Train Operating Companies

HC Deb 01 April 1998 vol 309 cc1175-95

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

9.34 am

Mr. Rhodri Morgan (Cardiff, West)

As this is the first debate on 1 April, I should pass on to you, Madam Speaker, the serious warning that I received from Westminster city council: some of the squirrels in St. James's park have been found to have rabies, so nobody should walk in St. James's park today.

I shall now deal with a matter pertaining to people on whom the joke has been played—the railway passengers of the west country, south-central England and south Wales. It arises from the proposed takeover bid by FirstGroup, which used to be called FirstBus, for Great Western Holdings, the franchise company set up in November 1995. The problem seems to have started in November 1997.

A week ago, nine Labour Members of Parliament from the affected areas had an extremely interesting meeting with John O'Brien, Director of Passenger Rail Franchising, followed shortly afterwards by a meeting with Mr. Trevor Smallwood, chief executive of FirstGroup. Mr. Smallwood told us that he made the first approach to Great Western Holdings "towards the back end" of last year. He did not specify the month, but I imagine that that means in about November. He also referred to the fact that, as the sleeping partner of the original franchise company since November 1995— FirstGroup had held 25 per cent. of the shares from the beginning—he had decided to use the first two years as a learning curve. FirstGroup had intended to get into rail travel under the privatisation proposals, but as it was a bus operator it was not sure whether it had the expertise. It therefore wanted the management buyout team to lead the field and operate the company while it sat in as a sleeping partner and travelled up the learning curve.

Towards the end of last year, the company decided that it had travelled far enough up the learning curve, so it made its first approach to the management buyout company, which had 51 per cent. of the shares of Great Western Holdings. November 1997 is a significant date for four reasons. First, it was the second anniversary of the awarding of the franchise. Secondly, it was the date of the first approach by FirstBus to Great Western Holdings. Thirdly, the Deputy Prime Minister and Secretary of State for the Environment, Transport and the Regions had issued new objectives, instructions and guidance to the Director of Passenger Rail Franchising. Thus the company had new OIGs from November 1997.

Fourthly, November 1997 was the approximate date on which we all noticed a serious deterioration in the quality of the service. That does not mean that the service had been good up to then; it had been just about passable, and pretty disappointing to people who had looked at the promises made by Great Western Holdings. However, from about November 1997 onwards, matters got seriously worse. Hon. Members need not take my word for that. Mr. Smallwood, the head of FirstGroup, agreed with us about that at the meeting. He said that from about six months ago, the service went seriously downhill. It went from just about passable but somewhat disappointing to pretty catastrophic. People were leaving the train service in droves. I know that I am not the only Member of Parliament to have become a much more frequent user of the car rather than the train to come here in the past six months because of the unreliability of the train service. We do not want to change from train to car, but we find it necessary, because we need as much time as possible here.

Mr. Smallwood said that it was better for FirstBus to take over Great Western Holdings because it was a plc, whereas Great Western Holdings was only a limited company. He felt that it was better for a plc to be running the service if it was to build itself up into a powerful operator, to do good deals with the rolling stock companies and raise money on the stock exchange. That leads me to wonder why the franchise was offered two years ago to a limited company. However, that is as may be. Mr. Smallwood said that a plc would be better.

That suggests that in November 1995 Mr. O'Brien franchised an unstable company. It was unstable because the sleeping partners—Mr. Smallwood and his FirstBus—always envisaged that the management buyout team, which owned 51 per cent. of the shares, would be a front organisation. It is more politically acceptable to have a management buyout with railway experience and employee participation. That sounds better than giving a railway franchise to a bus company shortly before an election, with all the possible monopoly implications.

However, the decision resulted in a group, consisting of 51 per cent. management buyout, 25 per cent. FirstBus and 24 per cent. 3i—Investors in Industry—which would also want to get out at some stage. That would inevitably implode. The management buyout team would be looking for an exit strategy and FirstBus would be looking for an entry strategy, to move from a 25 per cent. shareholding to being 100 per cent. shareholders when it felt that it had travelled up the learning curve.

That is the difficulty that Mr. O'Brien, the franchising director, created for himself in November 1995 when he approved the rickety Great Western Holdings structure, which could not last. It was only a matter of time before GWH imploded and FirstBus emerged from being a sleeping partner to take over the company.

Ms Julia Drown (South Swindon)

Will my hon. Friend comment on a peculiar implosion, which leaves the directors getting millions of pounds as a result of the takeover? Constituents from Cardiff to Swindon have seen millions of pounds going to a few people while they wait for better service, improved safety at stations and cheaper fares.

Mr. Morgan

I thank my hon. Friend for that intervention. She has put her finger on why people are so outraged by the takeover bid. The management buyout team, who held 51 per cent. of the shares, have walked away with millions. That appears to have been a reward not for efficient management, but for providing a chaotic and rapidly deteriorating service. The more rapidly the service deteriorated, the clearer it was that that was part of the exit strategy. The management buyout team wanted to cash in their chips when FirstBus was ready to buy their 51 per cent. To do so, they had to provide a justification for the franchising director to approve the takeover.

It is easier for the franchising director to approve a takeover if the service is deteriorating. If it is improving, he has no reason to approve the takeover by the former sleeping partners, which has monopoly implications, given that FirstBus is a big bus operator in Bristol and Swansea, provides long-distance coaches in south Wales and owns 51 per cent. of Bristol airport. However, if the quality of service has been going down, people will be begging for the takeover to be approved. Once the management team have decided that the time has come to execute their exit strategy, they have no incentive to maintain the service. They have a perverse incentive to run down the service, to make it easier for the franchising director to approve the takeover, as he has done at least in principle in the past few weeks.

My hon. Friend the Member for South Swindon (Ms Drown) also mentioned that the takeover brings back concerns about fat cats. The previous Government thought that a management buyout was a great idea in presentational terms. The top management, who knew the line, brought in employee participation. Some of those employees—ordinary guards and others—will also have made a good deal of money. That is more politically acceptable than working out the best kind of company to take over such an important rail franchise.

However, that merely delayed the problem of fat cats until after the election, once they decided to sell their 51 per cent. That 51 per cent. shareholding is a franchise from the state, on which they are making millions. It was awarded by UK plc—that is what a franchise means—to GWH, but it belongs to us, not them. The management team did not build it up through their own efforts.

There was a different Government at that time. Their pre-election strategy put great emphasis on presentation— what sounds best in the run-up to an election. Undoubtedly, management buyouts with employee participation have superficial attractions.

Mr. David Drew (Stroud)

As my hon. Friend knows, we had a short Adjournment debate on Monday on Great Western. Does he agree that the root of the problem is the way in which privatisation was set up? The deterioration in service would be understandable if there was a lack of passenger interest and a decline in numbers. However, I am sure that, like me, he has found that the trains are packed. That is a badly kept secret. People want to use the trains, yet the company apparently cannot make money even with overcrowded trains. There is clearly something wrong with the basis of privatisation.

Mr. Morgan

The franchise system was a Heath Robinson contraption that should never have been approved. The Conservatives privatised the railway industry by breaking it up into Railtrack, the rolling stock companies, the train operating companies and the maintenance companies. That had political attractions for the Conservative Government, but it has left the new Government with an enormous problem to unravel.

Sir Michael Spicer (West Worcestershire)

I am listening carefully to the hon. Gentleman, who is making some telling points, but is not his argument rather one-sided? Is it not possible that the regulator takes into account positive factors such as investment plans and business plans when he decides on the rights and wrongs of a takeover bid? There is a positive element to the dynamics of privatisation, which does not involve taxpayers' money. The hon. Gentleman should also refer to that.

Mr. Morgan

I should like to finish my response to the previous intervention first.

My hon. Friend the Member for Stroud (Mr. Drew) made an interesting point. Because of the improvement in the economy, rail passenger numbers are rising by 6 or 7 per cent. I do not think that Great Western is different from the other companies in that respect. Great Western's response has resulted, as my hon. Friend said, in overcrowded trains on which people cannot get a seat. There is not a problem of a shortage of passengers in the present state of the economy.

I now come to the points made by the hon. Member for West Worcestershire (Sir M. Spicer). The Director of Passenger Rail Franchising can extract additional concessions when there is a takeover bid. This is the problem of the perverse incentive. If concessions are to be extracted, the baseline from which improvements are to be made is critical. If the baseline is lowered by providing an appalling service, it is much easier for the company taking over to say, as in this case, that it will provide better services than those provided over the past six months. I am worried that such a perverse incentive is built into one aspect of the new instructions that were given to Opraf in November.

The instructions refer to the passenger dividend, but do not protect against an arranged deterioration. There is a lack of incentive to maintain services, never mind improve them, in the run-up to a takeover bid, as has clearly been going on since November, because it is then much easier to satisfy the condition that there must be something in the bid for the passenger. As far as I am aware, the bid must also include a reduction in subsidy. Indeed, the company will receive £100 million less subsidy by the end of the franchise.

Sir Michael Spicer

Much of the hon. Gentleman's argument hangs on the concept of some conceived, planned or conspired deterioration in the services. Factually, he may be correct; there has been deterioration—although not on the part of the line that runs through my constituency, which I shall leave aside. What evidence has he of some conspiracy, some specific plan? Or is there merely some fluke from which he has conceived some conspiracy?

Mr. Morgan

As I said, it was not me who referred to the fact that there has been an appalling deterioration in services over the past six months. Mr. Smallwood told us in our meeting last week. He agreed that the service had greatly deteriorated, particularly over the past six months. I certainly do not have any access to company telephone conversations or minutes that would enable me to substantiate the principle of a conspiracy to cause deterioration. I am making a deduction from the fact that certain events occurred together.

First, FirstBus approached Great Western Holdings towards the back end of last year—according to Mr. Smallwood. Secondly, there has been a severe deterioration in services over the past six months— according to Mr. Smallwood. Thirdly, new instructions were issued by the Deputy Prime Minister in November last year, when FirstBus decided that its two years on the learning curve were up and that it wanted to make a serious move.

I understand that FirstBus first approached the franchising director informally in January to see whether he liked the idea, according to recent written answers and Monday's Adjournment debate, which was initiated by the hon. Member for Northavon (Mr. Webb) and to which my hon. Friend the Minister for Transport in London also responded. Suddenly, in a great rush in early March, the matter began to move very quickly, with the special request of the management of FirstGroup that the bid be approved with great speed, which was why the period of consultation was foreshortened if not non-existent.

Mr. Paul Flynn (Newport, West)

Does my hon. Friend agree that it is surprising that at least one hon. Member has not noticed the deterioration in rail services? It has almost become universal that the most dependable aspect of the service over recent months is that trains will always arrive late. Many of us have had to organise and reorganise our timetables and catch earlier trains to ensure that we are here for Question Time. Is it not galling to realise that the result once again proves—this is certainly not a coincidence—that the wages of sin are stupendous?

Mr. Morgan

That is getting on to the same point made by the hon. Member for West Worcestershire—except in a disbelieving sense.

We asked Mr. O'Brien last week whether there had been—to use the crude word with implications of Guy Fawkes—a conspiracy to cause deterioration in services. Mr. O'Brien and his staff said, "Absolutely not; that is an absurd idea." They said that, obviously, a company's shares are worth far more if it is doing well; obviously, a company is worth far more if it is building up rather than running down its assets; and, obviously, a company has every incentive to try to improve the quality of the service because it means that anybody who wanted to take it over would have to pay a higher price.

In principle, all that is true, but very special circumstances in this case make that quite likely to be untrue—strange though it may seem. If owners of 51 per cent. of the shares need an exit strategy, they need the approval of the Director of Passenger Rail Franchising in order to implement it. The takeover cannot be made on straight commercial terms because it is a state franchise. The owners have to persuade the agent of the state—not the Minister, but the franchising director—to give his approval. Of course, the franchising director can withhold consent. It is as simple as that. In order for consent to be given, conditions set out in the objectives, instructions and guidance to the franchising director must be met.

The owners' shares become worth much more because they are the equivalent of a ransom strip in a property deal—the little shop in the middle of a comprehensive development that developers have to pay a fortune for in order to develop the land. The owners of the 51 per cent. of the shares and the franchising director are the keys to control of the overall state franchise.

The takeover bid was not made from the outside, but was made by sleeping partners on the learning curve from the bus industry, who, because of political implications, did not originally want to be majority shareholders. As they explained to us, they were concentrating on the bus industry, but knew that they wanted to get into the railway industry once they had undergone the learning experience. Mr. Smallwood was quite frank and open about that to us last week. He said that, when the two years was up, the company decided to move in.

The bus industry has been a very interesting area of competition over the past few years, since deregulation in the mid-1980s. What was originally an idea of letting a thousand flowers bloom has become an industry in which about three dominant companies have survived extremely aggressive competition. A couple of years ago, the bus industry was described as an aquarium, the owner of which had left home about three weeks earlier and forgotten to make any arrangements for feeding the fish. As a result, the fish had to feed on each other. The three or four surviving dominant groups have the financial pulling power in the City to be able to buy rail companies. Some did so directly, but FirstGroup took a more cautious line, first becoming sleeping partners and buying 25 per cent. of the shares.

Another point that arose in our meeting with Mr. O'Brien, which baffled us, concerned the advertisement for new rolling stock that was placed by Great Western in the autumn, in the contract supplement of the Official Journal of the European Communities. The point was raised not by any hon. Member but by Mr. Bray of Save Our Railways, who was also present.

Mr. Bray mentioned the so-called extracted passenger dividend, in which the hon. Member for West Worcestershire was so interested. In other words, at the time of the takeover one would be asked, "What are you willing to promise in terms of improved services?" Mr. Smallwood and Mr. O'Brien had been praising to the skies the deal that they had done with each other—well, they would, wouldn't they?—and saying that extra orders were now being placed for rolling stock.

Then the representative of Save Our Railways asked, "Are those orders really extra? Were they not advertised in the Official Journal of the European Communities last autumn?" Mr. O'Brien's response was mystifying. He said, "Oh no, when you advertise in the contract supplement of the Official Journal, it is not like actually ordering something. It is like putting an advertisement for your house in the local evening paper to see what offers you get, so that you can find out its value. It was not really an order at all."

We all scratched our heads in disbelief at that explanation of the purpose of the contract supplement of the Official Journal of the European Communities. We had always understood that in public procurement, advertising in the supplement was a legal obligation for any order in the public domain worth more than £150,000. So far as I know, people advertise in the supplement only because they have to. They never advertise simply to test the market and see how much their "house", or its equivalent, is worth in terms of commercial ordering procedures.

To us, the explanation was absurd. The sensitivity that Mr. O'Brien displayed as he tried to knock down the advertisement and imply that it was of no significance, suggested that he wanted to be able to say that he had extracted big benefits from the takeover, along the lines suggested by the hon. Member for West Worcestershire, despite the fact that many of the benefits were due to come through anyway, as the advertisement placed last autumn showed.

We wondered why Mr. O'Brien was so sensitive about that aspect. Why was he trying to build up the so-called benefits to passengers, instead of accepting that some of the improvements, such as the rolling stock, were already on the way?

Since all the subdivisions were created by the way in which the railway industry was broken up into rolling stock companies, train operating companies and so on, train operating companies do not buy rolling stock; they agree an order that is paid for by the leasing company that will own the rolling stock. The deal is done on a back-to-back basis. The rolling stock company pays the train manufacturing company, then the train operating company agrees a back-to-back lease with the leasing company for use of the trains when they are finally built and delivered, perhaps in a year's time.

The significance of the timing of last autumn's order for new trains for Great Western was that it revealed again how rickety was the contraption of the rail passenger franchise issued in November 1995. The company had expertise at the top, because it consisted of the top management of Great Western, but it had no money. The people with the money were the sleeping partners, FirstBus.

The top management had 51 per cent. of the shares, and I know that at least one of the managers had to mortgage his house to buy his part of the 51 per cent. When the idea emerged of the majority shareholders having to commit themselves to leasing 20 additional trains, they could not mortgage their houses again two years later so as to expand the equity capital of the company. They could not cope with a big new leasing commitment to a rolling stock company to finance the order for new trains from Adtranz, ABB or whatever, because they had already dug as deeply into their pockets as they could.

Those people were never ever going to be able to order new rolling stock. The only way in which they could commit themselves to more leasing was by selling out. They had to get through the election period without ordering new rolling stock, then wait for the right moment to cash in their chips for the 51 per cent., as owners of the majority shareholding. That meant that the company could start to think about ordering new rolling stock before it had to find the money for it.

That all seems to have happened at the end of last year. The advertisement, which has a long time fuse, was issued, but the company did not have to commit itself to spending the money. Then the managers had to get out of the industry before anyone came to them for the money for the rolling stock that they had ordered. That was when they had to say to FirstBus, "Time for you to take over. You have learnt the game, and we can get out. The only problem is, we have to get the agreement of the Director of Passenger Rail Franchising."

That was the nature of the Heath Robinson contraption set up in November 1995—a totally unstable company in which the top management had the expertise but no money, and the sleeping partners had the money but no expertise. The company had to wait until the post-election period when the need for new rolling stock became critical, at which point the owners of the 51 per cent. had to make their exit.

In order to get out, those people needed a justification, and a deterioration in the service is the ideal way of being allowed to execute one's exit strategy and justify the takeover bid.

Mr. Drew

There is another aspect, which was also partly rehearsed on Monday night. Another reason for the poor quality of the service is what Railtrack is up to. Because of all the present goings-on, we have fewer opportunities to put pressure on Railtrack to improve—

Mr. Deputy Speaker (Sir Alan Haselhurst)

Order. I must remind the hon. Gentleman that he is not conducting a conversation with his hon. Friend. He should be addressing the Chair.

Mr. Drew

I apologise, Mr. Deputy Speaker. I just wanted to ask my hon. Friend whether he agreed that the present situation was taking away the chance to put pressure on Railtrack to improve the service. I strongly believe, and I hope that my hon. Friend agrees, that the two are inextricably linked, and it is crucial to ensure that Railtrack comes up with its part of the bargain.

Mr. Morgan

I am grateful for those remarks, and I shall talk about Railtrack as I draw my remarks to a close. However, I hope that my hon. Friend will allow me to continue in the intended order, because I have something else to say first, and Railtrack will be my last point.

I am still talking about the company, whose situation is further complicated by the loss of two of the train sets that Great Western Holdings had when it came into being. When the parliamentary Labour party Welsh group originally met Richard George and Brian Scott from Great Western Holdings about eight months ago, they apologised to us for what was already seen as a pretty poor service, and said that the situation was complicated by the loss of a train set, which I believe took place in 1996. Hon. Members who represent constituencies in the south-west will know more about that than I do. I am talking about the crash at Newton Abbot, which left Great Western one train set short. It had no margin, so the crash at Newton Abbot was a big problem.

Then, in 1997, there was the Southall train crash. That made the shortage of available rolling stock much worse, because the company had now lost two train sets and had somehow to scrounge some from elsewhere. There was loss of life; I personally knew well one of the seven people who died, and many people from south Wales knew people who were either injured or among the seven fatalities.

A major inquiry is taking place, and I do not want to pre-empt its findings, but we must face the fact that one of its possible outcomes is a corporate manslaughter verdict. That is only one possibility of many, but it could mean some sort of comeback for the people who were at the head of Great Western Holdings at the time of the Southall crash. We do not know what will happen; that is only one of a wide range of possible outcomes. None the less, if that is the result in a year or two, when the public inquiry is finished, people will say, "Ah, was that one of the reasons why they chose to execute their exit strategy in the six months between November 1997 and March 1998?"

That is an important issue. What are the responsibilities of the top management of a company that holds a state franchise, if there is a serious crash involving fatalities, and a subsequent public inquiry? If an inquiry finds people responsible, they must be willing to stand up and defend the actions for which they were responsible.

Finally, there is the subdivision between the responsibility for track and track maintenance, which is Railtrack's, and that of the train operating companies—the TOCs, as we call them—such as Great Western. That is undoubtedly the easiest method that has ever been devised of transferring blame. The track can blame the train, the train can blame the track and the passenger never knows who is telling the truth—it is a wonderful form of rotating-blame machine. Responsibility for delays cannot be attributed—the finger is pointed in two directions.

Dan Norris (Wansdyke)

Will my hon. Friend assist me in compiling a book for guards of the reasons for delays? I am suffering sensory deprivation after hearing time and again the same excuses, and I should like to help the staff by giving them new reasons for delays.

Mr. Morgan

I do not think that April fool's day would be a good day to start that book. Certainly, one feels very sorry for the guards on Great Western, who do not like what is happening any more than the passengers do—it must be sheer hell to have to explain why a service is an hour or an hour and a half late, why two trains have been merged without notice or what the refund arrangements will be if such and such happens. When things are going seriously wrong, employee-passenger relations are the most difficult of all, and I do not think that morale on any service can be as bad as that of the guards on the Great Western who have to carry the can when issuing excuses.

I think that the idea of my hon. Friend the Member for Wansdyke (Dan Norris) is imaginative. No doubt those long hours waiting somewhere between Bath and Chippenham or between Cardiff and Swindon can be spent compiling a list of excuses. I do not think that the guards invent the excuses; I think that the excuses are genuine. The issue is that one cannot get to the nub of the problem. One does not know whether the fault is caused by track or by bad maintenance and shortage of train sets—Great Western is one or two train sets short since the crashes at Newton Abbot and Southall.

I have used Paddington for more decades than I care to remember. It is a second home for anyone from south Wales who travels to London—I am sure that the same is true for people from the south-west of England. As soon as one arrives at Paddington in a taxi or on the tube, one feels halfway home—it is an important place for us. During the past two or three years, we were told that the delays at Paddington were a result of the huge works on the three tracks, I think, to accommodate the Heathrow express link, but that when that work was completed, Paddington would be a much better place. That sounded fair enough; it was clearly not an invented story, and the huge investment to link Heathrow with Paddington was welcome.

Now that the work is complete, however, things have not got better, as we were promised—they have got worse. The new summer timetable, which starts in about a month, adds a further five minutes to the journey between south Wales and Paddington. A train will take as long as two hours and 10 minutes, which is 20 minutes longer than it took 20 years ago. That is sad, and we look jealously at other parts of the country where train services are being speeded up and where, in a year or two, there will be new trains, such as the tilting trains on the main line to the north-west, which sound good when one reads about them in the newspapers, even if they are never put into service.

The service from south Wales is slower than it was 20 years ago partly because of congestion at Paddington, which is now more important because of the Heathrow express link. However, it is odd that every year there is another reason why an extra couple of minutes is added to the journey time. The Government will never be able to green the transport system if trains become slower and less reliable.

Because of the emphasis in the passengers charter on reliability, the trains are timetabled to be slower—even though they have the same locomotive power—so that reliability targets are hit more often. That will ultimately have a negative impact on trains. It always seemed insane to drive to London, as that took at least three quarters of an hour longer than the train, but now that is not always the case. The combination of poor reliability and slower timetabling means that more people will use their cars. The Government will fail in their aim to ensure that, by investing in good-quality, reliable, and speedy passenger transport, the majority of journeys between the major metropolitan centres—between London and Bristol, Cardiff or Swansea, for example—are made on trains, minimising the use of the car and the need for extra lanes on motorways.

The importance of this debate is that it concerns the first takeover bid for a train operating company. The terms on which that takeover is approved, disapproved or conditionally approved, will set the tone for future takeover bids—they will set the precedents, the guidance and the rules. We shall observe what happens, although I accept that the rules may change when the White Paper is issued or as a result of legislation to establish a strategic rail authority.

We are extremely dissatisfied by the way in which the bid was made—especially during a time of severe deterioration in services—and by the lack of consultation. We shall never know whether my conspiracy theory is correct or whether what happened between November 1997 and April 1998 is sheer coincidence—these things cannot be proved. However, passengers in south Wales—I am sure that the same is true in south-west and south-central England—cannot believe that the managers of Great Western Holdings will walk away with millions of pounds as a reward for running an appalling service.

10.16 am

Mr. Matthew Taylor (Truro and St. Austell)

I congratulate the hon. Member for Cardiff, West (Mr. Morgan) on securing this important and timely debate. In the past couple of months, the House has debated railway issues a number of times, which reflects the great concern about the mess in which the previous Government left rail services.

Takeovers will be one of the last elements to be taken into account in an assessment of whether the regulatory system has been effective. The background is a series of failures—on any measure—to deliver the improvements that were promised on privatisation. Service was meant to improve, but Opraf figures for last year show that performance worsened—season tickets had to be given on six routes, a third of routes failed their passenger targets and reliability deteriorated on almost half the routes.

Like the hon. Member for Cardiff, West, I feel sorry for the staff, who constantly tell me of their frustrations with the new system and of their concerns about the way in which it is failing to deliver. On some routes, they express their views in guarded terms—they do not want to be quoted, as they are anxious for their jobs. There is no doubt, however, that people with experience of the system believe that the new structure is failing to deliver.

Cost is another measure of that. Pre-privatisation, British Rail received a subsidy of some £1 billion. The year after, that had doubled to £2 billion but, from the figures that I have given, it is clear that passengers have not yet seen the return.

Although some passengers get compensation, the negotiated requirements have not delivered it for the great majority of those who suffer delays. On the contrary, the franchise agreements and allowances have delivered fare increases, including above-inflation increases this year on several of the worst-performing lines.

We can also measure whether the regulator has been effective by looking at complaints, which have risen massively, reflecting the lowering performance figures that have been referred to. Last summer, complaints were up 96 per cent., and on Connex South Central they were up a whopping 158 per cent.

There has been pretty much unmitigated joy, with huge returns from privatisation, for those with a financial stake. Shareholders have been clear beneficiaries from privatisation. Share prices have increased and a substantial number of millionaires have been created on the back of privatisation—not least those who are becoming much richer through the sale of Great Western—but however hard the franchising director and others may have tried, they have failed to deliver the promised improvements.

The first takeover is now going through and others may follow, so we must make a judgment on whether the regulatory system delivered the benefits to passengers that could be expected from a renegotiation of franchise terms. That is important, because it can tell us something about what may happen when other franchises come up for renegotiation in the natural course of things.

We understand that the regulator was told in January, at least informally, about what was likely to happen, but as far as we can tell, there was no attempt to build in any passenger consultation. It is hard to say what preparations were being made behind the scenes—presumably, some were—but the people who would eventually be on the receiving end were not consulted.

My hon. Friend the Member for Northavon (Mr. Webb) suggested in his Adjournment debate that there may have been a question of commercial confidentiality, but it was perfectly open to the Rail Regulator to explore with passenger groups what they would like to happen in the event of either franchise renegotiation or takeover. There are likely to be further takeover bids, so the effects should have been explored, but nothing of the sort happened before the formal bid, after which there were only three days of work before the regulator gave approval to a £75 million deal. I understand that the only rail user consultative group that was formally involved was the one that there was a statutory obligation to consult.

The regulator first met FirstGroup on 4 March and by 6 March, the deal was announced. It has been suggested that commercial confidentiality prevented consultation; even if that is so, it is a clear failing in the system, because any change of such significance to passengers should surely have built into it a requirement for consultation in the early days, before the announcement of any deal.

I cannot accept that such changes should be made so quickly. The regulator said that the company had pressed for an early decision. Clearly, a commercial organisation with a bid on the table would want to get the go-ahead as quickly as possible, but that was not the position for passengers.

Passengers—and, indeed, Members of Parliament—had hardly got over the shock of hearing that there was to be a takeover when they were told that there was a closed deal. The Deputy Prime Minister and the Leader of the House were still saying that everything was up for negotiation even as papers were being signed and press releases issued to say that the deal was done.

It is strongly rumoured—I have heard it from several angles—that FirstGroup was expecting a much tougher process, taking much longer and consulting it much more thoroughly. It is hard to prove, but the whispers are strong. It is hard to believe that FirstGroup would otherwise have gone with the best bid so early on. There is a suspicion of some naivety on the part of the regulator.

I use Great Western services. Recently, a train was held up about halfway along our route because train staff were awaited. The service is too often delayed, although it is by no means the worst in the country and, to be fair, there has been some good investment in rolling stock.

My constituents and I feel strongly that, because it was our franchise for which money was changing hands, we should have got the overwhelming benefit and that funds should not have been diverted to other parts of the country, where the franchise was not up for renegotiation. Good luck to the other areas, which need investment, but this was about Great Western and we expected substantive improvements.

We were told that there would be 32 new vehicles, and I thought for a moment that the entire inter-city fleet was being renewed, but it turned out that there were to be only four new trains: hardly a spectacular improvement. Indeed, the huge gain that we were meant to have got had already been advertised and the processes were already under way. The franchising director's excuses are simply incredible.

Some so-called benefits have been negotiated. The Minister told my hon. Friend the Member for Northavon that the fines were £1,000 for a train cancellation and £250 for a train being more than half an hour late. Frankly, in terms of the costs of running inter-city trains and the benefits that train companies get, let alone the subsidies, that is a joke.

If the company has bothered to stock the buffet properly—in itself a regular problem—the extra profits from the sales as passengers while away the extra time with a coffee and a burger or a Twix, or whatever slim pickings happen to be left, will more than outweigh the £250 fine, quite apart from the ticket sales that have already been made.

Whatever the ultimate benefits or the quality of the companies may be, the Great Western takeover has shown the regulatory system failing to deliver the benefits it should deliver. It has failed to deliver passenger consultation, and it has left Ministers powerless. That is the legacy of the previous Government, and we look to the new Government to introduce legislation on this matter early on.

I have one question for the Minister. Can we be assured that legislation will be introduced in the autumn for the House to get through as urgently as possible so we do not see these problems again? I have every sympathy for the Minister, but that will give out if the new Government do not take action to deliver improvements.

10.29 am

Jane Griffiths (Reading, East)

May I apologise for inadvertently leaving my pager on audible mode earlier? I realise the discourtesy to the House that that represents.

The Great Western takeover is the first, and it will set the tone for others. It is important that our feelings be made known. Reading is the first major stop on the Great Western line going west. For the past two centuries, if Reading has not functioned effectively—whether in terms of canals in the early days, rail or road—the western transport network has fallen apart.

At the meeting attended by my hon. Friend the Member for Cardiff, West (Mr. Morgan) last week, I was disturbed to hear it said that people using the trains had a choice. The people of Reading, by and large, use the trains to commute to Paddington to go to work. They do not have a choice at all. The point was made that because the trains have got worse, it has become more of an option to drive to London. That is not a realistic option for the people of Reading.

I do not believe that the activities engaged in during the takeover should be allowed to continue unchecked as future rail companies change hands. This may be a Utopian vision, but when any rail or bus company changes hands, I would like citizens' juries to be established, made up of the users—the people who will be the victims of any bad practice, inefficiency or incompetence. Those people should have the opportunity to have their say on who should run the railways.

A lot of people have become a lot richer as a result of the takeover—that is the way in which the system was set up. Many of us welcomed the changes in the objectives, instructions and guidance last year which obliged any future franchise holder to invest. Under the previous rules, the investor was obliged to get the best financial deal. Now, companies must invest and demonstrate that they would provide better facilities for cyclists and more accessible trains. That is all well and good.

We have heard that after the takeover, punctuality has not been a problem. However, passengers cannot have the figures on punctuality on the Reading service because they are commercially confidential. If passengers cannot have the figures, their feelings are based on perception only. Perception only it may be, but I am concerned about the experience of those using the trains.

Let us look to the future and change the system if necessary. We look forward to the White Paper and a strategic rail authority, but the important thing in the short and medium term is to have decent rail services which people can use and which offer a true alternative to the car—especially over short distances and close to London.

10.33 am

Sir Michael Spicer (West Worcestershire)

I had not intended to speak in the debate, as I came in to the Chamber to reserve my seat for Prime Minister's questions. I am a Whip's nightmare in this respect—I listened to the arguments and became interested.

The hon. Member for Cardiff, West (Mr. Morgan) is right to raise the subject of getting takeovers right. Precedents are established here—I would not deny that. There was an implication in his remarks that takeovers were bad intrinsically. On the whole, the existence of takeovers is a good thing, as they are a threat as well as a spur to inefficient management. His central argument was whether there was a planned deterioration, and I want to address that.

The hon. Member for Wansdyke (Dan Norris) said that an excuse book was needed and suggested that it would be a pretty big book. Under what Labour Members see as the Utopian days of the nationalised system, the excuse book would have been very small because people did not give excuses. No reason was ever given why trains were late, and they were late much more often then than they are these days. No excuse was given because the passenger did not count. There was not the transparency that there is now—although problems occur when there is transparency.

The hon. Member for Cardiff, West alluded to the casting of blame between Railtrack and the operator. Of course there is buck-passing, but there is also merit in that the matter is discussed and, on odd occasions, it is provable whether Railtrack or the operator is at fault. The system is much more open and transparent to the customer. We must look at privatisation and the problems of running a railway in the context of greater transparency.

The hon. Gentleman said that, in his view, there was some kind of planned intent to run down the railways. He did not want to use the word "conspiracy", but he accepted that he could not find a better word. That is a grave charge, which may even have potentially criminal implications. Before he goes hell for leather on this matter, he needs to produce more evidence than saying, circumstantially, that the company is providing a worse service than before.

Mr. Rhodri Morgan

My argument concerned the perverse incentive built into the system.

Sir Michael Spicer

I understand precisely what the hon. Gentleman is saying. I am merely playing devil's advocate, as someone needs to come back at him.

The hon. Gentleman stated that due to the previous circumstances of the structure of the company, there would be difficulty in terms of investing in new rolling stock. He said that the management of the company— they are also the owners, having 51 per cent. of the stock—would be unable to afford to buy or lease new stock. That needs careful analysis. A back-to-back deal for a leasing arrangement, as he himself said, is the way in which it could be done. That is a conventional way in which to set up the structures for such investment.

Such a deal is typically done on the back of outside financing, and on the basis of a lease being sustainable and providing the payback over a period of time that outside financiers would require. That kind of deal does not require the massive resources implicit in the hon. Gentleman's argument.

A central part of the hon. Gentleman's argument was that management could not afford further development, that they ran down companies to impress the regulator and achieve the takeover that they required, and that they then took away the cash in their pockets. There are a number of steps in that argument; hon. Members must analyse them much more carefully than the hon. Gentleman has done before coming to a conclusion about the matter.

10.39 am

Mr. Richard Ottaway (Croydon, South)

I sympathise with Labour Members, who raised a catalogue of complaints; I cannot address them all because of time constraints.

It is the job of the Office of Passenger Rail Franchising to resolve such matters. The previous Government set up Opraf in passengers' best interests, to monitor the performance of franchisees and to ensure compliance with franchising agreements. We wanted rail privatisation to work then, and we want it to work now, which is why we gave the Secretary of State for Transport powers to set out objectives, instructions and guidance for Opraf's franchising director as he set about transforming Britain's railways.

In his latest annual report on the privatised network, Mr. John O'Brien, the franchising director, stated: Annual support from the taxpayer for the railways will fall over the next six years from over £1 billion to just under £1 billion. The franchisees are committed to investing over £1.5 billion into the rail business. Franchise plan commitments include new rolling stock on 10 franchises, new services across the network, better security measures, new ideas in ticketing and improved information. I believe that these deals offer effective and innovative services to passengers as well as value for money for the taxpayer. That is the answer to the central complaint about quality: Opraf's powers were made available before May 1997, but the director must put them into effect.

Guarantees were given for better trains, new services, better security, improved ticketing arrangements and more information for travellers, which is why we gave Opraf the duty to safeguard the existing strengths of rail travel. Mr. O'Brien recognises that network benefits such as connections, through ticketing, interavailability and rail cards are particularly important. I could not agree more. Labour Members would also agree, although they might ask why problems are occurring.

Mr. O'Brien adds that it is now my highest priority to ensure that the benefits which the franchise deals promised are secured for passengers. Opraf has put in place a rigorous regime of data collection, review and audit to ensure the delivery of franchise obligations and to incentivise operators to perform better. That is how he views his powers, all of which were in place before May 1997. He is an uncompromising regulator who is ready to use the powers given to him by the previous Government. His raison d'être is to provide a good deal for rail passengers.

We set up Opraf because we wanted a regulator who would make Britain's railways run better, and his powers were set out in the objectives, instructions and guidance. The November 1996 objective, which was the last to be set under the previous Government, was to Secure an overall improvement in the quality of railway passenger and station services available to railway passengers.

Ms Jean Corston (Bristol, East)

Will the hon. Gentleman give way?

Mr. Ottaway

No. I shall not be able to complete my points if I give way.

The Government wanted to impose their own rules. The November 1997 objective was to secure progressive improvement in the quality of railway passenger and station services available to railway passengers. The words are almost identical to those in the November 1996 objective, but the Government claim a great triumph over the change of shareholders in the franchises on the strength of that changed guideline.

In the Thames Trains franchise, the Go-Ahead group, which is already the majority shareholder, bought back 34.8 per cent. of the shares currently held by the management and employees of Thames Trains. The hon. Member for Cardiff, West (Mr. Morgan) set out the details of the FirstGroup takeover of Great Western Holdings. Before agreeing to the takeovers, the franchising director withheld his agreement to change of ownership until £75 million of passenger benefits and further investment were obtained.

The Government were quick to say that that was a result of the new guidance, which was introduced in November 1997. It was nothing of the sort. First, many of the improvements would have been achieved without the intervention of the franchising director and the change of ownership enabled the companies to confirm that further investment improvement was already going to take place. I agree with the hon. Member for Truro and St. Austell (Mr. Taylor): the companies knew that there would be a price to pay the moment that they asked for the regulator's approval for the takeovers. They held back a bit so that they could make an improved offer.

Secondly, the improvements could have been achieved without any change of guidance. The franchising director already had powers in the 1996 guidance note and the changes in the November 1997 guidance note do not add up to a row of beans in the takeovers. A cosmetic operation was undertaken by the Government, who wanted to take credit for any long-term improvement in the privatised railways.

I believe that, in the long term, there will be an improvement in the privatised railways. It is easy to take a snapshot of the current situation and say that it proves that privatisation of the railways has failed. Investment is proposed by the Virgin group and an announcement was made yesterday by National Express: hundreds of millions of pounds of investment is going into the railways.

The travel time to Glasgow on the west coast main line will come down by nearly 90 minutes by 2005. Such improvements will take place in the long term. Labour Members who attended the meeting of the all-party west coast main line group heard directors say that 90 per cent. of delays were caused by outdated rolling stock and that there would be a faster, more reliable service when it was replaced.

Every privatisation that was carried out by the previous Government struggled at first. Hon. Members should read newspaper headlines from the mid-1980s, when we privatised British Telecom. The Labour party passionately opposed that privatisation and Labour Members gleefully came to the House with stories of telephone kiosks not working. Today, no one in their right mind would say that BT is a failure and should be renationalised. It is a British success story of which we can be proud.

Ms Corston

We are talking about trains.

Mr. Ottaway

I am discussing the general principle of privatisation, which is under attack.

The Government have difficult decisions to make over the next few weeks about the channel tunnel rail link, Eurostar and London Underground, and we wish them well. Labour Members should consider the fact that Railtrack would not be a central player in those matters, and the Government could not look to it to provide the investment and expertise required in those projects, if it were still in the public sector. That alone illustrates the success of bringing the private sector to the railways, which will be a success in the long term.

10.48 am

The Parliamentary Under-Secretary of State for the Environment, Transport and the Regions (Ms Glenda Jackson)

I congratulate my hon. Friend the Member for Cardiff, West (Mr. Morgan) on securing the debate. There has been great interest in it, but all hon. Members in the Chamber, with the possible exception of the hon. Member for Croydon, South (Mr. Ottaway), wish with all their heart that there had never been a need to have it. The root cause of the problems that we have been discussing is rail privatisation. The hon. Member for Croydon, South praised privatisation.

Mr. Ottaway

Will the Minister give way?

Ms Jackson

No. The hon. Gentleman referred to British Telecom as a shining example of the success of such processes. We are, in fact, debating railways and trains and I was not aware that British Telecom received £1.8 billion every year from the taxpayer to subsidise its activities. That is certainly the case for our railways, yet as hon. Member after hon. Member has pointed out this morning, they and their constituents are experiencing difficulties in obtaining what the Government are committed to see that they obtain for those vast amounts of money—namely, a safe, reliable, affordable railway service throughout the United Kingdom.

Ms Corston

Would it surprise my hon. Friend to learn that last year, I tried to catch a train from Bristol Temple Meads station, which was not indicated on the departure board? I could not find anyone to give me information. Eventually, I found a man in uniform. I asked him when the train was leaving and from where. He said that he did not know, but that he was the driver so if I stuck with him, I would catch the train.

Ms Jackson

I wish that I could say that my hon. Friend's intervention caused me some surprise, but I regret to say that that story probably could be replicated throughout the United Kingdom.

This morning, my hon. Friends the Members for South Swindon (Ms Drown), for Stroud (Mr. Drew), for Newport, West (Mr. Flynn) and for Wansdyke (Dan Norris) all raised the issue of poor service on Great Western. My hon. Friend the Member for South Swindon spoke of her constituents' sense of outrage at the vast profits made via the takeover when their stations were poor and the service was bad. That point was also made about late arrivals by my hon. Friends the Members for Newport, West and for Wansdyke.

The hon. Member for Truro and St. Austell (Mr. Taylor) said that railway staff were fearful of losing their jobs if they complained about what they saw as a deterioration of services. If he or they wish to write to me, I will ensure that their concerns are passed forward without any possible comeback for the individuals who raise them. There should in every industry be a whistleblowing service so that no worker feels that he is under threat as a result of expressing concerns about the failure of the management to fulfil their obligation to provide a high quality of service to the travelling public.

Ms Julie Morgan (Cardiff, North)

Does my hon. Friend agree that not only punctuality of trains, but the circumstances that prevail during journeys cause concern to passengers? I have found on the journey from Cardiff to London that the train shakes extremely on certain parts of the journey. When I was travelling up last week, I was drinking a cup of coffee that went all over me because the train was shaking so much. That is something that I have noticed on journeys especially in the past six months. Does my hon. Friend agree that that is another issue that causes a great deal of concern to rail passengers?

Ms Jackson

My hon. Friend raises a point that is, or should be, a cause of concern to all Members of the House—namely, the failure to make proper levels of investment in infrastructure, especially rolling stock. It is a scandal and a disgrace that the previous Government allowed the rolling stock companies to be outside any regulation. That is why my right hon. Friend the Secretary of State for the Environment, Transport and the Regions has asked the Rail Regulator to look into the issue. We should be seeing new rolling stock appearing on our networks; we are not. We are, however, seeing the directors of ROSCOs turning themselves into millionaires virtually overnight.

A number of speakers in the debate have expressed concern about the substantial profits enjoyed by the directors of train operating companies as a result of the recent takeovers. Once again, the privatised railway has produced enormous profits for a few individuals, all as a result of the contracts awarded by the previous Government. I regret that there is nothing that this Government can do about those contracts, but what we can and have done is to ensure that the passenger gets the maximum benefits possible from any takeover deal.

Passengers on the privatised railway deserve the best service, and we are determined to ensure that they share the benefits of any takeover. That is what we mean by a passenger dividend. As my hon. Friend the Member for Cardiff, West said, last November, my right hon. Friend the Minister of Transport issued new objectives—a word that my hon. Friend, in a temporary aberration, could not remember—instructions and guidance to the franchising director. These scrapped the previous Government's guidance—to promote privatisation—and told him to put the passenger first. I am pleased that as a result of these new instructions, he has been able to secure substantial packages of passenger improvements as part of the recent takeover deals. My right hon. Friend the Deputy Prime Minister has also asked the franchising director to ensure there is a significant passenger dividend in any future takeover of a train operating company.

That dividend has been practically expressed in the franchising director's announcement of improvements worth in excess of £75 million for passengers of Great Western Trains, Great Eastern and North West Trains. Passengers can look forward to £32 million-worth of new rolling stock to be in service by June 2002, a week's free travel for Great Western season ticket holders and more bus-rail through ticketing on nine routes. For the first time, despite the protestations of the hon. Member for Croydon, South, there will be a performance regime for Great Western services under which the operator will pay penalties if trains are late or cancelled. That was not in the original agreement.

My hon. Friend the Member for Cardiff, West expressed his concern that the newly announced order for rolling stock was an old order that Great Western Holdings had announced, I believe, towards the end of last year. He was right in saying that a rolling stock notice appeared in the Official Journal of the European Union, but I understand that asking for a quote on rolling stock through the Official Journal does not imply any commitment to procure. There is no guarantee that following such an advertisement the rolling stock will be procured. I understand that the package negotiated by the franchising director has converted that possibility that rolling stock would be procured into a firm, contractual commitment. The franchising director must ensure that all such new commitments are met.

Opinions certainly vary about the appropriate level of payments made for late or cancelled trains—a point made by the hon. Member for Truro and St. Austell. However, if the franchising director had sought higher payments, it is possible that FirstGroup would have reduced other aspects of the passenger dividend, and there is a limit to the value that can be extracted in negotiations of this sort. Before the Great Western deal, there was no performance regime for inter-city services.

On Great Eastern services, all 96 slam-door vehicles will be phased out of service by no later than December 2002 and replaced by modern rolling stock, at an estimated cost of £35 million. On North West Trains services, the franchising director's provisional agreement included £1 million for additional passenger benefits, security improvements and—a point that I hope will be noted—better wheelchair access at core stations by the time new trains are introduced.

Since the franchising director announced on 6 March the package of passenger benefits provisionally agreed with FirstGroup plc, he has had further consultations and negotiations. As a result, additional benefits for passengers and passenger transport executives in the north-west have been secured and were announced by the franchising director on 30 March. These extra benefits include various payments by North West Trains towards the cost of refurbishing PTE vehicles in Greater Manchester and Merseyside, an additional £200,000 to the £1 million already agreed for additional passenger benefits, and a penalty regime in the event of late introduction of the new rolling stock already committed under the franchise agreement. I also understand that FirstGroup and North West Trains will give Greater Manchester PTE undertakings on bus-rail competition in the Manchester PTE area.

The other benefits agreed on 6 March remain as announced by the franchising director, with the addition of a similar penalty regime in the event of late introduction of the new Great Western rolling stock. The franchising director confirmed his approval of the change of control on 30 March.

My hon. Friend the Member for Cardiff, West referred to the meeting that he and other hon. Members had with the franchising director last week for him to explain the position and answer questions. The franchising director has a contractual power of approval or veto over change of control in franchise agreements. He has used this contractual power to negotiate passenger dividends. However, this does not amount to a full-scale renegotiation—

Mr. Deputy Speaker

Order. We must now move on to the next debate.