DEREK TWIGG, MR MARK LAMBIRTH AND MR ROGER JONES

19 JULY 2006

  Q440  Graham Stringer: The capacity in the system is directly related to the fares, though, is it not? If you are operating at full capacity, unregulated fares are likely to go up, so that is one of the issues. When you have pinch points, as you say, like Birmingham, Reading, platform 13 and 14 in Manchester Piccadilly, then you are going to affect both reliability and price. I ask you again. Your answer was ambiguous. Are we going to see the investment that was promised previously in those 20-27 pinch points?

  Derek Twigg: I cannot guarantee that 20-27 pinch points will be included. We have to look at the priority in terms of what is affordable and what investment they want to put in place, but clearly there will be improvements that take place. In a sense, Mr Stringer, I have to be clear: we are currently going through the HLOS process and obviously consulting and looking at a longer term rail strategy. We are also doing a range of Regional Planning Assessments, the Route Utilisation Strategy that Mrs Ellman quoted, and all this needs to be taken into account when we move through the HLOS process before we come to a decision about what is needed and what is affordable.

  Q441  Graham Stringer: Can I go back to the questions Mr Goodwill asked about the specification of franchises? Why are you increasingly putting very detailed specifications out? Does that not curtail the ability of the franchisee to make innovations? I have heard that you are going as far as specifying the level of catering on board trains. You can deny it, but there has been some evidence to that effect. Why are you getting so detailed in the specification?

  Derek Twigg: I do not accept that we are getting detailed. As I said before, we might say there should be X number of trains as a minimum per hour but we are not saying they should be timed at a certain point. There might be a last and first train issue. At the end of the day, if we are buying the service and specifying the service, we need to say exactly what we want to buy and what we want to specify. That is important, I think, because we now obviously, at the Department of Transport, have the strategic direction and responsibility for the railway and, as I said before, the train operating companies, over and above the minimum that we specify, and what is possible within the capacity and other restraints that they can run extra trains, that is something that can be done. So I do not accept that we are in any way putting constraints on them about what they can and cannot do. I have not heard anyone yet pick up with me or the Department from passengers saying that we have over-specified.

  Q442  Graham Stringer: We have heard that. You also mentioned vertical integration. Can you tell us which EU Directive makes vertical integration difficult?

  Mr Jones: It is EU Directive 91/440, as amended by Directive 2001/12.

  Q443  Graham Stringer: We have had contradictory evidence. One witness today told us that that was just an accounting issue, that you had to keep your accounts separate for Railtrack from the operating companies. Another witness told us that there had to be different ownership. Could you clarify what the Department believes on this Directive?

  Mr Lambirth: The view we took when we looked at all this in the context of the 2004 rail review is that there is no insuperable obstacle in EU law to the creation of vertically integrated franchises. As you say, it is primarily the EU legislation directed at transparency establishing that the costs properly attributed to the infrastructure are so attributed and the costs properly attributed to the passenger operation, so that anyone else who wants to enter the market can see that they are being charged a fair price compared with an incumbent. That is the essence. We have never said in the White Paper or elsewhere that the rationale for rejecting vertical integration as a model is rigid compliance with the EU legislation.

  Q444  Graham Stringer: So it is completely departmental government policy that you are not in favour of vertical integration? It is not for the reason of EU Directives?

  Mr Lambirth: No.

  Derek Twigg: Clearly, there are issues in terms of setting up different organisations and financial reporting systems and so forth as part of that but we think the current system is working well.

  Q445  Graham Stringer: The rolling stock companies have been referred to the competition authorities, Minister. I do not want to pre-empt, obviously, what they are going to do, but can you tell us why you thought that that market, which is unregulated, was operating so badly that they needed to be referred to the competition authorities?

  Derek Twigg: If you take the new rolling stock, you get a better value deal in terms of that. That is working reasonably well, but if you look at the older rolling stock, we do not think we are getting best value for the taxpayer for that, and that is why, after a lot of negotiations and a lot of time spent talking to them, we decided to refer.

  Q446  Graham Stringer: What is the benchmark you are using for deciding whether or not you are getting best value out of the older rolling stock?

  Mr Lambirth: We have to tread a bit carefully here because of the commercial confidentiality of the information we provided to the competition authorities, but I think there are two issues we focused on. The first is the evidence we have on the rate of return that the rolling stock leasing companies earn on existing stock versus new stock, and the second was just looking at the structure of the market, and this is a market investigation reference for that reason. When train operating companies are looking to buy new rolling stock for a franchise, there is pretty intense competition between rolling stock manufacturers and rolling stock leasing companies. When the obviously right solution for a new franchise is to buy the existing rolling stock, there is a de facto monopoly in those circumstances. So it is the combination of those two that drove the case. It is difficult to go beyond that.

  Q447  Chairman: Do not short-term franchises create a captive market for ROSCOs?

  Derek Twigg: I do not necessarily accept that. In terms of the franchise system, if you look at the rolling stock replacement in recent times, over 40% has been replaced. TPE just took on new rolling stock, have started to take on new rolling stock. We have just agreed a few months ago to have 17 four-car trains for South West. So again, it is about making sure in terms of the way TOCs manage the system, in terms of them looking for the best deals. They have obviously got to continue to operate in the market.

  Q448  Clive Efford: To continue that theme, I have been struggling with the ideal length of a franchise. We have been questioning TOCs and they do not seem to have an idea, but I also get the impression that the Department does not have an idea, that there is no clear thinking behind the policy on the length of franchises. Am I right or wrong on that?

  Derek Twigg: Our figure is we think it is about 8-10 years in terms of the length. There are a number of reasons for that, but we think that is probably the right time to revisit the market and it keeps train operating companies on their toes in terms of obviously knowing over a shorter period of time they have to bid again and we see improved competition, but also, in terms of the longer term franchises, I can see there obviously are advantages to doing that. Mrs Dunwoody mentioned rolling stock and there are issues there in terms of investment and innovation, but in terms that we think it is best to revisit the market before that but also they could become stale towards the end and it could actually peter out in terms of the sort of performance they give over that period of time. Also, it is difficult to forecast over that length of time, for anybody, I think, in terms of the passenger numbers, the sort of market that would be there then.

  Q449  Clive Efford: We have heard that basically, short franchises—and I accept that perhaps eight to 10 years is not really too short—actually have an effect on the amount of investment, not through the TOCs but that Network Rail will put in to allow, for example, for the electrification of the Great Western line. There is a short franchise there. There is a feeling that has been expressed to us that if it were a much longer franchise, that certainty would mean that it would be electrified.

  Derek Twigg: That is an interesting suggestion. I do not think it is for the TOCs actually in terms of putting that investment in. I think the electrification, say, of the Great Western, which I think has been mentioned, is a very large area, and secondly, it has implications not just for the TOCs; there are also issues around the environment, in terms of the scale of investment that would need to take place, is that best for the way we want to look at the railway in the future? For instance, the high speed train, the mark 2 we are currently looking at, in terms of the development of that. That is a very innovative and interesting project. All these things. I think that is probably not best with the TOCs actually. I think that is best for Network Rail to actually look at in terms of one, the affordability. Is it necessarily going to bring about the best benefit? How does it affect things like the environmental issues and so forth?

  Q450  Clive Efford: So you reject the proposition that the length of the franchise has anything to do with the amount of infrastructure investment you will put in on that line?

  Derek Twigg: Yes, but I feel it would be disingenuous to the Committee to say there is an absolute right way of doing this, that it is almost certainly the right thing to do. We just took on obviously the role now of franchising in the Department from the SRA, Mrs Dunwoody, and of course, we need to obviously assess how that goes as well. I cannot rule out that we would not ever change that, but I think currently it appears about the best period for us in terms of . . .

  Q451  Chairman: The point has been made to us, Mr Twigg, which I think is a very valid one, that 30 years ago British Rail had plans to expand the railway, to electrify Crewe to Holyhead, the Great Western line, things which are not even discussed either by the present Government or by the people involved in the industry, and if you use the franchising system to in effect freeze the railways into their existing situation, how will that change? Are you telling us that in the future that will be the responsibility of Network Rail, and they would expect to have commensurate compensation? Is that what you are telling us?

  Derek Twigg: No. First of all, you would have to say what is important for the railway, what you decide are its priorities in terms of meeting the capacity challenges, growth and of course what is affordable. You mentioned British Rail. They, of course, used to rely on a source of yearly annual budget from the government.

  Q452  Chairman: Mr Twigg, forgive me. Let us not get into too many cliche«-ridden paths. I am asking you a very straightforward question. Thirty years ago British Rail had a consistent programme of modernisation which looked forward to electrification, expansion of the system and extra capacity. We are being told that the existing franchise system freezes the railways in the size they are, and you have also told us today that there is no prioritisation and no indication in relation to capacity pinch points. We have that from the answers you have already given. I am asking you very simply do you think that is correct, and if you do not think it is correct, where are all these modernisations and innovations to come from? Is it going to be Network Rail?

  Derek Twigg: My answer is this, Mrs Dunwoody. You have to take account that most or quite a large part of the investment in recent years, the last control period, has gone into renewals and maintenance because of decades of under-investment.

  Q453  Chairman: So where is the next lot of innovation going to come from?

  Derek Twigg: Not least around £8 billion on the West Coast main line and also in terms of the improvement in the Channel Tunnel rail link. So there has been significant investment and that is why I was trying to say before to Mr Stringer, in terms of the High Level Output Specification process, obviously, the Eddington report is looking at things in terms of the economic benefit and of course our longer term. . .

  Q454  Chairman: We have agreed you are the person paying the money, so you have the right to specify.

  Derek Twigg: That process in terms of what infrastructure projects and how we want to spend money will take place as part of that process, and we have not completed that yet.

  Q455  Chairman: So we do not have a policy? That is something that is going to be part of the assessment of these different systems?

  Derek Twigg: The point I am trying to get across, Mrs Dunwoody, and obviously I am failing to do so, but let me try again. What I am trying to say to you is that a High Level Output Specification process in terms of what we want to buy, what is affordable for the railway for the next control period, 2009-14, obviously we are looking at things like infrastructure improvements and other ways we can actually improve capacity on the railway, such as longer trains and longer platforms, but then also we are looking in tandem with that at a longer term rail strategy.

  Q456  Chairman: Yes, but forgive me, Minister. You were asked some very specific things on pinch points, and you have been asked by other members on other aspects. We would like something from your Department.

  Derek Twigg: I am saying that is part of the process.

  Q457  Mr Martlew: When are we likely to find out the results of these investigations?

  Derek Twigg: The HLOS will be published next year and the long-term rail strategy, I think, will be at the same time.

  Q458  Chairman: When?

  Derek Twigg: Alongside it, next year.

  Mr Lambirth: June or July 2007.

  Q459  Clive Efford: Is it not true that risk has not been transferred from the public to the private sector through the rail franchising system because the rail network is so essential to the economy that the Government could never allow it to fail?

  Mr Lambirth: The rail infrastructure is obviously essential to the economy. The position of the train operating companies is, I think, very different and I think you saw when you took evidence from the train operating companies they feel exposed to risk and they take very seriously our stern injunctions that we would not charge to their rescue. If you delve into the risks that they bear, essentially, under the new franchise regime, they bear the cost risk, they bear revenue risk for the first four years and then revenue risk starts to be shared with the Department from year five onwards, and there are force majeure provisions in there. But they bear the cost risk and they bear a significant part of the revenue risk over the life of the franchise. If they fail to deliver, the Secretary of State has made it perfectly clear that we would not come to their rescue.