1.  Grand Central is an Open Access rail operator, and would like to submit the attached information for the Committee's consideration.

  2.  Because Grand Central, at the moment, does not bid for franchises (and hasn't done so since the first round in 1995), we can only have a limited input into the questions you pose concerning purpose, process, size and length etc.

  3.  However, it is clear that operators like Grand Central are not in a position to be considered acceptable bidders due to the emerging size of the new franchises, and the relevant size of our Company. And if the figures quoted often by recent/current bidders are to be believed on the cost of mounting a bid, then it is unlikely Grand Central would consider the risk involved as reasonable in respect of the financial commitment required.

  4.  What also became clear during the SRA's tenure was the overly prescriptive nature of the franchises, with many franchisees complaining they are no more than management contracts with little room for flexibility, flair and innovation. Whether that will change now responsibility has formally moved to the DfT is not yet clear, although there are encouraging signs.

  5.  Despite this prescriptive nature, some extremely large players continue to bid aggressively for franchises, only to win, and then bemoan the fact they are on tight 4% margins! I should add this is absolutely not the case with all bidders, some of whom have made it publicly clear they will not bid against certain specifications.

  6.  Again, if this financial information is true, it would tend to support the "management contract" theory. However, supporting this tight prescription is a level of protection for franchises through "cap and collar", in effect insulating a franchisee from failure of its own business plan.

  7.  This cap and collar protection ensures that should franchisees see revenue fall below a certain level, or increase above a certain level, then the DfT would effectively support the franchise through increased subsidy/reduced premiums, or take a share of increased profits. In exceptional circumstances, should a franchise be so poor it could be taken away from the franchisee.

  8.  Grand Central has also always been sceptical of franchisees claims on need for long franchises to protect investment, usually in rolling stock. What investment does the franchisee actually make?

  9.  As franchises are prescriptive, the rolling stock for example is part of the process. Whether a franchise is short or long, in each case stock procurement/leasing is underwritten by the Government (DfT). It is of absolutely no relevance whether it's for three, seven or 20 years, as the actual investment is made not by the TOC, but by the ROSCO, in nearly every case underwritten by Government. If a franchise is re-let after say seven years, the DfT specification would almost certainly include "no new stock" so securing the initial investment.

  10.  Only with Open Access, where a real business decision needs to be made, by both TOC and ROSCO, does the market really play its part.

Is franchising compatible with open access operations?

  11.  The answer must clearly be "yes". Franchises are specified by Government though DfT. By their very nature, these tend to be current services/specifications let to the operator agreeing to run it for the least subsidy/largest premium. In theory, there is nothing wrong in DfT seeking the best financial return, but this is looking at a very small piece of the overall picture, and so no focus is given to expansion beyond the core network.

  12.  If franchisees are tightly specified, all entrepreneurial flair is driven out, with the result that focus is "on what is", not "what could be". In this respect Grand Central has some sympathy with franchisees.

  13.  As the industry, and all open access operators know, many of the industry "models" for revenue growth are based upon incremental increases on an established service pattern. So the industry tools are pretty good, (it would appear) on increasing known markets. Where it is not so good is identifying new markets, as an incremental increase on nothing is still nothing!

  14.  As a result, all open access development nearly always requires a full "bottom up" business plan, with detailed discussions with stakeholders, the use of focus groups and then full evaluation of the available data. This time consuming and costly process will help determine whether indeed proposed new services will meet the stringent criteria laid down by the ORR in both the "Criteria and Procedures for the Approval of Passenger Track Access Contracts" and the "Moderation of Competition: Final Conclusions" documents. Both documents fully consulted on within the industry.

  15.  As Grand Central is only too aware, not all open access proposals meet this stringent criteria, and after 10 years of the private railway, only one new "open access" operator is running at present, the highly regarded Hull Trains.

  16.  This should give comfort that there is not a flotilla of open access operators waiting in the wings to challenge the status quo, but that those with the determination and vision must be allowed to put forward suitable opportunities for consideration.

  17.  Additionally, without holding out the opportunity for open access innovation, what improvements could the large populations of Wearside, Teesside and West Yorkshire expect to see?, and at other locations what price to pay for passengers with no direct competition?

  18.  In a nutshell, franchises deliver the railway the Government can afford to buy. What open access offers is the ability for the Government to get "more for less" as open access operators concentrate on important—but probably not core parts of the network—to develop new markets and offer limited competition as well. The risk is ours, no one else's.

Should train, rolling stock and track operation be more closely integrated?

  19.  I believe it would be beneficial for a more structured approach to be taken to the "cascade" of quality rolling stock, something British Rail was extremely good at. I found it somewhat bizarre that the SRA did not use its influence to propose a suitable programme for this to happen during its tenure, particularly considering the undoubted influence it should have been able to exert in that market.

  20.  It may be that the system is now maturing, as 10 years is a relatively short time in railway terms, and our understanding is that DfT is developing a more structured approach to this issue.

  21.  With relation to track operation, I would echo the words of some of my freight colleagues here—"Why would a passenger operator with say a 10 year franchise think it could do it better than Network Rail"—this would in effect give it priority of information etc over all other operators, both passenger and freight, and no doubt lead to further, in this case, very necessary regulation.

  22.  Network Rail at least is independent of train operations, and that position should remain.

  23.  I hope the information provided proves useful, and please don't hesitate to contact me should you require clarification or further information.

20 June 2006