Orders of the Day — Rolling Stock

– in the House of Commons at 11:09 pm on 30th June 1993.

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Motion made, and Question proposed,That this House
do now adjourn,—[Mr. Conway.]

Photo of Mr John Gunnell Mr John Gunnell , Leeds South and Morley 11:28 pm, 30th June 1993

There is a close relationship between the subject of this Adjournment debate and that chosen by my hon. Friend the Member for York (Mr. Bayley) at the close of Monday's business, when he raised the difficulties at Asea Boveri Brown Transportation, York, and the jobs being lost there. I, too, start with the railway engineering industry and the current state of its order books.

In its second report on the future of the railways, the Transport Select Committee reproduced the graph that Steer Davies Gleave published for the Railway Industry Association, showing that, by the end of 1995, the domestic order book of every railway engineering company would be empty.

The Select Committee also learned from Lord Prior, in his role as chairman of GEC Alsthom, that there would be no industry left in three years' time if there are no new orders, and that that would cause massive job losses and a subsequent reliance on imports. As we know, and as the hon. Member for York has said, the first fruits of that occurred earlier this month, with the loss of 900 jobs in York, Derby and elsewhere.

Many observers, including those who support and those who oppose the changes promoted in the Railways Bill, accept that the uncertainty caused by the Bill is a major factor in the decline in investment. On Monday night, the Minister for Public Transport suggested that the recession was the main factor. The recession is a factor, but I believe that the influence of the Railways Bill has been a much greater factor, as it has made people uncertain about investing in the railways because of the high risk attached to the industry at the present time.

The Minister for Public Transport has shown that, to a certain extent, he accepts that thesis. He has been prepared to make adjustments while the Railways Bill has been considered, and those adjustments may engender more confidence in the future of the railways.

I believe that I share common ground with the Minister and with most hon. Members when I refer to the importance of rail services in passenger transport authority areas. They carry about one quarter of British Rail's passengers, and they carry twice as many passengers as InterCity. Their business contributes some £250 million to BR, and they are also notable investors in the system, having spent £690 million in total infrastructure costs over the period of section 20 financing, of which £150 million was spent on rolling stock.

The role of PTAs in procuring rolling stock has been recognised in clause 31 of the Railways Bill. That clause gives PTAs the power to let railway locomotives and, rolling stock on hire. The importance of PTAs in addressing the issue of empty order books is obvious and accepted. Therefore, how do we overcome the problems of achieving that investment and purchasing that rolling stock?

My area of West Yorkshire highlights the issue and must be the nursery for a solution. The Leeds-Bradford line is currently being electrified, and £54 million of investment has been sanctioned and in part paid for by central Government. That project will be successful and the line will be electrified. However, once it is electrified, it would be very unfortunate if the passengers are forced to use 30-year-old rolling stock procured from Network SouthEast. That is what the Select Committee forecast.

Photo of Mr Bob Cryer Mr Bob Cryer , Bradford South

Is my hon. Friend aware that the scheme is going ahead only because of the determination of the PTA? Central Government have been very parsimonious about the money for electrification, which absorbed a good trolley bus scheme which was going to run from Bradford city centre to my constituency. That scheme would have provided a cheap, silent and environmentally friendly system of transport, but it has been sacrificed for electrification because of the Government's meanness.

Photo of Mr John Gunnell Mr John Gunnell , Leeds South and Morley

I thank my hon. Friend for his comments. He underlines the fact that it would be sad if, having electrified the line, we were forced to use Network SouthEast trains which hon. Members who represent Southend have criticised as clapped out. It would be sad if cast-offs from the south come north. Although the line is electrified, we might still have to use diesels if rolling stock is not available.

Those matters were reported to the Transport Select Committee. It noted the passenger transport authority's attempts to finance the leasing of new stock and the response of the financial institutions to the situation brought about by the Railways Bill. That meant, it having been agreed previously that there would be an operating lease, that it fell through when the financiers felt that repayment of the money and security could no longer be guaranteed.

I appreciate that the Minister is working to find a creative solution to the problem. The working party that he set up between his Department and the West Yorkshire PTA is my evidence for that. But that working party has found that two types of obstacles exist, and I shall explore each of them.

First, there is a need in any leasing arrangement to satisfy the lessors that the risk to them is reasonable. When PTAs had direct precepting powers and trains were operated on their behalf by a national railway, as was the case in the past, the lessors felt comfortable. But once the Railways Bill is in operation, neither of those conditions will hold true, which is why the lessors have become uneasy.

Their doubts about the future roles of the PTAs have by now largely been removed by clauses 28 to 31 of the Bill and the assurances that the Minister gave me in Committee. But more problematic has been the role of the franchising director and the status of the operators. On Third Reading, the Minister established a framework within which the franchising director could both protect the security of assets used to provide franchised services and ensure their continuation, and he has subsequently announced the setting up of companies to purchase the rolling stock and become lessors.

But those issues require further probing. Will he, with the Bill now in another place, give the franchising director and the PTA wider powers to promote investment? Will he allow the PTA to insist on new rolling stock or other new equipment or facilities on their services? Will the franchising director be party to agreements with the lessor, with the manufacturer of rolling stock and with the passenger transport authority or the passenger transport executive in the period before the franchises in their areas are to be let? Will he ensure that operating leases will, if the services remain viable, operate for 25 to 30 years, the life of the rolling stock—namely, for four franchises? I hope that the Minister will answer in the affirmative.

The second set of obstacles surrounds local government financial arrangements. With PTAs no longer able to precept for their cash, how can the lessors be wholly confident that they can continue to pay the bill? Before the problems of that payment can be considered, it must be realised that the changes brought about by the Railways Bill, even before inflation, increase substantially the section 20 costs of PTAs nationally, as Steer Davies Gleave showed in their May 1993 paper.

The Minister has given assurances that section 20 payments to district councils will be increased to reflect fully the increased costs. But each council will have to pass over that money, and they may find it hard to justify to members of the public increasing payments to rail, while reducing many services that other people might regard as more essential.

For example, when I was the chair of social services in my authority, I faced reducing budgets. I might find it hard to support a passenger transport budget being substantially increased, which would be necessary through the section 20 system, if, at the same time, I had to tell people in the social services that they would receive less service. That will be a real problem for local authorities.

Payment for rolling stock leases will exacerbate the problem. First, it will require an additional distribution factor in the section 20 formula to reflect leasing costs. Then the Minister may need to use some mechanism to ensure that payments are passed on to the PTA. Take, for example, the Leeds-Bradford line. All five West Yorkshire district councils will have to levy this money and hand it over to pay the lessors. Of course, the Leeds and Bradford councils can easily justify this because the line will run from Leeds to Bradford, but how will Calderdale, Kirklees and Wakefield justify such payments?

This point is illustrated by the one rolling stock purchase that has taken place so far. I refer to the recent very welcome Strathclyde PTA order from Hunslet TPL in my constituency. Strathclyde is a multi-service authority, so the same council agrees revenue collection and leasing costs. The situation is much more difficult in metropolitan areas, where each of several councils has to make a separate decision.

This issue poses a serious dilemma. I hope that the Minister will seek imaginative solutions, perhaps by an extension of clause 56-type arrangements, or some alternative mechanism, such as the sort of credit system being used to finance electrification. I hope that, when he meets the chair of the West Yorkshire passenger transport authority in the near future, there will be on the table some suggestions as to how it might be made easier for district councils to pass on the money that will be needed to satisfy the lessors.

Before drawing to a close, I must stress the urgency of the situation. Ministers have said that there will be a long lead time of four to 12 years before the provisions of the Bill are fully implemented. So far as the PTA is concerned, legislative changes that are still needed will have to be implemented as soon as possible after Royal Assent, so that the new trains may enter the Leeds-Bradford electrified service at the earliest possible date. Both ordering and entry into service will be necessary before franchising commences, and that will involve the agreements about which I have spoken.

The rolling stock industry is in a parlous state. One of the forecasters of gloom and doom, and a severe critic of the whole process brought about by the Railways Bill, isPrivate Eye's "Thomas the Privatised Tank Engine". But he is only putting cleverly the worst prognostications of the Opposition, the Select Committee and informed railway users.

The threat is real, but I believe that passenger transport authority services already have a better prospect as a result of certain safeguards in the legislation. This debate aims to further that process. The current situation in west Yorkshire can provide a good test bed for the Government to demonstrate their commitment both to PTA services and to the railway engineering industry. I urge the Minister, who has already shown himself to be a good listener, to respond.

Photo of Mr Gary Waller Mr Gary Waller , Keighley 11:43 pm, 30th June 1993

I am grateful for the opportunity to intervene briefly in this short debate. I should like, first, to pay a genuine tribute to my right hon. Friend the Minister for Public Transport, who has shown, not only by his words but also by his actions, that he has a genuine commitment to completion of the project which, in the context of this debate, is obviously centre stage: the electrification of the lines to the north of Leeds and Bradford—in particular, the Airedale and Wharfedale routes, which are so important to many of my constituents.

My right hon. Friend has not only engaged in discussions too numerous to mention, in an effort to resolve a problem that he inherited with his current responsibilities—I remember going to see his predecessor about this issue—but also visited the area on several occasions and incorporated helpful amendments into the Railways Bill.

It is, of course, difficult to exclude political differences from any area of life. Nevertheless, I should like to say that over several years those concerned with public transport in west Yorkshire—I should mention successive PTA chairmen: Councillor Michael Simmonds and Mick Lyons, as well as the hon. Member for Leeds, South (Mr. Gunnell) himself—have co-operated with members of my party to try to get the best possible deal for local commuters and other public transport users.

It is highly regrettable that my right hon. Friend and everyone who wants a sensible outcome should have had to work so hard to try to secure the provision of modern rolling stock on the lines which are to be electrified shortly following the preparatory works which have already taken place.

The present service, which is so well patronised, is urgently in need of updating and expansion. At peak periods, the trains cannot cope with the demand, and their reliability is unacceptably low. Surely it would be nonsense if the existing stock were to be replaced by 30-year-old trains transferred from elsewhere on the BR network, running in west Yorkshire on newly electrified track, incorporating the most up-to-date signalling equipment.

The scheme meets the rigorous cost-effectiveness criteria laid down by the Treasury. In addition, it is highly beneficial in environmental terms, providing an attractive alternative to some appalling bottlenecks on the A65 and the A650 trunk roads, and orders for new trains would be very welcome to manufacturers in Yorkshire.

Uncertainty has for far too long bedevilled the project and those involved in it. Even if it is not possible tonight finally to blow away the final doubts hanging over it, I very much hope that we are on the last lap towards what we all wish for—a successful outcome.

Photo of Mr Bob Cryer Mr Bob Cryer , Bradford South 11:45 pm, 30th June 1993

I shall intervene briefly, as this is a Leeds and Bradford matter. As the Minister knows, it has been debated for many years and he has tried to get through the labyrinthine financial controls without much success so far.

As my hon. Friend the Member for Morley and Leeds, South (Mr. Gunnell) and the hon. Member for Keighley (Mr. Waller) said, it is a splendid new project for Leeds, Bradford and Airedale routes. To have second-hand rolling stock would be a let down for the passengers, and also for the engineering workers who build the rolling stock, whether at Hunslet Engineering of Leeds or in York. The manufacture of new rolling stock would help to create and retain jobs and stop wasteful expenditure on the payment of unemployment benefits.

Some of us wonder at the great ease with which the Treasury spends huge sums of money on, for example, the European fighter aircraft, whereas we cannot get a relatively small sum of money promised as the conclusion to the splendid electrification scheme. I hope that the Minister will display a positive attitude.

Photo of Mr Roger Freeman Mr Roger Freeman , Kettering 11:47 pm, 30th June 1993

I share the aspirations of the hon. Members for Morley and Leeds, South (Mr. Gunnell) and for Bradford, South (Mr. Cryer) and of my hon. Friend the Member for Keighley (Mr. Waller). I have 11 minutes, in which I shall try to respond as constructively as possible. I put on record the fact that I share the aspirations expressed by the two hon. Gentlemen and my hon. Friend. I hope that the hon. Member for Morley and Leeds, South will forgive me if I go straight to the business in hand rather than making more general comments, which I can do at greater length on another occasion.

On the issue of particular interest to the hon. Gentleman, let me assure him that I am determined to do all I can to help to overcome the difficulties being experienced by West Yorkshire passenger transport authority and passenger transport executive in negotiating acceptable leasing terms for new rolling stock to be used on the Leeds-Bradford electrification project.

I should explain that the PTA is seeking to negotiate an operating lease under which the lessor would retain some 10 per cent. to 15 per cent. residual risk at the end of lease period. The hon. Gentleman will know, without my having to draw it specifically to his attention, that these are different terms from those outlined by the Treasury in its publication of late May, in which it sought to define what was a more conventional operating lease for the rest of the railway industry.

My point is that these are very favourable terms according to a local authority definition of an operating lease. A 10 to 15 per cent. residual value would probably mean a lease period of 17 to 18 years, depending on the discount rate. The lessor would be looking to that period to reduce the residual value to that modest sum. The PTA would be the lessor, although the trains would be operated by British Rail, pending franchise.

When the services are franchised—it would be our intention to seek to franchise them in due course, but certainly not in 1994 and perhaps not even in 1995—the PTA would sublet the trains to the successful frachisee.

What are the difficulties? As I understand the position, the difficulties centre on the termination provisions of the lease. In a nutshell, the lessors, with whom the PTE was negotiating last year, stipulated that the lease should provide that a lump sum should be paid, equivalent to the value of the remaining payments under the lease, in certain circumstances. Those circumstances were, to put it bluntly, if the PTE was no longer the lessor because the Government proposed, and Parliament passed, legislation abolishing the PTAs and PTEs, and the lessor was not satisfied with the credit standing of the successor body, company or institution, that operated the trains. The lessor would then want the right to accelerate—effectively to terminate the lease.

The PTE does not hold substantial reserves, and at nearly £40 million the deal is a large one in relation to the size of its activity. The PTA is understandably anxious that the PIT could not meet such a call without undue recourse to its constituent local authorities.

Although I understand the difficulties of both parties, I am convinced that they are not insuperable and should be capable of resolution with a little give and take. The Government are prepared to be part of the give. I therefore wrote to Councillor Lyons, the chairman of the West Yorkshire PTA, on 7 June.

I referred in particular to the new clause, to which the hon. Member for Morley and Leeds, South has already referred, which would enable the franchising director to specify that the trains that the West Yorkshire PTE wish to lease would be used for more than one franchise. The power is explicitly related to the encouragement of investment and it explicitly allows the franchising director to enter into agreements with PTEs. Those new provisions are designed to enable comfort to be given to potential lessors—precisely the problem that we are seeking to address in this case.

I should note that the comfort must stop short of a Government guarantee that the franchisee will make the lease payments. Such a guarantee would result in a substantial transfer of risk to the public sector. That would result in the reclassification of the project, so that the capital cost of the trains would score as public expenditure in the year in which they were acquired. That would reflect the fact that, if Government were to shoulder such a large proportion of the risk, the public sector might as well buy the trains outright.

The hon. Member for Bradford, South asked why the Government are not sanctioning purchase outright. When I gave authorisation for the infrastructure, no money was available for the rolling stock. I am sure that I made the right decision, because there was a prospect of an operating lease, and I am determined that we should seek to write the lease.

The way forward is not found, however, by the Government guaranteeing the lease. On the other hand, I hope that potential lessors will take substantial comfort from the arrangements that we have put in place. At bottom, the Government's interest and those of lessors are very similar: Government want services to operate without interruption, and lessors want lease payments to flow without interruption. We are going to considerable lengths in the Railways Bill to provide safeguards to ensure that continuity of service is maintained.

In particular, we are providing for essential assets to be designated as "franchise assets" and are establishing a special railway administration regime, in the event of financial difficulties. I will not detain the House now with the detail of those arrangements. Suffice it to say that they provide a mechanism to enable quick and effective steps to be taken if a franchisee gets into financial difficulties. They will ensure that the essential assets—including the rolling stock—continue to remain available and can be transferred to a new franchisee in mid-franchise, if the worse comes to the worse.

That does not mean that there is no risk that a franchisee will default on his lease obligations, but the risk is strictly limited. What the private sector is about, as the hon. Member for Bradford, South will know because we have exchanged observations on this in previous debates, is limiting its risk. The arrangements are a practical way in which to do so.

Following my letter to Councillor Lyons, my officials met the West Yorkshire PTE officers to discuss the options. As a result, West Yorkshire PTE is now exploring possibilities with its lessors. I cannot anticipate the outcome of that, but I reiterate my firm commitment to helping to find a way forward on this transaction. I look forward to reviewing progress with Councillor Lyons on 15 July.

I now turn to the four specific questions that the hon. Member for Morley and Leeds, South asked. I am grateful to him for giving me advance sight of his remarks—it gave me a chance to prepare my thoughts. They are all relevant to what I have said, which I hope is helpful.

The hon. Gentleman asked me whether the PTA would be able to acquire new rolling stock. The answer is yes, because it must be a signatory to a franchise agreement. It will have the right, because it will stipulate the terms and conditions of a contract relating to the PTE area when it co-signs with the franchising director. It is our intention that the franchising director will also be a signatory. Our intention so far as the content of a franchise agreement is concerned is that new rolling stock will be delivered in the future or be used in a specific service.

The hon. Gentleman asked whether the franchising director could be a party to the lease agreements. That is what we are talking about—these assurances. While I am not sure that he would be a party directly, I believe that he should be joined in the negotiations, possibly by means of a side agreement or side letter providing directly to the lessor certain guarantees and assurances. That should be practical. It is certainly the assumption on which I have worked.

The franchising director cannot commit himself formally until the Railways Bill receives Royal Assent. Therefore, we may have a particular problem in making as rapid progress as I would like on the West Yorkshire lease transactions. The franchising director cannot enter into such agreements until he has been formally appointed. However, it does not preclude the franchising director-designate or the franchising advisor to the Secretary of State from entering into discussions now.

The hon. Gentleman also asked whether leases could effectively be as long as 25 to 30 years. The hon. Gentleman said four franchises—it may not be four franchises. Certainly, it is our intention that the franchising director should take powers to fetter his own discretion and require the continued use of leased assets. That is not time-limited. With this sort of lease, we are looking at 17, 18 or possibly even 19 years, so I would not rule that out.

The final and most important issue in the one minute left to me is that of levying and precepting. I can go a little further than the assurance that I gave on the recycling of moneys for the PTEs as a result of, for example, Rail-Track charges rising or other expenses being inevitably passed on to the PTEs as a result of the reforms. I am prepared to look at mechanisms in addition to the normal section 20 payments, so that the money gets more directly into the hands of the PTA and the PTE, to allow them to continue to make their lease payments. I am having discussions with the Association of Metropolitan Authorities. I hope that when the matter is debated in another place we will be able to give certain assurances on that score.

I want this lease to be written. I look forward to the meeting with Councillor Lyons and the occasion when the hon. Member for Bradford, South can congratulate me wholeheartedly on a transaction completed.

Question put and agreed to.

Adjourned accordingly at three minutes to Twelve midnight.