Written evidence submitted by Freightliner Group (INV0026)

INTRODUCTION

This is the response of Freightliner Group, which is the UK part of the European division of Genesee & Wyoming Inc.

Freightliner Group specialises in moving freight by rail and offer rail freight services throughout the UK to a wide range of customers. Freightliner is the second largest rail freight operator in the UK. We move about 1 in 5 of all deep-sea containers transported in the UK, as well as approximately 12 million tonnes of bulk goods. Freightliner is also a supplier to Network Rail, moving bulk materials by train and providing engineering trains to work within possession sites all around the UK. We have also played an important role in supporting the building of major infrastructure schemes such as HS1, Heathrow terminal 5 and the Olympic Park.

GENERAL

Public-private rail freight investment

Although not documented as such, in effect a public-private investment framework already exists in the rail freight sector.

Over the last two decades, around £2.8bn of investment has been supported by private rail freight operators including new and existing rolling stock, wagons and terminals. In addition, ports such as Felixstowe, London Gateway, Southampton, Teesport, Immingham and Liverpool have invested in updated or new rail terminal facilities and contributed to enhancement schemes, which increase the capacity and capability of the rail network to support growth. Our customers have invested in new wagons and rail terminal facilities and other companies, such as logistics companies and road hauliers, have invested in rail linked warehousing and new terminals.

Government has also invested around £900m in the rail freight network, through the Transport Innovation Fund, and latterly through the Strategic Freight Network (SFN) fund, for Control Period 4 (CP4) and CP5.  This investment by Government is providing a modern day equivalent network and provided gives confidence to investors, who can see a long-term government commitment to rail freight, where a functioning system requires all three strands of investment. 

These combined investments have contributed to delivering significant new capacity and to improving the efficiency of rail freight. The collective investment, alongside the competition that exists between rail freight operators has underpinned £800 million per annum of productivity benefits for end customers, and £400 million of environmental, safety and de-congestion benefits to the wider UK annually. There are record levels of containers moved by rail (around a million a year) as well as materials moved into urban areas which are used to build houses, roads and other key infrastructure.

We therefore welcome the further commitment to funding in rail infrastructure to support rail freight growth in CP6.  We recognise that details of how much will be made available, or whether it will be provided as a fund or on a scheme by scheme basis is still to be confirmed.  There are some candidate schemes already in development by Network Rail, including some that have been postponed in CP5. We would welcome further clarity in the near future on the investment plans to enable the private sector to plan its own investment portfolio to complement the government investment.

Strategic Freight Network

The long-term objective of the Strategic Freight Network (SFN) process is to develop a railway network that supports the efficient movement of freight.  Schemes are identified to improve capacity and capability for rail freight, which are funded via the ring-fenced fund within a control period.    Having a fund has allowed for flexibility within the control period as new requirements arise and the scope of schemes are developed.  As such, the control period process has supported longer-term planning with the flexibility to assess shorter-term opportunities.  The SFN funding and governance arrangements provide an opportunity to deliver smaller tactical projects, which emerge over the control period.

Understanding what lessons can be learned from the governance of the SFN fund may be helpful in establishing how future enhancements are funded and managed. This fund, which delivers enhancements to increase the capacity and capability of rail freight across the network, was recognised in the Bowe report as an example of good practice. The SFN fund was allocated a set budget for CP4 and CP5 with the strategic aim of promoting modal shift. The fund is managed by a governance group which includes Network Rail, DfT, Transport Scotland, the ORR, all rail freight operators, the Rail Freight Group and the Freight Transport Association. It is in the interest of all members of the group to maximise the benefits and value for money from the fund, as the fund is finite. Typical Benefit : Cost ratios achieved in CP4 and predicted in CP5 are between 4:1 and 8:1, demonstrating the high value for money this approach to funding achieved.

However, the boundaries of the control period do present difficulties for effective project planning, meaning that work tends to cluster around the final months of the period.  If schemes slip, for example if a possession is delayed, then there is complex governance to enable funds to be ‘carried over’. This adds additional complexity and risk.

Comments on Specific Questions
The impact of postponing renewals from the current control period into the next and the implications of the Secretary of State’s decision to remove enhancements from the control period process;

Impact of postponing renewals

A combination of events appear to have resulted in a position where renewals volumes have fluctuated throughout CP5, notably the reclassification of Network Rail into the public sector, which resulted in reduced financial flexibility.

Network Rail has considerably reduced the volumes of maintenance and renewal works over the final two years of the CP5 but are advising suppliers to prepare for a very considerable step change increase in volumes from the beginning of CP6. This has created a challenge for suppliers as it is uneconomic to retain staff and assets as work volumes decline, creating challenges for a sudden step-up in work at the beginning of CP6 leading to a significant risk that there will be a shortage of skilled staff in the supplier base when volumes increase.

This stop-start profile of work does not support an efficient supplier base or efficient use of Network Rail’s own staff. With many fixed costs remaining unchanged, a reduction in renewals volume inevitably leads to an increase in unit costs.

We understand that consideration is still being given by the government to bring forward maintenance and renewals spending from CP6 to CP5, to support a smoothing of the work-plan. We firmly support the principle of smoothing the fluctuations between control periods, but ideally any such funding (to improve efficiencies in the supply chain) should be secured at an earlier stage to align to Network Rail’s planning process. Network Rail is, we believe, working on a detailed plan of what might be achievable with the 15 months left in this control period, noting that the usual industry timescales for proposing engineering access have passed.

For rail freight operators the drop off in renewals workload coincided with the severe and sudden reduction of the movement of coal for electricity generation. The reduction in coal movement was the main driver for hundreds of redundancies across all the rail freight operators, but a more certain outlook for infrastructure work may have mitigated the impact.

Uncertainty in the pattern of work reduces supplier investment and can lead to a staff being made redundant.  When the work returns there is the need to recruit new staff and inevitably skills and experience get lost in the interim period.

Consideration is needed across the industry to support Network Rail to deliver a stable and steady pipeline of renewals (and enhancements) that supports long term constructive relationships with suppliers and enables suppliers to make investments, invest in future skills through apprenticeships and recruit and retain the right skill base.  Creating greater certainty and stability in the pipeline will have a long-term benefit for the entire industry, improving efficiency and productivity and reducing unit costs to Network Rail. 

Freightliner welcomes the announcement of Statement of Available Funds for Network Rail in CP6. The industry would welcome a breakdown of the headline announcement in order to enable suppliers to plan where skills and resources will be needed.   Without a greater level of detail, there is still risk that there will be insufficient resource available, which in turn could adversely affect costs.

Enhancements

The postponing of schemes originally planned to be delivered with Control Period 5 has had a considerable impact on the rail freight sector.  We welcomed the decision to largely retain the level of Strategic Freight Network (SFN) funding following the Hendy review.  By the end of CP5 the SFN is due to deliver a new loop on the Felixstowe branch and enhancements to support longer freight trains on the Southampton to West Midlands/West Coast Main Line corridor.

Locations where work has been delayed, that directly impacts on the rail freight sector include at Ely, between Ely and Soham, grade separation at Leicester, grade separation at Peterborough North and the doubling of Coventry to Leamington. The impacts are listed below:

Since the Hendy review we have seen some welcome improvements in the development and sponsorship of schemes by Network Rail, and a greater focus on cost saving and pragmatic solutions.  DfT and Network Rail are also setting up a Freight Programme Board to provide additional governance, and align the SFN with other programmes.

There are improvements that can be made to ensure that enhancement schemes are closely linked to outputs. In that context a scheme should have a specified target of a quantified number of additional new train paths (of a determined capability, e.g. weight or length) rather than simply being about the infrastructure intervention required, e.g. the focus of an enhancement should not be to move signal or build a bridge. Having a clear output will help make sure the benefits of the investment can be quantified in the specification stage and upon completion, understand whether those benefits have been realised.  This will help ensure that when budgets are constrained those enhancements that are funded deliver the most value.  The development of the System Operator function at Network Rail will help support this improved outcome, by providing more detail of the output of different options.

It may be more difficult to make sure an investment has a clear output if projects are considered individually rather than on a corridor basis. It is particularly important for freight investments, to make sure that the output of schemes is clear and understood by the industry. Unlike passenger operators, freight operators do not start a new timetable on a certain date in anticipation of demand, but start a new service in response to customer demand.

In order to make sure the outputs are delivered and that Government achieves value for money from its investments it is important that there is a mechanism to secure the capacity and capability gains that have been funded into the timetable. Strategic capacity, which are train paths added to the timetable to enable growth, is an important means of securing these outputs.  These strategic paths can be bid into by freight operators, once customer business is secured.

Providing this greater certainty about the outputs from investment will continue to support confidence for aligned private sector investment.

We understand that further details of the new process for approving enhancements will be announced by the government soon.  We support the principles of a pipeline and a smoother plan of projects. It is unclear at this stage how smaller schemes will be progressed within any process or pipeline, and we await clarity in this area.

It is also necessary to consider how a framework for enhancements will support certainty in the supply chain. In order to achieve overall best value for money and efficiency the ideal is a steady (concurrent) pipeline of works. A pipeline of schemes would support the supply chain in providing the required skills and available workforce as well as enabling businesses to invest in apprenticeships and training, innovation and capital equipment – rail assets are long life assets of 25-40 years typically. Policies that support long term planning by businesses will result in stable and efficient prices being offered by Network Rail’s supply chain.

The adequacy of the control period process in enabling the delivery of long term rail infrastructure objectives;

The use of 5-year control periods has provided certainty of funding over a reasonable length of time and we strongly support the continuation of at least a 5 year structure. The industry requires long term certainty to reflect the fact that railway assets typically have a life of over 30 years and frequently longer, and need to be sustainably managed over a long timeframe. A continuation of a framework that encourages continuity in planning and avoids disconnects and gaps as well as supporting investment in skills and innovation from Network Rail and its suppliers would be strongly supported.  Consideration could be given to longer control periods as a means of increasing consistency and stability, and as a mechanism for supporting private sector investment. 

Over the long term, fluctuations in funding and work undertaken will lead to a more unreliable and less safe railway network. The renewal holidays taken during the latter period of British Rail had impacts for at least the following decade.

The current final settlement is timed at six months before the start of the control period, leaving insufficient time to support planning of major renewal works, which require considerable access negotiations with operators. There should be consideration to a proportion of funding being agreed further out before the start of a future control period. One way to do this would be to agree a proportion (ideally the majority) of the renewals funding for the first two years of CP6 well before the start of the control period rather than this being fixed in the ORR’s final determination. This would enable better planning for major renewal schemes and reduce the risk of a slow and inefficient start to control periods and avoid most of the major work being in the final two years of the control period, which creates risk and challenges.

Whether Network Rail’s long term planning process is effective in providing the industry with strategic direction beyond the five year control period;

Network Rail’s long term planning process is a tool that can be used by potential funders, including government to understand future demand and what infrastructure enhancements are required to support the implication of demand. The process also assists funders in understanding what the most urgent demands are and which options offer the highest value for money.

The process, led by Network Rail, is very collaborative and there is opportunity for a wide range of stakeholders to input into the process.

It is difficult to say however that the process is effective in providing a strategic direction beyond the five-year period, it is more that the process offers a list of future priorities and potential choices. Each Route Study lays out options for future investment and only a few of these are taken forward by funders for implementation. 

We would therefore not use the long term planning process to underpin any future private sector investment that we were considering. We would only do this once funding had been announced by government. Even then, as experienced over the last few years, there remains a risk that wider challenges result in funded schemes not being delivered.

The possible implications of the Government’s policy of increasing the share of private sector financing in rail infrastructure;

With institutional investors, including pension funds, looking for long-term stable cash flows and with government trying to lessen the impact on its finances of railway infrastructure projects,  It is appropriate to consider the barriers preventing third-parties from financing infrastructure schemes across the network.

Many of the barriers that are preventing third-party investment have been identified by Professor Peter Hansford.  The Hansford Review clearly sets out how Network Rail can attract greater private investment to the railway.  To address many of the review’s recommendations Network Rail announced a series on reforms. This includes providing greater flexibility around standards, establishing a service level agreement and presenting frequent updates on opportunities.  We strongly welcome the Hansford Review and believe that it can act as a springboard for support more private sector investment.

Experience from other sectors should be considered when assessing the suitability of using private finance to fund rail infrastructure projects.  A range of public infrastructure projects have been funded with private capital, including investments in schools, hospitals and the London Underground network.  Public Private Partnerships (PPPs), particularly through Private Finance Initiatives (PFIs), have been used over recent years to fund public infrastructure.  Many of these investments have encountered criticism and therefore it is important to review what lessons can be learned from these schemes. 

An understanding of the full cost of capital and the return sought by the private sector, against the cost of the finance to Treasury is a key consideration.  The cost of financing to Treasury is likely to be lower than that available to the private sector, however the additional financing costs should be balanced against any savings originating from private sector efficiency.  Understanding the feasibility of transferring the delivery risk from the public to private sector will be important to understand, as this will impact on the scope for efficiency gains. 

It is also important that any rail infrastructure funded by third parties does not disrupt a national access-charging regime for rail freight.  A premium should not be charged for operators, including freight operators, to use infrastructure financed by third-parties.  Doing so is unlikely to lead to the efficient utilisation of capacity on the network.

Although EU legislation transposed into UK law through the 2016 Access and Management Regulations allows funders to levy higher track access charges to recoup the cost of the investment, doing so would create a very complex charging structure and would risk pricing freight off the network.  It is likely that such a levy, which would be in addition to the charges based on direct costs, would be beyond the ability of freight operators to pay. 

Charging a premium to use new infrastructure will not necessarily consider the wider benefits of such investments and the holistic nature of the rail network.  For example, the real benefit of a new flyover may be to increase the capacity of the railway line under the flyover, as a result of a reduction in conflicting moves.  Therefore, to levy an additional charge on the users of the new flyover, would fail to understand the benefits of the scheme, and the need to consider the network holistically.

A more complex and expensive charging regime would make rail freight less attractive, and would be likely to lead to modal shift to road.  The charging regime for road is in effect fuel duty, which is very simple and has been frozen since 2011. Careful consideration of the impacts would be needed and how this compares to the charging for road before any proposals for charging a levy to train operators were made.  The benefits of moving freight by rail instead of road, which have been calculated as £1.2 billion a year, fall outside of the railway balance sheet, and these benefits will be eroded if business is lost to road.

Whether steps taken by the Government and Network Rail to increase private sector investment for rail infrastructure are adequate and how continuing barriers to private sector investment might be addressed.

Funding

There is already considerable third-party investment in the railway, and related infrastructure, particularly in the rail freight sector, as described above – £2.8bn since privatisation.

In some cases off-network investment has been linked to a contribution to infrastructure enhancements on the rail network.   For instance Associated British Ports contributed funds to the Network Rail project to gauge clear to W10 the line between Southampton and Nuneaton, DP World contributed to the upgrade of the branch line to their port at London Gateway, and Hutchinson Ports are contributing towards the new loop on the Felixstowe branch line to increase capacity to the port. 

There has been inconsistency however, in the contributions sought from different ports, both in size and methodology, mainly linked to such matters being dealt with by local planning authorities. Where such contributions to rail network enhancements are requested, it is important that the funding requirements are consistent with equivalent schemes on the road network, and seen to be fair and consistently applied to competing ports around the country. One solution may be for Network Rail to take a lead in these matters, developing a policy and enabling a national consistent picture.

The 2015 the Rail Delivery Group (RDG) Freight Britain report highlighted that there is a ‘virtuous circle of investment’ and the existence of a symbiotic partnership between government and the private sector investment[1].  While nominally separate, the investments are interdependent and the report highlighted that continued investment in the rail freight network by Government is crucial to facilitate other third-party investments, including in off-network facilities and rolling stock.  Therefore when considering third-party funding it is important to understand how public funding can give confidence and act as a catalyst for private sector investments.

Third-party investments in the network should align to the overall strategy of the route, and their implications on the capability and capacity of the network should be understood.  This is particularly important when local schemes, such as new stations, are funded by developers.  The stations themselves are usually relatively low-cost, however, other enhancements to the rail network are often required to support the train service, and to make sure the impact on network capacity is not detrimentally affected.

A good example of this is the third-party investment that funded the development of the new station at Kenilworth.  Kenilworth is located on a strategic freight corridor linking Southampton to the West Midlands and beyond, and therefore it is important that the network-wide impacts are fully understood.  In this instance, it is highly likely that without the proposed (and subsequently delayed) doubling of the section between Coventry and Leamington Spa the proposed train service that supports the station would detrimentally affect freight capacity over the line.  It also risks jeopardising part of the on-going multi-million pound investment along that corridor that is being funded by the Strategic Freight Network fund to enable longer freight trains to operate to and from Southampton port.    It is clear that despite the interaction between the two schemes they have been separately planned and managed. This in turn risks jeopardising the delivery of the outputs from the investment already made by government in the Southampton to West Midlands train lengthening scheme, commenced in Control Period 4 and due for completion by the end of Control Period 5.

This demonstrates the importance of considering investments holistically – at a network-wide level.  Crucially any third-party investment should be consistent with the schemes identified through Network Rail’s Long Term Planning Process, to ensure compatibility with wider network strategy.  These documents (which include the Route Studies), and the schemes that are identified in them, undergo full public consultation and so any third-party funders have the opportunity to provide detailed comments.

In the context of the investment in the station at Kenilworth, the Route Study[2] identifies the other “associated infrastructure improvements” necessary to provide a train service between Coventry, Kenilworth and Leamington Spa.  We note that development funding for the doubling scheme has been announced as part of the November 2017 budget.

With regard to the delivery of railway infrastructure projects, it will be particularly relevant to consider the rationale for retaining non-contestable areas of infrastructure delivery.  There are good reasons for many of the areas of infrastructure delivery to remain ‘non-contestable’; for example the booking of possessions, which balance the needs of all railway users, as well as the safety management and consents procedures.

December 2017