the full value of modal shift, not least because the value of
carbon is unrealistically low. In parallel, the rail economic
benefits of interventions should be taken into account.
2. INTRODUCTION
2.1 Despite not being much in the consciousness
of most of the population, the efficient and reliable transport
of freight around the UK is a vital part of the success of the
UK economy and contributes to the competitiveness of the UK in
the global market. Just in time deliveries into factories, warehouses
and retail units allow UK businesses to minimise their stock levels
and quickly react to changing demand. The Eddington report, published
in 2006, quantified the importance of an efficient freight sector,
in particular in connecting international gateways to regions
of demand; despite the recession since, the report is still absolutely
relevant.
2.2 The rail freight sector is a crucial part
of the UK's transport solution and it is estimated[83]
that it contributed £5.9 billion to the UK economy, £870
million directly, in 2009. It has achieved 60% growth since privatisation
and now holds a 13% market share in inland freight movements in
2007 (latest available statistics).[84]
2.3 Rail freight is a strategically critical
player in various UK markets including:
- ¾ Power
generation: over 25% of the electricity
consumed in the UK is generated by coal moved by rail. Nuclear
waste from power stations is also carried.
- ¾ Construction:
rail moves aggregates and cements into major conurbations to enable
developments that in turn enable our economy to grow. In London
over 40% of raw materials are delivered by rail,[85]
which played a major part in the delivery of Heathrow Terminal
5 and the Olympic stadiums.
- ¾ Retail
and Manufacturing: one in every four
deep-sea containers that arrive or depart from the major deep-sea
ports is carried by rail. Containers have become the standard
unit of transport around the world and can accommodate almost
anything, eg food, clothes, consumer goods, raw materials or chemicals.
Rail provides low cost, reliable movements between the ports and
the distribution centres or factories.
- ¾ Heavy
Industry: Steel making or manufacturing
cars make use of rail in their supply chains delivering raw materials,
parts and finished goods around their centres of production or
distribution.
- ¾ Waste
Management: The equivalent of 55,000 lorry
movements of domestic rubbish are removed from our major cities
by trains every year.[86]
2.4 Rail freight also delivers significant carbon,
congestion, road infrastructure and safety benefits to the UK
economy. It is estimated that the freight carried by rail rather
than road:
- ¾ Saves
£68 million per annum in CO2 costs.[87]
- ¾ Saves
£772 million per annum in congestion costs.[88]
- ¾ Saves
£133 million per annum in road infrastructure costs.
- ¾ Incurs
negligible costs from accidental fatalities[89]
compared to the £532.8 million that could be attributed directly
to fatalities involving Heavy Goods Vehicles (HGVs) in 2009.
2.5 The rail freight industry was privatised
from 1994 and there have been several new entrants since; a total
of five active operators currently. Operators have adapted to
changing demand, developed new markets and can offer a viable
alternative to road. The sector is highly competitive, this has
driven efficiency through seeking economies of scale and scope
(such as longer and heavier trains), higher staff productivity
and increasing throughput at existing terminals. The rail freight
sector has attracted over £1.5 billion of private sector
investment, in rolling stock, terminals and IT. This capital investment
has driven the 30% real unit cost reduction and brought improved
service quality to the rail offering. However, due to competition,
predominantly with road hauliers, it remains a low margin business
earning 1.7% (Profit After Tax) across all rail operators in 2009.
3. "Have the UK's economic conditions
materially changed since the Eddington Transport Study and, if
so, does this affect the relationship between transport spending
and uk economic growth?"
3.1 The UK economic climate did materially change
after the publication of the Eddington report and the "credit
crunch" had an immediate and negative impact on global and
national trade; the demand for freight transport in the UK reduced
as a consequence. The effect, however, has been short lived and
there is now credible evidence of a recovery in traffic, particularly
in the movement of deep-sea containers, where year to date (from
April) port volumes are up 11.6% and rail volumes are up 12.6%.[90]
We are aware of future further recessionary pressures but are
advised any impact is unlikely to be lengthy or severe.
3.2 Long-term forecasts for growth of GDP and
freight movements have not changed and we believe that the conclusions
that the Eddington report reached remain valid. The downturn in
traffic in 2008-09 led to some reduction in congestion on the
UK road network but a return to pre-recession demand is already
resulting in a similar level of road congestion (estimated to
cost the UK economy between £7 and 8 billion per annum by
Eddington).
3.3 Arguably a period downturn is the best time
to make investment, as impacts on UK business will be minimised
at a time of lower demand. However, the nature of spending on
infrastructure schemes means investments take, at best, several
years to complete; a short-term view is therefore impractical
and decisions on transport spending should consider at least the
medium term economic expectations, if national infrastructure
is to be suitably prepared.
3.4 Alleviating congestion requires supply side
investment characterised by enhancing the capacity of infrastructure
or increasing the efficiency of the user of the infrastructure.
Eddington concluded that incremental improvements to existing
infrastructure, rather than building new infrastructure, would
deliver the best ratio of benefits to cost. The current schemes
of gauge clearance and train lengthening as part of the Strategic
Freight Network are good examples of incremental investments that
will make the most efficient use of existing infrastructure and
increase the efficiency of the rail freight operator (thus increasing
competitiveness with road).
3.5 Certainty of investment in infrastructure,
such as the Strategic Freight Network programme, is a key driver
of private sector investment, which in turn allows for best use
of the delivered infrastructure. In the rail freight sector assets
such as locomotives, wagons and cranes typically have a 30 year
life span (versus 7-8 years for lorries), so certainty that future
capacity on the rail network will be put in place facilitates
private sector investment.
4. "What type of transport spending should
be prioritised, in the context of an overall spending reduction,
in order best to support regional and national economic growth?"
4.1 It is quite difficult to provide a detailed
response to this question, as there is a lack of transparency
as to how the current Department of Transport budget is spent;
we are unable to undertake analysis in the way we would to our
own business. However, from the position of the private sector,
we would ration spending to where the value for money case is
clearly demonstrable and deliverable, rather than aspirational.
Transport spending should be targeted where most deliverable economic
benefit can be realised, whilst aiming to reduce carbon emissions,
deaths and injuries.
4.2 In a constrained funding environment, the
private sector would make the best use of its' existing assets
rather than undertaking large-scale unproven investments. This
aligns well with the conclusions of Eddington and an incremental
approach to improving existing infrastructure, rather than brand
new infrastructure. In this context, careful consideration of
"landmark" projects should be undertaken to ensure the
benefits are deliverable. Multiple smaller investments on existing
infrastructure could release more benefits for the same value,
and can be staged, as funds become available.
4.3 From a rail freight perspective, the Strategic
Freight Network, with a relatively modest budget of £200
million, is part way through a succession of key nationwide projects
that will strengthen rail's position as a viable alternative to
road by improving the existing infrastructure to release capacity
and also deliver economy of scale opportunities for operators,
for instance, gauge clearance work on key routes[91]
and signalling modifications to allow longer freight trains. By
such means the existing infrastructure is made fit for purpose
and the operators can more effectively compete with road, leading
to modal shift from road. This is turn reduces the need for further
investment in the road network as well as bringing carbon and
safety benefits.
4.4 In order to maintain the benefits already
achieved by rail freight growth and modal shift, the highest priority
spending is the Modal Shift Revenue Support grant that is currently
available to all rail freight operators and customers. Whilst
modest in terms of budget (£20 million per annum), without
this grant a considerable volume of rail freight traffic would
return to the road. The grant makes up the difference between
current road and rail costs and is critical to retaining business
to rail. (£10 makes the difference between whether a container
travels by rail or road). It should be noted that in real terms,
revenue support has declined by 65% since privatisation, yet has
delivered an increasing Value for Money from 1 to 1 at privatisation
to currently greater than 5 to 1. The scheme is risk adjusted
for government as it is only paid when it is delivered, and therefore
it is certain that the benefits will be reaped, unlike capital
schemes. Without the continuation of this grant, the potential
benefits of the Strategic Freight Network investment may not be
deliverable. There would be a significant reduction in volumes
moved,[92]
concentrated between the major deep-sea ports and the West Midlands
(Birmingham). The consequence would be a dramatic surge on already
heavily congestion roads, eg A14, A34, M6, and an urgent need
for significant road enhancement works, which have been estimated
as high as £21 million per mile.[93]
The recently postponed A14 upgrade scheme was estimated to cost
some £1.3 billion.
5. "How should the balance between revenue
and capital expenditure be altered?"
5.1 In straitened times such as these, additional
scrutiny of capital spend is required to ensure that the assessed
returns are both realistic and deliverable. Because capital spending
is depreciated over many years rather than directly impacting
on the current account the actual cost of the cash of capital
spending is not always as heavily scrutinised as revenue spending.
In particular, schemes with very long accounting paybacks should
be carefully reviewed and spending should be focused on schemes
with a shorter payback.
5.2 Facing a shortage of available funds, the
private sector would try to continue to invest in those capital
schemes that will trigger future growth and efficiencies but would
ensure that these capital schemes were cut to the pareto optimum,
ie to only that which is really needed to secure the benefits.
More emphasis on investments with a faster payback is likely to
lead to investment in smaller incremental schemes rather than
"big bang" projects.
5.3 In considering spending choices, consideration
should also be given to how spending will impact on the private
sector and in particular creating the right environment to enable
private sector investment. A good example for this is the Modal
Shift Revenue Support (detailed in 4.4 above). Certainty as to
market viability derived from the continuation of this fund would
enable rail freight operators and their customers to invest in
new equipment, which makes rail more efficient, and reduces the
gap between the cost of rail and road. This in turn will enable,
in the future, a reduction in the grant paid and a growth in freight
moved by rail.
6. "Are the current methods for assessing
proposed transport schemes satisfactory?"
6.1 This is a complex area and there are many
different impacts from investments that have to be considered
and evaluated. We believe that much thought and consideration
has been put into evaluation methodology already used ("NATA"—DfT's
"New Approach To Appraisal"), and that this should be
built upon rather than rebuilt from scratch. It is very difficult
to measure accurately economic benefits from investment, however
this is one of the most important drivers, particularly at this
time and additional focus is needed in this area.
6.2 Network Rail recently published a document
in conjunction with the CBI titled "Prioritising investment
to support our economy", which helpfully focuses on this
area. This report suggests a parallel approach to appraisal in
order to capture the wider economic benefits of transport schemes,
such as lowering costs of UK distribution and a focus on providing
the same outcomes for less.
6.3 The current appraisal methodology includes
only the marginal benefits of modal shift to rail rather than
the full value of the modal shift already achieved. The mechanism
calculates the benefit of the next lorry removed from the roads
rather than the impact if all current rail volume returned to
the road. Roads such as the A14, A34 and M6 would potentially
gridlock if this were to occur. The net result is that the current
appraisal methodology undervalues the value of modal shift, particularly
when used to calculate the benefits to calculate the value for
money in the Modal Shift Revenue Support Scheme, which enables
existing rail freight volumes to be retained to rail rather than
shifting to road. This is illustrated in the following diagram,
with the marginal benefit being represented by area A, whereas
the real total benefits of rail freight is the whole of the area
under the marginal benefit curve, ie areas A + B.
TOTAL BENEFIT OF RAIL FREIGHT (KPMG 2006)
6.4 We perceive that the current value generally
attributed to carbon is too low,[94]
and does not reflect likely future oil prices or the likely real
market value of carbon, and we suggest that this reviewed. Additionally,
carbon positive schemes have a perversely higher return because
of the current method of discounting benefits of a scheme by the
loss in revenue from lost fuel duty.
6.5 Another difficult area is how the value of
externalities are captured across modes, and the validity of the
values ascribed, are a key consideration, not least since the
rail freight sector is disadvantaged as a more environmentally
friendly mode of transport by the failure of the road sector to
repay its' true external costs to society. The arising problems
are twofold; it makes the external benefits of rail freight harder
to capture, since they are not quantified adequately in economic
terms, and since they distort the haulage market, keeping road
haulage prices artificially low at the expense of the environment.
6.6 According to research published in April
2008 by MTRU,[95]
"…even using the assumptions which are most favourable
to HGVs and leaving out congestion, no study shows that tax revenues
from HGVs cover their UK costs except on motorways: "Current
cost estimates in the UK used for comparing rail and road freight
(the Sensitive Lorry Mile—SLM values) appear to be in the
low to middle range of the study results for environmental factors
and thus may underestimate HGV costs in the UK." The
report, consistent with others in this country and abroad, stated
that using Sensitive Lorry Mile calculations (those used by Department
of Transport), and counting fuel duty and annual licences as income,
Heavy Goods Vehicles met 36% of their external costs—a shortfall
of £6.7 billion at 2006 prices.
6.7 It would be gainful to consider how levelling
the playing field across transport modes might improve rail's
critical mass generally, and unlock efficiencies in the rail sector
and elsewhere. We consider lorry road user charging to represent
such an opportunity, as demonstrated in countries such as Germany
and Switzerland. Growth and improved efficiency in rail freight
operations may be brought about whilst simultaneously addressing
road congestion.
7. "How will schemes be planned in the
absence of regional bodies and following the revocation and abolition
of regional spatial strategies?"
7.1 Transport generally is difficult to plan
locally as, by its' very nature, it connects one place to another.
In the context of rail freight goods are moved on average 220
miles and therefore there is a need for national planning of the
rail network.
7.2 Development of existing or new rail freight
terminals will be more difficult in the absence of regional bodies
and there is a significant concern about the "nimby"
effect. It will always be difficult for a local council to give
planning permission for a development that has local impacts but
the benefit is only seen at a national level. The concept of National
Planning Statements was introduced to ensure that there was national
guidance for planning that would assist local decisions. It is
unclear whether the intention is now to proceed with National
Planning Statements but we believe such guidance would assist
local councils in reaching the right decisions.
September 2010
83 Network Rail: Value and Importance of Rail Freight
July 2010 Back
84
ORR National Rail Trends 2009-10 Table 3.3c, billion tonne kms
(excluding pipelines and water) Back
85
Transport for London: Rail Freight Strategy August 2007 Back
86
Network Rail: Value and Importance of Rail Freight July 2010 Back
87
Based on Sensitive Lorry Mile values (DfT) multiplied by lorry
journeys saved (ORR) Back
88
Based on Sensitive Lorry Mile values (DfT) multiplied by lorry
journeys saved (ORR) Back
89
Excludes suicides and trespass, no more than one or two a year,
most years zero although published statistics are not available
for freight only all rail. Road deaths in accidents involving
a HGV 2009-284-Reported Road Casualties Great Britain - DfT September
2010. Value of fatality £1.876 million on all road types
and times of day - Unit 3.4 The Safety Objective - DfT Back
90
In '10/11 Periods 1-6, Freightliner has moved 323,000 containers,
versus 287,000 containers in '09/10. Back
91
Examples include the gauge clearance of Southampton to the West
Coast Main Line (WCML) and between Felixstowe and Nuneaton via
Peterborough Back
92
Freightliner estimates by as much as a third Back
93
http://www.guardian.co.uk/uk/2007/may/06/transport.world Back
94
Stern (2006) has values of carbon aligned to a USD price for a
barrel of oil Back
95
Metropolitan Transport Research Unit: Heavy Lorries - do they
pay for the damage they cause? - April 2008 Back
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