Written evidence submitted by G&W’s (Genesee & Wyoming) UK/Europe Region companies (FAB0017)

Executive Summary

The key points discussed in this submission are:

• The impact of Brexit is not yet known, making it difficult for logistics businesses to plan for change
• The freight and logistics sector will be directly impacted by macroeconomic changes and possible changes to logistics patterns post Brexit
• The increasing cost of railway rolling stock which is mostly manufactured outside the UK, due to the decreased value of sterling and possible increases in duties
• The continued requirement for government to invest in increasing the capacity and capability on the core rail freight corridors from ports to prevent future bottlenecks
• The availability of labour post Brexit, particularly in the road freight sector
• The lack of clarity about the application of, and UK input to rail technical standards
• The uncertainty of the approval body, and possible delay in the approval of schemes that currently require state aid approval, such as Mode Shift Revenue Support

Introduction

This is the response of G&W’s (Genesee & Wyoming) UK/Europe Region companies, which in the UK includes Freightliner and Pentalver.

Freightliner is the second largest rail freight operator and operates nationally throughout Great Britain. It operates circa 100 daily intermodal train services across the UK, moving over 770,000 containers per year as well as up to 200 bulk trains per week, moving over 12 million tonnes of bulk freight by rail each year. Freightliner has a wide range of customers from many different sectors including worldwide shipping lines, road hauliers, third party logistics companies, suppliers of construction materials, waste companies and Network Rail.  Some of these companies have businesses based predominantly in the UK whilst others are based in different continents and transport goods all over the world. The impact of Brexit on these different sectors may vary considerably.

Pentalver operates five container depots, totalling over 80 acres collectively. Pentalver offers facilities and services at the UK’s four main ports along with the state-of-the-art inland depot in the heart of the Midlands. Each depot is strategically placed, modern and secure, offering innovative container solutions including Container Storage, Transport, Cargo Handling, Refrigeration Services and Container Maintenance and Repair.

Overview

Neither Freightliner nor Pentalver currently transport goods across the UK border; we only move goods within the borders of Great Britain. Despite this we are concerned about the impacts that Brexit will have on our business. There is currently much uncertainty about future trading relations as well as frameworks for immigration, what future EU legislation will apply in the UK, and how we will be able to influence European standards in the future. The impact of changes on the UK economy is unknown. It is difficult to plan for change, because we don’t know what changes we are planning for.

Macroeconomic Implications

A healthy economy is crucial to a healthy logistics sector. If the British economy saw a decline in spending and demand in the event of Brexit, this would have an adverse effect on the freight and logistics sector. Equally a post-Brexit scenario that presents a stronger economy could present benefits to the industry with freight operators seeing an increase in business.

Much of Freightliner and Pentalver’s business is linked to the transportation of deep-sea containers so an increase in trade with countries outside of the EU could result in an increase in the number of containers moving into and out of the UK, though this may take some time to materialize in practice. This may create a business opportunity for Freightliner and Pentalver. However, existing capacity constraints on the rail network could potentially limit the amount of growth that could be achieved. See section below on infrastructure requirements. The road network is also congested with the UK having the most congested major road network in Europe[1].

As the transport moves goods for many other sectors, it is directly impacted by the health of the economy. In particular we are involved in the transportation of containers, which are a bell-weather of the health of the overall economy. If there is an economic downturn or an increase in duties paid for goods moving in and out of the UK from Europe, this could lead to reduced demand, which would result in a reduction in the volumes of containerised goods being moved.

Except when we move dangerous goods, we are not aware of what materials we are moving in containers. We are aware that supply chains are linked across Europe and in some cases world-wide, meaning that parts coming from Europe could for instance be used to manufacture equipment in the UK, which could then be exported around the world. Uncertainties around membership of the Customs Union or a future customs arrangement could have an impact on the affordability of global companies in the UK versus other European countries. If companies choose to relocate, this will not only directly impact those companies, but linked sectors, such as freight transport companies will also be impacted.

Possible change in some logistics movements

Freightliner or Pentalver do not currently move any freight traffic through the Channel Tunnel or via the Port of Dover, whether by rail or road. However we do understand that there is considerable concern about how a system will be quickly put in place to replace the existing Customs Union that will not result in queues of lorries at the Port of Dover and the Channel Tunnel.

If the current processes that are in place at deep-sea ports for third-country freight were replicated for European traffic, it is speculated that some trade could migrate to other ports, where the sea journey is longer or where there is more spare capacity and land. This is likely to include ports on the East Coast such as Humber ports, Teesport, and the Thames ports of Tilbury and London Gateway.

If this was to be the case, it could create opportunity for Freightliner to serve these ports with rail services.

Increasing cost of purchasing assets

Since the referendum, the value of the pound has decreased considerably against both the dollar and the euro. The value of the euro has increased by around 16% and the dollar has increased by about 12% compared to the pound. This has had the impact of making assets more expensive to purchase and/or lease. UK manufacturing capacity of locos and wagons is, at best, modest, with the manufacturing centres moving to Eastern Europe or the US and the majority of lorry tractors and trailers are also purchased from EU nations.

An increase in duties paid for goods moving into the UK from Europe would also increase further the cost of purchasing assets manufactured in Europe.

The more expensive cost of assets will ultimately be passed onto the consumer and will have an inflationary effect. The increased cost of assets makes it harder for businesses to make business cases stack up and to commit to decisions about the use capital to purchase assets. In a global company like G&W, capital can be spent in many different countries and continents and is likely to be prioritised where the best return on capital deployed can be predicted.

Uncertainties in future frameworks

Like other sectors, the freight and logistics sector are concerned by the current uncertainties around the frameworks for Brexit, notably regarding what mechanisms and or charges will replace the current Customs Union and uncertainties around future immigration rules. The uncertainty makes it very difficult for businesses to plan and/or invest in reaction to a new proposed framework.

Investment

One of the key concerns is that there will be insufficient time to plan and invest once the framework is decided upon. This applies to transport companies, like G&W’s UK/Europe Region companies but also in planning road and rail infrastructure. If there are any changing patterns in logistics e.g. in ports of entry etc any investment to improve the infrastructure to that port will take many years to develop and be built, and there will be a time lag of at best several years. This could lead to increased congestion in the intervening period, which impacts on the efficiency of freight users and the overall economy.

Infrastructure

As referenced above, it is expected that Brexit could drive changes to logistics patterns. Increased trade with third countries would be expected over the longer term to increase the number of containers entering and exiting the UK via the major deep-sea ports at Felixstowe, Southampton and London Gateway. Additionally congestion in the Channel Tunnel and Port of Dover could push trade towards other ports on the East Coast such as Humber ports, Teesport, and the Thames ports of Tilbury and London Gateway.

Due to considerable growth in passenger and freight services, the rail network is capacity constrained on many routes. The UK has the most intensively used large network in Europe (9,826 miles) and the 2nd highest overall (The Netherlands comes first in this measure with a network of just 1,795 miles)[2].

The requirement for more rail freight services competes for limited capacity with the requirement for increased passenger services. As passenger services are operated in anticipation of demand and freight services are operated in reaction to demand, and because of the stronger public and political voice around passenger services it is often difficult for rail freight operators to secure paths for new services when demand arises.

In recognition of the requirement for more freight capacity the concept of a Strategic Freight Network (SFN) was originally enshrined in the Department for Transport’s 2009 vision for rail freight “Strategic Rail Freight Network: The Longer Term Vision” which formed the centrepiece of DfT’s rail freight strategy between 2009-16 and was supported by the CP4 and CP5 “Strategic Freight Network” ring-fenced enhancement funds.

This promoted the progressive realisation of a core network of freight capable rail corridors linking the nation’s key deep sea, short sea and bulk ports with the terminals and railheads serving centres of production, distribution and consumption – a strategic freight network. The corridors forming would conform to a consistent set of operational benchmarks; namely: – W10/W12 loading gauge – 775m length functionality (650m minima & 1500m aspiration) – RA10 without infrastructure driven speed restriction – Electrified (25kV AC, though noting the DfT’s current position set out in 2016 by the Secretary of State) – 24/7 availability (through core & diversionary routes)

During Control Period 5 (2014-19) £250m (for England and Wales) and £30m (for Scotland) were funded by governments for Network Rail to develop the SFN. Projects that are being funded and due to be completed in 2019 include Southampton to the West Midlands and West Coast Main Line train lengthening project and a new loop on the Felixstowe branch line that will support an additional 10 freight services a year between Felixstowe and Ipswich. Investments in the SFN fund have delivered excellent value for money with typical Benefit: Cost ratios of between 4:1 and 8:1[3].

Whilst these schemes represent good progress there is still considerable other infrastructure interventions that are needed to enable additional rail freight services from the port to the destination terminals. The cross-industry SFN Steering Group forum has agreed a priority list of interventions that could be deliverable in Control period 6 (CP6). See below:[4]

Freightliner urges that a commitment is made by government to continue to invest in the Strategic Freight Network in Control Period 6 (2019-24) in order to increase available capacity and capability on the key rail freight corridors, and to relieve existing bottlenecks. This would give confidence to the market of government’s commitment to support the use of rail freight on key routes from ports, and in turn, this would assist in underpinning decisions to invest in infrastructure and rolling stock by the private sector players, such as ports, terminal owners and rail freight operators.

Employment

Like many other transport companies, Pentalver employs many staff from Eastern Europe, especially as lorry drivers, but also at its container depots. We are concerned that it will become increasingly difficult to recruit staff over the next few years. The new rules regarding future immigration from European states, particularly non-graduate labour is currently unclear, and this makes it difficult to put any plans in place to mitigate the impacts of any new system.

Railway Standards

Freightliner understands that about 20% of the current railway standards framework is mandated through EU legislation.

At a European level, there are mandatory Technical Specifications for Interoperability (TSIs) whose primary purpose is to harmonise requirements across Europe to the extent necessary to meet objectives of European legislation. The broad aim is to make the key aspects of the whole EU railway network ‘technically the same’ so that, in theory, any TSI compliant European train could operate anywhere on the whole EU rail network. The application of common standards is designed to reduce specialism and therefore reduce the cost of purchasing bespoke products for the UK rail industry.

Freightliner understands that the UK’s membership of the European Union Agency will cease on ‘Brexit Day’ and the Government has indicated that it is not seeking bilateral membership on a similar basis to Switzerland or Norway. This means that government and the rail industry will lose their opportunity to influence the TSIs in their development; something it has done very successfully in the past. The UK railway differs from European railways particularly in loading gauge and therefore influencing European standards has been essential to allow compatibility of vehicles to continue.  Without the ability to influence the TSIs, the industry, including freight operators, may find that it has to apply something that is not entirely suitable.

We are also aware that there may be a future opportunity to dis-apply some of the current standards that are not seen by the government and rail industry as beneficial or necessary. It is difficult at this stage to evaluate the benefits that this could bring to Freightliner.

We are conscious that most of the rail equipment that we purchase, such as locomotives and wagons are built outside of the UK. If future UK standards are different to European standards, it may be more expensive to procure non standard equipment. There is also a risk that it will be more expensive to secure a lease for non standard equipment as there would be limited markets for future use.  

State aid approval

Freightliner is one of the beneficiaries of Mode Shift Renewal Support (MSRS), which is a scheme to incentivise modal shift from road, administered by the Department for Transport (DfT). The current scheme has been approved by the European Commission to operate until 31st March 2020. Freightliner understands that DfT are evaluating options for a future replacement MSRS scheme to apply from April 2020. Previous versions of the scheme have typically taken about a year to receive state aid approval.

It is understood that the EU (Withdrawal) Bill would preserve a general prohibition on State aid without specifying what body would assume the Commission’s current role of reviewing and approving compatible measures[5]. It would therefore appear that there are not yet any provisions in place to deal with schemes such as MSRS that would require State Aid approval post 30th March 2019. This could result in a “gap” between approved schemes. Freightliner currently receives MSRS funding for about 60% of the containers it moves by rail every year. A gap in funding would result in a sudden change in the ability of rail freight operators to compete with road hauliers, which would result in modal shift to road and wider impacts on rail freight operators, with potential of asset overhangs and the requirement to restructure.

June 2018