House of Commons Public Accounts Committee

The Department for : Letting Rail Franchises 2005–2007

Twenty-first Report of Session 2008–09

Report, together with formal minutes, oral and written evidence

Ordered by the of Commons to be printed 30 March 2009

HC 191 Published on 19 May 2009 by authority of the House of Commons : The Stationery Office Limited £0.00

The Public Accounts Committee

The Committee of Public Accounts is appointed by the House of Commons to examine “the accounts showing the appropriation of the sums granted by Parliament to meet the public expenditure, and of such other accounts laid before Parliament as the committee may think fit” (Standing Order No 148).

Current membership Mr Edward Leigh MP (Conservative, Gainsborough) (Chairman) Mr Richard Bacon MP (Conservative, South Norfolk) Angela Browning MP (Conservative, Tiverton and Honiton) Mr Paul Burstow MP (Liberal Democrat, Sutton and Cheam) Mr Douglas Carswell MP (Conservative, Harwich) Rt Hon David Curry MP (Conservative, Skipton and Ripon) Mr Ian Davidson MP (Labour, Glasgow South West) Angela Eagle MP (Labour, Wallasey) Nigel Griffiths MP (Labour, Edinburgh South) Rt Hon Keith Hill MP (Labour, Streatham) Mr Austin Mitchell MP (Labour, Great Grimsby) Dr John Pugh MP (Liberal Democrat, Southport) Geraldine Smith MP (Labour, Morecombe and Lunesdale) Rt Hon Don Touhig MP (Labour, Islwyn) Rt Hon Alan Williams MP (Labour, Swansea West) Phil Wilson MP (Labour, Sedgefield)

The following member was also a member of the committee during the inquiry: Mr Philip Dunne MP (Conservative, Ludlow)

Powers Powers of the Committee of Public Accounts are set out in House of Commons Standing Orders, principally in SO No 148. These are available on the Internet via www.parliament.uk.

Publication The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at http://www.parliament.uk/pac. A list of Reports of the Committee in the present Session is at the back of this volume.

Committee staff The current staff of the Committee is Mark Etherton (Clerk), Lorna Horton (Senior Committee Assistant), Pam Morris (Committee Assistant), Jane Lauder (Committee Assistant) and Alex Paterson (Media Officer).

Contacts All correspondence should be addressed to the Clerk, Committee of Public Accounts, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 5708; the Committee’s email address is [email protected].

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Contents

Report Page

Summary 3

Conclusions and recommendations 5

1 The Department’s performance 7

2 The rail passenger experience 9

3 Rail subsidies 13

Formal Minutes 15

Witnesses 16

List of written evidence 16

List of Reports from the Committee of Public Accounts 2008–09 17

3

Summary

In 2005, the Department for Transport (the Department) took over responsibility for passenger rail franchising from the Strategic Rail Authority. By the time of our hearing it had re-let eight franchises, half of the 16 franchises currently in operation across the country. All eight franchises were re-let within the planned timescales after a good level of competition. The Department changed the operator on six out of the eight franchises.

The Department specifies the minimum levels and quality of passenger services and agrees annual levels of subsidy or premium which it will pay to, or receive from, each train operator for franchise terms of typically 7–10 years. The Department invites views on the service specifications from relevant local bodies. These local bodies may elect to pay for options that need additional subsidy.

Increasing demand, high existing utilisation of the network and a shortage of rolling stock meant it was not possible for the Department to incorporate sufficient additional capacity to deal with crowding when re-letting the franchises. It has since announced plans to add a total of 1,300 additional rail carriages to operator fleets across all 16 franchises. This will stabilise, but not significantly reduce, the crowding that many rail passengers currently experience. Train operators have made commitments to improve service quality, but may be able to withdraw passenger benefits that had originally been offered alongside franchise agreements, such as we have seen with the removal of a full restaurant car service on one service. In January 2008, average unregulated increases ranged from 4.3% to 7%. In January 2009, the average of unregulated was 7%, with some as high as 20%. Special low fare offers are available, often through the internet, but those without access to a computer may need help to identify and book these fares.

Following the competitions, the Department projected that taxpayer support for the eight franchises would reduce and, in five cases, turn into payments from the train operators. If the projections are realised, a direct subsidy of £811 million to train operators in 2006–07 would be replaced by a £326 million receipt from train operators in 2011–12. The Department also provides support in the form of grants to . If these grants were to stay at the 2005–06 level, these passenger services would receive about £926 million of support from the taxpayer in 2011–12, reduced from about £2,063 million in 2005–06. This reflects a Government policy of rebalancing service costs, with a higher proportion for the passenger and an overall reduction in subsidy. This outcome depends more on continued rail passenger growth than on fare increases, although the latter will generally exceed the rate of inflation.

On the basis of a report by the Comptroller and Auditor General,1 the Committee examined the Department on its performance since taking over from the Strategic Rail Authority, the service to rail passengers, and how the taxpayers’ interests are protected.

1 C&AG’s Report, The Department for Transport: Letting Rail Franchises 2005–2007 HC (2007–08)1047

5

Conclusions and recommendations

1. Since taking over from the Strategic Rail Authority, the Department has shown itself capable of letting rail franchises to the planned timescales and protecting the taxpayers’ interests. The Department has procured passenger rail services that live within the public funding available and improve railway performance, although passenger satisfaction continues to pose problems. The Department cannot be complacent and should provide regular analysis and assurance to demonstrate that rail franchising developments are consistent with the Government’s wider objectives.

2. The Department does not consider damaging side effects for passengers from its rail franchising approach. The Department sets requirements for service frequency and punctuality but does not, for example, measure the impact of rising car parking charges, complex fares and crowding on travellers, including on vulnerable members of society.

3. Although the Department consults widely, regional transport bodies are not involved in selecting the bidder who will operate services in their area. The Government plans an increased emphasis on a local approach to transport decisions, with Integrated Transport Authorities providing oversight to a number of Passenger Transport Executives in the regions. The Department should invite local and regional bodies to second suitably qualified staff to join the Department’s bid evaluation teams so that details of the services, as bid, are checked against local needs.

4. The present economic crisis may well put additional pressure on the commercial skills of the Department’s staff. The Department’s franchise management and monitoring will only be effective if there are enough staff in post with the necessary skills to interpret and question financial and commercial information. The Department should be flexible in its recruitment, remuneration and use of staff with commercial experience. Pressure to reduce administrative budgets should not undermine its ability to negotiate effectively with train operators.

5. The Department promises of bringing 1,300 new rail carriages into service by 2014 look over-optimistic. There are only 423 on order so far, and another 150 carriages are the subject of negotiations. It takes 30 to 36 months to mobilise the supply chain, suggesting deliveries running into 2011–2012 for the current work in progress.

6. It is unacceptable that low cost fares, which should be available to all rail passengers, are most readily found by those with access to the Internet. This approach undermines the whole basis of the railways as a public service available to all. It excludes those people without access to the Internet, without the time to search or who decide to at short notice. There is no reason why the Department should favour a system which supports such perverse and unwarranted exclusion.

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7. The Department must do much more to simplify fares. The Department has made a start in simplifying fares, but some complex fares still exist and the best fares are hard to find without access to the Internet. Fare structures should be simple, fares should be accurately named, and the lowest priced fare for a journey should be publicised and readily available at station ticket offices, as well as on the internet.

8. In the economic downturn, the Department intends to hold train operating companies to their financial commitments. The Department hopes that, by 2010– 2011, direct subsidies to train operators will be eliminated as companies increase their revenues. But the recession may trigger a reduction in rail travel and fare revenues, and some train operating companies may ask the Department to relax their contractual obligations. The Department should hold train operators to their contract terms although, in some cases, including ’s bid for the East Coast franchise, the original bid might have included over-optimistic revenue assumptions.

9. In the short term, there is an increased risk of train operator financial failure. Although the Department has effective arrangements for monitoring the operational and financial viability of train operating companies, there is a risk that some companies could fail as their revenues fall. In some cases problems that are temporary in nature will be managed through parent company support for additional bank finance. The Department should explore all options and develop robust contingency plans to keep train services running in the event of multiple failure.

10. In the short term, there is also an increased risk of financial failure by banks that have issued performance bonds. The Department requires train operating companies to issue performance bonds, backed by banks, which the Department can call in the event of the failure of a company. The bonds cover about 5% of the annual cost base of each franchise holding company and have been issued by a selection of banks. The Department should review the ability of the issuers of performance bonds to respond to a call as often as necessary, potentially even on a daily basis.

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1 The Department’s performance

1. Each year UK passengers make more than one billion journeys on rail services, run by the private sector. In 2006–07, passengers paid about £4.8 billion out of a total cost of £9 billion for these critical public services. The Department for Transport (the Department) provided around £3.1 billion as grants to Network Rail, £0.8 billion directly to train operators and £0.3 billion to local bodies.

2. In 2005, the Department took over responsibility for letting and managing rail franchises from the Strategic Rail Authority. Following the hand-over, it completed the letting of four franchises in 2005–06, including the InterCity East Coast franchise awarded to GNER. The Department specified and let the in 2006–07, and a further four franchises in 2007–08. Throughout planning and procurement, the Department has specified services that reflect its objectives to control costs and live within the public funding available. The Department is not, however, always well informed about the likely impact of its rail franchising decisions on passengers and, therefore, on its wider transport objectives.2

3. The Department’s specification for each franchise is based on a cost-benefit test: services with higher benefits than costs are generally included in the specification. Some exceptions are permitted on safety grounds.3 Train operators are allowed to put forward innovative proposals, but the selection of winning bidders for each franchise is largely based on bids for the base specifications.4

4. Local bodies may also elect to pay for services to meet local needs and which need additional subsidy. Most train operators, however, admitted that they do not put much effort into working up the optional part of their bids. And, because the Department does not involve the local bodies in evaluating and negotiating the actual bids, local awareness of shortcomings in bid options might be overlooked.5 As a result, the crucial local voice in securing suitable train services may be lost.

5. Overall, the Department has been successful in stimulating competition and letting franchises to planned timetables. There has been keen competition with three or more bidders on seven out of the eight franchises, although overseas companies showed little interest because of the strength of the established UK bidders.6

6. Varying levels of activity make direct cost comparisons with the Strategic Rail Authority difficult. The Department’s costs are generally lower, although for most bids the Department still spends over £2 million on consultants. Train operators have complained about their own costs of up to £5 million for each bid. The Department cannot influence the total cost incurred by bidders, which includes the bidders’ own choices on success fees

2 Qq 94, 114, 122, 131–133, 159–161 3 Qq 116–117 4 C&AG’s Report, paras 1.10, 13; Appendix 4 5 Qq 118–120 6 Q 115

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and bonuses, but it has reduced the document length and the number of detailed plans required in an effort to reduce bidders’ costs.7

7. The Department has operated with fewer staff than the Strategic Rail Authority, bringing the cost of managing franchises down from £7.3 million in 2004–05 to £5.7 million in 2007–08. Some 30% of staff had departed within two years of the change in responsibility. The Department expects people to move on every two or three years and many Strategic Rail Authority staff had been in post for some time. The Department’s rail service delivery team does not normally recruit from the wider civil service. It recruits largely from the railway industry itself instead, and has difficulty in attracting and retaining staff because it pays salaries towards the bottom quartile of that industry.8

8. The Department’s arrangements for identifying and managing risks, including handling the failure of a train operator, follow good practice. For example, the parent company of GNER, which operated the InterCity East Coast line, was unable to support GNER through a period of financial difficulty. The Department negotiated a management contract with GNER to operate the service until the franchise was re-let competitively. The passenger experience on this line has, however, continued to be much the same after re-letting the franchise to National Express in 2006–07.9 National Express has committed in the franchise agreement that it will bring in a number of specified improvements in accordance with the timetable set out in the Department’s note to the Committee.10

7 Q 121 8 Q 99 9 Qq 15–16 10 Ev 18–21

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2 The rail passenger experience

9. Passengers’ experiences across the eight franchises let by the Department have been variable (Figure 1). The most recent National Passenger Survey, carried out in autumn 2008, shows strong improvements in passenger satisfaction on most measures for First Great Western and National Express East Coast. But it also shows a fall in satisfaction on many measures for East Midlands and . There has been a decline in satisfaction with the value for money of the tickets on five franchises, with facilities for car parking on four franchises, and with the room available for sitting and standing, ticket buying facilities and train punctuality or reliability, in each case on three franchises. Passengers have faced overcrowding on some services, and passengers are concerned about rising fares and car parking charges.

Figure 1: Trends in passenger satisfaction on the eight franchises

% change in satisfaction between autumn 2007 and autumn 2008

TICKET DATE SUFFICIENT FACILITIES TICKET FRANCHISE OVERALL PUNCTUALITY/ VALUE FRANCHISE ROOM TO FOR CAR BUYING OPERATOR JOURNEY RELIABILITY FOR BEGAN SIT/STAND PARKING FACILITIES MONEY First Capital April 2006 0 1 -2 0 0 -1 Connect

First Great April 2006 7 10 6 3 0 +1 Western

South Eastern April 2006 2 -1 -1 -1 -8 -3

South West February 2 5 0 4 -5 2 Trains 2007

November Cross Country 2 3 -3 -7 10 2 2007

East Midlands November -1 -1 -1 -2 -7 5 Trains 2007

November London Midland -1 -6 1 1 -14 -7 2007

National Express December 5 6 -1 4 3 4 East Coast 2007

Source: National Passenger Survey: Autumn 2008 (Passenger Focus: 28 January 2009) 10. The 27% increase in journeys in the five years since 2003 has resulted in increased crowding, including on peak services into London.11 This is not just a problem for London commuters but affects journeys throughout the country.12 Train operators have been projecting revenue growth, mainly from increased journeys, of between 47% and 62% over

11 Q 27, London Assembly Transport Committee Report, The Big Squeeze: Rail overcrowding in London, February 2009; Office of Rail Regulation, National Rail Trends Yearbook, Five Years to 2007–08 12 Qq 53, 62, 125

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a five year period to 2010–2011.13 Although the rate of growth may fall in the short term, the Department expects it to pick up again after any downturn.14 Commuters face increased crowding at peak periods, at least until planned investment delivers more carrying capacity. Trends in the number of passengers being carried in excess of capacity at peak times are worsening.15

11. In the eight franchises let between 2005–2007, the Department’s initial plans to address overcrowding involved negotiating an average 7% increase in fleet capacity over the franchise term.16 The Department subsequently planned to add 1,300 further carriages. If this is implemented in full, it will increase capacity by a further 15% by 2014.17

12. The Department has promised to bring the 1,300 new rail carriages into service by 2014. There are only 423 on order so far, with the first set entering service towards the end of 2010. Another 150 carriages are the subject of negotiations, and it will take 30 to 36 months overall to mobilise the supply chain. This suggests deliveries running into 2011– 2012 for the current work in progress. The Department therefore faces a major challenge to complete the orders for delivery by 2014.

13. The average age of trains in the UK is the lowest in Europe, but the total fleet is short of capacity.18 As a result, the Department faces the challenge of altering the commercial terms of most rail franchises to bring new, previously unplanned, rolling stock into service. This will stabilise, but not reduce, the level of crowding that many rail passengers currently experience.19

14. The Department regulates fares such as saver and season tickets, which account for 60% of passenger journeys.20 These fares have generally risen each year by 1% above RPI. Nearly all regulated fares in the eight franchises examined, apart from Southeastern, increased on average by 4.8% in January 2008. They also increased by 6% in January 2009 (and Southeastern by 8%). The Department justifies these increases by reference to its broader policy on funding railway improvements. It aims to ‘rebalance’ the respective shares of the taxpayer and the passenger. This means an increase in the passenger contribution to the amount of subsidy needed for modernising the railway system, and a reduction in the taxpayer subsidy.21 The Department’s investment plans mean, however, that it projects that overall taxpayer support to the railway system will remain the same.22 There is a possibility of falls in the retail price index during 2009. This should mean, under

13 Q 23 14 Qq 22–24 15 Q 27 16 Q 24; C&AG’s Report, Figure 11 17 Qq 26, 114 18 Qq 23–24, 63–64, 161 19 Qq 29–30 20 Qq 34, 46 21 Qq 47–48; C&AG’s Report, Figure 13 22 Qq 19–20

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the current regulations, that on some 60% of journeys, hard-pressed rail travellers may see rail fares fall in January 2010.23

15. The Department does not regulate all the costs associated with travelling. For example, the overall journey cost for many season ticket travellers has increased by more than the regulated amount because station car parking charges are not regulated and may rise more than once a year.24 The Department agreed that passengers would have reason to complain, but has no information on the extent of the problem.

16. Around 40% of fares, mostly relating to off-peak travel are entirely unregulated. Train operators have generally set increases in unregulated fares as high as they calculated the market would bear. Average unregulated fare increases in January 2008 ranged from 4.3% to 7%.25 In January 2009, the average reported increase in unregulated fares across all 16 franchises was 7%. Some individual increases have been higher; for example, Stagecoach raised some unregulated fares by 20% in 2007. The Department does not have evidence that these increases have any undesirable side effects, such as persuading some passengers to travel in the peak or to make car journeys instead.26

17. Some special low fare offers are made available, generally in advance, and often through websites specially designed for the purpose. Many rail travellers, such as those without home computers, may need help to identify and book these fares. Some may inadvertently pay higher fares than necessary.27

18. Measures being introduced to ease crowding include ‘-style pricing’ for long distance journeys, which means fares are determined depending on demand at a specific time. At times when demand is high, this could lead to price increases for some groups of passengers. The Department does not have evidence of any undesirable side effects to this approach compared to the benefit of lower prices at times when demand is low.28 It is possible, however, that some passengers face very high fares for ad hoc or infrequent journeys, such as visits to family members in other parts of the country.29

19. The Department has introduced a business excellence model into the franchising process which train operators must adopt.30 Train operators have made commitments to improve service quality, notably in respect of traveller security and station accessibility. Yet one result of allowing train operators to self-certify compliance with obligations is that the Department may not always have full knowledge of aspects of service that matter most to rail passengers. In particular, concerns remain over the overall quality of service provided by companies. Travelling on crowded trains is not comfortable for passengers, and can pose significant challenges for the elderly.31 One alternative to the Department playing a

23 Qq 154–155 24 Qq 38–44 25 C&AG’s Report, Figure 13 26 Q 122 27 Qq 49, 53 28 Qq 72–74 29 Q 53 30 Q 114 31 Qq 132–134

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more active information gathering role itself would be to provide funding for occasional ‘mystery shopping’ surveys by Passenger Focus.32

20. Timetabling can cause problems for some travellers. With input from Network Rail, the Department evaluates whether a train operator’s timetable is deliverable. This does not test whether an adjusted timetable is sufficiently stretching to deliver real punctuality improvements. Trains that run early and wait outside the station imply that the opposite may be the case.33 Some existing targets that aim to improve punctuality might miss the greater importance, for passengers, of train cancellations, because of their effect on crowding.34

21. Train operators may also be able to withdraw passenger benefits that had originally been offered alongside franchise agreements. In the case of the National Express East Anglia service, let by the Strategic Rail Authority in January 2004, this flexibility has led to the removal at the end of February 2009 of the full restaurant car service described in the Passenger’s Charter attached to the franchise agreement.35 In the Department’s view this change cannot be reasonably refused because the franchise agreement only requires, as a minimum, a trolley service which the train operator intends to continue.36 This is a very regrettable example of a lowering of passenger service standards.

32 C&AG’s Report, Recommendation 4 33 Q 156 34 Q 133 35 Qq 96–98 36 Ev 24

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3 Rail subsidies

22. The estimated direct cost of the eight franchises in 2006–07 was £811 million. By 2011– 12, the number of subsidised services will fall from six to three (Figure 2). The ability of these eight train operators to deliver an overall premium, instead of continuing subsidy, depends on revenue growth. The two main causes of this revenue growth are increases in the volume of passengers carried and increases in fares, together delivering between 47% and 62% growth over a five year period. Despite the economic downturn, the Department does not necessarily agree that the rail industry faces a low growth situation. It still believes that at some stage in the future it will only be subsidising the provider, Network Rail, and not the train operators.37

Figure 2: Rail Franchises let 2005–2007 and premium or subsidy bid for 2011–12

PREMIUM OR FRANCHISE AREA OR TRAIN OPERATOR PARENT(S) START EXPIRY (SUBSIDY) NAME £ million Integrated Kent Southeastern Govia Ltd Apr 061 2014 (65) Franchise

First Capital Thameslink/ FirstGroup plc Apr 061 2015 126 Connect Great Northern

First Great Greater Western FirstGroup plc Apr 061 2016 168 Western

Stagecoach South Western Feb 07 2017 140 West Trains Group plc

London Midland West Midlands Govia Ltd Nov 07 2015 (162)

East Midlands Midlands Nov 07 2015 46 Trains Group

New Cross Cross Country Arriva Group Nov 07 2016 (156) Country

National Express InterCity East National Express Dec 07 2015 229 East Coast Coast Group plc

OVERALL PREMIUM 326 Notes: 1 Franchises specified by the Strategic Rail Authority and let by the Department. The franchise expiry dates assume that any relevant extension is earned. The amount of premium or subsidy contracted will change to reflect any change in track access charges payable to Network Rail. Source: National Audit Office analysis 23. The Department uses a ‘traffic light’ system to monitor the risks faced by the operators and has meetings scheduled on a small number of franchises where the current signals are at ‘red’. The Department presents its tentative view at these meetings, which the train operators may validate or modify.38

37 Qq 68–70 38 Qq 2–6

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24. The Department intends to hold train operators to their contract terms, although there is some scope for train operators to cut back any services that are not core requirements of the franchise. The scale of such contingency plans, however, is unlikely to deal with the adverse conditions arising from the present recession.39 If an operator fails, the Department holds performance bonds that cover about 5% of the annual cost base of the company concerned. The bonds have been issued by a number of different banks, mostly based in the UK. At present, the Department reviews the nature of these bank obligations monthly.40

25. The Department expects train operators to cope with the current recession, but has remedies that have already been tested in case a company is unable to fulfil its obligations. For example, in the case of GNER, the Department paid the management team to run the company for a period while the Department re-let the contract.41 In this case, the performance bond covered the cost of re-letting the contract. There is a risk of more than one franchise failing at a time, and that one or more might have to be re-let at an adverse price compared with the original transaction. The Department would not be bound to intervene immediately unless the company was incapable of managing the franchise.42

39 Qq 136–139 40 Qq 106–113, 143–151 41 Qq 139–140 42 Qq 13, 141

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Formal Minutes

Monday 30 March 2009

Members present:

Mr Edward Leigh, in the Chair

Mr Richard Bacon Rt Hon David Curry Angela Browning Rt Hon Alan Williams

Draft Report (The Department for Transport: Letting Rail Franchises 2005–2007), proposed by the Chairman, brought up and read.

Ordered, That the draft Report be read a second time, paragraph by paragraph.

Paragraphs 1 to 25 read and agreed to.

Conclusions and recommendations read and agreed to.

Summary read and agreed to.

Resolved, That the Report be the Twenty-first Report of the Committee to the House.

Ordered, That the Chairman make the Report to the House.

[Adjourned till Monday 27 April at 4.30 pm

16

Witnesses

Wednesday 21 January 2009 Page

Dr Mike Mitchell, Director General National Networks, Mr Jack Paine, Director of Procurement and Mr David Payne, Acting Finance Director National Networks, Department for Transport Ev 1

List of written evidence

Department for Transport Ev 18

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List of Reports from the Committee of Public Accounts 2008–09

First Report Defence Information Infrastructure HC 100 Second Report The National Programme for IT in the NHS: Progress since 2006 HC 153 Third Report Skills for Life: Progress in Improving Adult Literacy and Numeracy HC 154 Fourth Report Widening participation in higher education HC 226 Fifth Report Programmes to reduce household energy consumption HC 228 Sixth Report The procurement of goods and services by HM Prison Service HC 71 Seventh Report Excess Votes 2007–08 HC 248 Eighth Report Ministry of Defence: Chinook Mk 3 HC 247 Ninth Report Protecting the public: the work of the Parole Board HC 251 Tenth Report New Dimension—Enhancing the Fire and Rescue Services’ capacity to respond to terrorist and other large-scale incidents HC 249 Eleventh Report The ’s Future Nuclear Deterrent Capability HC 250 Twelfth Report Selection of the new Comptroller and Auditor General HC 256 Thirteenth Report Department for Work and Pensions: Handling Customer Complaints HC 312 Fourteenth Report HM Revenue and Customs: Credits and Income Tax HC 311 Fifteenth Report Independent Police Complaints Commission HC 335 Sixteenth Report Department for International Development: Operating in insecure environments HC 334 Seventeenth Report Central government’s management of service contracts HC 152 Eighteenth Report Investing for Development: the Department for International Development’s oversight of CDC Group plc HC 94 Nineteenth Report End of life care HC 99 Twentieth Report Ministry of Defence: Major Projects Report 2008 HC 165 Twenty-first Report The Department for Transport: Letting Rail Franchises 2005–07 HC 191 Twenty-third Report Mathematics performance in primary schools: getting the best results HC 44

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Committee of Public Accounts: Evidence Ev 1 Oral evidence

Taken before the Committee of Public Accounts

on Wednesday 21 January 2009

Members present:

Mr Edward Leigh, in the Chair

Mr Richard Bacon Dr John Pugh Mr David Curry Geraldine Smith Keith Hill Mr Alan Williams Mr Austin Mitchell Phil Wilson

Mr Tim Burr, Comptroller and Auditor General, Mr Ed Humpherson, Assistant Auditor General and Patricia Lealy, Director, National Audit OYce, were in attendance Mr Marius Gallaher, Alternate Treasury OYcer of Accounts, HM Treasury, was in attendance

REPORT BY THE COMPTROLLER AND AUDITOR GENERAL

LETTING RAIL FRANCHISES 2005–07 (HC 1047)

Witnesses: Dr Mike Mitchell, Director General National Networks, Mr Jack Paine, Director of Procurement and Mr David Payne, Acting Finance Director National Networks, Department for Transport, gave evidence.

Q1 Chairman: Good afternoon. Welcome to the contact with all the franchisees on at least a monthly Committee of Public Accounts. First of all, I would basis. Obviously the economic downturn is having like to welcome a couple of delegations joining us. an eVect, but for the present revenues appear to be We have a delegation from the Public Accounts holding up reasonably well. In one or two cases we Committee of Sierra Leone, you are very welcome. have been told by franchisees that their season ticket We send our best wishes to your chairman who is ill renewals in January, which is a very good indicator, in hospital after arriving here; we hope he is better a lead indicator, have been up. That gives us a bit of now. Also, we have oYcials from the Stormont comfort, but I think you are right in saying that this Public Accounts Committee, Northern Ireland is a matter we need to keep under very close review. OYce. If any Members are available I will be meeting our guests and friends after this Committee Q3 Chairman: Let us just explore that in some more and we will discuss interesting points arising from it. detail, if we may, and look at paragraph 4.8, which Today our business is that we are considering the you can find on page 25, Dr Mitchell. At the bottom Comptroller and Auditor General’s Report on of that paragraph it says: “The Department now Letting Rail Franchises 2005—2007. Welcome back produces ‘traYc light’ early warning reports on the to our Committee, Dr Mike Mitchell, who is the financial position of each operator”. So what are Department’s Director General responsible for these traYc lights showing on the financial position national networks. Perhaps, Dr Mitchell, you could of these operators? What is happening at the introduce your colleagues, please. moment? Dr Mitchell: Yes. On my left is Mr David Payne, who Dr Mitchell: This is a report that we maintain on a is Acting Head of Finance for National Networks, regular basis to give ourselves our view of where we and on my right is Mr Jack Paine, who is my think train companies may be going over the course Director of Procurement. of the next few months. We also monitor the condition of the holding groups, bearing in mind the Q2 Chairman: Okay.Can I ask you, first of all, about experience we had with GNER some 18 months ago. your forecasts on passenger numbers. If you look at We seek to validate these views with the train paragraph 10 on page six of the Report it reminds us companies and with the holding groups, and we are that: “The reduction in subsidy is dependent on a in the process of doing that at the moment. continued strong increase in the number of passenger journeys”. I just wonder whether you were Q4 Chairman: You are just describing to me what I not over-optimistic in thinking that you were going already know. What are these traYc lights showing to have to pay less in subsidy because of a strong at the moment? increase in passenger journeys when, of course, Dr Mitchell: I have diYculty saying what the exact— because of recession that might not happen? Dr Mitchell: Yes, Chairman, that is clearly a concern Q5 Chairman: How many lights are now at red? that we have, but we do monitor the financial Dr Mitchell: I would have diYculty answering that position and, of course, the passenger numbers of all question, Chairman, because that is price sensitive the train companies closely. We are in very regular information on behalf of all the train companies. Processed: 13-05-2009 19:11:41 Page Layout: COENEW [E] PPSysB Job: 426391 Unit: PAG1

Ev 2 Committee of Public Accounts: Evidence

Department for Transport

Q6 Chairman: I was not asking you which Q11 Chairman: Of course. companies are showing at red. There is a lot of public Dr Mitchell: The press statement says: money at stake here, Dr Mitchell, £3-4 billion worth “Commenting on today’s article in The Guardian rail of public money. I think that as a Committee of firms ask Hoon for state help. An ATOC spokesman Public Accounts we are entitled to know in general said, ‘The story in today’s Guardian is not an terms what is going on. I am not asking you to accurate reflection of the discussion which actually specifically mention a particular company, which I took place at the meeting between train operators agree with you might aVect the share price, but I do and the Secretary of State yesterday. Train operators ask you to reconsider your answer and see if you can explained that they are weathering the current give some sort of answer to the Committee, which economic climate and, as with all other responsible monitors public spending, so that we can be assured businesses, are actively monitoring how events that £3-4 billion worth of taxpayers’ money is not unfold. The specific ideas reported were not raised in danger. with the Department but train companies Dr Mitchell: I understand the question. I would underlined both their commitment to deliver quality emphasise that these are our views of the likely risks services to passengers and their willingness to going forward on train companies. contribute actively to the economic recovery of the UK.” Mr Curry: Chairman, a point of order. As a financial Q7 Chairman: I know they are your views. How journalist could I just point out that if we are given many lights are now at red? information in camera the interpretation outside will Y Dr Mitchell: I repeat, I have great di culty be that all or any of the companies might be in answering that. diYculty and I think that will have a much more damaging eVect than being specific because even for Y Q8 Chairman: You are refusing to answer that those that may not be in di culty the speculation question? may well be that they are. Dr Mitchell: May I consult with my colleague? Chairman: You may. Q12 Chairman: You have heard what my colleague Mr Curry: A non-answer to a question is more said. Of course I will allow you to give us evidence in damaging to the rail companies than an answer. private, but you might contemplate what Mr Curry has said and you might want to use this opportunity Q9 Chairman: Do you know how many lights are in public session to give some reassurance to the red? public. Dr Mitchell: What I may say at the moment is a Dr Mitchell: Yes, I do. Chairman, I am very small number of companies are showing red and I concerned about the eVect that this is likely to have am prepared to divulge the number in private at on share price, however I accept that you have a the end. right to know this information. May I suggest that we have a session in private at the end of this session at which I will be pleased to give you that Q13 Chairman: Let us ask you, looking at paragraph information? 11 on page six, what would happen if there was a Chairman: My colleague will just ask a question failure. The taxpayer, it tells us, shares demand risk about something that has been in The Guardian with the train operators. Presumably the taxpayer is, today. therefore, exposed in the event of a failure? Mr Williams: The Guardian today is full of the woes Dr Mitchell: Yes, indeed. In two ways they would be of the franchisees and saying that they are asking for exposed. First of all, most franchises now have a reconsideration of the franchise terms and that they revenue share arrangement whereby the want shorter trains, they want rewriting of financial Government take some of the downside risk in terms in the financial agreement, they want extra return for some of the upside reward. Obviously if a state funding for a thousand staV across the railway train company is not trading successfully then the network and there are a whole series of figures that Government starts having to bear some of that pain. they apparently have given to The Guardian. Why The second thing is, depending on the time of the are you not aware of these and why can we not be market, if a train franchise has to be re-let then we told? may get an adverse price compared with the time that the franchise was let. Chairman: A subject of interest to me is GNER, for Q10 Chairman: Why can The Guardian be told and those who have constituencies in the East not this Committee? Midlands— Dr Mitchell: The straight answer to your question, Mr Curry: Ex-GNER. Mr Williams, is that The Guardian report is inaccurate. I attended that meeting which The Guardian reported and none of these issues was Q14 Chairman: Exactly, precisely what I was going raised with the Secretary of State. Perhaps it would to ask about. Of course, GNER was at risk of help if I read an extract from an ATOC—that is the failure. If we look at figure 17 on page 26, the history Association of Train Operating Companies—press of GNER, I can say as a passenger—maybe my release this afternoon in response to The Guardian colleague, Mr Curry, may disagree with me—I have article. May I read this? not noticed any fantastic improvement in the service Processed: 13-05-2009 19:11:41 Page Layout: COENEW [O] PPSysB Job: 426391 Unit: PAG1

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Department for Transport that I am receiving. I see that they have promised Q21 Chairman: Thank you very much. My last you—National Express—an additional £100 million question is if we look at paragraph 1.7, it says here: premium. Is that secure? Are you going to get it? “In setting service specification, there is always a Dr Mitchell: The train companies have said that they balance between providing a clear statement of what are intending to deliver the franchise premiums and is required, and leaving scope for bidders to the franchise agreements they have with us. The re- innovate. In these eight franchises, there has been let of the GNER franchise, the East Coast franchise, some industry criticism that the Department takes was, as you say, let at an increased premium. That, I an overly prescriptive approach”. Is that a fair think, reflected the state of the market at the time criticism and are you being overly prescriptive? but, as I said in my previous answer, if one was to let Dr Mitchell: I do not believe we are. Inevitably there a franchise like that now— has to be a balance between protecting the public purse and making sure that the taxpayer receives what it has paid for in a franchise and preventing a Q15 Chairman: It is very much at risk now. Given the franchise company from exercising its normal passenger experience is much the same, what are we commercial activities. We try to seek to meet that achieving? For instance, it says here: “Among the balance but at the end of the day, as the diYculties extra services will be new London-Lincoln . . . ” line. with First Great Western showed, it is important That is not a very exciting prospect because it is that we do have early warning of any instances where going to go via . the company is not delivering what it should be. Dr Mitchell: There are a number of additional promises made within the franchise agreement, one of which is an enhanced service to various Q22 Keith Hill: Dr Mitchell, it seems to me that with destinations in the north from the second timetable regard to the process of letting the franchises this is iteration which is due at the end of this year. There a good report, but amongst other things there are are a number of other franchise commitments which some concerns raised in the report about the National Express have made which I would be passenger experience and I would like to focus on happy to elaborate on if you wish. one which is the question of overcrowding, a natural concern for a London Member. My presumption is that it would be your expectation with regard to 1 Q16 Chairman: You can send me a note about them, passenger numbers that the volumes will pick up I do not want to weary my colleagues with more after the downturn. questions about GNER. Dr Mitchell: I assume so, yes. Dr Mitchell: I will be happy to.

Q23 Keith Hill: Could I draw your attention, first, to Q17 Chairman: I think you will find that various of paragraph 2.4 where rail passenger growth for the my colleagues will have interests around the country eight franchises that we are looking at here are so you will have to do your best to answer them in predicted to grow by between 47% and 62% over a some detail or give us a note. period of five years. Then again, if you look at Dr Mitchell: Of course, I will be happy to do so. paragraph 3.5 there is a reference to the July 2007 White Paper predicting an overall growth of 20% in Q18 Chairman: Let us go on asking a couple more capacity by 2014. questions before I finish on the impact on the Dr Mitchell: Yes. taxpayer. If we look at paragraph eight, the impact on the taxpayer, we see that: “These savings help to Q24 Keith Hill: However, figure 11 indicates that the fund the Department’s proposed investment in total increase in capacity on the eight franchises we passenger services”. How will you ensure that any are looking at here will grow by 22% by 2015–16, in reduction in subsidy you do receive is, indeed, other words we are looking at a rail passenger ploughed back into investment in passenger service? growth of between 47% and 62% over five years and Dr Mitchell: There is no direct link between the an overall growth in capacity by 20% plus. funding that has been promised for railways over the Dr Mitchell: Yes. next control period, which is 2009. Q25 Keith Hill: Does this not mean, inevitably, more Q19 Chairman: It says here: “These savings help to overcrowding? fund the Department’s proposed investment in Dr Mitchell: Not necessarily. These vehicle numbers passenger service”. What we want to know is that in table 11 reflect the promises made by franchising any money or saving is going to be ploughed back to companies when the franchises were let. In addition passengers. That is a fair question, is it not? to that there are 1,300 vehicles which are part of the Dr Mitchell: Yes, it is. High Level Output specification which is in the process of being settled now. Q20 Chairman: Are you prepared to give me any kind of positive answer? Q26 Keith Hill: My reading of figure 11 is that the Dr Mitchell: Yes. The answer is a straight yes. franchisees, the TOCS, are proposing to add 7% on capacity and then Network Rail will add 15% 1 Ev 18 bringing it to 22%. Processed: 13-05-2009 19:11:41 Page Layout: COENEW [E] PPSysB Job: 426391 Unit: PAG1

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Dr Mitchell: If I can refer to that, the report is purely doing is maintaining and slightly improving on the referring to the letting of franchises, it does not current situation and that is against a background of include, for example, the 1,300 vehicles which were fast rising demand. promised as part of the High Level Output specification, nor does it include some of the vehicles Q29 Keith Hill: So overcrowding at the moment is over a slightly longer timescale for the Thameslink getting worse, there is not much doubt about that programme which allows for a total of 1,100 vehicles over the past couple of years, but you think that from Thameslink. The straight answer to your additional capacity will enable you to stabilise the question is that we do not expect overcrowding to situation at more or less present levels of get worse over this period but it is probably our overcrowding? biggest challenge in how do we deal with what is a Dr Mitchell: That is probably correct, yes. very successful and fast growing railway. I may add Y that the recent economic di culties have not led me Q30 Keith Hill: So it is a future of overcrowding in to believe at this point that any of these plans should London and possibly elsewhere really over the next be modified. I am assuming that any dip in demand ten years? will be a temporary one. Dr Mitchell: No. Our estimates are that by 2014, which is the end of the next control period, which is Q27 Keith Hill: It does look as though at the moment the five years from this year until 2014, we will have the problems of overcrowding on the peak are stabilised the position at that point. It will take that getting at worse. I you look at paragraph 3.2, in 2006 length of time because it takes, broadly speaking, London services in the peak were in excess of two years to obtain new vehicles. Out of the 1,300 capacity between 3.5 and 4.8%. If you look at vehicles, for example, we have ordered 423 and a paragraph 3.3 you will see that in the West Midlands further 150, or thereabouts, are in the process of being ordered, so we are not waiting until the start the definition of standing capacity was raised from of the control period but manufacturers do normally 110% to 130%. That is to say, for planning purposes take about two years to produce these vehicles. it is now apparently acceptable for 191 people to stand on a 148 seat train instead of 163 under the earlier standards. Certainly at the moment there is Q31 Keith Hill: Network Rail is going to produce no question that overcrowding is getting worse. I do 1,300 extra carriages over the period? not entirely understand your confidence that the Dr Mitchell: No, the Department is. railway can cope and reduce these problems of overcrowding. Q32 Keith Hill: I beg your pardon. And then we see Dr Mitchell: As I said, undoubtedly outside the the TOCS are going to produce, I deduce, an extra economic position it is our biggest single challenge, 700, something of that order? how do we produce additional capacity given the Dr Mitchell: That is coming from the franchise lead times that it takes to produce vehicles and given promises of the TOCS, yes. the task of getting these additional vehicles in service with the train companies. You referred to the change Q33 Keith Hill: Why are the train operating in definition in the West Midlands. In fact, the West companies producing so far fewer numbers of Midlands Passenger Transport Executive, Centro, vehicles as a result of the franchises than the had a diVerent definition of overcrowding from the Department? DfT standard one. We gave them the opportunity to Dr Mitchell: I suspect that it is because the train keep that definition and obviously fund the companies have bid to a price for the franchise and additional vehicles that would be required, but they what we have done is we have overlaid on top of that declined that opportunity. I am as confident as I can what we think the demand required is. In the case of be, given the fast growing nature, certainly until very Cross Country, which was won by Arriva, for recently, of the railways that we have a credible plan example, they have by themselves proposed a fairly to deal with this, but I am under no illusion that this large increase in capacity, prompted, I would have to problem will have gone away by the end of the next say, by ourselves. The reason for that is because control period. outside the London area, the Cross Country service, that is a service which runs, broadly speaking, Bristol, Birmingham, Derby, SheYeld and to the Q28 Keith Hill: Can you tell us a bit more about the North East, is very heavily overcrowded between basis of your optimism that you will be able to deal Birmingham and Derby particularly,so we were very with it to some extent? keen to do something early on that. Dr Mitchell: We have modelled forward what we expect the passenger demand to be and also in detail Q34 Keith Hill: One last question back on London. what the crowding levels are likely to be at, for We see in paragraph 3.12 that the unregulated fares example, Central London stations. The modelling on the so-called shoulder peak have been subject, in demonstrates that in every case, except one, which is some cases, to very significant increases. Does that Moorgate, the crowding level will not deteriorate not give you an anxiety that it may, in practice, from where it is now, in other words it will not incentivise people to use the more crowded peak become more overcrowded. However, I have to say services, thus adding to the problem of that the diVerence is marginal so that what we will be overcrowding? Processed: 13-05-2009 19:11:41 Page Layout: COENEW [O] PPSysB Job: 426391 Unit: PAG1

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Department for Transport

Dr Mitchell: It is important to know that 60% of Dr Mitchell: Let me solve one problem at a time. We fares are regulated and therefore subject to the retail expect to conclude a commercial contract with price index plus one price control. The fares that are National Express East Anglia very soon to put new regulated tend to be the ones which we fear might be and additional trains on the service in East Anglia. abused by a monopoly operator otherwise, so they As far as the Stansted line is concerned, we are are there to protect the public. Having said that, the developing ideas for how we both can meet the Secretary of State has asked the train operators, growth in East Anglia and if necessary, subject to particularly in the current diYcult economic what happens with the Stansted expansion, deal with circumstances for the ordinary people, to bear that any potential expansion of the . We are on in mind in setting their unregulated fares. He did that this case. in early January this year. Q38 Mr Curry: Can I ask you, when you do your Q35 Keith Hill: Although a couple of years ago they franchising deal with the companies, is there raised it by 20%. Is there any evidence of people anything in that deal which influences the level at shifting from shoulder to peak? which companies can charge for car parking at Dr Mitchell: No.2 stations? Mr Curry: Dr Mitchell, I represent a North Dr Mitchell: Not normally, no. constituency but I commute, I do not have a London house. My house is near SaVron Walden Q39 Mr Curry: Would you agree that the increases and, therefore, I commute in daily from Audley End. in car parking charges at stations, particularly for On that line you have the Stansted Express, trains those who commute into London, have gone up at a which are laughingly known as express trains, or multiple of the rate of inflation over the last few used to be called those, and then you have ones years? which stop at every single station, and they are all on Dr Mitchell: I will accept what you say. the same track. What that means, of course, is there Mr Curry: For example, National Express at are constant delays and constant overcrowding Peterborough has gone from £10 to £12 and when because half the world seems to live in Broxbourne asked why they said “We have not had an increase as far as I can see who commute into London, so the since we took over the franchise”; that was the entire minute you hit Broxbourne you cannot even open a answer for the increase. That is utterly abusive, is it newspaper because you get walloped in the face by not, the increase in car parking charges? We want somebody with a backpack on their back standing. people to use the train and yet the companies put up The daily travelcard is £32.70, it has gone up quite every deterrent possible by increasing car parking substantially, and that does not include the car park charges. which is now over £5.00. It would always be more Chairman: We have to go and vote now; just say yes. economical for me to drive into central London, Mr Curry: And they go up several times a year, not even with the congestion charge, than it would be to even annually. take the train, and it would almost always be quicker door to door, even though I live 50 miles almost Q40 Chairman: You cannot shrug your shoulders exactly from the House of Commons, than it would either, for the sake of the record, you have to say be to take the train. something. Chairman: This question is almost as long as the Dr Mitchell: I am waiting for a chance. The answer is train journey! that we do not park charging by the train companies and the train companies are expected to Q36 Mr Curry: Oh no it is not, Chairman. There is price them according to what the market is. Having something wrong with that maths, is there not? said that, another issue that you may have observed Dr Mitchell: I think I can give you some comfort on as well is that the amount of car parking space is too that particular line. We have been negotiating with small and we are looking at how we can increase the National Express East Anglia as one of the first of number of car parking spaces. We would not be the High Level Output specification interventions, pleased, for example, if train companies were using these are the 1,300 vehicles that I spoke of, to put an pricing to reduce the demand for car parking at entirely new fleet of vehicles and an increased particular stations. number of vehicles on the Stansted line and, indeed, Mr Curry: They use it to reduce the number of on a number of other lines in East Anglia. passengers because they say so. Chairman: We will have to break for a moment. Q37 Chairman: But, Dr Mitchell, the problem is that Mr Curry: We will park that for the time being if you you are not putting any more track down, so if you do not mind. get stuck behind a Hertford East train which stops The Committee suspended from 4.01 pm to 4.07 pm at every holt and thicket there is along the line you for a division in the House. cannot get past it, and that is true of the Stansted Express. We can the most super-duper Q41 Mr Curry: May I just continue on the subject of environmentally friendly, with in-house car parking charges because, quite clearly, the entertainment, train but because of the track we are increases have been hugely abusive and eVective. As not going to get there any faster. I said, National Express 20%, and you said “We expect them to charge what the market will bear”, is 2 Ev 21 that right? Processed: 13-05-2009 19:11:41 Page Layout: COENEW [E] PPSysB Job: 426391 Unit: PAG1

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Department for Transport

Dr Mitchell: We expect them to charge an amount reflect the economic circumstances and the which reflects the utility of the car park and other punishment in people’s pockets. Do you think it is factors that they take into account. I would have to logical to cap council at that sort of level but to emphasise that we do not guide them and nor do we allow rail fares to increase by a minimum of 5% and set any charges for car parks. in some cases 9% plus, and on many routes which are not regulated somewhere around 7% plus. Does that Q42 Mr Curry: I know that, but would you explain make any sense? what the diVerence between what you have just said Dr Mitchell: We regulate 60% of the fares and that is and the expression “what the market will bear” is? set at RPI plus one. Dr Mitchell: What the market will bear is normally taken to mean to price to the limit that people are Q47 Mr Curry: I know the RPI in the month of prepared to pay. September was exceptionally high. Dr Mitchell: Yes, it was, but I assume it is going to Q43 Mr Curry: Let me put it this way, that when be lower this year. Having said that though it is part people using the services discover that the increase in of Government policy to rebalance the financing of car parking charges may come every six months or railways between the taxpayer and the fare payer so they have reason to complain. and the secretary of state has set that out no more Dr Mitchell: Yes, I would say so. recently than in the White Paper last year.

Q44 Mr Curry: That has happened so it would be Q48 Mr Curry: What it looks like, I am sorry to say, interesting if you would commission some research is a cosy little arrangement between the companies to take in, let us say, the 50 major commuting and the Government to fleece the travelling public. stations in an arc around London and just see what That is what it looks like in absolutely clear terms. has happened to car parking charges over the last Dr Mitchell: In about 1990 the taxpayer funded three years. I think you would be surprised and I about 35% of rail fares; more recently they are hope that in future franchising there may be some funding 50% of rail fares and that is why the guidance to the companies about their habit of Government has decided to rebalance the amount trying to fleece the passenger for every last penny. I that the taxpayer pays and the amount that the user will give you an example of my own station, pays. That is Government policy. National Express; at the beginning of December we had a notice which said from now on if you want to Q49 Mr Curry: If you did a comparison between, let park your car you must either phone or text or go us say, certain average or standard journeys in onto the website but you cannot buy a parking ticket Britain with standard journeys in the leading at the kiosk. The extremely helpful staV at the continental countries, what conclusion would you station said “Don’t blame us, it does not cause us arrive at in terms of the fares and the quality of the any extra eVort at all”. I finally took it up with the service? company and I said “Why are you so determined to Dr Mitchell: It would be quite a diYcult comparison make yourself an enemy of your customers by because there are some extremely cheap fares in the adding to the inconvenience of your customers by UK. It is possible to travel, for example, at certain removing the simple facility to buy a car park ticket times of day to places like for £6 or £7. The when you buy your ticket?” In the end they backed most expensive fares, in other words the first class down and they said “We never intended this.” The fares, the any time fares, constitute something like notice was absolutely clear; what sort of psychology 20% of the fares. I do not recall the exact figure but in the company occasions that sort of behaviour? fairly recently the managing director of West Coast Dr Mitchell: I would not like to hazard a guess but I Trains, the Virgin franchise who operate West Coast, repeat it is a matter for the company; obviously you said that the vast majority of his passengers paid took it up with the company and they resolved the quite a low fare and that the average fare was less matter. than £35. I may have got that number slightly wrong, but it is of that order. Q45 Mr Curry: Does it not worry you? For a Mr Curry: I am sorry; I have been held up at a red significant number of passengers their relationship light. with the company which runs their trains is one of antagonism. I wake up in the morning thinking what Q50 Dr Pugh: In my constituency, Southport, two problems am I going to have with this damn railway franchises terminate, the Northern Rail franchise today. When I go to Tesco I think that on the whole does and the Merseyrail franchise does, so the trains they are on my side; most other businesses by and park side by side. There is an interesting comparison large are on my side, but the railway companies I do there because they are both running on Network not, I think they are my enemies. Rail track, they are both Serco Ned franchises, they Dr Mitchell: I would be happy to raise your concerns both get their carriages from Angel Trains and so on, with the chief executive of the company. but with one service there is broad satisfaction— good indicators, good reliability, clean carriages and Q46 Mr Curry: Can I just look at the pricing. The so on. That is the Merseyrail section. On the Government last year capped council taxes at 5% in Northern franchise I get nothing but criticism of all order to get them below 5%; this year it is saying it kinds, both about the quality of the rolling stock, the is going to cap council taxes at below 5% in order to cleanliness, reliability, any factor you care to Processed: 13-05-2009 19:11:41 Page Layout: COENEW [O] PPSysB Job: 426391 Unit: PAG1

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Department for Transport mention. The two diVerential factors there are agreements with the Department of Transport, so obviously satisfaction, but the other diVerential when you go back to tell your constituents why they factor is obviously the fact that in one case the are getting such am appalling service you end up Department of Transport is not particularly telling a very complicated story where it is not involved in the franchising arrangements, that is obvious where the blame lies. given to MPTE, and in the other case you are. Dr Mitchell: The 200 additional vehicles that are Dr Mitchell: Yes. being ordered as part of the fiscal stimulus package, there will be a number of these destined for Q51 Dr Pugh: What inference would you draw Northern, so that should help some of the problems from that? you mention. Dr Mitchell: They are two very diVerent franchises of course. The Merseyrail franchise is a high- Q55 Dr Pugh: When you say they are being ordered, frequency urban network serving Liverpool and the they are ordered or they are being ordered? Wirral and the line up to Southport, and it runs on Dr Mitchell: The timescale is that we have issued the an extremely frequent service. The company Serco invitation to tender, the tender returns are due in and Railways who run it have been early February and we expect to place the order by extremely successful in getting quite old rolling the end of this financial year. stock, dating from the 1970s, to work successfully, and they have done a lot to improve the quality of Q56 Dr Pugh: This is a full order for these 200 the franchise. The Northern franchise is a very extra trains. challenging franchise, it is a very large franchise, it Dr Mitchell: We are ordering 200, yes. has a very eclectic mix of rolling stock on it and it is a franchise which operates through a large swathe of Q57 Dr Pugh: You would accept though that if you the territory and across several other main lines, so do not do something soon, even on the timescale you it is a much more diYcult franchise to operate. are working to, you are going to end up on this franchise with the vast bulk of the rolling stock being Q52 Dr Pugh: You would accept probably that 30 years old and not having been refurbished as the somebody could run that franchise or ought to be Merseyrail stock has been. able to run that franchise to customers’ satisfaction. Dr Mitchell: Yes, the Merseyrail rolling stock is Dr Mitchell: Up until quite recently—they have had amongst the oldest rolling stock in the country, but a dip in performance recently—we have been very you are right in saying that there is some quite elderly pleased with the development of the Northern rolling stock in Northern; the oldest dates back to, franchise and we think that Serco-Ned have done a from memory, the late 1980s. good job in improving what was really quite a diYcult franchise. They have recently had a Q58 Dr Pugh: Early 1980s, the 142s, and some of performance problem but we think they have those go back to 1983 at least. Is there anywhere else resolved that. in the UK apart from the Welsh franchise where they have got trains that are that old? Q53 Dr Pugh: You can still get on the trains at Dr Mitchell: The Welsh franchise has some of them Manchester and find yourself in grossly and the rest are in the west of England. overcrowded carriages. I have seen young mums with children who have paid good money for a ticket Q59 Dr Pugh: And the object is to phase them out. and end up travelling a considerable distance Dr Mitchell: The first objective is to increase the fleet without getting any kind of seating whatsoever, I size but, clearly, these will be the first trains to be have seen people go across the Pennines in phased out when we get to that point. thoroughly overcrowded trains, all the way. We have got to both agree that that is not acceptable in any Q60 Dr Pugh: Can I briefly ask you in the interim shape or form, is it, at the moment? what the spare capacity in the industry is in terms of Dr Mitchell: It is something we are working to stock not currently being on the rails but waiting to resolve. You mentioned the TransPennine route and be used, could be used? in fact the franchisee there, First TransPennine Dr Mitchell: A very small fleet and a very small Express, which operates between Liverpool, number of trains which were operating on Great Manchester, Leeds and the North East as well as Western which are in the process of being reassigned other places, replaced the entire fleet with new trains. to other franchises. They are temporarily out of use We are shortly expecting to agree with them an and there is a very small number of trains which used increase in the fleet to alleviate some of the to be with which are currently overcrowding problems. being refurbished for use on the Brighton main line.

Q54 Dr Pugh: That is an issue I raised directly with Q61 Dr Pugh: So if a train operator were to look the chief executive of Northern Rail, Heidi round for a diVerent sort of rolling stock they would Mottram, and I had a conversation that went find, until you have commissioned and these trains something like this, “Why can you not put on better have been produced they have very little choice. trains, it is enormously important with a big Dr Mitchell: They have very little choice, yes, and franchise.” Her answer was she would love to do that there are very few vehicles which are not actually by and large; however it was subject to franchise in use. Processed: 13-05-2009 19:11:41 Page Layout: COENEW [E] PPSysB Job: 426391 Unit: PAG1

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Department for Transport

Q62 Mr Mitchell: You have to recognise that this is Dr Mitchell: No, it is two years. Two years is the essentially a good Report; you are here like the figure average, but then of course we have to negotiate with in the Japanese workhouses where workers are the manufacturer or, rather, in most cases the train allowed to come in and bang it to bits and take out company negotiates with the manufacturer. That the grievances that have accumulated against the might take up to, perhaps, six months. They then companies that bring us here, so a lot of the knock take two years to build them, so we are talking of, at about stuV deals with that. I have to say, Chairman, a minimum, about two a half to three years; it takes there has been an improvement on the East Coast that length of time to actually get the supply chain Main Line—the problems were mainly caused by going. As I said before we are not waiting until the Geordies whipping the cabling from the signal start of the next control period to get this process system and people from Nottingham as well seemed going and we have actually ordered 423 of the 1300 to be in on the game, not problems of the new vehicles. National Express. However, we have a problem which is common to a lot of lines of overcrowding; Q68 Mr Mitchell: The Report indicates, and you the trains are getting increasingly overcrowded. I Y have had a couple of occasions now where I have had must have indicated to the National Audit O ce, an to stand in First Class—and you are charged extra to end of subsidy, in other words it is going to die away, stand in First Class—all the way to Doncaster. That you will be subsidising the track provider but not the is a crazy system; you cannot have bargained for companies. This is like a mirage, it is not going to enough increase in capacity to cope with the happen, I just do not believe it in fact; do you? increasing demand. Dr Mitchell: That we are going to? Dr Mitchell: As I have said on a number of occasions our biggest challenge is dealing with capacity Q69 Mr Mitchell: That there will be an end to increase and how we match it with demand; that is subsidies at the end of the contract period. our single biggest problem and it is the one that we Dr Mitchell: The predictions we have indicate that, tried to address in the White Paper last year. but of course that depends on a number of underlying assumptions and there is no doubt that Q63 Mr Mitchell: The Report says that you the railway network as a whole, including the anticipated a 7% increase (which is not much) in fleet payments to Network Rail, will continue as a capacity over the terms of the new contracts, but subsidised service; I do not think there is any doubt Table 11 on page 20 actually says the totally planned about that. increase in capacity is going to be around 22%. What are you going to do, put them in like cattle? Q70 Mr Mitchell: Does that allow for a recession. I Dr Mitchell: Yes. Can I correct an earlier answer, see paragraph 18, “Value for Money” on page 7 says Chairman? that “the bids assume continued high passenger growth. Slower growth would lead to subsidies Q64 Mr Mitchell: You just said “Yes”. falling by less than projected.” We are now in a Dr Mitchell: The 22% is a 22% increase in total slower growth scenario, are we not, so will there be seating in trains provided, so in other words if you an end to subsidy? take all the seating of all the additional trains— Dr Mitchell: I would not necessarily agree we are in a low growth situation. As I said, the most recent figures from the train companies still indicate quite Q65 Mr Mitchell: I cannot see that it is possible to substantial growth of, in many cases, towards 8% or have that increase, particularly given the fact that 9%, which is still spectacular growth in the number the number of journeys is going to increase and has of people travelling. These are the most recent been increased. figures we have got and they are not as high as they Dr Mitchell: Can I make two points? First of all, this were, but we are certainly not in a position yet where is only the eight franchises which the NAO they are declining or hardly increasing at all. We investigated, so that is 22% of those franchises. The have to assume for the purposes of planning that second point is that a particular set of rolling stock growth will continue at something approaching the will obviously do more than one journey in a levels we have predicted. particular day so the 22% increase in seats will generate an improvement in the overcrowding levels. I am sorry if I misled the Members before on that Q71 Mr Mitchell: I wonder if the Department will answer. have to change their attitude because things have worked okay up to now, largely because business has increased and demand has increased and you have Q66 Mr Mitchell: Why can you not increase the been able to increase the fares, but the fares are now capacity more quickly, why can we not get more at an exorbitant level. This is business travel, rolling stock in on the contract and why do the businessmen’s travel not people travel, and when I leasecos have such a monopoly on the system? found over Christmas that I could go to Iceland and Dr Mitchell: It is largely a question of how long it back—and I was paying my own fares so I took takes to manufacture the trains. particular account of this—more cheaply than I could go from London to Leeds I thought things Q67 Mr Mitchell: It cannot take seven years. have gone too far. 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Department for Transport using rail and in cheaper rail fares to encourage them Q76 Mr Mitchell: It seems daft to take a spur to to transfer from road. You are never going to get that Lincoln when we have no direct service to Grimsby, with this system of pricing. and that Lincoln service could easily be extended to Dr Mitchell: Some of the train companies, for a centre of civilisation and large population and example Stagecoach, have introduced the megatrain meet heavy educational demand by extending that where they do an extremely cheap fare, and we service to Grimsby. Why such a truncated little thing obviously welcome that kind of initiative. In terms just to Lincoln? of the assumptions underlying the growth figures Dr Mitchell: The estimate was made that that was that we have predicted we are assuming, obviously, where the demand was for a service, to Lincoln. that some will come from fare increases but that the rest will come from volume increases. In addition to Q77 Mr Mitchell: Who made the estimate? that, of course, there is a continued high level of Dr Mitchell: We would be happy to look at whether subsidy from the Government and from the there was a case for extending that to Grimsby. taxpayer of the service.

Q72 Mr Mitchell: The signals lie towards an increase Q78 Mr Mitchell: Okay, if you are going to look at in fare. I see there is talk now of “airline pricing”. Do it I will not take it further. Thank you very much. Chairman: Mr Mitchell, you would like a note on not for heaven‘s sake give the companies that abuse 3 because the greedy companies are going to use that that. As it extends to Grimsby it goes through extort more from customers. I see that Stagecoach, Market Rasen. Richard Bacon. which you have just mentioned, actually increased the near peak service prices by 20%. If we are going Q79 Mr Bacon: Dr Mitchell, I cannot help reflecting to get airline pricing that is going to happen on an that the last time you came before this Committee enormous scale, is it not? you ended up on the front page of the Evening Dr Mitchell: I think what is meant by airline pricing Standard. is the ability to price to— Dr Mitchell: Yes, exactly.

Q73 Mr Mitchell: Airline pricing is where the Q80 Mr Bacon: I was going to ask you what question demand is heaviest you charge more. you thought the answer to which you gave would Dr Mitchell: Conversely when demand is lightest lead you to repeat your performance, but you have you charge far less. Airline operators like Ryanair already done that in answer to the earlier question and Easyjet have been spectacularly successful at from the Chairman about the traYc lights, and it pricing to fill the planes. I have never been, for remains to be seen whether that is correct. I would example, on an Easyjet plane that was not full; that like to ask you about figure 2 on page 6. This sets out is the kind of concept that the train companies are the impact of the revenues over a period of years on moving towards so that they can discount and sell the franchise contracts; I understand these in that list seats at the oV peak which are otherwise unused. in figure 2 are those for which the Department itself is responsible for letting the franchise. Q74 Mr Mitchell: Would that be by time in the day Dr Mitchell: Yes. or time of the season because if I am taking a large family of eight grandchildren on summer holidays Q81 Mr Bacon: You have two columns there, the and you are going to start charging excessive prices second column which is the numbers in 2011/12—in because it is the summer holidays, that is going to be other words the first four years—am I to take it that murderous. that is not so much a projection as what you are Dr Mitchell: We welcome the fact that the train contractually expecting and will get, is that right? companies, in particular some of the more Dr Mitchell: Yes, that is correct. progressive train companies, are looking at innovative ways in which they can improve the passenger oVer. I have mentioned Virgin West Coast, Q82 Mr Bacon: There is a reference in paragraph 11 for example, which has got some very attractive where it says that “Beyond this point, the oVers to the North, and National Express East Department shares the financial consequences with Coast has similarly, as you will be aware. Stagecoach the train operator, by varying the amount of subsidy South Western also run the megatrain, and that paid or premium received by the Department . . . ” oVers seats from as little as £1. Does “beyond this point” refer to after the first four years or does it refer to if the revenue falls 2% below the projection? Q75 Mr Mitchell: I just want to push a local barrow Dr Mitchell: Can I refer that to my colleague? for a minute because I see one of the Mr Payne: It is after four years. recommendations is more consultation with local authorities, particularly Passenger Transport Executives who I think should be consulted more Q83 Mr Bacon: Within the first four years, come closely right up to the decision, but I am talking now what may, the operators have to pay you this about local authorities more generally. You have amount, so that is what you would expect to see. provided for the East Coast Line to introduce a spur Mr Payne: Absolutely. to Lincoln. Dr Mitchell: Yes. 3 Ev 22 Processed: 13-05-2009 19:11:41 Page Layout: COENEW [E] PPSysB Job: 426391 Unit: PAG1

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Q84 Mr Bacon: Presumably there are intermediate Dr Mitchell: They have to provide evidence either in columns available for 2007–08, 2008–09, 2009–10 the form of a description of what their methodology to 2011–12. is or in some cases even photographs of what they Mr Payne: There, are yes. have done or indeed examples of their calculations. We expect them to self certify but no new evidence. Q85 Mr Bacon: Could you then send us a note which lists all of them rather than just the first and the last Q94 Mr Bacon: I was quite surprised to see that so to speak? service quality is not actually something to which Mr Payne: Yes, we can. you attach financial penalties or rewards as well as not undertaking direct monitoring. Am I to take it from that that if I am a train operator and I choose Q86 Mr Bacon: Why was 2006/07 chosen as the start to allow the service quality to decline, I can do so point for that chart; I presume it is because they all knowing I will not be financially penalised? That is start in 2006, is that right? what that says, is it not? Mr Paine: That is correct. Dr Mitchell: Yes, it is.

Q87 Mr Bacon: In that case could you send us a Q95 Mr Bacon: Why would I not allow my service chart showing all the intermediate years? Then what quality to decline then? happens after 2011–12? This is where presumably Dr Mitchell: Train companies do not generally do projections come in based on assumptions about that, but having said that in the new South Central revenue forecasts and so on, is that right? franchise we have included that as a requirement and Mr Payne: They are still contracted subsidies. we have included the Passenger Focus independent watchdog as a means of suggesting how we can do Q88 Mr Bacon: They are still contracted but there is that. more risk-sharing. Mr Payne: Yes, there is. Q96 Mr Bacon: Are you aware of the controversy surrounding National Express East Anglia’s service from Liverpool Street to Norwich about the Q89 Mr Bacon: Do you have numbers for those restaurant car which has been the subject of a lot of latter years? publicity? Mr Payne: Yes, we have contracted numbers. Dr Mitchell: I am aware of it, yes. Mr Bacon: They are replacing—the word that they Q90 Mr Bacon: How far can you send us figures used at one time was enhancing—the service, this is going forward? to say instead of getting a nice cooked meal you are Mr Payne: We can send them up to the end of each going to be able to get a pasty; instead of getting a franchise. cooked breakfast in the morning you are going to be able to get some yoghurt and this is an enhancement Q91 Mr Bacon: If you do that it would make a much apparently. bigger chart; that would be very helpful. Secondly, Chairman: It will do you good anyway. could you make the chart include those other train operators which are listed in figure 1, they are Q97 Mr Bacon: It probably would, although outside the box in figure 1? representing a big pig-producing area I would prefer Mr Payne: All the franchises. a cooked breakfast and so would my farmers. What discussions have taken place between the train operator, in this case National Express East Anglia, Q92 Mr Bacon: In other words the SRA ones as well and the DfT to ensure that in making these changes as yours so it is a much bigger chart, much more they are complying with their franchise obligations? 4 inclusive. They will say—they have said to me—it is all in Mr Payne: Yes, we can do that. compliance, but do you know if it is in compliance? Dr Mitchell: Yes, it is in compliance. As I mentioned Q93 Mr Bacon: That would be very helpful indeed. in an earlier answer we have regular monthly I want to ask about 4.3, Dr Mitchell, on page 24 meetings with the train companies and a major where it says in (i) of 4.3 that the train operators “self feature of that is the extent to which they are certify” that they are meeting the contractual delivering the obligations they have within their obligations. If they are self certifying how do you franchise agreement. So although I do not know at actually know that they are meeting those which meeting that would have been discussed I am contractual obligations because it is fairly easy to fill certain that that feature would have been discussed in a form saying we have met these contractual at the regular meetings. obligations in the following respects to do with performance or investment or service quality or Q98 Mr Bacon: If you could send us a note on it;5 whatever, tick the box, sign it and send it oV to you there are a lot of people in East Anglia who would at DfT. How do you actually know, if they are self like to know more about it. It would be very helpful certifying, that they have actually done it? if you could send us a bit more detail. Am I to

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Department for Transport understand also that there is a person within the DfT Mr Payne: I could not possibly say, could I? I hope whose direct responsibility is to be the chief to. interlocutor between the and your directorate? Do they have one train Q106 Mr Bacon: Good. In paragraph 4.9 it talks operating company each or how does it work? about each train operator having to post a bond for Dr Mitchell: Generally speaking there is one the benefit of the Department. How does this work; franchise manager for each train company and do they actually give the Department some cash and usually a contract manager as well. The next level up it kind of sits there unless and until they go bust or obviously covers a number of franchises. fail to fulfil their franchise in which case you then take that money for termination costs? Q99 Mr Bacon: It says in paragraph 4.6 that you are Mr Payne: Yes, we call the bond from a bond operating with 40% fewer staV than the Strategic provider which tends to be a bank. Rail Authority was and that may very well be to the good, it may be that they were overmanned or Q107 Mr Bacon: Oh dear. Which bank—are they overstaVed, but it also says that you have tried to diVerent ones for each franchise? recruit from the rail industry but have found Mr Payne: Correct. diYculty competing on salary because of perceptions of a less innovative ethos than the SRA Q108 Mr Bacon: Do you know that they are all and that within two years of the formation of the okay? It is something that is actually right now quite Rail Service Delivery Directorate in 2005 30% of the serious so it is probably worth checking, is it not? staV left. That does not suggest that it is a Mr Payne: We do. particularly happy environment, does it? Mr Curry: None in Iceland. Dr Mitchell: The turnover of staV is not exceptionally high; we would normally expect Q109 Mr Bacon: There are none of them in Iceland. people in the course of their careers to move on every Mr Payne: None are in Iceland. two or three years, and it is important to remember that many of these staV had been in post at the SRA Q110 Mr Bacon: Have you checked that they are for some time. We do have diYculty, as the Report all okay? says, attracting and retaining staV because we do pay Mr Payne: We have checked and we continually towards the bottom quartile of the competitor check them. industry, which are eVectively the railway companies. Most of our staV in the rail service Q111 Mr Bacon: What is the value of the bond in delivery area come from the railway industry and each case, does it vary? usually go back to the railway industry; it is not an Mr Payne: It does. It depends on the value of the area that normally recruits from the wider civil franchise but it is usually 5% of costs. service. Q112 Mr Bacon: 5% of costs. What does that mean, Q100 Mr Bacon: Mr Payne, you are the acting operating costs? finance director, that is right, is it not? Mr Payne: Yes. Mr Payne: I am, correct. Q113 Mr Bacon: 5% of annual operating costs. Q101 Mr Bacon: Not permanently appointed. Is that Mr Payne: Correct. simply because you have not taken the civil service Mr Bacon: Can you send us a little schedule showing exam so to speak and so you have to be acting? the value of the bond for each of the train Mr Payne: I have to go through the recruitment operators?6 That is it, thank you, Chairman. process, yes. Chairman: Thank you Mr Bacon. Phil Wilson.

Q102 Mr Bacon: How long have you been in post? Q114 Phil Wilson: The Report is pretty good really. Mr Payne: Three months. Paragraph 4: “The Department’s service specifications are generally well thought through . . .” Paragraph 6: “The Department has Q103 Mr Bacon: How long was your predecessor been successful in stimulating keen competition for in post? franchises.” Paragraph 7: “The Department has Dr Mitchell: Two and a half years. been successful in letting franchises to the timescale initially established.” The Report goes on to talk Q104 Mr Bacon: How long was the person before about value for money for taxpayers et cetera in your predecessor in post? paragraph 18. With all that being true why do we still Dr Mitchell: If I recall he was the first appointment have problems with customer satisfaction? We know shortly after the transfer from the Strategic Rail that with a lot of the trains there are too many people Authority. Mr Payne’s predecessor is still employed using them but how are we going to change that over by the Department for Transport but he moved to a the coming years knowing that we are going to be diVerent job. waiting for 1300 new carriages for example? What can you impose on the people you have given these Q105 Mr Bacon: Mr Payne, are you expecting to become the permanent finance director? 6 Ev 24 Processed: 13-05-2009 19:11:41 Page Layout: COENEW [E] PPSysB Job: 426391 Unit: PAG1

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Department for Transport franchises to to actually improve their customer conscious decision to failsafe positive in that case. services and how do you monitor customer Where it is a purely commercial undertaking then we satisfaction? Is it independent, is there a way of have to make sure that passes the cost benefit test. doing it which is separate and independent from the franchises? Q118 Phil Wilson: In paragraph 5 where the Report Mr Paine: Initially when we send out what is called talks about the involvement of local bodies, why do “OJEU” notice to encourage people to bid for a you not involve local bodies in bid evaluation? franchise we have introduced more recently quite Mr Paine: Why do we not? strict quality assessment evaluation processes, so we are looking for companies to align what is known as the business excellence model. This does not happen Q119 Phil Wilson: You have local PTEs, which other overnight; usually the model takes about three to organisations should be involved? five years to work but we have, since moving to the Mr Paine: To be quite candid no one has ever asked Department, introduced that business excellence me if they can be involved. model as a criteria for train operating companies. Many of the companies are now aligned with that, Q120 Phil Wilson: Why wait for them to ask, why they are investing money in sending managers on the not just involve them? appropriate courses, but I would emphasise that Mr Paine: What we have done is when the initial turning quality standards around does take time. overture from public bodies was to take more part in They are on the pathway, however, and that the consultation process we welcomed them into that contributes to their score when we evaluate their process. We have developed that, it is working. I bids. have spoken to a number of contacts and we would welcome in properly qualified people who were Q115 Phil Wilson: I mentioned about being comfortable to sign up to our confidentiality successful in there being keen competition for the undertakings, so the door is open if people wish to franchises, for example; has there been a problem come in but it is not something, I admit, that we have with actually trying to attract the overseas bidders? readily undertaken previous to this Report; however Mr Paine: I do not think there is a problem. We have it is one of the recommendations and Dr Mitchell what we call our commercial stakeholder strategy has charged me with exploring that. where we promote and try and publicise as much as we possibly can the opportunities within transport Q121 Phil Wilson: Lastly it is about the expense; as a whole in the UK. More recently we focused that apparently it can cost each bidder £5 million on top on the rail franchising exercise; there has been a lot of the Department’s own costs. Has there been of interest from , there has been interest from consideration to reducing the bidder’s costs? , Dr Mitchell has already alluded to Mr Paine: One of the hats I wear in the Department Nedrail for example from the Netherlands. They is that I am the suppliers’ champion—some of them maintain their interest but they are well aware that often wonder whether that is strictly true, but it is an the bidding fraternity in the UK is very strong and intent and we try to deliver against it. What you are it does cost money to bid, and that is a commercial seeing there is a P&L output; when a company is decision for a new entrant to decide whether it is asked what has the bid cost you they will inevitably worth that risk or not. We do run what we call an put into that number everything they can. When we open door policy for potential suppliers and we brief undertook our lessons learnt processes around them as much as we possibly can, but it is fair to say, franchising this follows what we call a debrief where for example, that it is a commercial decision for the we debrief the winning and losing bidders as to what company concerned. Some have crossed the went wrong, where they failed in their bid, how they Rubicon and made their presence known, Nedrail can improve next time and so on. One of the for example, but we are constantly promoting the feedbacks we had was that they were worried about opportunity. escalating costs on bidding so we undertook to reduce the number of plans against which we judged Q116 Phil Wilson: In paragraph 1.6 which is on page their bids—for example previously, in most of the 11 it talks about “Most potential improvements are programmes the average number of plans that we only agreed if they pass a cost benefit analysis” so measure were in the middle 20s; more recently there how do you decide which improvements that have have been around 14 plans that we analyse. We also failed the test are to be adopted? ask them to limit the volume of paperwork they send Mr Paine: I did not quite understand the last part of us, in other words a thinner bid, getting more that question. emphasis on a pareto basis on the stuV we really wanted to see in the bid and the peripheral, less Q117 Phil Wilson: In the paragraph it says “Most important information withdrawn. My immediate potential improvements are only agreed if they pass understanding from the bidding community was a cost benefit analysis, although some of the security that that did reduce their costs, but the costs you are and safety measures proposed may be adopted even referring to often include things like a success fee or if they show net costs.” internal company bonuses based on the result of the Mr Paine: Safety and security are of paramount successful bid. I would argue we have moved interest for the industry. 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Department for Transport ultimately we pay as taxpayers for the bidders’ Q126 Mr Curry: You can fly to Singapore for less costs—but they also do include some of these things than that. I have mentioned such as success fees and bonuses. Dr Mitchell: You asked if we had seen any evidence of people being deterred and we have not seen that evidence. The Northern franchise, which I believe Q122 Geraldine Smith: Does the Department have would operate the service that you refer to, has in any concerns that overcrowding and high fare fact seen continuous growth. In fact, I spoke to Ms increases may lead to people not using the railways Mottram the managing director only quite recently and using their own cars? In my own area if you are to ask her if she had seen any decline given the going by train from Morecambe to Preston it will economic situation, and her answer was that she had probably cost around £6 per person; if you have a not, she was seeing an increase. family of four that starts getting really expensive when you can drive there in the car for about £4— from £20 to £4 people are going to jump in their car. Q127 Geraldine Smith: You have not seen The high prices are deterring people from using complaints about overcrowding and high fares. trains, I am quite sure—it is becoming a form of Dr Mitchell: That is a slightly diVerent question. travel for the rich or perhaps for MPs who are on expenses and can aVord to travel by train. Dr Mitchell: We have not seen any evidence that that Q128 Geraldine Smith: Is that a yes or a no? is happening. Dr Mitchell: Have we seen complaints about overcrowding, yes, obviously we have. We get lots of complaints about overcrowding and that is one of Q123 Geraldine Smith: You have not seen any the reasons that the secretary of state has given such evidence that that is happening. a high priority to capacity relief in the current Dr Mitchell: No, we have not seen any evidence that control period. So we are on the case but it does take the demand for rail travel is slackening. time to alleviate.

Q124 Geraldine Smith: It depends who is travelling Q129 Geraldine Smith: How can you get the capacity on the train; do you collect any evidence towards the if you have not got the track down to start with? type of people who are travelling and the type of Dr Mitchell: Part of the objective is to increase the people who may be deterred from travelling by train? track but also to increase the length of platforms. Dr Mitchell: We do see evidence of that but we have not seen any change in the diVerent types of people travelling by train. In fact, during the recent summer Q130 Geraldine Smith: When will we have some new when of course petrol prices shot a way up for a track in our area that we desperately need to run a period, the transfer to train increased quite proper train service? dramatically and several of the train companies Dr Mitchell: The other thing is to increase the length reported that in various statements they made to the of platforms where that is required as well, but I take public. We do not see any evidence of deterrence your point that it is not just about increasing the from people travelling by train but, clearly, it is an number of vehicles—in fact, that is a point that Mr individual decision for the individual passengers. Curry made—it is about how do you get more capacity into the system as well. Vehicles in a sense are the easy part. Q125 Geraldine Smith: And you do not get feedback. I noticed that Mr Hill mentioned overcrowding in London; I can tell you that there is overcrowding on Q131 Geraldine Smith: The problem I find since rail the Morecambe to Lancaster line every morning. privatisation is everything seems so fragmented and Indeed, I used that train this morning and it was full; even as a Member of Parliament I find it diYcult to the ticket collector could hardly get round because know, when people complain, just who to raise those there were so many people on the train and one of complaints with, because people pass the buck and the reasons is that there is not enough capacity on it is very diYcult. You have diVerent people dealing the track, the train has to cross over the main line, with stations, diVerent people dealing with trains Virgin Rail is always given priority, so one of the and things; do you not think it would be better if it services had to be moved back to five minutes to nine was a lot simpler and is this not working out really which gets people into Lancaster at five past nine, expensive for the taxpayer in the long run? too late for them to go to work and to use that train, Dr Mitchell: I do not think it is working out more so instead they have to use heavily congested roads. expensively for the taxpayer. The 2005 Act of course We seem to be in a crazy situation; I am surprised simplified the structure considerably by taking the that you have not really noticed any evidence of SRA out of it and reducing it basically to the people complaining about overcrowding and high Department for Transport, the OYce of Rail prices. Regulation and Network Rail. It is obviously more Dr Mitchell: No, that is not quite what I said. complex than under but the results are Geraldine Smith: My second journey was from there for themselves; the train companies I believe Lancaster to London Euston. A first class ticket on have brought a lot in terms of innovation and in Virgin Rail cost me £399—that is very, very terms of improving capacity in a situation where up expensive I think; do you not? until the early 1990s we were managing decline. Processed: 13-05-2009 19:11:41 Page Layout: COENEW [E] PPSysB Job: 426391 Unit: PAG1

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Q132 Geraldine Smith: That very much depends on agreement because the danger with that is the old the train companies and you will find very mixed problem of micro-management; if we put everything experiences if you travel on the trains a lot; in then we have to monitor everything carefully and sometimes it does not feel like there are those it would be a valid criticism then to say that we are improvements but other times it does. Virgin Rail micro-managing. There has to be a balance between operate a pretty decent service, as I say very putting everything in and putting the more expensive in terms of business travel, but they important things in and then going for discussion operate some reasonably priced fares, so the long with the train companies. distance does not seem too bad. For commuter journeys and things, however, it is pretty hit and miss Q135 Geraldine Smith: Finally you were asked and if you travel in school holidays at times it can be previously why not involve local bodies in the bid a nightmare on those trains. I travelled with my evaluation; I just get the feeling you know when it elderly mother and, you know, when someone is old comes round to the rail franchises that it seems very and is faced with being stood on platforms, crowded complex, it does not feel like you go out and try and in like cattle, not being able to get on a train and seek the views of people, it does not feel like you get when they eventually do get on there is nowhere to involved and find out what people want and what sit; someone like that is not going to use the train the feelings are about the time of the train service. It again in a hurry. You seem a bit complacent about just feels like there is not much competition, one of these sorts of issues. the companies is going to get it and you just make do Dr Mitchell: No, not at all. with the best of a bad lot. Dr Mitchell: Quite the reverse; the train franchises so Q133 Geraldine Smith: You do not seem to think far have been hotly contested and we have there are any real problems there; just as long as you recognised that there is more we can do to involve can get enough people on the trains it really does not local bodies as we have done with the South Central matter, they will just have to put up with it. franchise, first of all by involving Passenger Focus Dr Mitchell: We are certainly not complacent about which of course directly represents the passengers on it. As I have said, we have got the challenge since the route, but also by making sure that local bodies really the start of privatisation of a growing railway, are consulted directly, not just circularised and asked and it has been a challenge to deal with that position. for their comments. That is showing good results on You are right, we have got patchy performance, not South Central, so I am happy with that and I think only between companies but within companies, and we should continue to do that. There have been part of the challenge is to get that level of average occasions in the past—again I can think of Great performance up. We have improved punctuality, for Western—where that was not done as well as it might example, but there are still outliers. You mentioned have been and we paid the price. ; for reasons, mainly not of their Chairman: Your last questioner before we move into making, their performance has been below what we private session will be Mr Alan Williams and there would expect in recent weeks. In terms of the action will be one or two supplementaries. Could I please we take on it, I have seen in the Report the reference urge you to speak up because we are finding a little to First Great Western where there was considerable diYcult to hear. It may be that in your training you disquiet about their performance at the start of last are told that permanent secretaries are meant to year and we took quite severe action on their part speak as softly as possibly, but it does not help us so and I am happy to report that their performance is speak up. Mr Alan Williams. now among the best in the UK. It can be done and it is part of our job as eVectively franchise managers Q136 Mr Williams: Thank you. We are told in the to lift that general standard and to get the public the supplementary briefing that in the event of adverse service they need. economic conditions train operators have contingency plans to reduce costs. These of course Q134 Geraldine Smith: Would you say you pay were agreed, I assume, as part of the agreement you enough regard to actual quality? I take on board have with them. what you say about punctuality and there have been Dr Mitchell: Yes. improvements in train times, they do tend to run a lot better, but sometimes it is the experience while Q137 Mr Williams: What scale of adverse conditions you are actually on that train and sometimes it can were they envisaging at the time the contracts were be extremely poor. What can you do; once the entered into? franchises are actually issued how can you keep a Dr Mitchell: I do not know what their contingency check on those companies and what sanctions can plans were. you have against them if they are running a poor service? Q138 Mr Williams: But they were unlikely to be at Dr Mitchell: The level of complaint that each train this level unless you were one of the few percipient company is getting, the reasons for those complaints people in the United Kingdom. and the passenger satisfaction scores are discussed Dr Mitchell: The train companies are of course free on a monthly basis so we do pressurise the to vary things which they may have introduced over companies to improve where we think they can do and above their franchise obligations. We cannot, so. 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Department for Transport do would be to revert to what the franchise calls for believed that for some reason the company was and to deliver the actual contract. The secretary of incapable of managing the franchise for the period it state is quite clear that these are commercial had been let. contracts with private companies and we expect them to be delivered. Q142 Mr Williams: If you felt that and if there were multiple situations who would bear the cost? Q139 Mr Williams: If there were contingency plans Dr Mitchell: The DfT would. obviously they would meet any contingent that you could envisage. In light of what had been recent Q143 Mr Williams: Obviously in the face of history of 20 or 30 years at least before the contracts collapses in so many areas inevitably transport is were drawn up you could not have envisaged going to be aVected. This was raised and I would like anything like what is happening now; are the to know the answer to this: we are told that the contingency plans remotely capable of dealing with termination costs could be covered from a what it looks as if we are moving into? performance bond. Dr Mitchell: I think so, up to a limit of course, Dr Mitchell: Correct. depending on what were to occur. Based on what we know now and what we believe the train companies’ Q144 Mr Williams: I apologise to my colleagues; current results are, as revealed by their very recent could you tell me a little more about the scale of these statements, we are not anticipating having to do bonds, how they are underwritten and how anything other than what we already have in hand. meaningful they are, how reliable they are in the case The sort of thing we would do would be if a company of people inside the firms that are providing these were unable to fulfil its obligations then we would bonds. seek to re-let the franchise—if a company is actually Dr Mitchell: Mr Payne will maybe give some more unable to deliver on its performance. If it was a information in a second about the size of the bond temporary downturn we would expect the company but as you heard him say the bond is about 5% of the to ride the storm and to carry that loss if there was cost base of the company, so it is a very substantial one, but we would not expect to renegotiate a amount of money. In the case of the GNER contract nor would we expect to give them an termination all the costs for the DfT were met from easement against the terms of it. the GNER bond. Q140 Mr Williams: We are told that the Department Q145 Mr Williams: The bond is provided by whom? has a statutory duty to intervene should the train Is it underwritten? operator be unable to continue operations; what Mr Payne: It is underwritten by banks. would be the extent of that potential intervention? Dr Mitchell: In the case of GNER, which is mentioned in the Report, we made an arrangement Q146 Mr Williams: That really reassures us. I have with GNER to carry out the functions of the to be very careful what I say in the circumstances but franchisee on a management basis; in other words you have bonds underwritten by organisations we paid GNER to run the franchise while we re-let which have not exactly excelled in the quality of it. That decision was on the basis that GNER were bonds that they have shown they issue. Are you at all a good and competent operator; they had fallen on concerned about the situation? I do not mind who hard times but there was no reason why they should answers. not continue and, as events proved, they ran the Mr Paine: We do monitor the status of those bonds franchise extremely well during that 11 months or so on a regular basis. They are on what is called a first of the contract. In the event that that is not possible call basis, which means in the gradation of debt they you are quite right that section 30 of the Act allows are valued very highly, but in answer to a previous that the DfT has a duty to intervene and run the question we did undertake to send in a report on the franchise. status of those performance bonds.

Q141 Mr Williams: You are capable of dealing with Q147 Mr Williams: Are they with British banks or an individual company but we would not expect you international banks, British and international? to be prepared for anything more than an individual Mr Payne: A selection. company running into trouble, but it is conceivable Mr Paine: It varies. The original aim was to ensure, in the situation we are now in that you could have on advice back to bidders, that they did not all have, trouble across more than one company. You have to use a phrase, eggs in one basket, so we do referred to three projects that are in the red area and encourage a range of performance bond holders. you could have a wide scale failure. How would you deal with that? What capabilities do you have to do Q148 Mr Williams: If the bonds collapse you would with it? be in a mess, would you not? Dr Mitchell: On the assumption that the company Mr Paine: It would be more than us in a mess, but was capable of operating the franchise in terms of a we do take account of that risk. As I said earlier, they professional approach, then what we would do are on a high level of call option and they are would do first would be to go to a management monitored on a regular basis, we have to receive contract for that company; we would not undertakings to guarantee that they are there for immediately go to a DfT intervention unless we call. Processed: 13-05-2009 19:11:41 Page Layout: COENEW [E] PPSysB Job: 426391 Unit: PAG1

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Department for Transport

Q149 Mr Williams: You check them every ten Q157 Mr Curry: But if they are giving themselves minutes do you? longer to get there of course they are going to be Mr Paine: My colleague would give you the answer more punctual. to that. Dr Mitchell: If I can just explain, the checks that we Mr Payne: They are checked every month. ask Network Rail to carry out when we are letting a franchise are to determine whether the timetable Q150 Mr Williams: Should you not start checking proposition from the bidder is viable and part of our them more frequently? That is a serious question in franchise evaluation is to see whether the plans set view of what is happening. out by the various bidders are indeed deliverable, Mr Paine: We will take that away. and Network Rail help us with that work because Dr Mitchell: We will give consideration to that. only they have that expertise. Mr Paine: Your point is well made. Q158 Mr Curry: But deliverable in terms of being eYcient and not deliberately inflating the times to Q151 Mr Williams: I want to be sure the Department make it less likely you arrive late. is as protected as it can be so I would urge you to Dr Mitchell: We do not have evidence of that but consider that. That is all, thank you. obviously a train company will seek to deliver an Dr Mitchell: We will give consideration to that. attractive service to the public, and the idea that you sit outside the station for five minutes every time Q152 Chairman: That must be the answer of the would not be an attractive option. week, Mr Paine, that there will be more than us in a Mr Curry: It happens. mess if the bonds collapse. None of these are in Iceland, are they? Q159 Mr Mitchell: I do not often go to Europe in Mr Paine: I cannot recall the exact location but I do case I become infected with something like Euro know there are none there. enthusiasm or something like that, but when I do go, Chairman: Before we go into private session we have particularly to France or Germany, I am always got three quick supplementaries from Mr Curry, Mr struck by how much cheaper, more eYcient and Mitchell and Mr Bacon. better invested those railways systems are than ours. Why is that? Q153 Mr Curry: I suppose it is possible that the Dr Mitchell: I do not necessarily accept that that is Bank of England of course could buy up this the case. The level of punctuality, for example, now corporate paper, could it not, as part of its bears comparison with Europe. quantitative easing? It would be quite funny at the end of the day, good quality corporate bonds, the Q160 Mr Mitchell: The fares are consistently lower. Bank of England is going to buy them up. Dr Mitchell: The standard fare in many countries is Mr Paine: That would be a matter for the operating well above some of the discounted fares that are company. available in this country; it depends which fare you compare with. If you compare an any time first class fare in this country with a similar type ticket on the Q154 Mr Curry: That is an aside. If later this year continent you will usually find that the fare in this year-on-year inflation were to come out at minus 2% country is more expensive, but there is a wide range what would the fare adjustment be according to the of discounted fares available in the UK which is not franchising agreement? generally available on the continent. Dr Mitchell: On the current arrangements it is RPI plus one so you can do the maths. Q161 Mr Mitchell: I am sorry, I think the fares are cheaper, the services are much more eYcient and Q155 Mr Curry: They would have to cut fares. there are more of them and certainly the investment Dr Mitchell: Yes. seems to be much higher in modern rolling stock and faster trains there than here? Q156 Mr Curry: Secondly, when I use the train— Dr Mitchell: I do not accept the point on rolling most of the time I drive because getting from Audley stock. For example, the average fleet age of rolling End to Yorkshire by train is rather like trying to get stock in the UK is around about nine and a half to Moscow under Napoleon and with 900 square years so in fact we have got the youngest rolling miles of constituency you need your car—but what stock in the whole of Europe, so I would not accept I do find when I get to Leeds is that very often the that the rolling stock is older in this country than it train stands outside Leeds because it is early. I is on the continent. Yes, we do have some old rolling suspect there is significant over-timing on some of stock, we spoke about it earlier, but there has been a these services in order to build in a cushion against huge volume of new rolling stock put in over the last arriving late. When you deliver franchises do you do few years. any checks as to the realism of the timings in the train timetables because I suspect that over the last Q162 Mr Bacon: Very quickly, the train operating decade there has been very little improvement in the companies recently changed the terms of open actual journey times to some of these destinations? tickets, they used to be what was called an open Dr Mitchell: Of course there has been a very major return, you bought it and it was then valid for 30 improvement in punctuality. days—that is to say you bought your ticket and then Processed: 13-05-2009 19:11:41 Page Layout: COENEW [O] PPSysB Job: 426391 Unit: PAG1

Committee of Public Accounts: Evidence Ev 17

Department for Transport at any point in the next 30 days you could use the Certainly on the National Express East Anglia outward portion and then also, as long as it was used service they did not know either, they had to be told within 30 days, the return portion. Now there is a after the event. It is plain on its face that it is not new ticket called euphemistically “any time” which helpful, it is plain on its face that it is more confusing. is anything but, and I understand from talking to I am amazed that you can say the opposite. train staV on the Anglian service that this is a Dr Mitchell: I gave you my view. uniform agreement between all the train operating Geraldine Smith: Could I possibly come in on that companies; you buy the ticket, it is only valid on the point because you really are out of touch if you think day that you buy it and then 30 days hence for the that is more helpful because it causes all sorts of return, or if you want to buy it now but it be valid problems. If you pay,as I did today,£399 for an open tomorrow or next Wednesday you have to say so and ticket and you find that for some reason you cannot then the return portion is valid for 30 days hence travel today,you have to travel tomorrow, that ticket from that date. What I do not understand is as a you cannot use. result of this change what benefit is there for Mr Bacon: That is exactly what happened; it is passengers? suddenly invalid. Dr Mitchell: The benefit is in terms of simplification V Geraldine Smith: How can that be more helpful? of the fare o er. The railways were rightly criticised Mr Bacon: You are paying full price, you are not a couple of years ago for the very confusing range of paying a discounted price; this is a full fare that is not tickets and the fact that each train company had a any time at all. diVerent name for what apparently were similar tickets. Q169 Geraldine Smith: It does not give you Q163 Mr Bacon: The open return was called the flexibility. same on each train operator and now it is called any Dr Mitchell: It all depends how clear the oVer is time. Do you think it is helpful or confusing to call made to people who are then buying it. a ticket any time when it patently is not any time? Dr Mitchell: The ticket is any time in the sense that you can travel on any train on that day. Q170 Geraldine Smith: How can you say that is more helpful when you cannot have a flexible ticket? Q164 Mr Bacon: My question is do you think it is Dr Mitchell: I would accept that if that is not made helpful or do you think it is confusing to call a ticket clear then that is obviously not helpful. any time when it is more restrictive than the one that Geraldine Smith: Even if it is made clear—it is not you had before that was any time? made clear because depending on the people on the Dr Mitchell: I can understand the point you are train some know that you have got to use it on that making. day and some people do not know, but having said that how can you say it is more helpful because that ticket is no longer fully flexible because it must be Q165 Mr Bacon: What is the answer to my question, used on a certain day for the outward journey. is it more helpful or is it confusing? Dr Mitchell: What I would say is that the train Chairman: I am trying to help, Dr Mitchell, so that companies took the view, in response to a request you do not dig yourself into a hole; why not go away from us to simplify their oVer, that this was one way and try and think of a more helpful answer. in which they could simplify the oVer and make sure Mr Bacon: Essentially you have got a diminution of that they did in fact— service but you are still paying full fare. How that can be an enhancement, how that can be clearer, how that can be of benefit? How that can be anything Q166 Mr Bacon: Dr Mitchell, you have just given me other than more confusing when you call it any time an answer which is not an answer to my question. and it is not I do not know. You told me what the train companies took the view Chairman: Why do you not go away and just think of; if I had said what view did the train companies about it, Dr Mitchell. Thank you very much.7 take then I would have expected the answer you Mr Williams: It is misleading. gave; my question was do you think it is more helpful Chairman: That concludes our public hearing. All I or do you think it is more confusing? Dr Mitchell: I think it is more helpful. will say in conclusion is that in a time of recession where the prices are falling heavily in many industries I am sure you will agree, Dr Mitchell, that Q167 Mr Bacon: Do you? Why? If it says any time passengers will be rightly infuriated if any prices rise and it is not any time surely it is more confusing. above inflation. That is one point I would like to Dr Mitchell: I do not agree. The fact is that it is make. The second point I would like to make is if available for any time on that day and the return you do move towards more airline type ticketing— portion can be used any time— you yourself mentioned Easyjet—it is one thing to book on the internet for aircraft travel but many Q168 Mr Bacon: This is the point, it does not say any people, particularly elderly people, find using the time on that day, it just says any time and in plain internet diYcult so it would be unfortunate in my English any time has only one meaning. I will tell you this: the staV clipping the tickets did not know. 7 Ev 25 Processed: 13-05-2009 19:11:41 Page Layout: COENEW [E] PPSysB Job: 426391 Unit: PAG1

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Department for Transport view if all these cheap fares were increasingly public hearing. If any members of the public or the concentrated on the internet. That is my personal press could now leave as quickly as possible we opinion. Thank you very much; that concludes our would be very grateful.

Supplementary memorandum from the Department for Transport

Questions 14–16 (Chairman): Service improvements contracted in the new East Coast franchise The Chairman asked what improvement had been contracted in the new East Coast Franchise, compared to the service contracted with GNER. These are set out in the following table. Services may of course be oVered which are above the contracted minimum where the company believes there is a commercial case.

Summary Description Due Date New and additional Services December 2010 Introduction of a new two hourly direct service between London and Lincoln and a new two hourly London to York service calling at intermediate stations, giving good connectivity whilst enabling trains between London and Leeds, York, Newcastle and Scotland to be accelerated. An increase in weekday trains from 136 to 161. Circa 8,000 additional seats each weekday. Better Performance January 2010 Commitment to improve performance with nine out of 10 trains running on time. Passenger Compensation Ongoing Introduction of a “Delay Repay” passenger compensation scheme with refunds of: 50% of the price of a single-leg journey delayed by 30–59 minutes 100% of the price of a single-leg journey delayed by 60–119 minutes 100% of the price of a return journey delayed by more than 119 minutes Committed Obligation Website in place at Introduce a dedicated Franchise website providing the following functions: the start of the (a) information on fares including for diVerent times of travel; franchise, currently (b) information about expected crowding levels; being enhanced to (c) ticket booking; include all of the (d) seat choice; items on the left by (e) taxi pre-order. 31 July 2009 Committed Obligation Completed Introduce facilities to allow passengers to: (a) print tickets at home; and (b) display travel authorisations on mobile telephones. Committed Obligation 30 April 2009 Employ 20 persons accredited by British Transport Police, (pursuant to the Railway Safety Accreditation Scheme Regulations 2004). Committed Obligation Pilot system in Implement a system that permits a passenger to submit feedback to the Franchisee place, full system by by text message from their mobile telephone. 31 January 2009 Committed Obligation Complete Implement a system that permits a registered passenger to be sent journey alerts by the Franchisee by email or text message. Committed Obligation 31 March 2009 Install electronic posters at all Stations plus Kings Cross, Leeds and Edinburgh. Committed Obligation Complete Implement a system that permits passengers to be sent timetable information by message to their mobile telephone. Committed Obligation 30 April 2009 Install “Smart Columns” at all Stations plus Kings Cross, Leeds and Edinburgh. Committed Obligation 31 July 2009 Introduce a system oVering passenger a refund of fare for the journey leg if the Franchisee is unable to fulfil their seat reservation. Committed Obligation 30 April 2009 Processed: 13-05-2009 19:11:41 Page Layout: COENEW [O] PPSysB Job: 426391 Unit: PAG1

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Summary Description Due Date Provide wi-fi enabled PDAs to Customer Operations Leaders, so that each is issued with one. Committed Obligation 30 June 2009 Installation of additional CCTV cameras at stations. Committed Obligation (i) by 31 December Commission comprehensive reviews of security arrangements twice, once during 2009 the period 2008–09, and once during the period 2011–12. (ii) by 31 December 2012 Committed Obligation 31 March 2010 Provide an additional 465 cycle parking spaces at stations. Committed Obligation 31 March 2009 Repaint stations, replace station signage, restore existing station seating and install additional seating. Committed Obligation 30 June 2010 Enhance facilities at Newcastle station including the entrance and lighting. Upgrade the station toilets and provide a disabled toilet. Committed Obligation 30 June 2010 At Grantham station enhance the station lighting and install 6CCTV cameras. Committed Obligation 30 June 2010 At Retford station upgrade waiting shelters and refurbish toilet facilities. Committed Obligation 30 June 2010 At Doncaster station upgrade the station frontage, upgrade Standard class waiting facilities and refurbish toilets. Committed Obligation 30 June 2010 At Durham station upgrade waiting rooms, underpass lighting and create a safe walking route to the car park. (a) upgrade waiting rooms and areas; (b) enhance lighting in the station underpass; and (c) create a safe walking route to the car park for passengers. Committed Obligation 30 June 2010 At Dunbar station replace/revise the existing entrance doors and redecorate/ refurbish the subway entrance to the station. Committed Obligation 30 June 2010 At Darlington station redecorate and deep clean the existing footbridge, install seven CCTV cameras, enhance the station entrance turning circle area, deep clean and redecorate the existing subway and refurbish toilet facilities. Committed Obligation 30 June 2010 At Peterborough station refurbish the waiting room on platform 4/5, upgrade lighting, re-coat and maintain non-slip coating on the passenger footbridge. Committed Obligation 30 June 2010 At York station use floor media on the over bridge in order to create a laned flow, enhance lighting and refurbish the ATM unit. Committed Obligation 30 June 2010 At York station the Franchisee shall create a new waiting area including a first class lounge. Committed Obligation Wardens in service Introduce peak time “traYc wardens” at Peterborough and York stations as a pilot scheme for 18 months. Committed Obligation 31 January 2009 Introduce through bookings onto National Express coach services from Stevenage to Luton and Stansted , marketed as a “rail-air coach link”. Committed Obligation 30 June 2009 Provide 250 additional car parking spaces across the route, (excluding York, Peterborough and Wakefield stations). Committed Obligation 31 March 2010 Provide 200 additional car parking spaces at York station. Committed Obligation 1 April 2011 Provide 400 additional car parking spaces at Wakefield Westgate in a potential new car park being developed adjacent to the station. Processed: 13-05-2009 19:11:41 Page Layout: COENEW [E] PPSysB Job: 426391 Unit: PAG1

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Summary Description Due Date Committed Obligation End of Franchise Provide 1,000 additional car parking spaces at Peterborough in a potential new car Term park being developed adjacent to the station. Committed Obligation Completed Procure and deploy 81 new mobile ticket machines. Committed Obligation 30 September 2009 Procure and deploy automatic ticket barrier gates at the following stations: (a) Grantham; (b) Newark Northgate; (c) Wakefield Westgate; (d) York; (e) Darlington; (f) Newcastle; (g) Durham; and deploy manual barriers at Peterborough and Doncaster Stations. Committed Obligation Completed Provide free wi-fi to First and Standard class passengers within all trains (as comprised in the Train Fleet at the Start Date). Committed Obligation Completed Commence providing annual customer conferences, and continue while customer feedback indicates they are valued by customers. Committed Obligation 31 October 2008 Written correspondence from customers including emails/web forms fully responded to within 10 Weekdays. Committed Obligation Completed Introduce an “Adopt a Station” scheme for Dunbar, Berwick-upon-Tweed, Retford, Newark and Grantham. Committed Obligation 31 December 2009 Procure and deploy 36 new Ticket Vending Machines. Committed Obligation 31 December 2009 Implement smartcard back-end functionality, and smartcard front-end functionality at Stations for: (a) ticket vending machine fulfilment; (b) Avantix Mobile fulfilment and validation; (c) Tribute fulfilment; and (d) gate validation. Committed Obligation 31 January 2010 Introduce smartcard option for season tickets. Committed Obligation Ongoing Retain “Investors in People” accreditation throughout the Franchise Period. Conditions None. Ongoing Committed Obligation Ongoing Commence and continue providing conflict avoidance training for non-oYce customer facing staV. Committed Obligation Ongoing Commence performing annual surveys of all Franchisee employees. Committed Obligation 31 April 2010 Achieve Station Quality Management System compliance scores of: (a) 90% for stations; (b) 80% for trains; (c) 90% for people under the Service Quality Management System. Committed Obligation Completed Provide enhanced operational training for senior managers. Committed Obligation Ongoing Introduce Franchisee “Momentum Project” to schools. (Enhances environmental awareness). Committed Obligation Ongoing Commence holding annual stakeholder forum meetings. Processed: 13-05-2009 19:11:41 Page Layout: COENEW [O] PPSysB Job: 426391 Unit: PAG1

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Summary Description Due Date Committed Obligation Ongoing Financially support Community Rail Partnership activity to the value of £60,000 pa. Committed Obligation 31 October 2009 Implement package of modifications to Class 91 to enhance reliability. Committed Obligation 31 October 2009 Implement package of modifications to Mk IV vehicles comprised in the Train Fleet to enhance reliability and provide full internal CCTV coverage plus forward facing CCTV. Committed Obligation 31 October 2009 Complete HST power car refurbishment/re-engine programme commenced under Previous Franchise Agreement. Committed Obligation 28 February 2009 Implement package of modifications to HST sets of vehicles comprised in the Train Fleet to enhance reliability and provide full internal CCTV coverage plus forward facing CCTV. Committed Obligation Completed Introduce a “Carbon Club” through Franchisee website. Committed Obligation 9 March 2008 then Commence annual reporting of environmental indicators. annually by 28 April each year Committed Obligation 31 December 2009 Expend £400,000 on small schemes to reduce energy use at stations and depots. Committed Obligation Aberdeen Clayhills (a) Designate four Stations as ‘Green Stations’ and introduce solar power depot and/or Ferme generating at each; and Park depot—31 (b) install 8 (in total) small and 3 (in total) large wind turbines to serve Stations March 2009; and/or Depots. and/or Neville Hill—31 March 2011; and Stations—31 December 2009. Committed Obligation 31 March 2010 Reduce the quantity of non-hazardous waste disposed of by the Franchisee going to landfill by 50% from 2006 levels of approximately 3,500 tonnes. Committed Obligation Aberdeen Clayhills Install rainwater harvesting facilities at the following depots: and Ferme Park— (a) Aberdeen Clayhills; 31 March 2009; (b) Ferme Park; and Neville Hill—31 (c) Neville Hill. March 2011. Committed Obligation 30 September 2011 Reduce water consumption by 5% from 2006 levels of approximately 150,000 cubic metres.

Questions 23–35 (Keith Hill): Capacity and growth figures 1. This additional note is intended to clarify some of the points made by the Committee, which may rest on a misunderstanding of the language around demand, capacity and growth which is used in the report. 2. The growth figures which were highlighted by Mr Hill in paragraph 2.4 are revenue growth predictions.1 These are the train operators’ own predictions as set out in their bids. As the report indicates, DfT has its own internal projections of likely revenue growth which may diVer from those of operators. It is also true that train operators are likely to revise these estimates as the business develops, and have contingency plans (such as reducing costs) if the levels of growth do not materialise.

1 Train operator revenue can increase due to a number of factors, including more passenger journeys, an increase in regulated fares (currently rising at RPI!1%), an increase in the face value of like-for-like unregulated fares, a change in the mix of fare types (such as more first class sold), a reduction in ticket evasion (for instance through station gating), or an increase in other sources of revenue such as advertising spaces and car parking. Processed: 13-05-2009 19:11:41 Page Layout: COENEW [E] PPSysB Job: 426391 Unit: PAG1

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3. The July 2007 White Paper Delivering a Sustainable Railway said that the Government “wants the industry to be able to accommodate a 22.5% increase in passenger demand by 2014”. This is the figure referred to in paragraph 3.5 of the NAO report. This uses passenger kilometres as the measure of demand. It is based on the total kilometres travelled by passengers on the English/Welsh railway network in 2007 (shortly before the publication of the White Paper). This target was broken down by Network Rail route in the accompanying High Level Output Specification (HLOS). HLOS also specified levels of peak demand to be accommodated, alongside specific loading factors at busy stations (for instance a increase of 5,300 additional passengers arriving at London Victoria in the three hour peak, with a maximum average load factor of 67% by 2014). These targets are set out individually for the biggest commuter centres: London termini, Birmingham, CardiV, Leeds, Manchester. More detail is available in the White Paper and the HLOS, which is driving infrastructure improvements and the construction of 1300 new trains by 2014. 4. The capacity percentages set out in table 11 on page 20 of the NAO report were prepared on the basis of a diVerent measure. Table 11 counts the total number of passengers that can be carried by the available fleet (seating plus a standing allowance) as a snapshot—for instance if it were all parked in the depot. This measure is relatively simple to calculate and understand, but misses many of the key variables of capacity in practice. The capacity which is available to passengers during a three hour peak will depend on the timetable, the calling pattern and the rolling stock, with many trains being used more than once. The increase of 22% in this fleet capacity by 2014 is therefore not comparable to the detailed peak targets in the HLOS or to the overall aim to accommodate an all-day increase in passenger kilometres of 22.5% by 2014.

Questions 75–78 (Mr Mitchell): Extending National Express East Coast services to Grimsby 1. DfT did not specify in our Invitation to Tender (ITT) that the new ECML operator should serve Lincoln. The ITT asked for a fifth train per hour to provide additional capacity on the main line, and particularly to serve Grantham, Newark and Retford so that trains to Leeds/Newcastle/Edinburgh could be speeded up, but left it open for bidders to determine the origin/destination of the fifth train. The ITT said: “of the five trains, four are expected to provide limited-stop fast services: two to York and beyond, and two to Leeds. The fifth train is designed to provide an hourly service calling at all intermediate stations between Peterborough and Doncaster; bidders must suggest suitable destinations for these paths that maximise the financial value;” 2. Such specification decisions are based on a consideration of the core objectives of the franchise, aVordability,value for money for the taxpayer, operational factors (such as the size of the fleet) and the other services oVered in the region. 3. NXEC, as the winning bidder, proposed that the fifth train should run in alternate hours between Kings Cross and York or Lincoln. DfT contracted on this basis as an intrinsic part of their overall bid. The bid states that they had examined running to Grimsby or Cleethorpes but found that these extensions of the proposed Lincoln services did not have a positive business case so were not included in the bid. 4. NXEC’s bid, including the proposed two-hourly Kings Cross-Lincoln service was contractualised in the franchise agreement. Implementation is dependent on NXEC acquiring the necessary access rights and the OYce of Rail Regulation will announce its decisions on the allocation of ECML access rights at 10.00 on Thursday 29 January 2009. 5. Once the core timetable has been developed it is possible that NXEC might be open to considering extending some services to Grimsby or Cleethorpes, subject to their assessment of the practicalities and costs (for instance additional rolling stock and train crew). This is a matter for the operator. Processed: 13-05-2009 19:11:41 Page Layout: COENEW [O] PPSysB Job: 426391 Unit: PAG1

Committee of Public Accounts: Evidence Ev 23 021–22 29,559,997 " 30,926,556 " oes not take account 27,716,185 " 24,377,899 " 27,000 2,927,000 21,142,988 57,884,000 " " 18,139,357 323,420,000 " " 000 5,649,000 14,977,586 127,671,772 427,726,000 334,502,000 " " " " 11,627,678 286,596,000 205,925,246 363,855,000 394,721,827 " " " " " 8,705,725 9,310,498 79,477,000 115,962,772 302,151,000 " 241,737,000 " 179,212,905 346,156,559 t. " " " " " " 6,532,075 64,000,000 150,617,555 233,277,000 300,598,928 " 191,202,000 105,980,259 " " " " " " 4,559,466 97,147,993 36,405,000 127,176,667 168,296,000 228,568,603 " 132,890,000 " " " " " " 2,653,913 80,694,000 22,645,000 90,035,790 111,016,000 103,300,957 178,686,551 " " " " " " " 320,116 " 20,163,000 21,026,000 82,462,560 81,662,388 36,337,000 133,162,098 " " " " " " 84,756,464 75,601,999 66,509,871 19,412,000 " " " " 60,938,854 45,770,618 17,884,000 " " " Contracted subsidy year by year for all franchises ubsidy /S remia Franchise Agreement P ranchises F urrent chedule of C Payments to PTEs in respect of Centra and Northern are not included In this table. S Questions 80–92 (Mr Bacon): Arriva Trains Wales 08/12/2003 2003–04 2,927,000 2,927,000 2,927,000 2,927,000All amounts are in REAL 2,927,000Negative terms. figures The indicate analysis a relates premium toFigures payment basic for to payments Ariva the and trains Department excludes Wales show any payments potential due adjustments 2,927,000 from such the as Department 18.1, for benefit Transport share The etc. bulk of this franchise is funded by 2,927,000 the WelshThis Assembly Governmen table shows contracted subsidy levels. It 2,927,000 does not take account of any changes 2,927,000 arising from the ORR’s regulatory review for 2,927,000 Control Period 4, and d 2,9 c2c RailChiltern Railways 03/03/2002 2002 26/05/1996 Feb 1996 9,145,527 13,584,000 2,975,639 12,751,000 11,970,000 11,236,000 of any alterations to subsidy which may be made under the provisions of revenue support and share set out in the franchise agreement. TOC name Commencement Price Base 2007–08 2008–09 2009–10 2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18 2018–19 2019–20 2020–21 2 First Capital Connect 01/04/2006 Nov 2005 First Great Western 01/04/2006 Nov 2005 46,674,000 14,538,000 Gatwick Express 28/04/1996 Feb 1996 Northern RailONE Railway 12/12/2004 01/04/2004 Mar 2004 Nov 2003 325,475,270 333,903,518 332,320,182 330,686,336 328,794,987 327,349,051 326,309,067 South Eastern 01/04/2006 Feb 2005 114,117,319 100,273,000 126,058,406 107,665,918 65,177,466 24,672,519 South West Trains 04/02/2007 Jan 2006 74,797,000 28,033,000 Southern TrainsTransPennine Express 01/02/2004Arriva Cross Country 26/05/1996 11/11/2007 Apr 2001 Dec Feb 2001 2007 96,937,716 91,229,382 98,320,000 93,478,849 245,092,000 80,837,293 91,786,054 222,156,000 57,282,000 90,271,015 190,168,000 156,152,000 74,300,734 113,911,000 77,691,000 48,609,000 44,346, Virgin West CoastEast Midlands Trains 11/11/2007 09/03/1997 January Mar 2007 2006 35,651,000 274,554,000 63,390,000 294,622,000 36,112,000 243,672,000 205,331,000 2,675,000 172,135,000 London MidlandsNXEC 11/11/2007 January 2007 09/12/2007 78,284,608 198,307,266 January 2007 192,540,100 174,125,398 6,742,432 161,730,387 154,014,332 147,592,222 Processed: 13-05-2009 19:11:41 Page Layout: COENEW [E] PPSysB Job: 426391 Unit: PAG1

Ev 24 Committee of Public Accounts: Evidence

Questions 96–98 (Mr Bacon): Catering services: National Express East Anglia (NXEA) 1. NXEA has two obligations in its franchise agreement with regard to catering:

Stansted Sky Train Services “The Franchisee shall, for the whole of the Franchise Term, provide and maintain on-board catering facilities on the Passenger Services from London Liverpool Street to Stansted and Stansted to London Liverpool Street (the Stansted Sky Train Services). The on-board catering services oVered on the Stansted Sky Train Services shall be of a standard at least equivalent to the level of catering services provided on commercial flights provided by reputable .”

Norwich to London Service “The Franchisee shall, for the whole of the Franchise Term, provide and maintain on-board catering services on the Passenger Services from London Liverpool Street to Norwich and Norwich to London Liverpool Street (the Norwich Services). The on-board catering services on the Norwich Services shall, as a minimum, include a trolley service oVering light refreshments.” 2. NXEA is proposing to withdraw the restaurant facility from its Norwich services by the end of February. This will be replaced by an “at seat service” that is currently being trialled. There is no contractual requirement for NXEA to continue to operate the restaurant service. Confusion has arisen for two reasons: — At franchise award, National Express issued a press release that announced, among other things, that they would continue to operate the restaurant service. — The “Agreed Form” passengers’ charter (included in the Franchise Agreement) also includes a commitment for the continued operation of the restaurant service. NXEA has requested a change to the charter. DfT is under a legal requirement to enforce the franchise agreement reasonably, and our view is that this change cannot reasonably be refused as the commitment in the agreement explicitly and inarguably requires only a trolley service. 3. NXEA is the only operator that currently oVers a restaurant service, other than a few services on NXEA. 4. The Department has typically not specified catering services in more recently-let franchises. Operators have been left to reach their own commercial judgment about what sort of catering services cover their costs—either directly or indirectly (by attracting more customers or generating more high-value ticket sales).

Questions 106–113 (Mr Bacon): Value of bonds and the DfT process of assurance 1. The latest example of the internal Periodic Bond Report is separately attached to this letter.2 The ratings of the bond issuers as set out in the report are publically available. However the value of the bonds is a commercial matter between the operators and their bond issuer. 2. This report is produced for review every 4 weeks. However the Bloomberg service monitors ratings daily, and informs DfT immediately if there are any changes to the ratings. If any such change caused concern, senior DfT staV would be alerted. 3. The bond report includes both season ticket and performance bonds. In the event of a company ceasing to be a franchisee, the season ticket bond allows the Department to claim an amount equivalent to the amounts paid in advance by passengers for season tickets. This is estimated at a diVerent level for each operator and adjusted annually. The performance bond is intended to cover the Department’s costs arising from a company failure, such as re-franchising. 4. It is important to note that the Department may negotiate another solution with the company concerned to cover the costs of DfT and ensure that season ticket revenue is not lost to the railway. This is what happened in the case of GNER. It is therefore not necessary to call on these bonds in all cases where a franchise contract is terminated. 5. The attached report3 analyses the diVerent bonds by provider. It gives the date of the issue of the bond as well as the expiry date, bond value and potential maximum future value of bond. Each bond also has the latest Standard & Poors rating. It should be noted that no bond has a rating below AA-. On the last page of the report is a rating of all bond providers by the main rating providers: Standard and Poors, Fitch and Moodys.

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Committee of Public Accounts: Evidence Ev 25

Questions 162–170 (Mr Bacon and Geraldine Smith): Changes to the conditions of period return tickets 1. Given the strong feelings expressed by Committee members regarding the change of conditions relating to the sale of “Anytime” rail tickets, Mike Mitchell has raised the matter with the Association of Train Operating Companies so that they may consider whether any changes are required. 2. The fares simplification was developed by the Association of Train Operating Companies, who consulted on the changes with Passenger Focus. As Mr Mitchell said at the hearing, the Department welcomes the overall package of changes, which has created a simpler fares structure that is easier for passengers to understand. 3. The simplification process also sought to harmonise the terms and conditions of diVerent ticket types as far as possible. Anytime day return fares have always been valid only on the date of the ticket. OV-peak fares have also always had outward travel valid only on the date of the ticket.Delete sentence. ATOC decided that on balance the new Anytime period return should be consistent with the majority of walk-up ticket types. 4. The change in conditions which requires a nominated day of outward travel reduces the opportunity for ticket fraud. Previously, an open return was valid on its outward and return portion until clipped or retained by a ticket gate. Some passengers might therefore be able to dishonestly use the same ticket several times. By limiting the validity of the outward portion to the stated day of travel, this risk is reduced. 5. The new conditions will undoubtedly require some types of passenger to change their ticket buying behaviour, principally those passengers (including many MPs) who bulk-buy open, peak-time returns for use as-and-when needed. However, the change is not equally important to all passengers. Other aspects of harmonisation delivered important benefits, such as the acceptance of railcards on all Advance tickets. 29 January 2009

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