INTRODUCTION

  1.  The purpose of this paper is to assist the Committee in its inquiry into "Passenger Rail Franchising".

  2.  The statutory purpose of the Strategic Rail Authority are set out in the Transport Act 2000 and are

—  to promote the use of the railway network for the carriage of passengers and goods;

—  to secure the development of the railway network, and

—  to contribute to the development of an integrated system of transport of passengers and goods.

  3.  The draft Directions and Guidance, issued by the Secretary of State on 29 June 2001, specified the Authority's primary objective as being to deliver the key targets in the Ten Year Plan (Transport 2010—The 10 Year Plan, published July 2000) viz

—  to increase rail use in Great Britain (measured in passenger kilometres) by 50 per cent by 2010 while at the same time securing improvements in punctuality and reliability;

—  to reduce overcrowding to meet SRA standards on London and other commuter routes (that is for train companies to plan capacity so that passengers on journeys of more than 20 minutes can expect a seat and standing does not exceed a prescribed level for any journeys);

—  to achieve a significant increase in rail freight's share of the freight market by 2010. The Government believes it ought to be possible to increase market share, resulting in an 80 per cent increase in rail freight by 2010, provided the rail freight companies can deliver improvements in performance and efficiency.

  4.  In particular, the Authority is to ensure that its strategies, including its overall strategy are consistent with the resources available to it. These objectives take precedence over the others set out in the draft Directions and Guidance, which were:

—  to secure progressive improvements in the performance of franchised rail services and improved levels of customer satisfaction with the quality of stations and services;

—  to manage passenger franchises actively;

—  to take opportunities to achieve improvements in the terms of existing passenger franchises, both in relation to performance and otherwise;

—  to extend or replace existing passenger franchises in due time before they expire, or earlier where to do so is warranted by the potential benefits to passengers and other users;

—  to carry out a National Passenger Survey twice a year and publish a six monthly bulletin, describing, in terms that reflect the experience of passengers, the operating performance of franchise operators for the preceding period and their customer satisfaction;

—  to keep under review the level of regulated and unregulated fares;

—  to implement an improved system of support to freight operators to replace the existing Freight Facilities and Track Access grant schemes;

—  to secure increases in the capacity of the railway to accommodate the expected growth in passenger and freight traffic;

—  to develop a policy for the allocation of capacity among users;

—  to ensure that rolling stock is available so that train operators are able to accommodate expected passenger growth in appropriate modern standards of comfort and safety;

—  to achieve a significant improvement in the resilience of railway operations;

—  to provide leadership for the rail industry and ensure that different parts of the industry work co-operatively towards common goals.

STRATEGY DEVELOPMENT

  5.  The Government's Ten Year Plan, "Transport 2010", published in July 2000, announced an investment package, about half of which (£29 billion) was to be provided by the Government through the SRA and about half (£34 billion) from the private sector including Railtrack. It is the Authority's role to provide the framework for delivery of the rail component of the Ten Year Plan. In its Strategic Agenda, published in March 2001, the Authority identified eight priorities and aims, which were:

(1)  safety

(2)  more punctual, less crowded trains

(3)  improving accessibility

(4)  removing bottlenecks to increase capacity

(5)  increasing rail freight

(6)  better stations and rolling stock

(7)  more resilient rail operations, and

(8)  better information.

  6.  Circumstances have changed significantly since the 10 Year Plan was published, which has led to the re-assessment of the franchise programme. In particular:

(1)  the Regulator's review of track access charges for the period 2001-02-2006-07 resulted in higher and earlier costs for the SRA than had been budgeted in the Plan

(2)  several developments in safety and accessibility have substantial implications for the costs of the railway:—

(a)  the train protection system recommended by the Uff/Cullen inquiry

(b)  compliance with the EU interoperability directive

(c)  station access under the Disability Discrimination Act (1995), the cost of which has not previously been calculated by the industry.

(3)  the changed role for Railtrack following the Hatfield accident. The Government announced on 2 April 2001 an agreement with Railtrack, which included a £1.5 billion advanced payment to the company, to strengthen its ability to concentrate on operation, maintenance and renewal of the existing network. This has led to the Strategic Rail Authority having to accept a new and significant role for enhancement projects to expand the network. The Authority is in consultation with Railtrack, DTLR and the Treasury, to develop an alternative funding and procurement framework for this purpose (see paras 14-19 below).

(4)  the limited numbers of skilled engineering staff, particularly on the signalling side, identified by Railtrack as a significant constraint on project development and implementation

  7.  Together, these require re-appraisal of what can be achieved in the short to medium term. In particular, the expectation of £34 billion private sector investment assumed that Railtrack would be in a position to raise and contribute a substantial proportion of this, the remainder being raised principally by the ROSCOs and the train operating companies based on longer term franchises. Given Railtrack's withdrawal from funding network enhancements, alternative sources of private sector capital will have to be found. In addition, some means of funding continuing development works will need to be found until these new arrangements come on stream. Through the establishment of joint ventures, described in paras 17-19 below, the SRA is seeking to take forward the role of raising private finance that would previously have been undertaken by Railtrack.

FRANCHISE POLICY

  8.  The draft policy statement, "Passenger Rail Franchising", which the Secretary of State issued on 16 July 2001, does not preclude the replacement of existing franchises, nor does it prescribe the length of franchises. The Secretary of State has however, made clear that he wants the Authority to concentrate on earlier improvement of services for passengers, either by negotiating short two year extensions (for which the terms of existing franchises provide), or through more pro-active management of the existing franchises to complement longer term developments for passenger benefits. The policy generally separates the passenger benefits which are more directly within the control of the train operating companies and therefore deliverable through franchise agreements from the development of major infrastructure enhancement projects, which now depends on Railtrack's former role being assumed by third parties as explained below. Railtrack will proceed with projects to which it was already committed, notably the Train Protection Warning System (TPWS) and Cross Country and West Coast Main Line upgrades, and some longer-term franchises with major infrastructure elements—such as Chiltern—will still be arranged.

  9.  The approach will need to be kept under regular review and opportunities for further development—including longer term replacement franchises—will need to be considered once the present franchise terms (including extensions) are close to expiry.

  10.  The Authority has carried out a full review of each franchise in the light of the draft Directions and Guidance and of the draft franchise policy statement and has recommended to the Secretary of State a way forward on each. There are currently 25 franchises. On some of those, negotiations are already underway for longer-term replacement and the draft policy statement expressly acknowledged that new long-term franchises should be concluded for Chiltern, South Central and South West Trains. An extension to twelve years had already been agreed with Midland Main Line; an extension to the Great North Eastern franchise is being negotiated; and on 14 September, the Secretary of State asked the SRA to proceed, after consultation with the PTEs concerned, to seek revised proposals from the three short-listed bidders for a new Trans Pennine Express franchise.

  11.  Through the Rail Passenger Partnership scheme the Authority has also been able to support to date 31 schemes valued at £38 million, including new train services and additional rolling stock. Another 29 schemes are under consideration with a potential value of £78 million.

  12.  The remainder of this paper addresses the specific questions raised by the Committee in its Press Notice of 23 July 2001.

How to ensure that rapid improvements in the safety, punctuality, reliability, comfort and frequency of services are achieved

  13.  Improvements in safety, punctuality, reliability and frequency are the primary purposes of franchise extension and replacement. Improvements to all the above criteria are sought in the template replacement franchise agreement. Indeed, the key elements of replacement franchises were to secure a commitment to continuous improvement in safety and operational performance and closer attention to better customer service. The franchise policy statement identifies similar objectives for two-year extensions. The need for Railtrack to concentrate on maintenance, operations and renewals rather than enhancement and the shortage of technical resources are constraints in the medium-term.

  14.  In general, modest improvements should be achievable in the short-term through franchise extension for up to two years if additional funding is provided. However, a step-change in improved performance will require (on most routes) substantial investment with development and construction phases lasting several years and payback periods extending over decades in line with the typically very long lives of railway assets.

How to secure investment in additional network capacity and other improvements to meet both the long and short-term needs of the railways and whether the sums allocated to rail investment remain adequate in the light of events since the publication of the Government's Ten-Year Plan for transport

  15.  A new approach is required, given the changes in Railtrack's capacity to lead and finance enhancement projects and the constraints of technical resources. This will involve the use of Special Purpose Vehicles (SPVs) and the development of joint venture companies (including the Authority) set up to procure the enhancement required. In most cases it will require the separation of major investment projects from the process of franchise replacement.

  16.  There is widespread agreement that the railway industry needs substantial enhancement investment over coming years to address the system's failings. The present capacity of the system is inadequate to keep up with the growing user demand and there are well-known public concerns over the quality and reliability of the industry's services.

  17.  Apart from passenger services, increased capacity is needed to meet the targets for the growth in rail freight. Project Development Groups have been established to take forward projects to increase capacity and enlarge the structure gauge on key routes from the ports of Felixstowe and Southampton.

How to provide the framework for major infrastructure enhancement projects to be taken forward now that Railtrack is to focus on the maintenance and renewal of the existing network

  18.  A new procurement and funding framework for enhancement projects is being developed between the Authority, the Department for Transport, Local Government and the Regions, the Treasury and Railtrack. Under the framework that is emerging, the Authority's responsibilities will be to determine the strategic requirements and priorities, and to organise and control project development activity (largely carried out by private sector partners) and competitively procure project delivery. Whereas previously Railtrack would develop and implement projects, either alone or in partnership with train operators and other investors, development and implementation will over the next few years, need to be carried out by Enhancement Companies (ENCOs) and SPVs respectively. This approach has yet to be market-tested; and Railtrack's participation will still be crucial in, for instance, providing information on asset condition, possessions, safety cases and, it is envisaged, taking over the completed enhancements for operations and maintenance.

  19.  An ENCO will be a joint venture between the Authority and a Project Management Contractor. It would be responsible for the project development process, funding the preparation of detailed specification, successful resolution of statutory procedures such as applications for TWA Orders, reference design and tender documents and would earn its reward once a SPV was established by competition. The SPV would fund, design, build and, it is envisaged, transfer the completed project into Railtrack's operational control as Railtrack's responsibility for the operation and maintenance of the infrastructure, in accordance with its Network Licence. Whilst there will be one SPV for each project or programme, there will be only a few ENCOs for the whole country.

  20.  The framework for taking forward these schemes will be completed and set out in the Authority's Strategic Plan in November 2001. The Plan must persuade the capital markets to form a positive judgement about the viability of the new framework.

How to transform the Strategic Rail Authority's leadership of the industry, its day-to-day management of franchises and the way in which it assesses and awards new and extended contracts for passenger services

  21.  The Secretary of State's Policy statement referred to train operators looking for the Authority to be more prescriptive in its requirements of them. The Authority had previously sought creative solutions from the market. This imposed a greater burden on bidders' resources than the more conventional tendering used for original franchises and the evaluation of bids by the Authority was more complex and therefore time-consuming. The Authority will now invite bids against a clear specification whilst still allowing bidders to put forward their own additional proposals.

  22.  Day to day management of the railway industry is the responsibility of Railtrack and the train operators, but new franchise agreements will provide for closer scrutiny by the Authority, particularly on performance and the delivery of other franchise obligations. The Authority's new internal structure includes three Delivery Directors (Strategic Routes, London and South East and Regional Networks), and franchise managers have been replaced by Rail Delivery Managers with contract support managers. The changed roles of Railtrack and the SRA also raises questions about the structure of the industry. The Railway Industry Group accepted the existing structure, provided that changes were made to simplify and improve the contractual matrix and regulation: the Strategic Plan will address these issues. The respective roles of the regulatory authorities (including RSL and HSE) will need to be reviewed following the outcome of Lord Cullen's inquiry.

How to improve the poor state of industrial relations in the railways

  23.  Industrial relations for individual train operators remains a matter for each operator concerned. Terms and conditions of employees in privatised rail companies are matters between the unions and the management of the companies. The Authority maintains contact with the unions on strategic policy issues, but has no intention to become involved at company level or to become a focus for national negotiation. It is important that franchise agreements do not distort or unduly influence the conduct of appropriate employee/employer relationships.

CONCLUSION

  24.  The Authority has developed a coherent plan for each franchise, based on the new policy. Already, considerable progress has been made:

(1)  Heads of Terms have been agreed for a twenty year franchise for Chiltern.

(2)  Heads of Terms have been agreed with GoVia for the South Central franchise, and the company took over control from Connex on August 25. Key commitments on replacement of Mark I rolling stock for this franchise have already been secured.

(3)  Heads of Terms have been agreed with South West Trains, and an order for 785 new coaches to replace Mark I trains has been secured, Design work for platform extensions to accommodate new and longer trains is progressing.

(4)  A two year extension for Midland Main Line has been agreed with £234 million investment committed for infrastructure and trains

(5)  A two year extension for Island Line has been agreed

(6)  An extension to the GNER franchise is being negotiated.

(7)  A detailed plan for each franchise has been established, and put to the Secretary of State for approval on 28 August 2001.

October 2001