5 Vertical integration
98. In 2002, our predecessor Committee, the Transport,
Local Government and the Regions Committee, concluded that "there
is no evidence that vertical integration [of the railways] would
work."[191] That
Committee found that whilst vertical integration might be suitable
in self-contained regional franchises, it would not be a realistic
option for other, less self-contained franchises. We asked our
witnesses to revisit this debate, but found that little has changed
since 2002.
99. Our witnesses put forward a wide range of arguments
rejecting the idea of vertical integration. Simon Norton argued
that vertical integration is problematic because, in many cases,
track is shared by a number of franchise operators.[192]
The Railfuture Passenger Committee said that vertical integration
was likely to be an obstacle to further competition on the network,
not least in the freight sector. [193]
The Department for Transport also cited competition as a key reason
for rejecting vertical integration, stating that a vertically
integrated network would consist of monopolies and therefore,
additional regulation would be required to secure an adequate
level of competition, particularly in terms of inter-regional
and freight traffic.[194]
The Association of Transport Coordinating Officers (ATCO) emphasised
that:
"it is important that Network Rail is able
to exert its role as an impartial 'honest broker' for train pathing
and as overall infrastructure operator, it is able to maintain
uniformity of standards across the network. It is important that
the availability of freight paths is given appropriate importance
and not excluded because of aspirations for increased passenger
services."[195]
100. The Association of Train Operating Companies
(ATOC) embraced the view of our predecessor Committee that some
measure of vertical integration might be an option for small and
self-contained sections of the network. As for the wider network,
both ATOC, Network Rail, and the Department for Transport (DfT)
concurred that current projects to integrate operational management
and planning between Network Rail and Train Operating Companies
(TOCs) as well as the development of joint ventures are already
increasing the level of integration and coherence between track
and wheel.[196] The
key objective of vertical integration, to control interfaces on
the network, is being achieved through partnerships and integrated
Control Centres.[197]
The current consultation by the Office of Rail Regulation (ORR)
on a new incentives framework for Network Rail and its partners
is an example of the efforts of the regulator to promote integration
by proposing a formal structure in which incentives for Network
Rail, franchise operators as well as other parts of the industry
are interconnected and thoroughly aligned to the interests of
passengers.[198]
101. Mr Ford dissented from the view that cooperation
and partnerships have achieved as much as might be gained through
vertical integration. He highlighted persistent failures of coordination,
such as train operators leasing ever-heavier rolling stock which
causes unnecessary and costly damage to tracks. Mr Ford said:
"I would have thought that the radical approach
would be to consider vertical integration upwards from the rail
rather than downwards from the train. […] They have produced
a timetable. Perhaps there might be a case for Network Rail acquiring
trains and running a franchise themselves. That would give you
a lot of continuity and it could have break points in it at which
the Government could say, 'You are doing a good job or a bad job.'[199]
102. Professor Nash highlighted that "day-to-day
operations, planning of the timetable, the flexibility to adjust
things, and indeed perhaps planning investment" are more
straightforward in a vertically integrated system, but also emphasised
that such advantages have to be weighed up against the advantages
of competition.[200]
103. Merseytravel and NedRailways, a Dutch passenger
rail operator, strongly argued the case in favour of vertical
integration at a regional level. Merseytravel took over the management
of the self-contained "electric urban third rail system"
on Merseyside from the SRA in 2003 and subsequently agreed a 25-year
franchising contract with the joint venture Serco-NedRailways.[201]
Merseytravel has actively sought to achieve full vertical integration
on the Merseytravel network. Their proposal was for Merseytravel
to set up:
"a joint venture 'InfraCo' with Serco-NedRailways
to maintain and renew the infrastructure. The aim is to replicate
the success of our operating franchise. Network Rail's operational
responsibilities for track and signals would pass to Merseyrail,
enabling the InfraCo to work solely on maintenance and renewal,
and the train operator to introduce more efficient integrated
management."[202]
104. Merseytravel estimated they would save £33
million net over the 25-year franchise by integrating track and
wheel. They also anticipated other benefits from vertical integration,
for example improvements in reliability and punctuality; improved
responsiveness of maintenance works; increased control, reliability,
transparency and accountability; and more
investment and refurbishment of assets. The Chartered Institute
of Logistics and Transport (CILT) agreed that there is a strong
case for vertical integration on regional or local networks which
do not form part of the national infrastructure, but that this
argument cannot be transferred to the wider network.
105. Merseytravel suggested that an additional benefit
of vertical integration on their network would be the ability
for ORR to use the performance of a vertically integrated franchise
as a benchmark against which the performance of Network Rail could
be measured.[203] Network
Rail, however, withdrew from discussions with Merseyrail, and
the project therefore never came off the ground.
106. We did not receive any compelling evidence
to determine whether vertical integration would improve passenger
services. We believe that vertical integration across the entire
network, and in conjunction with the current franchising model,
would be a retrograde step. But we also believe that vertical
integration may have some merit in self-contained regions, such
as Merseyside. We therefore recommend that Network Rail and the
Government, with advice from the ORR, design and carry out pilots
of vertical integration on self-contained parts of the network,
where a sound case for such pilots can be made. It is essential
that Network Rail supports such pilots. We look to the ORR and
the Government to ensure that pilots are encouraged and given
the best possible conditions of success.
191 The Transport, Local Government and the Regions
Committee, First Report of Session 2001-02, Passenger Rail
Franchising and the Future of the Railway, HC239-I, para 56 Back
192
Ev 208 [Simon Norton] Back
193
Ev 39 [Railfuture] Back
194
Ev 142 [Department for Transport] Back
195
Ev 33 [ATCO] Back
196
Ev 1 [ATOC] Back
197
Ev 142 [Department for Transport]; Ev 109 [Chartered Institute
of Logistics and Transport]; Ev 17 [Railway Forum]; Ev 64 [Network
Rail] Back
198
Office of Rail Regulation press release: ORR consults on the
incentives framework for Network Rail to apply from 2009 ORR/23/06,
31 July 2006 Back
199
Q 246 [Mr Ford] Back
200
Q 244 [Professor Nash] Back
201
Ev 59 [Merseytravel] Back
202
Ibid. Back
203
Ev 59 [Merseytravel] Back
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