UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 169-i

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

TRANSPORT COMMITTEE

 

 

Rural Rail

 

 

Wednesday 15 December 2004

MR VINCENT SMITH and MR NOOMAN HAQUE

MR TONY McNULTY MP

Evidence heard in Public Questions 334 - 498

 

 

USE OF THE TRANSCRIPT

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Oral Evidence

Taken before the Transport Committee

on Wednesday 15 December 2004

Members present

Mrs Gwyneth Dunwoody, in the Chair

Mr Brian H Donohoe

Mrs Louise Ellman

Miss Anne McIntosh

Mr Graham Stringer

________________

Witnesses: Mr Vincent Smith, Director of Competition Enforcement, and Mr Nooman Haque, Principal Case Officer, Office of Fair Trading, examined.

 

Chairman: A little bit of housekeeping first, if you will forgive us, gentlemen. Members having an interest to declare:

Mr Stringer: Member of AMICUS, Director of Centre for Local Economic Strategies.

Chairman: Gwyneth Dunwoody, Aslef.

Mr Donohoe: Brian Donohoe, Member of the Transport and General Workers' Union.

Mrs Ellman: Member of the Transport and General Workers'.

Miss McIntosh: I used to have an interest in Railtrack and I am currently doing a placement with the Industry Trust (?) for Network Rail. I have interests in Eurotunnel and First Group.

Q334 Chairman: Good afternoon to you, gentlemen. You are most warmly welcome here. I am sorry it has taken us a little time to get going; it is actually all very clever psychological warfare. Would you be kind enough to identify yourselves for the record?

Mr Smith: Yes, I am Vincent Smith and I am Director of Competition Enforcement at the Office of Fair Trading. I am here with my colleague, Nooman Haque, who is the Principal Case Officer from the Transport Section.

Q335 Chairman: Thank you very much. Did you have something that you wanted to say to us, or are you prepared to go straight to questions?

Mr Smith: If I may, briefly, to begin with, Madam Chairman. You asked, through the Clerk, how we saw our role in relation to public transport. Can I just say that we see our role as making sure that in an unregulated environment, particularly, competition delivers benefits for passengers in particular. You will recall, Madam Chairman, that our two main statutes are now the Competition Act and the Enterprise Act. Under the Competition Act I would like to remind you that we share competition enforcement competence with the Office of the Rail Regulator, and, primarily, in relation to purely rail matters, it is the Rail Regulator that takes the lead. As you will remember, the Competition Act has a prohibition plus exemption system under it, so even though agreements may appear restrictive they will be allowed where they deliver greater countervailing benefits for the passengers, potentially, or consumers. So operators can make sure their agreements are exempt under this balancing test by coming either within a safe harbour or by self-assessment. These safe harbours we call block exemptions - it is a term borrowed from European Community Law and they are made in the UK by the Secretary of State on the Office of Fair Trading's recommendation. There is one, as you know, currently for transport ticketing schemes. We are proposing a change to that and we hope to consult on our proposed changes early in the New Year. In particular, we will be doing two things: first of all, we will be seeking to make the revenue sharing arrangements that we think do not fall foul of competition law more flexible - so, broadening the range of revenue sharing arrangements that are permitted. We will also ensure that the block exemption continues to cover a wide range of through-ticketing schemes. So all through-ticketing schemes, in principle, which fall within the revenue-sharing arrangements that we outlined should be outside the scope of competition law. I hope that helps the Committee understand where we are coming from and why.

Q336 Chairman: I think, Mr Smith, we want to question you a bit on the detail. Just in order to be quite clear in my own mind, what you really are saying is that there is actually a public interest defence.

Mr Smith: What we look at is what we call the consumer benefit. I accept that the consumer here may be a wide number of people; it is not just the people who already travel on public transport, it may be people who want to travel on public transport, it may be people who are affected by public transport in some way. We need to look to ensure there is an economic benefit that is quantifiable and directly results from the agreements that are being concluded between operators. Beyond that we take a broad view.

Q337 Chairman: I hope you both take economic benefit as being the definition of "take a broad view" because, frankly, how I define public interest (which is really my interpretation of what you are saying) is that there will be occasions when the economic benefit to the customer is the least of the advantages. For instance, with through ticketing you could say that ease, convenience, speed of movement - all of those things - are nearly as important (or certainly, I would say, as important) as the economic benefit.

Mr Smith: Certainly the benefit to the passenger from ease and convenience is part of the quality of service which they get from public transport. That we can take into account.

Q338 Chairman: The other thing that I really was concerned about was this suggestion that because you are changing these matters and you are going to consult, presumably you are hoping to get a very wide representation of the parties, are you?

Mr Smith: We hope so. We would welcome the views of the Committee.

Q339 Chairman: You did not respond when the SRA sent out a consultation document on community railways. Why was that?

Mr Smith: Mainly because we saw it, primarily, as a matter for the Office of the Rail Regulator. It is more or less purely a rail issue, and they, of course, as I said, share our competition enforcement powers in the rail sector and we felt that their response to the SRA's consultation should be sufficient.

Q340 Chairman: You made it clear, did you, that it was a question of "That's their patch, not mine"?

Mr Smith: I accept that we did not actually make that clear to the SRA.

Q341 Mr Stringer: Can I go back to your opening statement? I was not sure, when you were talking about safe harbours and block exemptions, whether they exist now.

Mr Smith: The ticketing block exemption currently exists; it lasts until next year. Therefore, we need to work now to make sure there is something in its place by the time it expires to ensure certainty of operators going forward. We intend to consult in the early part of next year on an extension of the placement.

Q342 Mr Stringer: How many applications for the block exemption have been accepted and how many have been rejected?

Mr Smith: People do not need to apply for the benefit of a block exemption, it applies to you it is a piece of delegated legislation, and it says that as long as your agreements fall within the terms of that piece of delegated legislation then competition law, effectively, does not apply to your agreement.

Q343 Mr Stringer: Have you investigated any of those to see whether the compliance is there or not?

Mr Haque: We have given advice this year on 40 various types of integrated ticketing scheme. Most of those, on our analysis, would comply with the terms of the bock exemption. On, I think, two occasions that I can recall we have suggested minor modifications to the scheme, which the parties in principle seem to have accepted. Obviously, it is up to the wider parties and operators to implement those.

Q344 Mr Stringer: You also said in your evidence that the competition issue delivers consumer benefit. What criteria do you use to see if it is actually delivering consumer benefit?

Mr Smith: Sometimes we ask consumers - that is not uncommon. We normally use economic theories. We check whether the criteria in Section 9 of the Competition Act are met. So we have to ensure there is some actual theoretical benefit. We then look to make sure that operators are not taking the benefit for themselves - i.e. that a fair share of whatever extra savings are made on the costs of the service or the efficiency of the service is passed on properly to consumers.

Q345 Mr Stringer: Why, when I write to you, though, with complaints about the fare-paying passengers of First Group in North Manchester, do you tell me that these are irrelevant and there has to be direct evidence of collusion between the different operators in Greater Manchester - when the evidence is there from the consumers that they are getting a worse service from Stagecoach in South Manchester?

Mr Smith: The Act, you will recall, applies to agreements, so we have to prove an agreement between the operators colluding together.

Q346 Mr Stringer: That is why I was confused by what you said to start with and what you have said just now, because you said you had to look at consumer benefit. I was wondering how you measure that when, clearly, fares are higher and consumers are complaining and you ignore it.

Mr Smith: We have to have a nexus on which to hang our action, and the nexus in the statute is that there is an agreement between operators to collude together.

Q347 Mr Stringer: So consumers can go and hang if you cannot find a piece of paper that says "We are breaking the law"?

Mr Smith: We would not go so far as to need a piece of paper but we do need some evidence of having talked to each other in a way which would set prices or might affect prices.

Q348 Mr Stringer: So the fact that bus companies operating in the same conurbation do not compete is not evidence?

Mr Smith: It may be in certain circumstances, but I think we need more than that simple fact to take action.

Q349 Mr Stringer: What do you say to Richard Bowker's comment that the OFT has mounted costly, time-consuming inquiries into rail franchises, which have yielded miniscule recommendations?

Mr Smith: The current Railways Act requires us to look at refranchising as if it were a merger situation. Therefore, we actually need to look at each refranchise on that basis. Most of them we do not find any difficulty with, it is only where there may be an overlap between railway services being refranchised and other forms of transport that we tend to take a closer look.

Q350 Mr Stringer: I think Mr Bowker was referring to National Express in East Anglia. He said that it cost the train operators and the railway industry half a million pounds. Do you think that is reasonable?

Mr Smith: I have no idea whether it did cost that much. If it did then I think it is probably rather high for the amount of the franchise awarded, but that is the general cost of a competition law investigation.

Q351 Mr Stringer: Can you give me some background into how much of your organisation is devoted to transport competition?

Mr Haque: We have one of the four industry sector divisions in the OFT devoted to services.

Q352 Mr Stringer: I am sorry, I missed that.

Mr Haque: There are four industry sector branches within the OFT: transport and other services sit within one branch - my branch - and land transport is approximately about a quarter of that team.

Mr Smith: So that would be, approximately, six people.

Mr Stringer: Thank you.

Q353 Mrs Ellman: When is through ticketing allowed under competition law?

Mr Smith: Most of the time, I would say, provided that the ticket is actually a genuine through-ticket - i.e. it enables you to add together different components of a public transport journey to get you from where you are to where you want to be. I think, generally, we would not see a problem with that.

Mr Haque: The other thing to add, I would say, is that one of the key considerations has to be that the two routes which are being joined by the through ticket do not significantly overlap - i.e. they are not effectively routes in competition with each other, in which case through ticketing cannot be used. So it is for routes that are, more or less, separate; for a connecting service from A to B to C, for example, a through ticket can be used.

Q354 Mrs Ellman: Do operators have to seek approval first?

Mr Smith: For their schemes? As I was saying to Mr Stringer, the answer to that is no; provided that their arrangements fall within the terms of the block exemption statutory instrument then they are not at fault. Automatically, there is no need for people even to come to us if they are content that that is the case.

Q355 Mrs Ellman: Do you think there is a full understanding of the rules and regulations that you enforce?

Mr Smith: I would hesitate to say there is full understanding amongst, particularly, the bus community. Particularly, where there is an interface between the largely unregulated bus industry and the rather more regulated train industry that can cause difficulties and misperception, I suppose, between what is allowed on the railway and what is allowed on the bus sector. That does cause difficulties in explanation to the bus industry, particularly.

Q356 Mrs Ellman: What are the major misconceptions?

Mr Smith: Anecdotally, although we do not generally get much direct evidence of this, people say that we are against integrated transport and that we actually try and block through ticketing schemes on competition grounds. I can assure you that is not the case.

Q357 Chairman: That is the generally held view, though, is it not, Mr Smith? Why would this view be so generally held throughout the transport industry when most of the people would actually benefit from through ticketing? Why are they so convinced that you are against it?

Mr Haque: I think one of the reasons that I have discovered - again, I have no hard evidence of this but it is anecdotal - is that on some occasions the interests of the Passenger Transport Executives and the interests of commercial operators, private operators, do not always coincide. Quite often the PTEs ----

Q358 Chairman: No. One is meant to make a profit and the other one is meant to provide a service; almost by definition they are going to collide.

Mr Smith: It would be false to assume that private bus companies do not intend to provide a service.

Q359 Chairman: No, but their legal duty is to return a profit, is it not?

Mr Smith: It is, Madam Chairman.

Q360 Chairman: Therefore, it is unwise for us to confuse the legal responsibility to produce a profit with the duty of the Passenger Transport Executives which is to provide an integrated and efficient form of transport. They are fundamentally different jobs, are they not? They may run parallel but they are different.

Mr Smith: Can I disagree with you there, Madam Chairman? After all, the Passenger Transport Executives are supposed to run an efficient service as well; they tender out their services, so they do have an interest in making sure what they buy is competitively priced.

Q361 Chairman: But that is not the same thing, is it? When I buy things, Mr Smith, I want value for money. That does not mean to say that I expect the deal to automatically make a profit. When, on the other hand, I am running something as a commercial undertaking then I expect it to make a profit. The two things are different, are they not?

Mr Smith: I think it depends on where the competition arises. If you are looking at a Passenger Transport Executive that is inviting bids to run a bus network in its area it needs a number of bidders at that point in order to get an efficient service at the lowest possible price. That is a competitive process; that is competition. Then there is the question of "Well, once the service has been tendered you need to make sure that the person who has been successful complies with the terms of the contract", and that is a regulatory function. If there is no regulation of that nature then competition is the only means of making sure that quality standards are maintained and/or prices ----

Q362 Chairman: No, it is not the only means; it is a means. What is important is that the original contract should encompass a set of standards that the operator has to comply with.

Mr Smith: I was drawing a contrast between those kinds of services which are subject to tender and, therefore, subsequently, subject to service quality, and those that are entirely unregulated and, therefore, where competition is the only means of making sure that services are maintained and that prices are kept at a reasonable level.

Chairman: I am sorry, I interrupted Mrs Ellman.

Q363 Mrs Ellman: You said that there is confusion in what you described as the "bus community". If there is confusion whose responsibility is it to put that right?

Mr Haque: The Office has a general policy of going out and speaking to industry and to consumer groups whenever possible to explain competition law. In the transport team, where I sit, we make particular efforts to go and talk to interested parties, which would be operators, PTEs and local authorities and we, obviously, as I said earlier, give formal advice and attend conferences and seminars and maintain a completely open-door policy in respect of any interested party in this sector, in particular.

Q364 Mrs Ellman: You have told us that you are going to consult on some changes. How do you intend to identify those changes?

Mr Smith: We do a standard consultation. When we consulted on a not dissimilar subject two years or so ago we did so through a standard consultation list, which has, from memory, about 500 operators' names on it of various sizes and geographical locations.

Q365 Mrs Ellman: You have not chosen those areas because there is a problem?

Mr Smith: No, we would consult widely and invite a range of views on the operation of the block exemption going forward to make sure that if there are any problems we get to hear about them and can adapt the proposal accordingly.

Q366 Mrs Ellman: In general terms, do you try to identify the areas where there are difficulties? In terms of running services.

Mr Haque: In general terms, through our process of talking with industry, particularly talking to interested parties, we gather views. Obviously, one of the things that led up to the change in exemption was this very strong industry view that revenue-sharing arrangements and block exemptions as they stand are far too restrictive. We have no hard evidence other than constant representations made by industry. However, we complemented that with our own analysis and our own thinking about how we could possibly change the requirements for revenue sharing. So I would say, in answer to your question, I think it is both internally driven as well as taken from representations from the outside world.

Q367 Mr Donohoe: Can I take you back to this through ticket situation, where you say that it would be anti-competition if, in fact, you know that it was not A to B and B to C but the train was running from A to C and the bus was running from B to C? That would not be allowed under competition law? Is that what you are saying?

Mr Smith: The difficulty we have where there may be overlapping services is that if two services - part of the railway service and some bus services - are jointly owned there is clearly a large incentive on the joint owner to try and squeeze out competition in the bus leg. When we were looking at the North Wales refranchising, for example, there were strong representations to us then that if Arriva were awarded the franchise it would have a big incentive to squeeze out rival operators who, at that time, operated connecting bus services to the various railheads on the North Wales' coast. They were concerned that if Arriva were awarded that franchise they would do that. Arriva actually offered a promise that they would allow competing bus operators to continue to operate on the same terms as Arriva's own connecting bus service, so a non-discrimination clause. That is the kind of thing that we are aware of, as it were: people owning two legs of a leg (?) and squeezing out competition in one leg where there could be competition.

Q368 Mr Donohoe: If I may just explore this a bit. I will not mention any particular company, but, say, company A owns both the railway and the bus locally. Is that healthy competition or is that something you would have something to say about? Operating on exactly the same line, if you are taking A, B and C as a straight line with B in the middle of that and it is the same company that is operating the buses and operating the rail from these towns, is that something you would have something to say about and stop?

Mr Smith: We would if we found that that company had been trying to exclude competitors - and I would assume the bus leg is an unregulated one and not subject to local authority tender. If that were the case we would have concerns if we found evidence of the train company trying to exclude connecting bus services to the benefit of its own connecting bus service, yes.

Q369 Mr Donohoe: If the company that had got the franchise for the railways, and it was at that point operating the buses, all of a sudden started to take its traffic from the railway and move it over to its bus operation, would you have something to say about that?

Mr Smith: Yes, we could do. You will recall this was a concern with the Scot Rail refranchising case upon which the Competition Commission has just reported. They found that First Group, which has been awarded the franchise, as you know, have such an incentive in certain parts of the network there between Glasgow and Edinburgh, and they have taken undertakings from First Group to make sure that bus and train services are maintained at the same prices they are now and at the same service.

Q370 Mr Donohoe: Would that be mirrored in any other part of that particular franchise? Or may there be parts of the country where there was a similar situation?

Mr Smith: Two different propositions. Yes, they would be mirrored in any other part of the franchise where there was a singular proposition because that is the undertaking that First Group gave to the Competition Commission, which is a legally binding promise. We would need to look carefully on a case-by-case basis if that were to happen in other parts of the country. It is actually quite a difficult analysis to undertake and we do not want to go around forcing people to maintain services unnecessarily.

Q371 Mr Donohoe: Who brings that sort of situation to your attention? Has it got to be a member of the public?

Mr Smith: It can be more or less anybody. We get a lot of complaints from MPs, for example.

Q372 Mr Donohoe: Can I just take you back to one of the points you made in your initial statement where you talked about those who are affected by the transport situation; it could well be that they are passengers but they could also be future passengers - or anybody else, for that matter. Who would be the "anybody else"?

Mr Smith: If there were clear benefits, for example, in reducing congestion in an inner city area from having a particular agreement between bus operators, and if that could be convincingly shown, I think we would take that into account - i.e. that there is an economic benefit to the public in general. It would have to be an economic benefit, so if the road use within the city centre would be easier there would be economic benefits flowing from that. I think we would look at that provided there was a clear benefit which could be shown.

Q373 Mr Donohoe: Can I take you, then, into the more urban areas where there are possibilities of co-ordination between bus and train timetables? Would that be something that you would deem possibly being in breach of the Competition Act?

Mr Smith: It is possible that co-ordination of timetables might be in breach of the Competition Act. It depends a bit on why it is done. One can imagine a situation where there are two large bus operators and a new entrant bus operator who wants to come in and operate as a competing service, which might be either more frequent or cheaper, or something like that. If there is a co-ordinated timetable between the two large operators it would be quite easy for them to exclude the new entrant on that basis. So I think we would have some difficulty with that kind of scenario. Following the Director General's previous appearance before this Committee, we did some research to find out whether competition law was seen as an impediment to co-ordinated timetables. I think we found that the answer to that question, generally speaking - and we had several hundred responses to that - was no, people did not feel that that was a problem; that problems with timetable co-ordination in an unregulated environment are likely to happen in any event.

Q374 Mr Stringer: Who were the people you asked?

Mr Haque: We sent a questionnaire to every bus operator operating in the country, large and small, every PTE and, also, a number of representative groups as well, from the passenger and industry side as well.

Q375 Mr Donohoe: If I am a travelling member of the public I can see advantages in some of that co-ordination, which might well be against what you would deem as competition. I would argue it is not, in these circumstances, in the interests of the passenger.

Mr Smith: If co-ordination could be shown in individual cases to be clearly in the interests of the generality of passengers then we might take the view that, in those particular circumstances, that could be left. Again, I come back to the densely populated area where it might be more appropriate to co-ordinate timetables in a small city centre.

Mr Donohoe: So you apply a public interest test to this, do you, at all times?

Q376 Chairman: I think it is quite clear that they do not apply a public interest test. You were told earlier on - and Mr Smith will correct me if I am wrong - that the definition is the economic benefit to the passenger. That was what you mentioned. That is not a public interest definition.

Mr Smith: Not a full public interest definition.

Q377 Mr Donohoe: Do you think that is sensible?

Mr Smith: I genuinely do not have a view. I think it very much depends on where we are looking. As you know, of course, the arrangements in London in relation to the bus service are very different; it was felt that was necessary because with that number of people living in such a small area there needed to be more central control.

Mr Donohoe: You are making that point. Therefore, in that circumstance, it would suggest that there needs to be a change to competition law as it exists.

Q378 Chairman: Mr Smith, you know that the reason that the Conservative Government excluded London was because most of them were concerned they could not drive their cars in London, and they did not take buses outside London so they were quite happy that the arrangement was done on a different basis.

Mr Smith: I have no comment ----

Q379 Chairman: No, but you are interpreting this in a very particular way. Are you saying that if the Government wanted to change the law so that the whole bus industry had the same arrangements on franchising that they have in London that would not give you a problem? Is that what you are saying?

Mr Smith: I think that if that was what the Government wanted ----

Q380 Chairman: No, no, no. I have a problem, you see, Mr Smith; I really do have a problem, and I think we all have this. You say there is a difficulty with through-ticketing because of these extraordinarily called block exemptions. Then you say, "The industry does not have a problem with that; they know all about it." Well, frankly, that is not the evidence that we have been given in this Committee; it is extraordinarily difficult to reconcile what you say you have been told with what we have been told. Somewhere along the line somebody is telling porky pies. If you are really saying to me that the only way to get a real public interest test is to change the method of franchising, then I think it would be better if you said so.

Mr Smith: If you felt, Madam Chairman, that the full public interest test was required, that would need a change of law.

Q381 Mr Donohoe: Surely you can be proactive on occasion. You can see that this is obviously against public interest and, as such, you recommend to whoever it is among your superiors that, in your opinion, there requires to be a change to apply common sense to the equation. Should you not have it within your abilities to be able to do that sort of thing? You cannot hide behind this bureaucracy of saying, "I have no opinion on that"; you have an opinion - or you should have an opinion - and you should be able to make some comment around that.

Mr Smith: I think, at the moment, as the law is framed, we are applying the tests that we are required to apply as reasonably as we can to a wide variety of situations. If it is felt that that does not give rise to the best set of benefits for the travelling public then it would be appropriate to look at the legislation again.

Q382 Mr Donohoe: Would you, as the Office of Fair Trading, at any stage say: "This is not working; it is not feasible, it is not something that is practical and it is against public interest, and we are saying to you, Government, we recommend that you look at this to change this law; the competition law does not cover this in a sense that is sensible"? Surely, you could make that recommendation.

Mr Smith: We can make those recommendations.

Q383 Mr Donohoe: You are not at that stage, then?

Mr Smith: We are not at that stage, at the moment, because of the lack of evidence that we have ourselves that there are serious problems across the country.

Q384 Mr Stringer: I want to follow that up. You are in a circular argument, are you not, Mr Smith? You told me that you cannot investigate higher bus fares because you need some sort of evidence that there is a cartel operating. Would it not be a good idea if you could use the evidence of higher bus fares to show that competition was not working?

Mr Smith: We can do, as I said to you, Mr Stringer, earlier, but on its own I do not think it is sufficient.

Q385 Mr Stringer: How do you define "economic benefit"?

Mr Smith: We define "economic benefit" as a better service, or a more reasonable price to passengers overall, possibly.

Q386 Mr Stringer: I understand price. What, beyond the price of a bus ticket or a train ticket, do you use?

Mr Smith: We could use frequency of service.

Q387 Mr Stringer: Not what could you use, what do you use?

Mr Smith: We use frequency of service; we use extent of timetable - i.e. whether there are late or early-morning services.

Q388 Mr Stringer: So you calculate the economic benefit or disbenefit if somebody has to wait an hour-and-a-half?

Mr Haque: We consider a wide range of economic benefits which would include quality of the service provided, for example. In the bus context, if agreements between operators are necessary to provide a safe and reliable service then that is something that could be allowed. So those sorts of benefits can be considered under competition law.

Q389 Mr Stringer: Do you consider them?

Mr Haque: Yes, we do.

Q390 Mr Stringer: In what percentage of cases do you go beyond the simple price?

Mr Haque: I think in all informed advice that we have looked at this year, and the 40 that I talked about, they concerned potential agreements or ticketing arrangements. So we do go beyond price in all of them.

Q391 Mr Stringer: I am not up-to-date on this but I know last time I looked at the figures the only case you really prosecuted a bus company for anti-competitive behaviour was First Cymru. How many bus companies have you prosecuted successfully for anti-competitive behaviour?

Mr Smith: I would have to write to you. I do not have the figure off the top of my head.

Q392 Mr Donohoe: Is it more than one?

Mr Smith: It is certainly more than one but I would not say it was more than five.

Q393 Mr Stringer: Does it strike you as strange that you have evidence that bus companies in similar situations are providing very different services and you are prosecuting less than one a year successfully?

Mr Smith: We can only bring cases, as I said to you, on the basis of the evidence that is put to us or that we find. We need a fairly strong body of evidence before we can proceed against people, so it is very much dependent on people coming forward to us with their concerns but with hard evidence to back them up. That is quite difficult to obtain.

Q394 Mr Stringer: This brings you back to Mr Donohoe's question and the Chairman's question. Would you like more powers to enable you to investigate anti-competitive behaviour further? If you do, what would those powers be?

Mr Smith: I do not think we need more powers; I think we need to be a little bit more savvy about how we use the ones we have got. The regime is still relatively young and we are still feeling our way somewhat. As I said earlier to the Chairman, this interface between the non-regulated and the regulated transport sector is a particularly difficult one and is still an evolving story.

Q395 Mr Stringer: When you are considering competition, do you see the car as part of the competition scenario?

Mr Smith: When we are looking at public transport we generally tend not to regard the private car as a substitute for public transport, only because not everyone has access to one.

Q396 Mr Stringer: Is that not rather strange when the Government's policy is to encourage people to move from the car to public transport and the Government sees the main competitor to buses, trains and trams as the car?

Mr Smith: I think we would look at the car-owning public, or car drivers, as potential customers on public transport in some circumstances, but I do not think we would say that that ability of car drivers to take public transport is sufficient to mean that the car is a competitive force for many kinds of public transport, particularly in urban areas.

Q397 Mr Stringer: Outside London that just is not what actually happens. Are you dealing with a very theoretical model when the reality for most people is there is a real competition between a car and good quality public transport? That is what most of the evidence shows in shire areas and most urban areas in this country. If you have got good public transport people move to public transport. If you reduce the quality of public transport people move to the car. That is the real competition, is it not, and it is not part of your model?

Mr Haque: I would say that the way we approach our work is on a case-by-case basis, so the facts of the case would be quite different from case A to B. It may well be that in investigating a transport case in such an area we may well conclude that the car and bus are substitutable with each other than they are in an urban area.

Q398 Mr Stringer: That is a very theoretical answer. I would contend - and I would be interested if you disagreed with this - that car and bus are in competition where there are buses everywhere in this country except London.

Mr Smith: I think I would disagree with that but I would not suggest that you were wrong overall. I think it very much depends on where we are looking and what the journey is that the passenger wants to make.

Q399 Miss McIntosh: I should declare another interest; that I spent five months in the Competition Directorate of the European Commission, dealing with joint ventures. I am familiar with the expression "block exemption" but I do not know if I understand it any better than anybody else. Can I ask you what the level of through ticketing is in other European countries? Is it higher or lower than through ticketing in this country?

Mr Haque: I have no firm answer to that, I am afraid. We can find out for you.

Q400 Miss McIntosh: My guess is it is probably higher but they seem to do something right in encouraging it. How many timetable changes would you expect in a year?

Mr Smith: Again, that I think is not something I have at the end of my fingertips; it may very well be that we would have to get the information from the Traffic Commission.

Q401 Miss McIntosh: When you look at pricing, especially travelcards, do you look at what the revenue anticipated from travelcards will be?

Mr Smith: I am sorry, this is in relation to whether or not we think the travelcards comply with the block exemption?

Q402 Miss McIntosh: Yes, whether they fall within the competition ----

Mr Smith: As I said earlier, we are looking to be more flexible with the variety of revenue-sharing options that we will allow under the block exemption. At the moment we do it solely on a passenger-mile basis, but we have had strong representations that that is too onerous a requirement for small bus companies so we are planning to replace it with something more general which says you can use anything you like provided you can be clear it does not actually distort competition

Miss McIntosh: I am looking, Chairman, at the report we published in, I think, 2001 - the previous Select Committee.

Chairman: I am sure Mr Smith's superiors remember it.

Miss McIntosh: It is just that at the time there did seem to be a slow uptake of the block exemption. In fact, it was concluded that some existing travelcard schemes had been withdrawn because of the concerns about the Competition Act. You have been fairly critical in your comments of the way the Competition Act is working. Do you believe that this calls for a review and an amendment of the Competition Act?

Q403 Chairman: Can I add a rider to that? Has the Enterprise Act made any difference to the way that you operate?

Mr Smith: Can I take these two questions separately, Madam Chairman, because they are slightly different? In relation to the travelcard point, we are looking at the block exemption and we might recommend extending it so that we can actually get most travelcard options within the scope of the block exemption. Again, this is something that is subject to competition as, clearly, the revenue-sharing arrangements may be the subject of some contention, particularly as between bus operators.

Q404 Miss McIntosh: You have had three years to look at this, though. Why has it not been done? Not you personally, but the OFT have had three years to look at this, presumably.

Mr Smith: The block exemption was made in 2002.

Q405 Miss McIntosh: Two years then.

Mr Smith: As I say, we have been working with block exemptions for that period and we have been collecting evidence on how it is working during that period. This is one of the main complaints, I suppose, we have had about it. I am sorry, Madam Chairman, I did not answer your question: how has the Enterprise Act changed what we do? I think in two ways: one is to do with the merger issue, which I alluded to earlier in relation to railway franchising. We are now decisional as distinct from making recommendations to ministers as to whether or not the merger and, therefore, the refranchising situation should be referred to the Competition Commission.

Q406 Chairman: So if, for example, by some mischance, Virgin got the East Coast Mainline you would look at that?

Mr Smith: That is currently under consideration, Madam Chairman. I did write to the Clerk to point this out. It is a sensitive issue, at this precise moment.

Q407 Chairman: I just want to make sure that you would, in fact, look at it.

Mr Smith: We are indeed looking at it, Madam Chairman.

Q408 Miss McIntosh: Can you give us an indication of when you think you might have taken a decision on what travelcards will come within the block exemption?

Mr Smith: As I said, we are hoping to consult on our recommendation to the Minister in the early part of next year.

Q409 Miss McIntosh: So the bus companies ----

Mr Smith: Will be able to comment on that.

Q410 Miss McIntosh: You would accept that if travelcards, pre-paid tickets and electronic smart cards help reduce boarding times and speed up journeys that would be ----

Mr Smith: That could be a benefit that we might want to take into account.

Q411 Miss McIntosh: It is up to them to tell you?

Mr Smith: Yes.

Q412 Miss McIntosh: You said at the outset that you have a shared competency with the Office of Rail Regulator as regards railway competition, but that the ORR takes a lead. Could you tell the Committee exactly what relationship you have with the ORR and how it interplays? Presumably, on block exemptions you are the ultimate word.

Mr Smith: We are the body that makes the recommendation to the Secretary of State but, clearly, given the ORR's sectoral expertise in this area, we take a very great deal of notice of what they have to say, particularly in relation to through-ticketing arrangements for the railway. So it is not a question of us ignoring what they say - it would be foolish of us to do so. There is also, on a case-by-case basis, a working party which meets to consider who is best placed to consider the cases where there is an overlap between rail and other sectors and we do consider them on a case-by-case basis at the beginning of the case to see who is best placed to take a case.

Q413 Miss McIntosh: Just to recap, the consultation will be in the early part of next year and it will take two or three months?

Mr Smith: I expect it will be a standard, three-month consultation period.

Q414 Chairman: Will the public be able to write in?

Mr Smith: Yes.

Q415 Miss McIntosh: Outside formal consultation periods, do you encourage bus companies and operators to come and speak to you?

Mr Haque: Yes, we do. We already have done, in a sense, as well. We have the recommendations and we talk to bus operators and regulators (?) about them informally as well as to how acceptable they will be and whether they meet the needs or we need to change them.

Q416 Mr Donohoe: I know the question of the West Coast Mainline and the East Coast Mainline is sensitive and you have written to the Clerk - and I am not dwelling on that aspect of it - but when you are involved in such an inquiry do you take into account the alternatives like cars - or 'planes for that matter?

Mr Smith: Yes, we do.

Miss McIntosh: Just one last question: Wensleydale Railway have a through-ticketing arrangement with Arriva on their buses. Can you say why that is allowed?

Q417 Chairman: Mr Nooman Haque, do you know why Wensleydale escaped? Did they bribe you with cheese?

Mr Haque: From what I understand of the scheme, Madam Chairman, the Arriva bus service connects Northallterton to the beginning of the railway journey, so that is the most basic through-ticketing scheme that you can imagine where the two journeys do not overlap at all. So there is no problem there.

Chairman: Gentlemen, you have been most understanding. I apologise for making you wait at the beginning. That is very rare. Anyway, thank you very much.

Witness: Mr Tony McNulty, a Member of the House, Minister of Transport, Department for Transport, examined.

Q418 Chairman: Good afternoon, Minister, you are most warmly welcome. Thank you for coming to see us this afternoon. Once you have got your breath back, would you be kind enough to tell us not only who you are but whatever else you have in mind to tell us?

Mr McNulty: Tony McNulty, Minister of State at the Department for Transport. I do not have any opening statement. All I would like to do is thank the Committee for rescheduling me and then re-timing me today so I could fit an adjournment debate in. I am very grateful for that.

Q419 Chairman: As you understand, Minister, we are always delighted to see you; it does not worry us if you are occasionally overcome with shyness and need to reorganise your timetable. I take it you do not mind if we start the questioning?

Mr McNulty: Absolutely not.

Q420 Chairman: The Community Rail Strategy was published by the SRA. Whose strategy is it - yours or theirs?

Mr McNulty: It is, essentially, an SRA document that is fully endorsed by the Government.

Q421 Chairman: Yes, but I think we need a little more precision than that. They, presumably, wrote it. Yes?

Mr McNulty: They wrote it. As I understand it, they consulted widely within the process of drawing the document up. They are currently charged with all that is strategic in terms of our control in terms of looking after the rail network. You will know that is changing during the course of the Railways Bill we are putting through the House at the moment. They discharge those strategic functions on behalf of the Department for Transport and we readily endorse the strategy.

Q422 Chairman: Do you foresee any difficulty when the Strategic Rail Authority ceases to exist?

Mr McNulty: When we published the Railways Bill - and alongside it there are many things that happen in a non-legislative capacity as well as the legislation - our first thoughts were on the overall structure of what the new DfT rail unit will look like, but at a very, very high level - just the Director General and what the Directorates will look like. We will now, over the coming months, continue to carry out the development of a detailed strategy that brings the 100-odd staff in DfT and the 500 in SRA together in the new DfT Rail Unit, which we have said, as a ballpark, will require about 300 of those staff altogether. Part of that process will be where the community rail people and SRA sit within that structure, and where some of the regional planners and others from the SRA sit within that structure. What we do not want to do is throw the proverbial baby out with the bath water and lose all that huge expertise built up in the SRA and some very significant expertise from rail experts. That is the exercise we are undertaking now. That runs alongside the Bill - I would not say "endlessly" because we have only had two sessions so far in terms of the Bill - and the Bill is part of the wider implementation process of the rail review. So all these elements can be carried out alongside rather than wait for the legislation to be secured. There will not be a sort of a flick-of-a-switch, Big Bang and, all of a sudden, the SRA becomes DfT Rail; all these elements, including where community rail and the planning and other functions that SRA perform, are an important part of the deliberations for the coming months.

Q423 Chairman: You have lost one or two senior people already. Is that because they think the strategy is changing or the job is changing?

Mr McNulty: Not having interviewed and debriefed them on a one-to-one, individual basis, I am not entirely sure, but I will find out if the Committee would like to know.

Q424 Chairman: I think the Committee would like to know if there is a feeling amongst people in the Strategic Rail Authority that the Government is going to ask them to do something else. Put simply: is your strategy going to be to get the most out of an existing asset, because you have got to keep it anyway, or are you really saying, "We are really concerned about community railways and this is their last chance to convince us that they really have a role to fulfil"?

Mr McNulty: I suspect, without sounding like a Liberal Democrat, a bit of both, but probably in an 80/20, 90/10 split, given that ----

Q425 Chairman: Which way is the 90 and which way is the 10? Forgive me.

Mr McNulty: Ninety for the former part of your statement and 10 for the other part. It is, in practice, about trying to get the most optimal use out of what we already have. It is not "Beeching by the back door", it is not "Dad's Army running community rail lines at the tail end of the rural network", which was most offensively said by a particular individual; it is about overwhelmingly how we can get, through the community partnership scheme, these particular lines used and used to the full. We have seen some very good examples, albeit small examples, of success. In relation to the 10 per cent, I have to put that caveat in because, as you will know, the Secretary of State has said we are not about preserving and carting fresh air around the country.

Q426 Chairman: Yes. "Carting fresh air around the country" may be a very good headline for a newspaper, but it does actually destabilise people who are concerned about community railways because they are already hyper-sensitive to the suggestion that this new legislation is meant to be Beeching No 2. I think there is a little inconsistency with the Government saying consistently, as it has, "No, we are not looking for ways to get rid of all these lines" and, on the other hand, the Secretary of State in an unexpected and unusual fit of pique saying, "We are not in the business of carting round fresh air". Well, no.

Mr McNulty: I think that was a statement of fact rather than a fit of pique. I understand the sensitivities that are there but we would far rather - and this is what the strategy does - focus on the 90 per cent which is getting full, optimal use of our network. There are some examples where that has worked, and worked well, and there are some really encouraging signs that we want to repeat.

Q427 Mrs Ellman: In the Railways Bill you are proposing to abolish the regional rail passenger committees rather than to reform and improve them. Is that not going to make the development of a community rail strategy more difficult?

Mr McNulty: I do not think so. As I say, many of the tags in the legislation are either precursors of or part of a whole range of things that are being gone through, and the Bill is just part of it. We are formally, as you suggest, abolishing the regional rail passenger committees. We are replacing them, with full cooperation and consultation, with the national RPC, with what we think will be a more refined structure, a stronger structure. The development of community rail partnerships and the development and understanding of localised networks does not need and absolutely require regional rail passenger committees in their current form. We think they are moving to a far stronger voice.

Q428 Mrs Ellman: My criticism is not that you are not leaving things as they are, but instead of strengthening that regional and local voice, you are simply making a national body, and the fact you are telling us the national forum agrees with this is irrelevant; I am talking about strengthening the local voice.

Mr McNulty: The implication in your question was that we could not develop community rail strategies at a localised level without the existence of regional RPCs, and the two do not follow at all.

Q429 Mrs Ellman: How are you going to do it?

Mr McNulty: Central to the entire strategy is the engagement - it is a clumsy, horrible word, but it is now in the parliamentary vernacular, or public policy vernacular - of a whole range of local groups and stakeholders, and that is what has happened in the successful areas where this sort of development has already happened, and has done very, very well. So it is not even at that regional level and regional RPCs; it is far more at the localised level, and where there has been significant engagement, it has worked very, very well.

Q430 Mrs Ellman: Have you made an assessment of the impact of rural closures on levels of demand for main line services?

Mr McNulty: There is a number of elements in that. If the strategy were about Beeching 2 in disguise, then it would be right and proper that we would have done such an impact assessment. Given that it is not, we have not, and in one or two of the examples where there has been success, quite the reverse has happened. The Penistone line. Penistone was very, very cold when I was up there. But that is now effectively an entirely revived branch line that feeds into the Trans-Pennine Express in a way that people did not imagine 10-15 years ago. Something like half a million passengers now use it as a core branch line feeding into the TPE, so there can be a very positive effect on the relationship between branch lines, lesser rural lines and main lines. That is a model that may be repeated elsewhere. I say may be because, crucially, this is an overarching strategy, and what we are trying to get into the ether is, without mixing transport modes, horses for courses. What works in Penistone might not work in Cornwall and might not work on lines like the Abbey line between Watford and St Alban's. I am not saying that the whole strategy is about replicating the Penistone success.

Q431 Mrs Ellman: Is this going to be built into the strategy?

Mr McNulty: Is what going to be built into the strategy?

Q432 Mrs Ellman: The importance, often, of rural local lines to main lines?

Mr McNulty: Where appropriate. Even in the designated lines, not all of them are in such close proximity to a main line in the way that Penistone is and all that it does to feed in through Trans-Pennine Express but, where appropriate, one would have thought for a local community rail partnership to be successful, then of course it would be built in - not to the strategy but to the practice on the ground of the development of community rail partnerships.

Q433 Mrs Ellman: How long would pilot schemes be running?

Mr McNulty: We have said roughly - because again, it is about the local dimension and local experience - two to five years.

Q434 Mrs Ellman: What would happen to a micro franchise if it developed to the extent that more than three trains a day ran from it? Would that breach the criteria?

Mr McNulty: In one sense it is difficult to say, because we do want to, within the overall strategy, look at each individual development of the community rail partnership and its success on its own terms, in its own locality. Clearly, one consequence of saying we are trying to get the most appropriate model for each and every area is that we cannot then insist on a rigid blueprint of a national criteria of assessment against which to judge success or otherwise, so it really does depend in the first instance what the community rail partnerships say they can do over a period of time, how successful they have been in their own terms, rather than come up with some broader national criteria. So it is an overarching strategy rather than having the specific blueprint for how every one of these lines is going to work and reach, in their own terms, the sort of success that Penistone has.

Q435 Mrs Ellman: How are you going to ensure stable and long-term funding for the community rail partnerships?

Mr McNulty: The crucial element there is that that is part of the development of the community rail partnership and is really their job. If you are saying to me the opposite of Beeching 2, if you are saying to me that in the end, is there absolutely 100 per cent stone cold guarantee of long-term sustainable funding by government for each and every line, the answer is probably not.

Q436 Mrs Ellman: Are you going to restore the rail partnership grant?

Mr McNulty: The rail partnership grant remains suspended as part of the mix and transfer of SRA into DfT. That is one of the elements that we need to consider and consider in some detail.

Q437 Mrs Ellman: What do you intend to do about it?

Mr McNulty: We intend to look at it, see where it goes, whether it should be revived and what we should do about it as part now of the transfer of SRA over to DfT.

Q438 Chairman: The difficulty is ACoRP is going to be abolished, is it not, and that is the umbrella organisation for community rail partnerships?

Mr McNulty: Not quite abolished. They are still in talks and discussions as I understand it with DEFRA, their lead body, as to quite what prevails after March next year. We think almost certainly that the SRA element of their funding will continue, certainly through this year, and again, as part of the overall transfer of SRA, principally to DfT, although some parts do go elsewhere, we need to look and consider that too in the light of wherever DEFRA get to with them at the end of their deliberations.

Q439 Chairman: They say very simply "We are a national federation. Our money comes from the Strategic Rail Authority, and the Countryside Agency, both of which are being abolished." Without us, a lot of the new community rail partnerships we have been able to assist will not happen. All I am saying is, does it not seem a bit daft on the one hand to say we want more and efficient community rail partnerships, and on the other hand to say that, unfortunately, we are going to abolish the organisation that has been giving them the greatest support?

Mr McNulty: We are not abolishing ACoRP in the sense that...

Q440 Chairman: If you do not give them any money, you are not going to have a very...

Mr McNulty: We have said SRA's money will continue, at least for the next year, only for the next year in the context of what we cannot do is pre-empt their discussions with DEFRA via the Countryside Agency.

Q441 Chairman: Are you not connected? Is there not any connection with the firm next door? Both you and DEFRA are parts of the same government, are you not?

Mr McNulty: There are, absolutely, connections.

Q442 Chairman: We do not really want you sitting there waiting for somebody else to take a major decision which could determine whether or not community rail partnerships are viable. Could you not give them some encouragement that you are not going to sit back? Saying to somebody, "You are not going to be abolished; we are just going to let you fight with your existing Department and, when we see how much money you get, we might talk to you" is not exactly the greatest support in the world, is it?

Mr McNulty: We have already talked to them, and we have already talked to them, as have the SRA, to the extent that we have guaranteed the elements of funding that come from this side of the table, but I take your point; it is one family and I am happy to undertake to talk with DEFRA, see where they have got to in their discussions via the Countryside Agency with ACoRP and report back to the Committee; more than happy.

Chairman: That would be helpful.

Q443 Mr Donohoe: Why is it that when we do any infrastructure work in the UK, it is so much more expensive than anywhere else in the world?

Mr McNulty: The short answer to that is the complete and utter mess that followed immediately in the wake of privatisation. The more useful answer is that over the last year or so we are getting to a stage where, working collectively with the industry, we are trying to drive down those costs, certainly in terms of rail infrastructure, and I think there are signs of success. I had the great pleasure of tootling up and down 15 km of line between Burngullow and Probus down in Cornwall, where we opened up a double track. That cost £15 million. The equivalent stretch of line, with pretty much the same signalling, same double tracking, was executed or undertaken some three or four years ago on the Chiltern line at a cost of £60 million. So there are signs that we are getting those costs down but it is not, sadly, restricted simply to rail kit and infrastructure, and it does seem, as others have suggested, to go across other modes too. We do not seem to be able to do light rail and trams at anything like the price that they do in the European context, and we need to understand why that happens.

Q444 Mr Donohoe: Is it something to do with the fact that we have allowed the private sector to come in and exploit the situation?

Mr McNulty: I think in the past that may well have been the case, and certainly there are early signs that Network Rail taking all their routine maintenance back in house and having greater control over who does what when, as well as greater control over cost, is working and working well. Whether that would be appropriate in terms of renewals, signalling and other elements of work, I am not entirely convinced of. Your point is that at least in part that is what I meant by the initial mish-mash that followed in the wake of privatisation.

Q445 Mr Donohoe: Is there any analysis being done inside your Department showing the direction that it is going will equal that of the development costs in, say, mainland Europe, for instance?

Mr McNulty: I do not know if there is any specific cross-national type research happening in that regard. Certainly in Network Rail and the Department, in all the elements that make up the rail industry, there is constant review of cost structures here compared to our European counterparts. As I say, Network Rail I think over certainly the best part of the last year are really significantly getting to grips with costs, and we are starting to see the dividend in terms of their money going a lot further in terms of infrastructure investment.

Q446 Mr Donohoe: On the basis of the way Network Rail was set up by your Department as non-profit making, why do you not do the same thing with new franchisees running the trains themselves?

Mr McNulty: Because I suspect the first time we do that - and I know there is a campaign around at the moment to do it with SET - many in the private sector across the entire industry will start asking why they should bother, and any investment that there is now in existing franchises would dry up, and any potential investment that there may be in subsequent franchises and investments will simply dry up.

Q447 Mr Donohoe: It is working inside the infrastructure side of the business, and that is a fairly substantial proportion of it.

Mr McNulty: Except that Network Rail is not government. It is not for profit. It is not public sector.

Q448 Mr Donohoe: Why not set up a similar kind of company to operate the trains?

Mr McNulty: As I said, in the end, we are putting £73 million a week into railways, and there is roughly the equivalent going in from the private sector. That will dry up overnight, and what possible incentive will there be for anyone who is only just starting a franchise to put any substantive investment of any sort into it?

Chairman: There are occasions when we have difficulty seeing all this enormous amount of private investment.

Q449 Mr Donohoe: If I may follow your train of thought there, Minister, if we take it to the point where you have companies that have been set up not for profit, surely it does make some sense that you can get to the point where you do the same with the operating companies. If one looks at the balance sheet of the operating companies, they may well be pumping money in, but they are equally taking more money out in terms of the profits that they are making. Would it not be better in the circumstances to have a similar set-up inside the operating companies as you do with Network Rail? If it is possible to do it with Network Rail, surely it is possible for the Department to do exactly the same with the train operating companies and have that same sort of situation?

Mr McNulty: I think in organisational and other terms, to compare the Leviathan that is Network Rail and its responsibilities in the industry to TOCs is apples and pears.

Q450 Mr Donohoe: When you get to that type of answer, I have to do the equation and suggest that if you are trying to continue to run trains in rural services, which will never make money, if you are into the profit motive, it is almost inevitable that you have to start having some kind of criteria to close down the rural routes, because they are never going to make any profit, and you are certainly not going to be in the position of being able to attract private money into these routes to be able to make them viable.

Mr McNulty: The franchisees take over networks, not bits of a network that they fancy and are the most profitable. Like any other company, they make whatever moneys they make on the profitable elements of the route and sustain the non-profitable elements. That is not exclusive, by the way, to the rural dimension. There are certainly some elements of urban networks that are equally under-used. In the old days, British Rail's classic mode of shutting a service was to make it so appalling, so infrequent and so unreliable that nobody used it and then turn round and say "No-one uses the station so we will close it down."

Q451 Mr Donohoe: Is it not possible for these franchisees to do exactly that, and to make sure that they bring it to your attention that it is so dire as a service that they are running on thin air, and the franchisees can say "We don't want to operate this" and you would have to take that into account?

Mr McNulty: Certainly there was potentially scope for that under the mish-mash system of franchises immediately post privatisation. We are seeking to re-map the franchises and get some logic and integrity back into them. You will know that East Anglia is now all one franchise and has an integrity as a network far more readily than the unnecessary splits there were in the case of East Anglia. In the body of the new franchise agreements that we are seeking to work towards, it will be that here is a network that needs sustaining, not simply one line and, as I say, the mish-mash that was there in the past.

Q452 Mr Donohoe: Do you think there is any danger in the same company operating buses and trains? Can I ask you more specifically, in that case or in any case, do you think the whole question of bus substitution for rural rail routes has been finally laid to rest?

Mr McNulty: I saw that as one of the questions and I thought it was quite strange, in the sense that bus substitution, where appropriate, may still well have a role to play. I do not know, but if the question is - I remember someone raised at Second Reading the notion that there were all sorts of promises that buses would fill in the gaps left by much of what Beeching did in the early Sixties that never materialised at all. I took the question in that context, so are we saying that bus substitution will be a flim-flam and excuse to close lines and then not materialise? I do not think that is the case at all. Should there be further integration, especially in rural areas, between bus and the tail end of rural lines? Absolutely. In Penistone that is working, and working well. I know you have had the OFT in earlier. Their role and responsibility comes under another department to me, but I think they are slowly moving in a more robust and flexible direction in terms of understanding what does prevail in the interface between different modes.

Q453 Mr Stringer: I will come back to that, if I may. If I can start with almost the opposite point, we have had evidence of a lot of cases of rural railway lines being subsidised at the same time as bus services going from, say, points A to B are also subsidised. Are you satisfied with that situation?

Mr McNulty: We are trying, certainly in the first instance, with PTEs following the transport review White Paper in July, at that local level to get far more integration and provide a framework where far more integration can happen between rail and buses, and I think that is something we need to look at in terms of rural areas too.

Q454 Mr Stringer: Those clearly are worthy objectives, but how will you do it? There is subsidy coming from the county council possibly to the bus service and subsidy coming via the Department of Transport in the future, SRA at the moment, to rural services. How will you actually get that co-ordination?

Mr McNulty: As I say, in the case of the PTEs in terms of the Bill - and bear in mind, as you well know, that although principally there were the old met areas, met area does not equal 100 per cent urban, and there are certainly rural dimensions to the PTEs. How will we do it in the first instance? We will not. We are trying to work with the PTEs in the case of the Bill so that they can get to the position where they offer a far more integrated approach. The county councils, partly through the Local Transport Plan process and others will seek the same. I do not say it will be easy but I think the import of your question is a very real one. If you are running, effectively, a bus service and a train service along the same or similar routes, it is worth exploring how the two interface and how the public subsidy interfaces.

Q455 Mr Stringer: How do you think the Competition Acts are operating in relation to rural train services and bus services? Do you think they could be improved?

Mr McNulty: I think they are getting better. I did not have the chance to sit in on your previous session but I think they are getting better in two ways. Firstly, the OFT and the Competition Commission are starting to understand, perhaps more readily than they did in the past, how the interface between various transport modes is in particular areas and what "the market" means in particular areas. At the other end, I think local authorities, PTEs and others are working far more closely together and understanding far more readily what can and cannot prevail under the competition scenario. When the competition framework was first put in place, there would never have been even an attempt by 14 bus companies across three local authorities in the Havant area to come up with an integrated ticket that covers all their bus services in the three areas. The response in the first instance, in the immediate wake of the competition framework, would have been "too hard" or "impossible" or "we can't do it." But they have worked with the Competition Commission to get to a stage where that is workable or do-able, and I think it is successful and that has been followed in other areas. It is a slow process, but rather than simply dancing round each other's handbags, both sides of that particular relationship are starting to understand each other better. That is not a criticism of the past. The competition framework is relatively new, and people need to find out exactly what will and will not prevail within it. I know there are examples in some areas where inter‑ticketing, securing quality bus corridors and other things seem to be terribly difficult to do in the context of the OFT and the Competition Commission. I think, again, there are lessons to learn there as we move forward.

Q456 Mr Stringer: I will come back to that point, if I may. You mentioned that the OFT and the Competition Commission are not your responsibility. Do you meet them regularly to talk about these issues?

Mr McNulty: I am not sure I would define it as regularly, but as and when necessary, we do, or someone in the Department does. As and when there are particular issues, we do. I have, and I know the Secretary of State has, met them in the past to talk about this whole series of issues like inter-ticketing and others. More recently, or round about the same time, we met them specifically to talk about their report on taxis and deregulation of the other elements in that regard. I will probably meet them less regularly now in the sense that I met them or interfaced with them far more regularly when I was Buses Minister. I do not do buses any more. I still use them, of course, but I do not have policy responsibility for them.

Q457 Mr Stringer: There are very specific proposals, of course, for taxis. I just wondered whether you met them regularly, when there were not reports, to talk about the overall regulation of the Competition Acts.

Mr McNulty: Not in any general sense. It would be wrong to suggest that I have a two- or three-monthly meetings on a regular basis with the OFT or the Commission to talk about transport issues.

Q458 Mr Stringer: You were not in for the session with the OFT. One of the things that surprised me was that, although they were not sure of the figure, they thought that five times they had prosecuted bus companies for anti-competitive behaviour. That is not very often. Are you surprised that it is so low, and are you satisfied that either the law gives them sufficient power to deal with anti-competitive behaviour or that they are as assiduous and aggressive as they should be?

Mr McNulty: As I say, I think there is now far more readily a willingness on the part of OFT to sit down with local authorities, with PTEs, on a far more focused basis than perhaps they have done in the past, to get an understanding of what is going on in local transport networks, and with operators and with others, and that should lead to a greater understanding both of what local authorities and PTEs want to do, what needs to prevail in terms of competition and what needs to prevail in terms of the prosecution of anti-competitive behaviour. I do not know if they said it or not but I think they would admit that there has been a learning curve in terms of interacting with local transport "markets."

Q459 Mr Stringer: If in one urban area - or rural area, for that matter, though I suspect the issue is less common in rural areas - you have two dominant suppliers of bus services charging different bus fares, one obviously higher than the other and not competing against each other, do you think that should be a prima facie case for investigation by the competition authorities?

Mr McNulty: It would depend on the specific circumstances, so I do not know about prima facie, but if after initial investigation it would appear to warrant investigation, then they should do.

Q460 Mr Stringer: If you can come full circle from subsidised competition to aggressive competition from private, unregulated offices against subsidised public rail, either light or heavy rail services, do you think that the government should intervene in that situation?

Mr McNulty: My initial reaction would be to say no, because I would far rather it was resolved at the local level, and I think what we put into places in terms of public policy, in terms of the transport review, should provide the framework for local authorities and PTEs far more readily to deal with that themselves in terms of quality bus contracts and how they integrate with either element of local transport far more readily. It does appear to be not terribly clever that PTE, for example, can try as best it can to control what is going on in the bus network in its area, but have no control over or say how that interfaces with light rail, with heavy rail, or no real control if an operator comes to them and says, "We have tried to flog that route to death, it doesn't work so we are stopping it." If there is a broader, strategic framework of control that the PTE can bring to have all those elements come together, for buses in terms of what we said about quality bus contracts, and giving the bus service operators' grant to local authorities to manage and control far more readily the strategic nature of their bus network, I think we start to get to a position that far more readily reflects what the local PTE and local transport needs are.

Q461 Mr Stringer: Are you satisfied with the way costs are apportioned to rural railway lines? Do you think it is fair that they have overhead costs from the main lines and from head office apportioned to them which make the subsidy per passenger look excessively large when in reality it is not?

Mr McNulty: It is a difficult one, and I would say it is something that at best could be described, from our perspective anyway, as work in progress, trying to really unpick what costs should be apportioned and otherwise. We have started the process. I think it is fairly robust but more work does need to be done.

Q462 Mr Stringer: Will that be your decision finally or will it be Network Rail's decision?

Mr McNulty: In essence, under the new structure, probably more in the first instance Network Rail's than ours; under the current structure probably more a mixture of us and SRA. It is the franchisee element as well as the infrastructure element in terms of the cost base. That is why SRA.

Q463 Mr Stringer: You were honest enough in answer to questions from Mrs Ellman to say that there might be the possibility, although it is not the Government's intention, of the closure of a rural line under the new rules, and I certainly appreciate that honesty. Does it worry you that, having set up a process both within the PTE areas and the shire areas which makes it easier to close lines, that a future anti-rail Conservative government will come in and grab hold of this legislation and close those lines very quickly?

Mr McNulty: I suppose the semi-facetious but serious answer is I do not see that coming in the foreseeable future. By the time that does happen, I suppose, even though there is a remote possibility of that happening, we will have flourishing community rail partnerships up and down the land, à la Penistone but in their own, appropriate local dimension that they could not touch even if they wanted to, and I do not believe actually, given where we are in terms of the public and private transport network infrastructure in this country, that an anti-rail government, Conservative probably, would get very far.

Q464 Miss McIntosh: Minister, do you agree with the comments made by the outgoing Chief Executive of the Strategic Rail Authority, who said, "Britain's competition authorities are hampering co-ordination between the different branches of public transport"?

Mr McNulty: I think from the answers that I have already made you will know that I probably do not agree with that now but may have done when he said it. There has been an iterative process between the transport sector and the competition sector, for want of a better phrase. Both sides are learning and things are far more robust now than they were before, and I think that learning process continues. So on its own as a statement reflecting today's current position, I would probably err on the side of gentle disagreement.

Q465 Miss McIntosh: Do you think it is acceptable that it has taken over two years and a consultation paper is only going out in the New Year to allow through-ticketing on a block exemption?

Mr McNulty: Do I think the two years is unacceptable? So long as the job is done properly, no, I do not think so. Would you rather six months and it not be done properly?

Q466 Miss McIntosh: Is through-ticketing not an inherently good thing if it is going to encourage more people to travel and to integrate between bus and rail?

Mr McNulty: Of course.

Q467 Miss McIntosh: That is presumably what the OFT is there for, to implement the Competition Act. I would have thought it was an unacceptable period of time, more than two years from the Competition Act to now, with the consultation only coming out in January.

Mr McNulty: No, I would not agree at all. I do not understand why the two years is unacceptable if the consultation paper and what it proposes is the right and proper way forward rather than otherwise. Anyone can do sloppy work over three months, knock it out, satisfy people in terms of the temporal fixation, but not the end result.

Q468 Miss McIntosh: Do you think that there was much consultation between the issuing of the latest railway timetable and the bus operators connecting with those trains?

Mr McNulty: I think there has been fairly extensive consultation with all sorts of stakeholders. If buried in the question is the notion that bus and rail operators should talk to each other more readily and, within the competition framework, have more scope to integrate more readily, I probably would agree.

Q469 Miss McIntosh: You will be familiar, presumably, having been the Buses Minister, with the Select Committee report from 2001. Are you disappointed that there has not been more movement on travel cards, prepaid tickets and electronic smart cards?

Mr McNulty: My disappointment would be modified depending where I was looking at it. If I look in the London context, I am terribly pleased with the advances there have been in terms of integration and issues like zonalisation, through-ticketing and others.

Q470 Chairman: Of course, London does not have the same system as the rest of the United Kingdom.

Mr McNulty: If it is slower in the rest of the United Kingdom, then I would encourage all parties to work together to improve it, and crucially, which is what I am trying to work on as London Transport Minister, make sure that eventually the inter-operability between the two works. I do not want - which I am sure will happen eventually - the rest of the country to overtake London in terms of integration and then find that, through a lack of compatibility or whatever else, the two do not interface.

Q471 Miss McIntosh: What is the involvement of European Railways Agency in particular in allowing differential standards?

Mr McNulty: It is only just coming into focus, so we need to work with them to see what prevails.

Q472 Miss McIntosh: Have there been any ministerial meetings with the European Railways Agency?

Mr McNulty: I have certainly not met the ERA but I have only been Rail Minister for two months.

Q473 Chairman: Is it true that part of the third package is the suggestion that every railway station in this country should be able to sell tickets to any other railway station within the European Union?

Mr McNulty: Not as far as I am aware. I had the great pleasure of being in Brussels last Thursday and Friday for Council, where the first element of the third package, train drivers licensing, was discussed. I know there are a couple of other dimensions to the overall package. I will find out, if I may get back to the Committee.

Q474 Chairman: We would like to know, because, as you know, it took some companies long enough to get any ticketing machines that worked for anywhere, and one can foresee some slight difficulty if they are required to issue tickets to Lithuanian destinations as well.

Mr McNulty: Underlining at least some of the deliberations last week in Brussels is whether the third package would be a package or not, or whether it would just be one item. But I will find out if that is a proposed element of the third rail package and report back to the Committee, happily.

Q475 Miss McIntosh: We took evidence that for the rural railway network to be a success, there have to be certain exemptions on the technical specification, not for safety reasons but just for technical reasons. Are you confident that we will be able to negotiate these differential standards, and who will negotiate them?

Mr McNulty: I am confident, obviously, that they can be negotiated, but you are right; it will not be on safety, in terms of the rolling stock especially, because in many instances that rolling stock does have to cross over some of the more significant main lines as part of the network. I am pretty confident that we can get to a stage where those exemptions are negotiated.

Q476 Miss McIntosh: Are you able to say why through-ticketing is perhaps more extensive and more successful on mainland Europe than here?

Mr McNulty: No, I am probably not, to be honest. I have been two months a Rail Minister. I am still trying to read - I am not using that as an excuse, by the way - in terms of what prevails in every nook and cranny of the UK system, which I am fairly confident about. Cross-comparing it with other European systems I am slower on but getting there. The through-ticketing in the first instance I would guess is because there has been, as a matter of public policy fact, certainly since the War, a good deal more focus on integration within and between modes in the European context than there has been in the UK context, and that is to damn all previous governments, not just those the same colour as your coat.

Q477 Miss McIntosh: One final question following on from what Mr Stringer said. Can you confirm that where a passenger transport executive is party to a franchise, the Government will not retrospectively remove them from such a franchise?

Mr McNulty: If they are already co-signatories to the existing franchise, that is the case. We have said very, very clearly as part of this transition in terms of the rail review White Paper none of it will be, by definition, retrospective.

Q478 Chairman: I want to ask you one or two specific things, please, Minister. Are you going to keep the community rail team together?

Mr McNulty: As I was alluding to earlier, in the first instance, that will be part of the process of marrying together the current rail...

Q479 Chairman: Yes, but are you going to keep the core of the community rail team together, because they have been doing a specific job?

Mr McNulty: I should think, in all honesty, the strongest I can say on that is I would hope so.

Q480 Chairman: What are you going to do with the SRA team of regional planning officers?

Mr McNulty: Again, they shall be thrown into the mix of the process of transition between where we are now with DfT Rail Directorate and SRA and the new model. The notion that a future DfT rail unit could do the work that it seeks to do without that strategy and planning expertise of SRA is doubtful. I only hesitate because we are talking now about a process whereby all the elements of expertise in particular jobs needed for the new DfT rail unit are being worked up as we speak and I wouldn't want to go further because we could be talking about individuals' jobs.

Q481 Chairman: If you throw people into a mix, quite often they are minced.

Mr McNulty: Throwing them into the mix is probably the wrong phrase then, but we are going through a whole process now, having sorted out the high-level elements of the design of DfT rail unit, of quite what expertise all the way down to what number of jobs we need in each of those directorates in each area and to do what. To go much further in terms of almost guaranteeing a ring-fencing of particular roles of teams in SRA is probably unfair of me as part of that process, because we are talking about the best part of 500 plus individuals going to 280-300 individuals.

Q482 Chairman: I understand that, but what we are really saying is could you give us a guarantee that the community rail partnership teams, however you define that, are going to exist after you have pared down all these existing services?

Mr McNulty: I think this is the best I can probably say: the community rail functions that currently prevail in SRA and DfT will continue in some form or other under the new system.

Q483 Chairman: That may be the best we can do this afternoon. Is the Department going to take responsibility for British Rail Property Residual Limited?

Mr McNulty: Probably. Almost certainly. We have just not finalised all these things yet.

Q484 Chairman: But you can see the logic. There is a lot of land. Some of us were very disturbed about the amount of railway land that went with the previous Railtrack, some of which they hung on to, but there's still a lot of land. What happens to that is very important to developing the railway. If it is sold off for unusable developments, which may be very nice having even more houses on brownfield sites, it is not going to do the railway a lot of good.

Mr McNulty: I think when the history of the last ten years of the railways is written, that will be post-privatisation one of the real elements that will need focus on because we missed the boat pretty much on that. I was exploring quite what is held by BRP and now I think they own something like - forgive me if the numbers are not entirely right - 840 sites, 780 of which are worth less than £50,000.

Q485 Chairman: The big money went to Railtrack.

Mr McNulty: In terms of larger and more necessary operational bits of British Rail land, they went to Network Rail rather than BRP with, as you say, a huge chunk of what was railway land in the middle between the British Rail position and the position that prevails today, where perhaps there was not the best utilisation or far-sighted portfolio management of those strips of land.

Q486 Chairman: Are you satisfied with the leasing charges that are levied on older rolling stock which is cascaded down to rural lines, to use one of those ghastly phrases?

Mr McNulty: We have said as part of the overall rail review we would like to look at, not through legislation but look at the entire relationship of the industry with ROSCOs, and I think the sort of cascading element in terms of older stock going on to some of the rural lines, and the costs of them, is part of the review of that process. I think it is worthy of review and exploration.

Q487 Chairman: You are aware that the leasing costs of the older rolling stock are very high? Would you, if need be, intervene in that?

Mr McNulty: We will undertake the review from top to bottom in the context of the rolling stock strategy SRA have and look at how that cascades across the piece.

Q488 Chairman: Could we assume that one of the reasons for the creation of Network Rail was in order to give the government a benchmark by which it could pursue whether or not it was getting good value for money? There might be an opening for a non-profit making company that deals with rolling stock, and that would also give you some idea of whether or not the leasing companies were charging correct amounts, would it not?

Mr McNulty: There are certainly no barriers at the moment in terms of the way things are configured for a not for profit company becoming involved in the provision of rolling stock.

Q489 Chairman: Are you going to allow spot hire markets like Fragonset to play an increasing role in providing rolling stock?

Mr McNulty: Last week in Rail magazine there was an interesting piece on that, where locomotives could almost be hired by the hour or by blocks of time to facilitate their use on parts of the rural rail line, and I think that is worth exploring.

Q490 Chairman: You will be aware that at the present moment there is a little window, because there is rolling stock and there are carriages available, and if they are properly utilised, they could transform a lot of the existing services, and so far there is not a very clear view that the companies have undertaken such reorganisation.

Mr McNulty: I would agree; that should be looked at, and looked at in some detail.

Q491 Chairman: If one charges lower rates but gets older rolling stock and possibly lower standards on rural lines, what is that going to do to the need to improve access for disabled members of the community?

Mr McNulty: It is not pedantry or mincing words, but I would say appropriate standards rather than lower standards. I think they are in the main focused on track and infrastructure rather than rolling stock, but I do appreciate that it will take time for all DDA-compliant and every other relevant rolling stock to cascade through if that is the model that prevails, and I do not think there should necessarily be, where we can, a lowering of standards in terms of accessibility to any part of the rail network.

Q492 Chairman: Are we going to keep the statutory half price concessionary fares on community rail lines?

Mr McNulty: I think the short answer is no, because the revenue mix is part of the elements of sustainability for these lines, and if you are putting one back behind their backs straight away in terms of concessionary fares, I do not think that is an entirely appropriate place to start. Whether they end up with, on the back of their success, a concessionary fare regime, that is a secondary issue, but I think in the first instance, no would be the short answer.

Q493 Chairman: Will there not be a conflict for the Government if on the one hand it requires an extension of concessionary fares for those who most benefit and on the other hand it says to particular areas "We will allow you to escape that recommendation"?

Mr McNulty: Not escape it, but in the interests of a public policy balance and equity between persevering to keep these lines fully functioning and with a degree of sustainability for the future, against the notion of concessionary fares, I think that is a mix and a balance that we need to weigh up, and we have weighed up, and if concessionary fares can be, longer term, factored back into what CRPs do with these lines, all to the good, but one of the only sources of any significant revenue for these community rail partnerships is the fare box and it is unnecessary I think to restrict that in the first instance.

Q494 Chairman: Can you do anything about the competition between subsidised bus and subsidised train services running on the same corridor?

Mr McNulty: Mr Stringer has already referred to that, and I think it is something that we can look at far more readily in the context of what we are doing with broader transport review and encouraging local authorities, PTEs and local councils to go for a far more integrated approach that includes rail as well as simply buses.

Q495 Chairman: Finally, I do want to bring you back to the Office of Fair Trading. We listened very carefully to their arguments and, frankly, we went round in a rather narrow circle and came back to where we started. Are you satisfied that the change in legislation will enable the Office of Fair Trading to regard transport as a public service and to accept a properly based assessment of public interest? We were told still this afternoon that their interpretation of public interest would be economic benefit to the customer. You and I both know that is not the only interpretation of public interest. In fact, it is such a narrow interpretation I think both you and I would have some difficulty in explaining it to our constituents. Are you quite satisfied that the Office of Fair Trading has got its ideas straight on what it is supposed to do?

Mr McNulty: I think the short answer is yes, and more satisfied as experience grows, not simply, as I say, in terms of how they interpret how they should work with local transport sectors but increasingly how local areas and locally based operators can work within the OFT and the competition framework to secure what they need for their communities.

Q496 Chairman: Yet they would say, as they did this afternoon, there is not a problem for bus companies and rail companies having integrated ticketing, because they just have to be within the block exemptions, and they have to come to us if there is a difficulty. Surely, if they are fulfilling their task properly, people should automatically know whether the agreement is within or without a block exemption.

Mr McNulty: From my experience last year as Bus Minister, it is clumsy round the edges, but I think collectively it can and will get better. Part of what I need to do is almost, within the family of organisations in rail, to get ticketing appropriately done at some areas, at some stations, rather than otherwise. There is a lovely new station that cost about £500,000 called Adwick in Doncaster North, where there is a lovely little man running a brand new park and ride facility. It all works very well and presses all the right buttons in terms of what we were trying to do, but through some complicated nonsense between the various elements involved in railway, he cannot sell tickets. He can sell orange juice, he can look after the cars in the car park and all that sort of thing, but he cannot formally sell tickets, which is a nonsense.

Q497 Chairman: You would sort that sort of thing out with them?

Mr McNulty: I am hopefully going back up there to see him when he can sell tickets. He does a nice line in orange juice.

Q498 Chairman: Minister, it has been very interesting to listen to you. Finally, am I to take it the Government are serious about the maintenance of community railway lines? They understand that these are a feeder for main railways, they went to see them developed, and they want to see the opportunity for communities to gain from the operation of these lines being one that is widely disseminated and widely understood. Is that a correct summation of your views?

Mr McNulty: That is an excellent and eloquent interpretation and summation of the views, and the only caveat I would put in is the local circumstances and local response to how to take forward their community rail partnerships.

Chairman: We are very grateful to you, as always, for coming to see us. Thank you very much.