Transport, Infrastructure and Climate Change Committee

Meeting date: Tuesday, April 20, 2010

Official Report 503KB pdf

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Budget Strategy 2011-12

We will crack on with agenda item 2, which is consideration of the budget strategy for 2011-12. This is the first evidence session that we have held on the topic. We will hear first from two transport academics who are familiar to the committee and then from First ScotRail and the Confederation of Passenger Transport Scotland. We will consider how the local government and Scottish transport budgets are likely to be affected by constraints on public spending in the next few years.

I welcome our first two witnesses: Professor David Gray, from the centre for transport policy at Robert Gordon University; and Professor Iain Docherty, Professor of Public Policy and Governance at the department of management at the University of Glasgow.

Are you able to identify what proportion of the Scottish Government’s transport budgets, both capital and revenue, is discretionary and, therefore, what impact cuts to the budget over the next few years may have on projects and programmes that are funded by the discretionary portion of transport spending?

The consensus in recent years is that Scotland needs the bridge. Basically the STPR contained one project and 28 others and I suspect that that will still be the case. Over the next few years, there will be a limited amount of capital spending based on the premise “Well, we’ll do the bridge and see what else we can afford.” The subway will go ahead because Strathclyde partnership for transport is borrowing the money and the Edinburgh to Glasgow rail enhancements will probably happen but, beyond that, I cannot see many new projects going forward.

As for the Aberdeen western peripheral route, you have really tossed a political grenade at us and I am trying to think how best to answer the question. I presume that it will be a design, build, finance and operate project. There is a danger in putting too many projects on tick, because at some point they need to be paid for out of either revenue or capital budgets. It all seems like a good idea when future budgets are expected to rise, but the plan is not so good when budgets are being constrained. I question the number of projects that we will be able to fund in such a manner, given that it will simply stack up problems for budgets in future.

That said, I would not like to say whether the AWPR project should be revisited, because I know that I will get into hot water back up in the north-east. What I will say, however, is that I would certainly not plan to build 70,000 houses around it, which is what the structure plan is rumoured to be suggesting. That would be an absolute disaster and my response to such a proposal is simply, “Don’t bother.” After all, the road is supposed to ease transport problems in the north-east, not create more.

Perhaps the timing issue is the key part of the question. Perhaps in some of the projects, the financial considerations were looked at in a prior period, and over the next few months we will learn a lot more about what we will face over the next few years and what the financial circumstances will be when the Scottish Government expects to spend money on those projects.

I think that that is the third time in this session that we have heard the phrase “one would hope that.”

You have both touched on the final question that I want to ask before I bring in other members. On assumptions about the likely reduced expenditure scenarios over the next few years, 20 per cent cuts have been speculated on. There are other scenarios that we might need to consider. If we make those assumptions and assume that projects such as the Forth road bridge will proceed, will anything be left? Is that likely to take up the entire capital budget or is any wriggle room likely to be available for other projects, notwithstanding what you have said about projects that can be funded in other ways and which do not require a capital budget?

As the Cabinet Secretary for Finance and Sustainable Growth has been keen to emphasise, there are three elements to the STPR: maintaining and safely operating existing assets, making better use of existing capacity and improving infrastructure. Apart from the Forth bridge, I suspect that Transport Scotland will focus very much on the first two elements for the foreseeable future. However, much depends on how long the STPR goes on and how long it is likely to take to implement. Obviously, if the timescale is up to 50 years rather than 20 years, it might become sensible at some point, perhaps 20 years down the line, to have a further review. There is a strong sense that the conveyor belt of capital projects is slowly grinding to a halt. It depends how quickly it accelerates again if the economic outlook gets better. It is probably a bit early to rule in or rule out a review, but we are looking at quite a long time period for delivery.

Given that the delivery period is, at best, likely to be stretched—

There is a careful balancing act. On the one side, there is delivering what we can when we can, when the money is available, but we want to avoid at all costs the return to short-term strategic planning and the charge of practising pork-barrel politics, which is what has let us down in the past. The good thing about the STPR is that the list of strategic projects is supposed to underpin socioeconomic growth. We should try as hard as possible to deliver that list in a reasonable timescale. We do not want the sense of strategic planning to go out the window in favour of short-term gain or political gain.

Professor Gray said that the maintenance of transport networks is an important part of the work that we need to do. Can you quantify how important investment in maintenance is at the moment, and how important is it that such investment is sustained when there are pressures on the budget? What impacts could cuts in the budgets have on the infrastructure?

As Iain Docherty suggested, road maintenance tends to be a line that is easy to reduce, especially at local level, until we get a winter like the one that we have just had—for example, every road in the north-east of Scotland is full of very deep potholes. However, it is difficult to predict winter weather. Having invested in our road and rail networks, it is important that we put in sufficient resources to keep them running and keep them modern.

The bubble in capital investment that we have seen in recent years, especially regarding the railways, was in large part necessary because of years, if not decades, of underinvestment on the maintenance side. It is a difficult balancing act. There is the short-term pressure of constrained resources, but not investing in the infrastructure and its wellbeing stores up financial and other problems for the future.

Increasingly, when researchers ask businesses what they think is important, they point to the condition of the local roads network, which they use to get their goods and services mobile and which also ensures that their staff, customers and clients can access them. The local roads network and local journeys seem to be becoming more important to business than the longer-distance trunk movements on which policy has focused in the past. Whether that tells us something about the way in which the economy is changing, it is too early to tell. Local road conditions can make a huge difference to the reliability of journey times at the local level, especially if there is imposed maintenance or emergency repairs, and not investing in what appears to be mundane maintenance can cause real economic problems.

I have one final supplementary question. Are you able to quantify the spend per kilometre on trunk road maintenance and tell us how that compares to the spend on local road maintenance?

I will stick with roads and turn to the railways in a minute. Do you think that the current trunk road maintenance contract offers value for money for the taxpayer? If not, what changes need to be made to the provision of trunk road maintenance?

I defer to my colleague from Transport Scotland on that one.

An alternative piece of evidence to back up that general position is the valuation of the trunk roads network that is carried out every year for the Transport Scotland/Scottish Government accounts, which is thoroughly scrutinised by Audit Scotland and others. Any marked deterioration in the maintenance standard of the trunk roads network would quickly have an impact on the asset value, given the amount of money that would be necessary to bring it back up to the required standard. That has not happened, and the audit structures seem to be quite happy with the maintenance of the trunk roads network as an asset base. There is lots of anecdotal and financial evidence that the system is working quite well, but that is the paradigm that we are in and whether we should do something completely different is another question.

I remember going to conferences at which a guy from Highland Council used to stand up and tell us how many hundreds of years it would take the Highland Council road maintenance budget to bring the roads up to standard—Highland was about 120 years behind on road maintenance. After this winter, it will be about 300 years behind, I suspect.



At local level, road maintenance has been an easy budget to cut traditionally, especially with milder winters. If you are going to cut anything at local level and you do not want to lose too many votes, nibbling into road maintenance and winter maintenance—as, ironically, I think Highland Council did this year by cutting one of its gritters just before the winter of snow came back to bite it—is an option. With revenue budgets in local authorities having to be squeezed—there is no realistic prospect of that not happening—one might say, perhaps arguably, that the two losers will be road maintenance and capital grants to regional transport partnerships.

It might also be interesting to revisit the small part of the interminably complex local government funding formula that relates to the local road network, which was traditionally based on road length. Local authorities would be delighted if they could purchase road maintenance by length rather than by area, because they pay by the square metre. It would be interesting to revisit that to ensure that authorities at the centre of labour market areas, which provide roads for the use of not only their own citizens but people who come in from adjoining local authority areas, have that traffic genuinely reflected in their maintenance allocation.

I mentioned at the beginning that, in round terms, the railways cost us 400 per cent of the figure that they cost before privatisation, which puts into context the 40 per cent growth in both passenger numbers and freight that we have seen in the interim. A 40 per cent increase is all very well, but at a cost of 400 per cent it is not exactly an improvement in productivity. It is hard for those of us who do not have sight of the core numbers and who observe—albeit, I hope, from at least a semi-informed position—to point to things that organisations such as Network Rail do and tell them that they could save money by adopting different practices or whatever. That is particularly the case given that we have been there before with Railtrack and we all know what happened after a rather brutal programme of efficiencies.

That said, the committee will no doubt be aware that the Office of Rail Regulation’s strategic review of the industry’s cost base is on-going and is looking precisely at the question whether we get value for money from the infrastructure base of the railway network. It is true that the railways cost us more in the UK—or Great Britain, to be more accurate—than they cost in most other European countries. It is also true that that cost has ballooned since privatisation. As I have said before, we therefore need to ask ourselves some hard questions about why that is the case. It is not any secret that lots of commentators inside and outside the industry have pointed to the structure that we inherited after privatisation and the number of interfaces between different organisations that are required for the day-to-day running of the industry. An interesting question is what the potential savings would be from any reform that we might wish to engage in. Since the formation of Network Rail, the Railways Act 2005 and the devolution of infrastructure powers to Scotland, there has not been much of an appetite to engage in such reform, because we wanted the current settlement to bed down. However, interesting things are happening, not least the change in the general financial climate. In Scotland, we are spending something like 1 per cent of our GDP on the railway. Is that what we want to do? Can we afford that in future? I am certainly not arguing that we should cut back on the railway, but at that level of expenditure it is not a cheap item in the Scottish budget. Can we make savings? Is the industry infrastructure part of that?

16:00

It is interesting to note that this month Sweden—one of the few European countries that has also pursued the privatisation experiment—has recombined its Government transport directorate, transport agency, roads agency and rail agency into one organisation to make strategic savings and to run its transport networks more efficiently. Things are happening from which we should perhaps learn. The last thing that we want after a period of concerted railway expansion, which we hope will continue with the various projects that are still in the plan, is to have to start cutting back again. We do not want to make those investments just to find that the overall financial position is somehow unsustainable. We will have to ask some hard questions about why the railway costs us so much.

The other interesting thing that is happening is the advent of what the DFT calls “directly operated railways”—East Coast, for example. We might want to ask other interesting questions about whether we might be better off directly operating our railways inside the public sector or in some not-for-profit vehicle. That is another huge political hot potato, but the time has probably come at least to ask the questions.

I jotted down a number of bullet points and, rather annoyingly, Iain Docherty answered them one by one. I think that the committee took evidence on the subject before Christmas, and the reported figures are that rail accounts for 30 per cent of the annual transport budget, but only 2 per cent of trips made by motorised mode are by rail, which is only 12 per cent of total person kilometres. Obviously, there is a significant imbalance between cost and modal share. The rail industry has been calling for vertical integration of all the managed costs for many years. That would certainly work in Scotland because the size of the nation is appropriate for the introduction of vertical integration. As Iain Docherty said, the only question then is whether the private sector should be allowed to run a vertically integrated railway in Scotland, or whether the railway here should be under public ownership. That could be explored in stages—one could vertically integrate the railway in Scotland and then see whether the private sector could run it. If not, why not have public ownership?

That is interesting. Thank you.

Before I ask my questions, I hope that the convener will permit me a supplementary on the last point that the two professors made about vertical reintegration of the railways, which would be more operationally efficient in my view—I am absolutely clear about that. Is that course open to the devolved Scottish Government under the present legislative and constitutional arrangements?

I agree completely.

How might budget cuts impact on the air discount scheme for island residents?

Nevertheless, what implications might a reduction in transport funding have for the potential roll-out of road equivalent tariff fares to the entire Scottish ferry network?

We talked earlier about the importance of smaller projects, which is sometimes missed. One aspect that the committee has been considering for some time is the subject of active travel, or walking and cycling. Will budgets for walking and cycling take a hit when budget decreases are considered, or are they so small that they might be missed? Should we still attempt to increase those budgets? Where should such projects fit in the hierarchy of projects?

They tend to be included in other lines in the budget and are easily hidden and not particularly transparent. The Cabinet Secretary for Finance and Sustainable Growth has alluded to that. Such projects are important in that they can deliver good returns for relatively modest investment. I would like an active travel strategy—an explicit, coherent, strategic, integrated and costed strategy for all active travel measures. We could bring them out of different budgets, put them all together, appraise them fully—so that we get an idea of what works and what does not—and ring fence the funding. It would be almost a mini STPR for active travel.

David Gray and I might be in danger of disagreeing slightly for the first time this afternoon. I am a bit of a sceptic about the concept of active travel in the way that it is currently packaged. In essence, it is predicated on substantial revenue support—spending money on transport service subsidy—to enable or encourage people to do what they would be able to do anyway. In every other area of the economy, the purpose of capital investment is to reduce future revenue exposure by making the system more efficient and effective, but the active travel approach is precisely the opposite. I wonder about the focus on active travel and some of its claimed benefits. There is not much research about it. Some early research showed huge benefit cost figures, but the figures tend to be slightly more modest in more recent work. I wonder about the extent to which those figures are true and the extent to which the approach builds in wishful thinking.

That is not to say that the concept of having people travel more actively is wrong, because of course it is not. I wonder whether spending money on it is the right thing to do, although there is the obvious and powerful critique that that would be much cheaper than building lots of new roads. I would like a focus on something a little different that encourages active travel and addresses some of the maintenance issues that we have talked about. We talk about local roads and local road maintenance, and we are all guilty of building in the idea that that is about motor traffic.



I would also like investment in streets. The quality of the streetscape in this country is a national disgrace; indeed, it is why people do not walk and cycle as much as they should and why our urban road safety record is so bad. The urban environment, which is based on the street, is really poor and instead of gently encouraging people in suburban houses not to use their four-by-four every once in a while we might find it nicer to spend money on improving the environment for the many more people who use our streets for walking, cycling and bus journeys.

16:15

For the benefit of any journalists listening to this conversation who try to edit it exotically to say that we are both against the concept of concessionary fares, it is important to say that that is not true. The point of the concessionary fares scheme was surely to make people in the groups who are eligible for it healthier, safer, more socially included and so on—that is a good thing. It would have been nice if we had thought about whether the concessionary fares scheme was the right way to do that before we introduced it, but we did not do that. The choice was made for particular reasons, but we are where we are.

I do not think that the kind of cap on the number of journeys that David Gray has talked about would in any way diminish the utility of the scheme for the people whose lives are made safer, more included and more comfortable by it. We want to help those people. However, we probably do not want to subsidise the famous man in a suit who is over 60 and commutes to work for free, because that is perhaps not the best use of public funds in a time of straitened financial resources, particularly if that person continues to make 90 per cent of his other journeys by car, for example. As long as there is a research base to imposing a cap that allows us to understand properly the different kinds of use of the concessionary fares scheme, I do not think that a cap would disadvantage the people whom the scheme is intended to help.

At the same time, though, we should also think about whether we need to extend the scheme to other people. The question is always why some groups are eligible while others are not. There is a lot of research around about the importance of building in knowledge of public transport for young people in particular for the years when they become independent and start to travel by themselves, so that public transport becomes an option for them and they do not get captured by the car as soon as they are able and ready to drive one. Again, it is a difficult question. There will be short-term financial pressures to look at the concessionary fares budget, but we also need to think about whether we might save ourselves money in the long term by investing in it or perhaps changing the eligibility criteria.

Could I just check that the cost of the scheme is £4,000 per head of population?

It is £400, is it not?

Yes, sorry.

Even so.

One could. However, the classic question that immediately arises is whether we have the capacity to do that. Further, would people make lots of trips simply because there is the opportunity to do so for free? Our railways are pretty full for large parts of the day, so the kind of non-time-restricted concessionary scheme that we have for the bus industry would be very difficult to justify or sustain if it were applied to the railways. Again, though, that does not mean that there are no other opportunities to make use of off-peak capacity.

We also have to be careful about the wider impacts of that, and again, I am mindful of the snippet of evidence that we heard from the previous panel. Exporting people to larger centres for free to spend their disposable income has big consequences for small local communities. Making travel cheaper has a geographical and social impact. It is often beneficial for the individuals concerned because it reduces the costs of what they want to do and gives them wider choices, but it can have quite a profound impact on the local economic and social viability of particular places, so we need to be careful with that.

Absolutely. I have argued for that for a number of years now, and my argument is based on equity and the remote, rural and island areas. A fixed amount of subsidy could be put on to a smart card for each individual in an eligible group, and they could spend it on bus travel or even air or ferry travel. If they rely on someone else to drive them because they have no or limited access to a bus, for example, they could use their smart card to pay for someone else’s petrol. It could even be used to sustain turnover in local shops rather than driving to a supermarket. That would be a far more equitable and effective use of subsidy than the blunt concessionary fares scheme.

That brings us to the end of our questions for you. Thank you both for your time in giving us evidence. We will suspend briefly to allow a change of witnesses.

16:28 Meeting suspended.

16:30 On resuming—

I agree. We have seen four years of growth and we will be lucky if it holds.

Like every industry, we have seen a decline. Last April, we saw a decline for the first time in any of the years of the current franchise. Such a dip was inevitable after the private sector started its downturn and many people were paid off. What is encouraging for us is that we have started to see a recovery over the past few months, particularly after the new year, although the weather blips have made it difficult to understand the trend. We saw a 3 per cent decrease in the early stages of the downturn, before it came back to the flat. We have now begun to see growth in the region of 2 to 3 per cent . That does not take into account the current disruption to air travel.

I support what has been said.

My next question is for CPT Scotland. You say that the impact of the recession has been a levelling off, static levels instead of growth, and perhaps a decline in patronage. Have bus operators been forced to redefine or cut services—whole services or services for part of the day—to cope with the decreased revenue? What type of services are in line for such changes, and will the changes impact differently on various groups in society?

Across the board different types of changes have been made, from widening a frequency in a high-frequency operation in an urban environment to looking at services in a rural area that are on a wider frequency. Across the country, different things have been happening, but there will have been impacts on networks pretty much across the board.

There will have been a willingness in certain areas to sit down with operators and look at the situation. However, as you commented, just as the industry in general is struggling, so too are the local authorities. Money is tight. The general feeling that we get from our members is that, far from supporting additional services, local authorities are pulling back and reducing the number of tendered services that are being operated. That is certainly not the case everywhere, but it is in numerous areas in Scotland.

So there has been a reduction in existing subsidised services.

As opposed to an increase.

There have been suggestions that some bus operators are using the current financial crisis to cut their marginally performing routes with the expectation that local authorities will step in and provide a subsidy for the continued operation of those services. How do you respond to those suggestions?

I guess it is like being a politician.

What is your view on the long-term financial viability of the national concessionary travel scheme for elderly and disabled people? You were no doubt sitting listening to our discussion with the previous witnesses.

Yes, and I would be happy to share those views with you at a meeting or at any time, Mr Gordon. We put forward some suggestions in the past. A decision was reached, and we operate the scheme as the Government sets out.

16:45

I guess we would ask you to take a step back. Originally, BSOG was introduced as a protection mechanism for passengers. Each year, the Chancellor of the Exchequer would announce an increase in fuel duty, and the operators would react to that. With the advent of BSOG, customers were protected to an extent from the full impact of fuel prices going up. That has now been removed and there is no linkage to fuel duty increases in Scotland. We understand that there is a scheme for the next year, based on current arrangements but, as an industry, we are not yet clear where that will go beyond 1 April 2011. We have ideas about links to low-carbon vehicles, which would fit with the Government’s policy on reducing the carbon impact. We will engage with officers at Victoria Quay over the next few months to try to come up with a scheme that better reflects the Government’s aspiration and protects the mechanism to help customers.

I suppose then that we are looking at what different Government priorities we are trying to achieve with this one grant. Should BSOG still be related to fuel prices? Do you envisage the new climate change agenda being involved? What priorities do you want to see in framing a scheme?

It is right that we have a look at the mechanism, but the beauty of BSOG was that it was simple, worked well and protected the customer. We have changed something because of fear about European legislation. It strikes me that the changes that have been made are perhaps bigger than required and call into question more the legal challenge from Europe than the original arrangement. We must work hard with the officers at Victoria Quay over the coming months to try to get something sensible and practical in place that still does the original job.

I have a general question for First ScotRail to start off with. Can you demonstrate that FirstGroup provides value for money in its operation of the ScotRail franchise?

On your first point, the rolling stock is the stock that was available in the franchise when it was signed in 2004. As you will be well aware, new rolling stock would mean a huge additional cost to the franchise, which the Government would have to meet. Given the distances that we travel to and from Inverness—a three-and-a-half hour journey—it could be argued that we should put on the Intercity-type stock of high-speed trains. However, that would represent a huge expenditure. Can we justify such expenditure? It is not the franchise holder that would have to meet that cost; it would be a future Government.

On the provision of coffee, inevitably there are times when the service runs out on the train. Many parts of the provision of catering services—for any operator, not just ScotRail—run at a heavy loss. Such services are heavily subsidised within the franchise. Initially, the service was franchised out, but we took it back in-house because of the quality, which has now improved dramatically. We could improve it further, but we have to consider the issue in an economic sense and say that it does not make money. We must also consider our responsibilities to our customers, particularly on routes in the far north. Therefore, we must strike a balance, and accept that we will have a loss on that service. It is unusual for us to run out of stock as often as you imply. We may be criticised for having no one on the train, but not for running out of stock.

On heating, we have failures of our heating systems, but we have spent a lot of money to try to improve the situation. There have been extreme temperatures this year, which have made it difficult to get trains up to any level of heat and to keep systems running. Your criticism of the chaos that ensued during the adverse weather is a bit unfair. ScotRail kept running when many operators decided just to get out. Considering that people had to work in -17°C and use steam lances to try to blast off ice under units to keep them running, it was difficult to run services. I do not think that things were chaotic or shambolic. They were challenging circumstances, the like of which we had not seen—certainly in the past 30 years, if we look at the weather archives. As always, there were lessons to be learned. We did a lot of work after the winter to consider how we can improve next year. We will see further improvements if we are hit with those conditions again.

To be clear, if revenue goes up, that brings an additional benefit to FirstGroup compared with the previous arrangement, but if revenue goes down, there is not a reduced benefit to FirstGroup, compared with the previous arrangement.

What has FirstGroup been doing to increase passenger numbers, and therefore fares revenue, on ScotRail services since the franchise was extended? How successful has that been?

ScotRail increased some of its unregulated fares by 3 per cent at the beginning of January this year. Will you explain why that was necessary?

Were those increases equitable throughout Scotland? Did they impact on any particular section of society or area?

Yes.

That would be useful.

Finally, how much additional annual subsidy will the Scottish Government have to provide you with to operate the Airdrie to Bathgate route, which is due to open?

So you are still in negotiations on that.

You may have heard the discussion with the previous panel about what might happen in future and about the fact that the rail network has been identified as one of the big-ticket items in the Scottish Government’s transport budget. There were arguments about whether there is legal competence or political will for a vertically integrated network, what benefits could flow from that and whether it should be run directly by the public sector, on a not-for-profit basis, or on some other basis. Would you like to respond to the arguments that we heard from previous witnesses?

Our stance is that we have to be open to looking at that, depending on the circumstances. If there is pressure on Government finances and rail takes up a lot of those finances, we would be open to look at that. We have an awful lot of data that we would obviously make available. Decisions would have to be made after that, whether on service cuts or whatever. The franchise itself accounts for a lot of cost, but there are heavy infrastructure costs, too, associated with Network Rail. There are a lot of fixed costs in the franchise, one of which is Network Rail and another of which is rolling stock. Many of them are unmoveable within the terms of the franchise, particularly the rolling stock companies and the Network Rail track access charges.

Within the terms of the franchise, that would be quite difficult. As I said, most of the costs are made up of track access charges and rolling stock leasing costs.

My colleague from Transport Scotland will answer first.

This is obviously the point at which to remind the committee of my other role, as one of two non-executive directors of Transport Scotland. As will become evident, nothing that I say should be taken to be the agency’s corporate line.

The standard line is that quite a high proportion of the budget is in some way fixed. The two items that are always at the top of the list are road maintenance, for which the agency, the Government more generally and local authorities have statutory and legal responsibilities, and the passenger rail franchise and associated costs. I cannot say off the top of my head what proportion of the overall transport budget fixed costs represent but, having been party to several discussions in round terms, I know that it is significant. The running estimate that people give is easily more than half and probably nearer two thirds or three quarters. There is a grey area at the margin concerning what is really required and what is discretionary. Later we can discuss items that are currently funded and have come to be seen to be necessary but are, in fact, optional. One immediately thinks of concessionary fares.

It is probably easier to look at the question in reverse and to ask what we could do without if there were large, immediate cuts in the budget. The figure of 20 per cent hangs around in the political debate, assuming that there is the same ring fencing of areas of public spending in Scotland for which the larger UK parties are arguing in the current Westminster debate. That means that non-ring-fenced areas, of which transport is assumed to be one, may face real-terms cuts of about 10 to 20 per cent over one spending review cycle and that capital spending will come under immediate pressure.

The Treasury has already published its forecasts for net public capital investment, which will effectively wither to nothing over the current cycle. That means an end, more or less, to new road building, unless we can devise ways of repackaging that in long-term, revenue-based, design, build, finance and operate contracts. It also means that other transport capital investments will come to an end, more or less.

With cuts on that level, we must look carefully at some of the increases in spending that have happened over the past few years, two of which come to mind. The first is the concessionary fares bill. None of the political parties is yet examining that issue seriously, but the scale of the cuts is such that it may need to be addressed. The independent budget review panel will no doubt look at it, as £185 million or so a year is a large number. The second is the bill to run the railway, which is roughly £700 million a year in Scotland. That is in the order of 400 per cent of the equivalent bill before privatisation. Under that level of scrutiny, the rail budget will be under intense pressure.

15:30

You have both touched on subjects that will come up later in questioning, but I want first to look at some of the large capital projects that are working their way through the pipeline towards final approval. Given the constraints that are likely to arise, should there be a financial review of projects such as the extra Forth road bridge and the Aberdeen western peripheral route before any decision is made whether to press ahead with them at the current time?

Again, that connects with our previous discussions on transport and planning.

And in so doing ensure that Aberdeen continues to depopulate at the rate that Glasgow depopulated in the 1970s and 1980s. That particular statistic always strikes me as somewhat salutary.

To answer your question directly, one would hope that in developing transport projects appropriate financial planning was carried out at all stages of the business case from inception to the final decision. I see no reason to suspect that that is not the case but, again, we are in a kind of phoney war in which we simply do not know the real extent of the cuts that will be made over the next two or three years. When we know that, we might wish to revisit some projects.

To be fair, that is a top-level aspiration of the STPR—to make the network work better. A modest real-world programme of road improvements in particular could be undertaken in the next three, four or five years on safety-led enhancement and junction work—on several smaller and sensible safety-led projects.

Yes. It should be remembered that it is not only the availability of cash resources or the scope for borrowing that makes the difference; for the infrastructure revenue, the forecasts of usage in the case of public transport schemes, the costs of construction, and the costs of borrowing money from the financial markets to construct schemes also make a difference. All those things are very different from what they were two or three years ago for certain schemes. One would hope that the financial planning for those schemes will continue to be revised until the final decision to construct is made. That strikes me as being good governance. Having said that, I have every sympathy with colleagues in Government and local authorities who understand the wider financial climate and what it is likely to mean in general and specifically for their own institutional budgets and the financial viability of specific projects. Equally, they still have to plan on the basis of the numbers in the real budgets as they are at the moment, and we have not yet seen the impact of the cuts feeding through.

An interesting consequence of how the Scottish Parliament and Scottish Government are funded is that there is a delay while the UK budget feeds through to the Scottish financial settlement and then into individual local authority, agency or project budgets. The impacts of UK national financial cuts and spending increases are somewhat delayed as they feed through to projects in Scotland. There is another timing challenge in that respect.

I want to say something about the affordability of projects and projects that will go ahead. I think that I have said to the committee before that nobody, perhaps with the exception of a few people in Fife and the editor of The Scotsman, wants to build a new bridge across the Forth for the sake of it. It will be built if it is required, if the engineering assessment of the state of the current bridge remains as it is and we need to replace it, and if the economic cost of not building a replacement bridge is significantly higher than the economic cost of doing so. That is the situation that we are in, and I do not see any change happening to that strategic context. Like David Gray, I think that the bridge will go ahead. It will probably take the lion’s share, if not the entirety, of the capital budget that is available for transport over the lifetime of the scheme and leave very little behind.

The other schemes that may survive may be those that are, in effect, funded by moving capital expenditure into the revenue account. I am talking about wrapping up major road construction and long-term DBFO packages, which can result in potential savings if the maintenance of the existing network can be packaged into the deal. Such an approach sometimes makes good financial sense. Some recent large road projects have been financed through that model.

There are also projects such as the Edinburgh to Glasgow rail improvement project. In that case, Network Rail is able to borrow funds as a third party, and the Scottish Government can pay that money back through the revenue accounts in future. Of course, as David Gray said, that is in effect a credit card. Our current capital spending is being financed on credit, and we will have to start to pay the bill sooner or later. We are probably at the limits of the affordability envelope now; I do not think that we can add much more on to our debit balance.

I presume that there is a fabled spreadsheet with the risks of some of the projects for the Cabinet Secretary for Finance and Sustainable Growth or Transport Scotland, and that those risks are monitored. Perhaps one or two projects are beginning to flash red. It will not be up to us to decide whether to cancel them, but one would hope that the committee would be fully consulted to avoid the kind of controversy that there has been with the Glasgow airport rail link.

I have discussed with the committee before the fact that I would like prioritisation of the projects in the STPR. Transport Scotland is doing work to bring some projects to a state of readiness, so that they can proceed at relatively short notice, but prioritising the list of 29 projects is in the realm of what is political. I would like prioritisation, but it might be difficult politically.

Prioritisation—yes. I understand the problem that the Government has had with the list of projects in the STPR. Much more and much better research, analysis and evidence underpinned that list and choice of projects than was ever the case before. Given the question that was posed over a 20-year timeframe and given expected resources, the STPR projects will probably continue to be the projects that we should take forward.

Too often, we and our colleagues have bemoaned the fact that transport priorities chop and change too often. That is part of the reason why we do not deliver, given the long timescales that are taken to implement projects. The last thing that we want to do is to undertake a wholesale review of where we have reached, which would not be worth while. That is not to say that changing circumstances are not taken into account—they are always taken into account in the sensible and sensitive business planning of any project. In previous inquiries, the committee has examined in detail the concept of having a preparation pool and being flexible about the projects that can be brought forward at any time to suit financial circumstances. That is the correct approach.

Prioritisation—absolutely. Wholesale review of the projects—probably not.

15:45

It will be stretched, so is it not more important that we have transparency about what the Government and Transport Scotland think are the priorities? I worry that we have an ad hoc approach to projects. You have both said that you think that Transport Scotland is ferreting away at working up projects that it can bring forward if something comes up. To me, that is not the best way to deliver the projects. I would have thought that it would be helpful to have a plan rather than just to bring forward projects that fit the budget at any particular time.

I agree whole-heartedly. Again, we and others criticised the early years of devolution as having produced a transport investment priority list that was partly pork barrel and partly political luck. The STPR was a big step forward in terms of its transparency and the fact that we have a list that we want to try to deliver over the medium to long term. Granted, as David Gray said, we clearly have to monitor that, and if timescales get so stretched that the environment changes, we must begin to review. However, we are not there yet. In general terms, we can never have enough transparency, because the choices are inevitably political as well as economic. There is obviously a degree of equity of investment around different parts of the country, as well as the naked economic case for each of the investments. Investment decisions are therefore made in a very political context, because the investments are usually so big and come along relatively infrequently. Transparency is therefore very important.

No, but I am sure that can be done from the published figures. I do not know the figure.

Okay. We can perhaps dig into that a little later.

I want to follow up on something that Iain Docherty said about 1 per cent of GDP being spent on the railways. In the previous parliamentary session, albeit during a different inquiry, I think that the figure used was that 15 per cent of GDP was spent on transport as a whole. Are you saying that there is a greater need to look at the 1 per cent that is being spent on the railways than the 14 per cent that is being spent on non-rail transport? If so, why is that need greater?

Sorry. My point was simply that that 1 per cent of GDP is public expenditure—it is money that the Scottish Government is paying out to support the railway—that could be spent on any of the range of public services for which the Government and Parliament are responsible. The 15 per cent figure encompasses all household spending on transport, so it is a much wider figure. Whether we should seek to reduce that figure for economic, environmental or social policy reasons, or indeed whether we should seek to increase it for those reasons, is an important but different question from the more focused one about the exposure of public expenditure to the subsidy profile of the railway.

That is a question for our learned friends. The consensus seems to be that that approach is not open to us and that it would require some amendment to the Railways Act 1993 and/or other Westminster legislation. Interestingly, if devolution had happened after the 1992 UK general election—it could have happened if there had been a different result—we would have had a vertically integrated ScotRail, which would have been responsible for the same domestic services and infrastructure that we have today, albeit that it would have been slightly smaller in scope, with lower passenger numbers and with the intercity operators coming to some agreement on the use of the network for those journeys. I cannot imagine that it is beyond our wit to recreate that structure if that is what we decide to do.

Do you share my view that, notwithstanding the uncertainty over those constitutional and legislative questions, it is possible for a Scottish Government to remove Network Rail from the equation, in a limited context? If I look at the developing plans for the Borders rail link, I could see vertically integrated arrangements in that context. Do you have a view on that?

I am not sure that I do, although I could report some of the discussions on that subject that one hears and takes part in with colleagues. That approach would be possible, when it comes to new, relatively free-standing routes—that is why the Borders project is often discussed as a comparator.

It is never as simple as that, however. We would encounter the problems that the line must end somewhere and that there will be an interface with the current network and Network Rail somewhere. How would that work in operational terms? It quickly becomes terribly legalistic and complex.

It would be easier to agree that Governments—plural—would be able to do the sort of thing that you have described if there was shared political will. Where the individual powers and responsibilities lie is a little uncertain.

Does the current First ScotRail franchise agreement offer value for money to the taxpayer? Are there options for saving money from future franchises without substantially reducing train services?

The same answer applies, although where there is a pilot project and something has not become universal, there is the attractive option of the fudge, which is to delay implementation. That is often politely referred to as moving something to the right on the timescale. That applies not only to revenue projects such as the road equivalent tariff, but to capital projects. At least in the short term, a sensible political narrative for any Government, whether the Scottish Government or the UK Government, will be about delaying, rescheduling, reprioritisation or other such terms, rather than not implementing or cutting back.

Iain Docherty thought that he was disagreeing with me; actually, he agrees with me completely.

By active travel, I mean not only smarter choices but capital projects involving cycle lanes, the streetscape and pedestrianisation, and by appraising I mean that we should look at what works and what does not work. There are grumblings about whether the smarter choices programme will deliver everything that it says it will over the long term, given the substantial revenue commitment involved in keeping people doing these things. However, having been involved with European partners in cities such as Bremen and Leeuwarden, I find it amazing what you can do when you invest in proper cycle lanes instead of simply painting a line at the side of the road. You can improve the urban realm as well as giving people a safe place to cycle.

That, I suggest, is one strategy: appraise the measures to see what works and then ring fence a funding pot to invest in them.

Last week, I made the point to Government planning officers that it is impossible to walk—and pretty dangerous to cycle—from the centre of Inverness to the main shopping centre on the golden mile. I know that you have answered questions on this issue but surely it is reasonable to assume that, in the huge developments that have already taken place, active travel should be possible. However, Iain Docherty does not seem to think that it is a good idea to spend money on that sort of thing for the outcome that we would get. Surely the ability to get round a town the size of Inverness should have been built in.

Absolutely. The cost of the scheme is now creeping up towards £4,000 per head of population a year, and it is about £194 million in total. The cost is obviously higher for taxpayers, but £4,000 per head of population per year is a lot of money. I have nothing against concessionary fares, but I fear that, with an ageing population, the cost to the revenue budget is going to spiral out of control. As Iain Docherty said, only one group is eligible for the scheme. It is obvious to me that we need to widen eligibility and manage the cost. The fine detail of how we do that is up to politicians. However, it is clear that the current blank cheque, on which the amount being filled in is getting bigger each year, is unsustainable at a time when we are trying to close the wallet, not open it further.

It is £194 million a year in the 2010-11 plans published by the Scottish Government.

We divide £200 million by 5 million.

Professor Docherty talked about perhaps extending eligibility for the scheme to other social groups. Could or should we make a case for substantially extending it to other modes, with wider eligibility for use on ferries and, crucially, on trains?

I want to come back briefly to what to do about the scheme as a whole. Whenever the issue of smart ticketing comes up, we are often told that, before we know it, we will all have a little plastic card like the Oyster card on to which we might load money, or we might be able to load the equivalent of a flexipass, a season ticket or a particular route that we commute every day. Even if the idea of a cap on the concessionary scheme is a blunt way of describing it, are you saying that we should have a debate about the range of products that might be subsidised or free, to whom they should be subsidised or free, and whether they should be part of an integrated smart ticketing system?

Can you quantify what the impact is?

Are you saying that there are parts of the country where services have not been reduced in that way, or has that happened pretty much across the board in Scotland?

Again, it is probably a mixed bag in different areas. In urban areas, for example, there has been a bigger decline in retail footfall, which has had an impact on the demand for high-frequency services. Operators in such environments have widened the frequency from a 10-minute to a 12 or even 15-minute frequency.

Have local authorities attempted to step in to subsidise socially necessary routes, or are the pressures on local authority budgets making that impossible? Have there been any moves in that direction?

That would be most unusual. The general feeling among our members, with very few exceptions, is that the local authorities have been pulling back on providing support for services. In that environment, it would be pretty risky to follow the strategy that you outlined. Matching resource to demand is the bottom line. If the demand is not there, the service has to be reviewed.

That is a difficult one to answer, given that we negotiated the arrangement. We negotiated a three-year deal, which gives the security to bus operators in Scotland that for the next three years—hopefully—we understand the revenue that will flow from that stream. The revision of the rate from 73.6p to 67p has inevitably had an impact. We spent a lot of time with officers and met senior politicians, and the package was agreed. Over the three-year period, there will inevitably be an impact.

The original reimbursement rate, as I understand it, contained a proportion of start-up costs. With the completion of the installation of the electronic ticketing system—I think that it will be completed in the next few weeks—those start-up costs are no longer present. Earlier, you mentioned the bus service operators grant. I understand that it will grow in parallel over the next three years, by 10 per cent gross.

There are two things to say about the review. First, in 2006, the country was not in the present financial pickle. Secondly, the review was pretty much bilateral, not a big general public consultation. It was mainly the CPT in dialogue with the Scottish Government—starting under one Administration and carrying on under the incoming Administration.

Charlie Gordon has already mentioned the bus service operators grant, but I have a further question on it. The Government is committed to reviewing the grant, so what would the CPT like to see come out of that review?

Perhaps what you are getting at is that we are trying to tick too many different agenda boxes with one grant. Should the Scottish Government be providing additional support for bus operators on top of BSOG and the concessionary travel scheme, whether directly or through local authorities?

I guess, as an industry, we are not looking for any further support than is already there. It is true that parts of Scotland, particularly the more rural parts in the Highlands and suchlike, are dependent on support but, in general, Scotland has a highly commercial bus network. I am not aware of any pressure from members to seek additional support for bus services. The support is there; we just want to see it being delivered and operators using it sensibly and on the basis of good value. At the end of the day, the legislation allows local authorities to fund services that they feel are needed socially. However, as we have discussed, the instances of that are reducing and will, I think, continue to reduce over the next few years as money gets tight.

I want to consider in more detail service delivery for passengers within that. On long-distance journeys in Scotland, people have to endure three and a half to four hours on commuter sets, with no hot drinks in winter, because they run out when the train is busy, and erratic heating systems. Also, organisation seems to go totally awry when we get bad weather. I wonder whether passengers on the services that I use feel that they are getting value for money.

I was speaking in general about the heating systems. There were problems before, and there were problems during the winter that exacerbated things, but we have invested in the heating systems. We have carried out major enhancements to the air conditioning and heating systems on the 170, 158 and 156 units. A lot of work has been done to enhance those systems over the past couple of years.

You spoke about running out of hot water. Where do we top up the hot water on the services that you have been speaking about? Going from Inverness down to the central belt, Perth is probably the only main location where the station is manned all day.

I wanted to divert on to some of those realities—I note that we need to consider the question of value in more detail. I want to have a constructive discussion about that.

Does the current First ScotRail franchise agreement allow for the Scottish Government to reduce payments to FirstGroup without major reductions in services?

We have a franchise service delivery requirement, which is a set cost over the length of the franchise. The Scottish Government could approach us and negotiate a change to it, but that would have to be a negotiated settlement.

It lies with FirstGroup.

Why is that the case?

That was agreed under the franchise extension. Previously, we had a cap whereby we could earn so much, and then we paid 80:20. If revenue fell below a certain amount, that would attract revenue support. The revenue support that we have now is far more extreme, in that we would need to lose—or gain—significant amounts of revenue before going into the support mechanism.

It has been successful in that there was steady growth in every year of the franchise until the economic downturn. Where there have been enhancements to services and new services have become available, that has helped the situation. There has been a turnaround from the previous franchise, with greater investment being put in—in staff training, in the quality of the units and in the number of staff we employ to carry out cleaning, for example. Customers are now seeing a difference thanks to many of those enhancements. That is why we got good scores nationally for what the customer sees. I will not take away from what Rob Gibson said, however. We have to keep improving, and there is still a long way to go.



Fares wise, we have put good promotions out into the market. We were the first train operator to do kids go free, so that an adult can take two kids for nothing. We have a club 55 promotion, which means that over-55s can travel anywhere in Scotland for £15. All those promotions have helped to grow our revenue over the years and have proven to be successful.

17:00

Which one of those has been the most successful at increasing your passenger numbers?

We do club 55 on a promotional basis and it does very well at generating passenger numbers. Kids go free is all year, and that also helps, particularly during school holidays.

How often do you run club 55? Once a year?

About three times a year.

They related more to a particular product. We protected certain areas, such as the Highlands, where there was less movement and where passenger volumes were dropping on certain fares.

What is the annual profit to FirstGroup from the ScotRail franchise?

The figures relating to that have not yet been agreed.

We picked up small snippets from Iain Docherty and David Gray, but I do not know what was said prior to that. On how the franchise is set up, it is difficult for us to make a great deal of comment on what the future holds. A lot will depend on what Government wants and whether the private sector runs the whole operation or it begins to go back into public ownership. One issue is whether we would have the same level of investment in the ScotRail franchise if it were not in the private sector. If the franchise went into the public sector, would it have to compete more for the money that is available? There are probably arguments both ways on the issue of how the franchise might be run in future.

There is the issue of whether the franchise is for seven years or 11 years. People set out their stall early on and are committed to that, although the parameters can change if the Government wants them to. People know what they will be committed to over the length of an Administration, or two Administrations, depending on the length of the franchise.

If the current Government or a subsequent one came to you and said that it was in a difficult hole, was expecting cuts and needed to sit down and talk about the rail network and where it could take out some costs, that would be the subject of perhaps quite complex negotiations. What would First ScotRail’s stance be on that? What likelihood would there be of identifying areas where there might be an outcome?

As there are no further questions for the panel, I thank you all for the time that you have spent in answering questions. Before moving on to the next item on the agenda, I suspend the meeting briefly to allow the witnesses to leave.

17:06 Meeting suspended.

17:07 On resuming—

I do not have an awful lot to add. The strategic transport projects review has become discretionary, simply because we have not got any money to spend on any of it. I also agree with Iain Docherty’s comments about concessionary fares. I realise that it is difficult for politicians to talk about tackling that issue, but the fact is that we will not be able to bear the scheme’s costs, as they take up too much of the revenue budget. How one addresses that without haemorrhaging votes is a different matter, and I sympathise with the politicians who will have to tackle that difficult question.

A lot of transport spending is already discretionary, through the single-pot allocations to local authorities. That will be more and more under threat because at such times education and social services tend to get protected while transport loses out. When local authorities start to receive a diminishing budget, local transport services will be big losers.

I was not going to touch on that but, if you want a case study on everything that is wrong with town planning, integration and transport planning in Scotland, that would be it: fund a route to ease transport problems and then stick 70,000 houses—a city the size of Dundee—around it, probably without bothering to think about what will happen when people try to get to work in the morning.

Would prioritising the projects in the STPR have benefit? As David Gray said, only one priority has been identified. However, several smaller interventions might be beneficial. Alternatively, given the scale of the budget cuts that might be ahead, is a wholesale review of the STPR and the national planning framework projects needed?

A definitive answer to that question would require sight of the internal Scottish Government and Treasury numbers, to which we are not privy—and nor are committee members, I guess. However, it is worth saying that we have been here before. In the recession of the early 1990s, such were the public expenditure cuts that the transport capital programme throughout the UK and in Scotland was radically scaled back. All too often, that period is reflected on through rose-tinted spectacles as the opening salvos of the sustainable transport debate and a time when many sensible decisions to shift resources around were made. The reality is that we went quickly from “Roads for Prosperity” and the largest road-building programme since that of the Romans to virtually nothing, because of the scale of public expenditure cuts. We have been there before—life went on and some projects still happened.

It is also worth saying that the baseline expenditure level now is much higher than it was then. The cuts might be painful in the short term, because we will be unable to do much of what we had hoped to do. We might have to cut back on, stop doing or spend more modestly on some of what we have done recently, but we are not in the territory in which activities will stop or we will have problems, simply because the baseline expenditure level is much higher than it was when we previously went through this part of the cycle.

If wriggle room exists, I would like politicians to stop being preoccupied by the large-scale infrastructure projects and to look for medium to smaller-scale projects, such as strategic park and ride, perhaps even active travel and sorting out local junctions rather than dualling large stretches of road. Such projects cost much less and will deliver better value for money in the short to medium term than will the larger projects that we cannot afford.

It will be.

I will be honest and say that I do not know. We seem to be in a period of relatively problem-free maintenance of the trunk roads network in comparison with the situation that we have faced in the past. That is a good thing. Does that mean that our current governance arrangements do not require market testing? No, it does not. I am sure that we need to do that. Does it mean that they are, by definition, more efficient than alternatives such as direct provision? No, not necessarily. We are where we are because a previous Administration made a choice that that was the kind of system that it wanted. The system seems to be working quite well at the moment, and the trunk road operating companies have responded well to the challenges of the winter. They work closely with the Government, and that relationship is strong and improving. On the outside, there does not seem to be much of a case for intervening strongly at the moment to change things. Does that mean that the system that we have is better than the alternatives? We are not sure. However, the cost of changing the tendering structure for the contracts is not trivial, so I do not think that the Government would want to go down that line at the moment.

People complain about the state of the roads, but much of the trunk road between Inverness and Thurso is in surprisingly good condition, although some short sections are not. That perhaps reflects what you have just said about the system working better.

We have mentioned that local authority road maintenance budgets could be under pressure. What is your view on that? How might further budget cuts exacerbate the situation? Interestingly, in the far north, the bits of the trunk roads that are in towns are among the worst.

In practical terms, quick patching is a big waste of money in local government budgets. Spending a bit more and making more permanent repairs is far more cost effective. We should look at that issue when we talk to local authorities, because they will save money in the long term if they do that. We know that, further north, short-term patching disappears with the next frost or rain.

Coming back to the railways, is there scope for Network Rail to save money on day-to-day rail maintenance and enhancement? Why are European rail infrastructure operators able to provide similar services at a lower cost?

I would be reluctant to do things piecemeal, because it would be harder to achieve the cost savings that we seek if we do not approach things at a Scotland-wide level, not least when having to buy in professional skills, which currently reside with Network Rail. We might as well build a team to do that, rather than bringing in one or two individuals to run small parts of the network.

In answering, one could ask another question: does the current franchise offer value for money within the current, franchised structure of the railway industry? There is a fairly unequivocal view that the answer to that is yes. ScotRail is a well-regarded, highly performing franchise, although there is always scope in any business to become more efficient and effective. There is relative consensus that the current franchise holder has done well in precisely that regard—the franchise has been more effectively and efficiently run since First took over. Under the current structure, the franchise is effective and efficient and offers value for money, as Audit Scotland said in its review.

I return to the core question about why the railway costs so much. It costs us a lot more than equivalent European railways cost, and it costs us very much more than it did not so many years ago. If we move out of the current paradigm to where we might be, and if financial imperatives are such that we need to make substantial savings, the question becomes very different.

Given the relatively modest cost of that scheme within the transport budget, which is not unadjacent to £2.5 billion per year, that is a very political question. There are a number of schemes, projects and support budgets. We have already mentioned the air discount scheme and the concessionary fares scheme, which are relatively small in the context of the budget overall. When every pound counts, however, such schemes may well come under scrutiny during the forthcoming budget exercises. They carry substantial political toxicity—once something is introduced, it is very hard to take it away.

The straightforward answer is that cuts could have a range of effects, depending on how much of the budget ministers wish to cut, but it is hard to imagine the likelihood of budgets for such schemes suffering in the world of realpolitik. As David Gray said, there is much more likely to be some nibbling away at the big, relatively unseen headings, such as road maintenance, which is always the first to go.

Given the size of our population, we spend a disproportionate amount of the budget on air and ferry links. However, those are regarded as lifeline services, so perhaps they do not have the same parameters for scrutiny as other spending lines. As Iain Docherty says, the process is far more politically sensitive when we start attacking our remote and island communities in such a manner. Such measures are difficult to repeal once the money has been made available. The same is true for concessionary fares.

There will be implications, because the extension of the scheme at this point would involve reopening the wallet at a time when we are trying to close it.

Nice for him to be told that.

Of course it should have been built in. Just to be clear, I am sceptical about whether we should support people by making travel cheaper through revenue subsidy when they could make the same choices anyway. More people could choose to use the bus or other public transport, walk or cycle more often. I do not necessarily think that we need to spend more public money to encourage them in that respect.

I think that Professor Gray and I disagree far more with the previous panel than we do with each other. However, it is true that, because of the kind of growth that we have chased for decades, we have created a set of urban environments that, frankly, are not very good. They are car-dominated, are of very low aesthetic value and are not nice places. Indeed, I am sure that we could all share examples of such not-very-nice places in our own communities. The question is whether we can do something about that. Undoubtedly the answer is yes, but it is difficult because any such move requires making hard political choices about where we get the money from to invest in those places and make them better. For me, the answer is to tax the people who make them bad in the first place. The big retailers would be the first in my sights, because the retailing environment has had a particularly bad if not disastrous effect on the public realm and the important spaces and places in many of our towns, villages and city centres. That investment priority is different from—and, to me, much more important than—the simple sticking plaster of living with the current settlement structure and hierarchy and somehow making them slightly less unsustainable by encouraging people to make the odd journey by bus. I fear that many active travel initiatives might well lapse into that.

Witnesses, particularly academics such as yourselves, keep bringing up the concessionary travel scheme in discussions about the budget. I want to press you on your view that the scheme should be changed, reviewed or made different. What changes would you make? How would the scheme look in future if it were to be changed—indeed, if it were to exist at all?

Perhaps there could be a maximum number of annual trips per cardholder. Much of what we are talking about is focused on discouraging unnecessary car use; perhaps we should also be discouraging unnecessary bus use. It is exactly the same thing. If we encourage someone to travel into town five times a week, that has a cost. If they have the resource only to travel in two or three times a week, that will cut the budget by 40 per cent—not including administration costs, of course.

But that is not £4,000 per head for a population of 4.5 million or 5 million people.

But even so.

The other thing to say about that is that the scheme is biased towards urban areas because they have thicker bus services. If there is no bus service or access to some sort of subsidised taxi, people are disadvantaged by concessionary fares, which is an equity issue. Someone who lives in a remote island area that does not have a bus service, or has even a limited bus service, will make far more journeys by car. If they do not own a car, those journeys will be made in someone else’s car and they will have the burden of giving others a lift to go shopping or, as is more likely, to health services or work. That most important element of public transport in its widest sense in remote, rural and island areas is not subsidised at all, but we are putting £200 billion into subsidising concessionary fares that are largely being used in large urban areas.

I welcome to the meeting Steve Montgomery, managing director of First ScotRail; Kenny McPhail, finance director and deputy managing director at First ScotRail; George Mair, director of the Confederation of Passenger Transport Scotland; and Paul White, public affairs executive at the Confederation of Passenger Transport Scotland.

We have quite a number of questions first for the CPT and then for First ScotRail, but I will begin with a general question for the panel. What impact has the recent financial crisis had on passenger numbers and ticket revenues in each part of the industry?

In general terms, the industry’s view is that, for the past 12 to almost 18 months, there has been an impact on patronage and revenues in most parts of Scotland. It has been a challenging time for the industry in general.

It is likely that, after the growth trend that we have enjoyed over the past three to four years, patronage will hold or even decline slightly.

It has been quite a unique scenario, in that, at the same time as the overarching economic situation has prevailed, the bus industry has been faced with uncertainties to do with concessionary travel and the bus service operators grant. It is within that mix of factors that the industry has had to consider the shape of the business, the investment and the services and suchlike that are operated.



It is fair to say that it is horses for courses in different areas of the country. In some areas, the partial removal of services and widening of frequencies is the first stage, moving on ultimately to the removal of services that the industry was previously in a financial position to support but which it is now saying can no longer be supported as commercial services and have to die. In conjunction with that, the industry is looking at the whole spectrum of costs that it faces and trying to be even more efficient than it has been in the past. It is taking a pretty broad-brush approach to trying to manage through this difficult time but, as Steve Montgomery said, things are on the turn, and the industry hopes to be able to put back in some of the things that had to go previously.

If that is as a result of job losses in the wider economy, have commuter services in the rush hour been affected, or have other services been cut to reduce costs?

In your view, has the revised reimbursement rate for the national concessionary travel scheme for elderly and disabled people had any effect on the provision of bus services?

You could spend a hellish lot of time trying to get to the bottom of the argument on start-up costs. Lots of consultants have made a fortune on that piece of work over the years. There has been a cost, which was borne by the operator at the start of the scheme. There has been substantial growth in patronage, and the operators have had to put in some resource. That resource has not been removed. There has been additional mileage and additional vehicles. When the original agreement was reached, it was accepted that the reimbursement was correct. There has been a review and, although we did not necessarily agree with all the conclusions, in the interests of getting agreement and moving forward we are where we are now.

Following negotiations, you signed a deal, but no doubt some of your members are not happy.

With the distinguished witnesses, yes. We were disappointed that some of the issues that the guys raised were discounted at an early stage. Things such as age criteria and the availability of the scheme for use for morning journeys pre-peak time were discussed as part of the general review that took place in 2006. There was nothing new there. Everything that the witnesses said was part of the mix of things that we had proposed. We attempted to put a value on some of them. If concessionary travel before 9 o’clock in the morning is reduced, that might include the 60-year-old guy going to his work at the Bank of Scotland to whom you have given a nice concessionary card.

It is a political decision. You are the paymaster, you decide who participates in the scheme and we operate the scheme on your behalf. There was nothing new in the things that the previous witnesses quoted. They formed part of the review and the Government decided, for its own reasons, not to adopt those options. The Government decided, under the three-year review that we agreed with, that there would be no change to the eligibility criteria.

I am not sure how many consultees were involved, but there is a fairly substantial list in the back of the report that was produced. I was not directly involved at the time, other than being an operator’s managing director, but there is an indication of the others who were involved in the consultation.

The CPT had suggestions, which it could revive, as to how the concessionary travel scheme could be altered, if that was thought necessary to keep some control over the emerging costs to the public purse.

Yes. That can be seen in what we have delivered, using FirstGroup as the overseer. Our bid to run the ScotRail franchise and last year’s deal to extend it have offered good value for money. As someone said earlier, Audit Scotland has looked at that, and there appears to be a good return. When the deal was settled, no one realised that the economy would drop back, but a commitment had already been made for £70 million additional expenditure on railways in Scotland. The franchise is run well; we get a lot of support from FirstGroup, which values the franchise.

My questions were specifically about the lack of hot drinks. We might ask why you cannot refill the flasks. When I talked about erratic heating systems, the issue was not just to do with this winter; there is a long-term problem with the trains. If that is value for money, I ask whether the passenger should expect better.

Where does the financial risk lie should there be a major drop in ticket revenue on the ScotRail network: with FirstGroup or with the Scottish Government?

Previously, there were quite tight arrangements for revenue support and revenue share. Under the new arrangements, there are much wider parameters. We have to gain significantly more before revenue share applies, or lose significantly more before revenue support applies. The parameters for the support and share mechanisms are far wider than they were previously.

I had understood the description properly—that is fine.

In between, it is all FirstGroup’s risk when it comes to revenue.

We looked at our fares basket and increased only a small number of unregulated fares by 3 per cent. We looked at areas in which we believed that we had not carried out increases in previous years or in which we believed that there was scope for an increase that would not significantly damage patronage.

I can tell you what the profits were for the year ending March 2009. I think that it was around £12 million, but I may have to confirm that by going back to the records from a year ago.

Will you confirm that?

The argument about competing with other Government priorities still applies in the negotiation of a franchise. A transport minister will argue for the resources that he or she might want to put into that particular priority against other Government priorities.

Would there be options to explore that would not involve service cuts?