DEREK TWIGG, MR MARK LAMBIRTH AND MR ROGER JONES

19 JULY 2006

  Q500  Chairman: I did not get that last bit.

  Derek Twigg: It is also interesting in terms of the added value, the improvement that train operating companies have brought about to the train network over and above the economic return which has brought about the increase in passengers so far.

  Q501  Graham Stringer: You have said, Minister, that it is both the economy and the franchising system of the railway, but what percentages would you put on the increase in passengers due to the economic upturn and because of the way the railways are operated now?

  Mr Lambirth: The only piece of analytical work I have seen on this is the one that was done by Chris Nash[2] in his ECMT paper. His assessment was that approximately 50% was attributable to GDP growth, approximately 30% to fares and to congestion on the roads, which is quite an important issue, and 20% to the effects of privatisation. There are two limitations on that: firstly, it was looking at the period 1995 to 1999, so the early days of privatisation, and maybe they expected a bigger impact there; and, secondly, it was looking only at London and the South East which is not the area of the country in which TOCs can do most to increase demand.

  Chairman: Minister, I hoped to allow you to escape before the vote, but I am going to ask you to come back.

  Q502 Graham Stringer: Thank you for that answer, which was about one-fifth, I think. In our last evidence session, I think it was, Mr Ford said that he agreed with Professor Nash that all the growth was exogenous, which I take to mean externally stimulated, not stimulated by the actions of people within the railway system. I would like to ask the question in two parts: firstly, do you have any comment on that as it is in direct contradiction to the previous answer; and, secondly, if you do not agree with it, do you think it is worth doing further research to find out what is stimulated and what is from the economy?

  Derek Twigg: No, I do not accept it. I think if you look at the facts of the massive increase in the use of the railway, the improved reliability, the improved rolling stock and customer service in many parts of the railway network is focused on more information for passengers, I have personally had conversations with passengers myself and people who work for the railway and I am not saying everyone agrees, but a significant number of people are saying that it has improved and it is more attractive to use. I do think it would be difficult to say that there has been no impact of that on attracting more people on to the railway and that it is all down to the fact that the economy is doing so well, so I do not accept that. You are right in terms of what percentage it may or not be, and we are going to do some research on that.

  Q503  Chairman: How do you justify the escalating costs of a franchise bidding process when it is estimated to cost each bidder £3 million to £5 million and with further significant costs incurred by the Department?

  Derek Twigg: Well, in terms of what the bidders want to put into it, that is a matter for them. In terms of what they submit and how they wish to address it, what research they do, the surveys, it is a matter for them in terms of how much they want to put into the bid. I think, as part of our new franchise process for South West Trains, which is the first one which I mentioned before, we have streamlined that. I do not know what the costs are made up of actually, but I think it is a matter for them how much they spend on it.

  Q504  Chairman: Well, we have got a written answer from the Department which said that between 2001 and 2004 the SRA "had incurred costs totalling £40.7 million".

  Derek Twigg: Sorry, are you talking about the whole costs or the train operating bidders' costs?

  Q505  Chairman: Well, the SRA is technically part of what you now are, is it not?

  Derek Twigg: I am sorry, I thought you were referring to the bidders' costs.

  Q506  Chairman: Well, it is, but, as I pointed out, it is not just the bidders. The bidders are saying £3 million to £5 million for them, but also you are incurring considerable costs. It said that, "Between April 2004 and November 2005, £14.4 million had been spent".

  Derek Twigg: I will ask Mr Lambirth to talk about this, but I think it is important to get this in perspective as well. These are obviously large contracts for a significant part of the transport network. It is important that the deliverability is right and it is important that we get the improved service and the investment that we want in this, so I think it is right that we do spend money, though not waste money and not do it unnecessarily, but to make sure—

  Q507  Chairman: Well, in that case, can you tell me how much the refranchising process has cost the Department in the last five years?

  Mr Lambirth: You have some SRA numbers. Refranchising cost us £8.4 million in the last financial year, but that is only nine months of the year because we took over the SRA three months in. That is £8.4 million last year, so call it £11 million on an annualised basis.

  Q508  Chairman: So that is 2005-06, but only nine months?

  Mr Lambirth: Yes, and I would expect a broadly comparable level of expenditure, ie about £11 million, on an annualised basis for 2006-07, the current financial year. The aim is to get it down by reducing the use of consultants, but that is not a quick or easy process.

  Q509  Chairman: Have you got an estimate of the total cost of each round?

  Mr Lambirth: To us?

  Q510  Chairman: Or you can give me both. I would not say no to both.

  Mr Lambirth: A rough estimate to us is probably of the order of £2.5 million per franchise.

  Q511  Chairman: Is that good value?

  Mr Lambirth: It is letting contracts which, on average, are generating perhaps £200 million per annum of revenue, so they are quite big franchises. As I say, the aim is to get it down, but that is by bringing things in house and becoming less dependent on consultants, not, I think, by doing less work.

  Q512  Chairman: Are you content with the system of referral to the Competition Commission?

  Derek Twigg: That is a matter for the Competition Commission in terms of the regulator. It is a matter for them, another body, in terms of determining that, but it is an issue that they must decide. It is not for us to decide.

  Q513  Chairman: So you do not even have a view on whether the system is working correctly or not? That is of no importance to you?

  Derek Twigg: Well—

  Q514  Chairman: Mr Jones, is the system working or is the system not working and, if it is not working, how is it not working?

  Mr Jones: Technically, the replacement of a franchise with a new franchise is classified as a merger legally and, therefore, the OFT and the Competition Commission take a view on that merger and whether they wish to investigate it. There has been quite a lot of dialogue over the years between the former SRA, the Competition Commission and the OFT and we have now got in place, I think, an agreement whereby rather than every single bidder being referred to that process, only the successful bidder is then reviewed by the OFT and the Competition Commission where they decide whether there is an issue they need to resolve.

  Derek Twigg: Certainly they can take an overview in terms of the wider issues.

  Q515  Chairman: I understand that they must have a view on their own powers, I do understand that, but you do understand that we need to know whether franchising is good value for money and if all of the bidders are being referred, then we need to know that this is a sensible use of their money and ours.

  Derek Twigg: I understand that.

  Q516  Chairman: You did not get the PTEs involved in the franchising process through the Railways Act, did you? Is there a reason for that?

  Derek Twigg: Not got them involved? They are involved in terms of the consultation.

  Q517  Chairman: Well, they were pretty marginalised, were they not?

  Derek Twigg: No. As you know, from your examination and discussions you will have had on the Act, we took the view in terms of the DfT taking the strategic direction and setting what we need in terms of the railway, but that is not marginalising them because they were involved and consulted at various stages during the franchising process and of course they can still suggest decrements and increments as part of that process.

  Q518  Graham Stringer: But, because they are not signatories to the contract, the private sector is bound to see them as less important. What the 2005 Act did was effectively remove their right to sign the contracts, did it not, so it was reducing the rights of the PTEs? Why was that so important?

  Derek Twigg: Well, we felt, as I say, because we wanted to take the strategic direction we have and take responsibility for obviously setting the bids and the minimum service, that we should do that. Obviously as co-signatories they worked with the SRA of course and certain things happened in being co-signatories. Now, that might not obviously have been in the best interests of the railway overall and it might have been a particular issue in your area, so I think we had to look at that as well, but I would sort of reject the point that they are not involved and that somehow they have been marginalised. They are still very much an important partner and very much an important part of the delivery and consultation for the franchise.

  Q519  Graham Stringer: But they are not involved on a statutory basis?

  Derek Twigg: No, they are not. That is the view we took, as you know.