Controlling operator costs
94. Professor Chris Nash raised concerns that franchise
operators were failing to control their costs since the Hatfield
crash. During the first few years after rail privatisation, operator
costs had declined significantly, but this trend had been reversed
in recent years. His research indicated that for the four years
directly post-Hatfield train operating costs appear to have gone
up 47 per cent in real terms when track access charges and rolling
stock leasing payments are controlled for. Professor Nash indicated
that part of this cost increase was likely to be caused by entirely
valid reasons such as increased pension liabilities and higher
energy prices;[185]
the introduction of more expensive, sophisticated rolling stock;
and more tightly defined quality standards in franchise agreements.[186]
However, these factors did not come close to explaining the scale
of the increase, and Professor Nash believed this was a significant
problem in need of attention.[187]
95. Train operators rejected the view that their
costs had increased unreasonably, and as a result of anything
other than factors beyond their control. ATOC argued that the
mere fact that operators were now carrying more passengers and
running more trains was a contributory factor to the increase
in costs, and noted that the cost of external factors such as
insurance, policing and fuel had increased above inflation.[188]
Mr Franks from National Express Group argued that in the case
of one of its operating companies which has a cost base of £450
million, only £25-50 million were variable costs, whilst
the largest slice of its cost base was track access charges, ROSCO
costs, or services which are driven by the timetable. "The
timetable requires a number of trains, a number of drivers and
a number of staff on trains and at stations so the true variable
element of a cost base for a train operating company is very small.[189]
96. The Government was not concerned by the developments
in operator costs because:
"When we are letting a franchise, we are
not actually interested in what the costs of the franchisee are,
although we are very interested in whether their cost reduction
plans are realistic or in what their revenue is, though we are
very interested in whether their revenue increase plans are realistic,
because the price that they are bidding to us is the difference
between the two. So if a train operating company looks at an opportunity
and says, "Look, if I spend an extra £1 million on improving
catering or recruiting extra revenue protection staff, that will
generate £2 million of revenue" then they will do it
and that must be in both their interests and ours. So we have
no separate aim of controlling their cost line. We are very concerned
about the gap between revenue and costs, which is what they bid
to us."[190]
97. This argument is, however, not valid on two counts.
Firstly, if operators fail to control costs, they are likely to
increase fares unnecessarily and to the detriment of passengers.
Secondly, the argument only holds if the Government is indeed
rock-solid in its commitment not to re-negotiate the contracts
of operators who get into financial difficulties. If operators
entertain any notion that they can go cap-in-hand to the Government,
the Government could end up bearing the cost of slack cost control.
The Government must ensure, through franchising contracts,
that franchise operators keep their costs tightly under control.
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