MR BILL EMERY, MR MICHAEL BESWICK, MR BRIAN KOGAN, MR MARTIN STANLEY, MR JOHN BANFIELD

19 JULY 2006

  Q380  Chairman: Does that not indicate you that there is little need for all this costly process?

  Mr Stanley: What happens is that the Office of Fair Trading get to look at the initial franchise and they will look at somewhere like Bristol, where they will see First Group also running the buses and they will say, "Initially the bus prices could indeed go up," as we found they would have done in Glasgow and Edinburgh some years ago when the ScotRail franchise was handed out. The OFT have fairly limited resources and a fairly limited amount of time so quite rightly, I think, they ask us to take a deeper look. At the end of the day we do not set out to block these things and at the end of the day First Group in that case persuaded us that there was no problem. But it is hard to see a way round that situation other than by giving the Office of Fair Trading more huge resources, which I do not would be a good idea. We are on tap to do a good job if we are asked to do it.

  Q381  Clive Efford: This is a question to both sets of witnesses. It has been argued that in reality risk has not been transferred from the public to the private sector through rail franchising because the rail network is crucial to the economy. Do you agree with that?

  Mr Emery: Certainly in terms of the franchising the government has insulated the franchisee from some changes in Network Rail's costs and in a sense that has detached the franchisee from some of the pressures on that, but I would not say that the franchisee is risk-free in that sense. We think that there is a good case for looking quite carefully at whether the allocation of risk is the right one and whether or not in time they should move more of the risk to the actual people who are in a position to manage and influence the risks and the implication of costs and also the benefits arising from those things. So I think that this is a fruitful area to look at quite carefully as to whether or not by moving or exposing franchisees more to the costs incurred to Network Rail or exposing Network Rail more to the costs and benefits of changes in revenue associated with their actions may well lead to a better outcome. So it is a rather longwinded way of saying that there are risks around; the present allocation does allocate quite a lot of the risks in the franchise process back to government but leaves quite a lot with the franchisees. With Network Rail clearly the government underwrites through the financial indemnity the costs of Network Rail going completely wrong, and that is an area which needs looking at and again we are looking at as part and parcel of our incentive consultation. So there is quite a fruitful area for debate whether what we have at the present time is really fit for purpose as we roll this out past 2010 into 2015 and 2020.

  Q382  Clive Efford: Is Modern Railways right to argue that the concentration of multiple franchises in the hands of a few franchise train operating companies actually weakens the government's position under the cross default process?

  Mr Beswick: I think ultimately it can do. That is really an issue for government to take a view on it and government is in a better position to take a view on cross default.

  Q383  Clive Efford: I am asking your view because the argument is that taking away the Connex franchise because it was just the one franchise was relatively simple, but to do it to a company that has a multiple number of franchises actually puts the government in a very weak position. Is that your assessment of the situation?

  Mr Beswick: I think it gets more difficult as more franchises are under the same owner. I am not sure that it is a particularly big problem at the moment, but it could get worse if there was more concentration.

  Q384  Clive Efford: Competition Commission, presumably you have a view on that?

  Mr Stanley: It is outside our field, I am afraid.

  Q385  Clive Efford: Office of the Rail Regulator, you argue that the current distribution of risks between the government and the train operating companies should be adjusted. Can you explain exactly what you mean by that?

  Mr Emery: I think it goes back to what I was saying earlier, that we think that the government actually insulates Network Rail and insulates the train operating companies a little bit too much and that it would be better if more risk was passed down to the train operating companies so that they can take the risk of increasing Network Rail costs but also take some of the benefits if, through working closely and innovating with Network Rail, they can reduce Network Rail's costs. So there can be a means by which they can have a commercial incentive to work closely in partnership with Network Rail to reduce the cost of the rail industry which, as you look at the railway industry, is one of the biggest challenges—the costs are too high and they do need to come down to make it an affordable railway and to provide the funds to grow the railway to meet the growing needs of passengers and freight customers. So there is a need to work on how you can reduce the costs and one of the ways is looking at the risks, allocating a little bit more out to both Network Rail and the franchisees as a means by which you can engage them both in means by which they can look to find better ways of doing things together as partners rather than just staying in their own paths and possibly not looking at these kind of options.

  Q386  Clive Efford: Is vertical integration a means of bringing costs down?

  Mr Emery: We could have a long debate about vertical integration or whatever it is—

  Q387  Chairman: No, no, we cannot!

  Mr Emery: But we do not want that! I am not certain that it is a matter for the regulator, it is a matter for Parliament at the end of the day and ministers on these things. We think that there is plenty of scope to build on the success of the railway industry to date to find ways of achieving a lower cost railway that is meeting the needs of passengers.

  Q388  Clive Efford: I am sorry to press you a little bit, but you are somebody who is very experienced in the rail network and therefore someone the government will have to take note of when coming to decisions about issues, for instance, around vertical integration, so presumably you do have a view that you would like to share with us?

  Mr Emery: We were somewhat disappointed when the initiative in Mersey Rail was not given a chance to prove the case, but that led on of course to Network Rail offering a much closer partnership between themselves and Mersey Rail, so in a sense we may well start to see whether closer working will deliver some of the benefits that were identified by Mersey Rail as to what they could achieve. I think what you look at is creating a huge entity—and I know what the previous witness was talking about, whether that would be a problem—and it is really recognising that the railway is lots of little railways, different railways serving different markets, and attacking that may well be a way of looking at it. There may be areas, whether it be Mersey or Scotland, where you could try and see whether vertical integration could work, but it is a matter for ministers and government and then Parliament.

  Q389  Chairman: Except you have expressed an opinion. Is it correct that European legislation advises us to have a system of open access?

  Mr Emery: I think it does actually.

  Q390  Chairman: Why have there been so relatively few open access permissions granted during the decade since privatisation?

  Mr Kogan: I think it is fair to say that European legislation requires two things which relate to open access. One is that it does require accounting separation between infrastructure managers and train operators, first of all; but secondly, and more importantly, it requires a process to be put in place which allows people who want to gain marginal access to the network to get that access on a fair basis.

  Q391  Chairman: So why have there been so few?

  Mr Kogan: We cannot force people to make applications for open access.

  Q392  Chairman: So it is a lack of imagination on the part of the operator?

  Mr Kogan: There may be a lack of opportunities. It may well be that the franchised passenger services cover most of the likely opportunities.

  Q393  Chairman: So do you think open access is a good way of providing rail connections for cities that are poorly served?

  Mr Kogan: I think we think that there are a certain number of limited opportunities which are not currently being exploited by the franchised services.

  Q394  Chairman: It is difficult. Forgive me, Mr Kogan, but you cannot say on the one hand, "The thing is the franchise is already covering all the bits that make money" and then in the next breath say, "Except there may be some cities that are not being covered and therefore we ought to be looking at them." Which is it? Are the franchises so all-embracing that there is no room for open access or is it that you sincerely feel that there are all sorts of commercial opportunities being missed?

  Mr Kogan: Franchise services do occupy the majority of capacity on passenger networks.

  Q395  Chairman: The majority?

  Mr Kogan: That is undoubtedly true. We believe that there is a limited group of flows which may be commercially worthwhile for open access operators.

  Q396  Chairman: So what magnitude, what order of magnitude is that, typically?

  Mr Kogan: I think it would be very difficult for us to venture an opinion on that.

  Q397  Chairman: Forgive me, I thought you were here to venture an opinion. It is something upon which, as an office, I would have thought you would have an opinion, since you are suggesting that there is a real opening here. Mr Emery, will you take your life in your hands and say something?

  Mr Emery: I am not going to take my life in my hands, but we have Grand Central and Hull Trains. I do not see open access being a substantial player in the rail for a long time. I think what you will see is the franchise operators beginning to compete more strongly on the areas which are outside the specification. But I do think that open access does provide a real challenge and a real opportunity to connect cities that have poor linkages, to offer local services—and you have heard some very good examples this afternoon of how a small local entity can respond quickly to local needs—

  Q398  Chairman: So I ask you again, Mr Emery, with your detailed knowledge of franchises what is the order of magnitude we are talking about? Are we talking about two, are we talking about 22, are we talking about 202?

  Mr Emery: I would say that we talking about staying under ten, I should think, in the grand scheme of things.

  Chairman: Under ten, thank you very much. Mr Martlew.

  Q399  Mr Martlew: Just on that point, one that I can see is quite badly served, and it is badly served by Virgin, is the London to Blackpool situation, but on the West Coast mainline and everywhere else there are capacity problems and they are going to be more acute next year and worse the year after. So are the opportunities for open access going to recede as the capacity problems become more acute?

  Mr Emery: Certainly the capacity of the system coupled with the definition of the specification for the franchise operators by the Department and a growing market as well do leave little scope. Let us look quite clearly as an industry, regulator and Department as to what should be the investment in the railways to meet growth and meet demand. That is part and parcel of one of the big issues that face the industry as part of the period review coming up, and that is something that needs to be resolved.