Passenger Rail Franchising (HC 1354-ii) Transport Committee 12 Jul 2006

Q153 Mr. Eric Martlew: Just on that point, surely if the government have put in £1b, and I think it is due to go up to a £1.5b, into the companies then the public are going to say to the government, "You are paying the bills, you must have some say over the operation of the timetable." So how do we get out of that particular argument?

Mr Scales: You have directly accountable politicians in my area that are accountable to the population of Merseyside that have that very right to specify the timetable on MerseyRail and that is why we have done it like that. So we recognise the fact that the government is putting tens of millions into our system and our local politicians have the last say on what happens, and at the end of the day the operator of last resort if anything goes wrong as well. That is one of the attractors that my politicians and my Chairman went for.

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Q177 Mr. Eric 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 co-ordinated, 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 co-ordination at the moment we probably have clearer objectives for each franchise than we have had over the last ten years from the public sector. Unless we have these kinds of objectives we are not going to be able to optimise the scarce resource.

Q178 Mr. Eric Martlew: Can I come to the length of the franchises? Recently, the franchises have been eight to ten 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.

Q179 Chairman: Which one of those?

Mr Segal: About eight to ten 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 ten 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. 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 ten 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.

Q180 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 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.

Q181 Mr. Eric 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 ----

Q182 Mr. Eric 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 ten years with some money in their pocket and leave the problem with the government. There is always a temptation to do that.

Q183 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 ----

Q184 Chairman: Are you saying eight to ten? What are you saying exactly?

Dr Brown: I think the current seven to ten 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.

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Q204 Mr. Eric Martlew: Can you think of any way that the franchisees could be made to take more responsibility for risk? Should they put a bond in?

Mr Segal: They do put a performance bond in and that does help a bit. Do you want them to take more risk, because if they do they will price it into their bid and the base bid will be more expensive. The reason the returns and the percentage returns are so low is because there is not much risk.

Q205 Chairman: It is not exactly minimal, is it? Any railway system that costs five times more than it did when it was a state run system is not exactly a small innovation, is it?

Mr Segal: No.

Chairman: I am sure it is fantastically innovative, brilliant and produces very high standards which somewhere along the line I have not noticed but nevertheless it costs five times more than it did when it was that poor old, state committed, held together with string organisation called British Rail which actually worried about customers.

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Q241 Mr. Eric Martlew: Can I pursue that? A comment has already been made about the Chiltern line. It appears at the moment that the Department are settling for eight to ten years and we have heard from the operating companies that they do not particularly want 20 years. What do you think is the best solution with regard to the taxpayer and the passenger?

Professor Nash: I think for the services which are predominantly social, where the franchising authority clearly is going to want to specify very tightly what should be run, so commuter services, local region services, probably eight to ten years is right. It is more where there is commercial development of services that it would certainly be worth thinking about how a 20-year franchise might work.

Ms Bonar: I also support looking at the types of business which are being franchised and seeing whether they should all be done under the same model. There is clearly a very large difference between intercity businesses and I do not think the fact that other businesses run on the same routes interferes with this. There are businesses which are in competition with road and with air and arguably they could be left far less specified because there would be alternatives for the public. It would still be possible to get to Scotland if it were not possible to do it on the East Coast or West Coast mainline. Those could be treated as businesses and they could be given a great deal more flexibility and taken out of the amount of subsidy which even they get in terms of the way the access charges work.

Q242 Mr. Eric Martlew: The question was about the length of the franchise; I am sorry.

Ms Bonar: Yes, but I think in terms of franchises generally the institute for which I am speaking would accept that the seven to ten year model is probably about as long as you would want to go, but I think you do the first step, which has just been identified by Professor Nash, of looking at whether all of these different franchise businesses are the same sort of business that should fit into that and I would be inclined to look at the intercity businesses with rather longer franchises, but on very different terms.

Q243 Mr. Eric Martlew: In earlier evidence we heard from the train operating companies that they did not want to take the risk of a longer franchise.

Ms Bonar: However, if you launch them in the market that does not mean to say that they cannot take a risk on them. At the moment they are used to a particular type of bidding structure and a particular length of franchise. That was not the case at privatisation when Virgin, for example, was looking for a much longer franchise.

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Q259 Mr. Eric Martlew: Just on the issue of the weight of the trains and going back to yesterday when we had the Energy Review, is the reality not that the heavier the trains the more energy it takes to shift them and we should be going to lighter trains not just because of the wear on the track but also because the environment would benefit from it?

Mr Ford: This morning I had a phone call from an engineer who ran a computer programme comparing what it would take to run one of the older air conditioned trains I mentioned and one of the new German air conditioned trains from London to Brighton. I think the additional energy consumption was something like 37 per cent. If you are moving a lot of mass around, a lot of heavy weight, it takes fuel and energy to get it up to speed and unless you have got regenerative braking that just disappears into the atmosphere so in addition to CO2 giving you global warming you get disc brakes warming the air as well.

Chairman: That is very helpful. Thank you very much.

This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee. Neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings.

On behalf of Eric Martlew, 3 Chatsworth Square Carlisle Cumbria CA1 1HB