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Session 2005 - 06
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Standing Committee Debates

Sixteenth Standing Committee on Delegated Legislation

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Sixteenth Standing Committee on Delegated Legislation

The Committee consisted of the following Members:


Mr. Christopher Chope

†Atkinson, Mr. Peter (Hexham) (Con)
†Brake, Tom (Carshalton and Wallington) (LD)
†Brazier, Mr. Julian (Canterbury) (Con)
†Joyce, Mr. Eric (Falkirk) (Lab)
MacShane, Mr. Denis (Rotherham) (Lab)
†Morden, Jessica (Newport, East) (Lab)
†Morgan, Julie (Cardiff, North) (Lab)
†Mudie, Mr. George (Leeds, East) (Lab)
†Mundell, David (Dumfriesshire, Clydesdale and Tweeddale) (Con)
†Osborne, Sandra (Ayr, Carrick and Cumnock) (Lab)
Pugh, Dr. John (Southport) (LD)
†Roy, Mr. Frank (Motherwell and Wishaw) (Lab)
†Ruddock, Joan (Lewisham, Deptford) (Lab)
Scott, Mr. Lee (Ilford, North) (Con)
†Twigg, Derek (Parliamentary Under-Secretary of State for Transport)
Wilshire, Mr. David (Spelthorne) (Con)
Frank Cranmer, Committee Clerk

† attended the Committee

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Thursday 14 July 2005

[Mr. Christopher Chope in the Chair]

Draft Railways Act 1993 (Determination of Turnover) Order 2005

8.55 am

The Parliamentary Under-Secretary of State for Transport (Derek Twigg): I beg to move,

    That the Committee has considered the draft Railways Act 1993 (Determination of Turnover) Order 2005.

Mr. Chope, it is a pleasure to serve under your chairmanship again so soon after the last time.

I am pleased to have this opportunity to discuss the draft order, which defines “turnover” for the purposes of considering a financial penalty that may be imposed on a railway operator in specified circumstances in accordance with the enforcement regime contained in the Railways Act 1993. Those circumstances are when an operator breaches the terms of a franchise, the conditions of a licence or a condition attached to the agreement that a railway service or facility may be closed. In addition, an operator could be required to pay a penalty if he failed to comply with any of the terms of an enforcement order issued under section 55 of the Act. Alternatively, a requirement to pay a reasonable sum might be included in an enforcement order, to be paid if the operator contravenes specified terms of that order.

The order defines the turnover that is applicable if a penalty or sum is to be imposed in any of those circumstances. To clarify what we mean by a “railway operator” in this context, a person may be subject to a penalty if he is the franchisee or the franchise operator who is a party to a franchise agreement, the person to whom a licence has been issued, or the person on whom a closure condition has been imposed. The need for the order arises because the Government introduced in the Transport Act 2000 a statutory ceiling on penalties of 10 per cent. of an operator’s turnover, which makes it necessary to define what we mean by “turnover”. A similar statutory ceiling applies to the penalties that may be imposed by the relevant regulatory authority for other regulated utilities—for example, gas, electricity, water and postal services—and under competition and enterprise legislation, and similar but not identical orders defining turnover are already in force relating to those industries.

The order defines turnover by reference to what should be included in the applicable turnover and sets out the period over which the applicable turnover may be measured when considering the amount of a penalty that does not exceed 10 per cent. of turnover. The applicable turnover is defined as the turnover derived
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from an operator’s railway business activities in Great Britain during a business year, net of discounts, VAT and other taxes but inclusive of grants and subsidy from Government sources. The order includes a non-exhaustive list of other income that is relevant. The definition of applicable turnover is relatively wide, which is necessary to avoid circumstances arising in which there is limited turnover available on which to base a penalty in the case of a particular contravention when the operator may, in fact, have a substantial income from wider railway activities.

The order also ensures that there is flexibility to consider a substantial penalty if the circumstances warrant it. Any penalty regime must provide for the penalties imposed to present a genuine deterrent, otherwise the regime will not be effective. The order sets out the period over which turnover will be measured when calculating a penalty. When a contravention has lasted for any period of up to 12 months, the preceding business year’s turnover will be taken into account in the calculation. It is anticipated that most contraventions will fall into that category, as most contraventions are detected quickly and put right. However, for contraventions that continue for longer than a year, additional turnover will be taken into account, depending on the duration of the contravention, up to a maximum of 24 months. That approach is appropriate to ensure that a larger amount of turnover may be taken into account when an operator has not acted quickly to remedy a contravention within a year. The longer the contravention continues after that point, the larger the penalty could become. That should be an incentive to rectify failures quickly.

It is, however, appropriate to balance that approach against the financial risk that may arise if operators are exposed to the potential for a penalty to grow indefinitely. We have therefore put a two-year cap on the maximum amount of turnover that may be considered when a contravention has continued for more than 24 months. In addition, circumstances could arise in which it was deemed appropriate to impose a penalty on an operator who had less than one year of previous accounts—for example, a newcomer to the industry who had nevertheless failed to perform, warranting a penalty. If there is no preceding business year the amount of turnover in the current year should be used. In practice that may mean that the authority will tend to calculate the cap on turnover by reference to turnover for the year to date, although it would be open to the Secretary of State, the Office of Rail Regulation or Scottish Ministers imposing the penalty to wait until the year had ended and the operator’s figures for a full year were available.

The draft order is not concerned with the policy approach to setting penalties. The decisions about when to impose a penalty and its size subject to the 10 per cent. limit are matters for the person imposing the penalty. At present the Strategic Rail Authority and the ORR have that power. Provisions in the Railways Act 2005 will, when brought into force, transfer the SRA’s role to the Secretary of State for Transport and Scottish Ministers and, in the case of
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the SRA’s role in relation to the consumer protection, it will transfer conditions of licences to the ORR. In due course the Secretary of State, the ORR and Scottish Ministers will consult on and publish a statement of policy about how they will approach their powers to impose penalties. There is, therefore, a clear framework of decision making into which the order slots.

The 2005 Act sets out the key principle that, first and foremost, any penalty must be reasonable. Once it has satisfied that criterion, a penalty cannot exceed 10 per cent. of turnover as determined in accordance with the definition in the order. Within those boundaries, it is for the authority taking the enforcement action to make its own decision in the light of all the circumstances. It is not always appropriate or necessary to impose a penalty. To put the order into context, only three penalties have been imposed under the Railways Act regime, which began in 1993. In the vast majority of cases, alternative remedies are effective and appropriate—for example, it may be appropriate to require an operator to put in place an action plan to ensure that a failing is remedied and a repeat offence is avoided, rather than imposing a penalty. Effective day-to-day management is the key to delivering an efficient and reliable railway that puts the interests of rail users first and avoids the need to resort to enforcement and penalties, but an effective enforcement regime with the prospect of a robust penalty for failure to deliver is an important component of such a system. The order will ensure that the relevant authority has a clear definition of what turnover may be taken into account when determining a penalty, if circumstances arise in which a penalty is deemed necessary.

9.1 am

Mr. Julian Brazier (Canterbury) (Con): Mr. Chope, it is a pleasure to serve under your chairmanship during our brief proceedings today.

The Government consulted widely on the order—an uncontentious measure that commands support from all quarters—but I have a few questions. During consultation, did the train operators express the view that an upper limit of two years’ turnover was acceptable? The Minister mentioned that the limit had come down from three years to two after the consultation.

Is there still concern about the risk of very high penalties? The majority of train operators that responded during the consultation said that a penalty at the upper end of the 10 per cent. range would put the financial viability of their business at risk. The Minister mentioned the question of viability and explored a complicated point around wider operations; in the process, he may have given an assurance that the adjustment for the maximum time over which railway turnover should be measured fully addresses those concerns, but will he make that clear?

Will the Minister give an assurance that the penalties will not lead to a higher level of rail subsidy as a result of operators seeking additional subsidy to compensate for accepting such a risk when they bid for
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franchises? Without trespassing too far into the unhappy wider picture, the experience with Railtrack left many people wondering whether railways are the right area in which to invest in any capacity. Obviously, there is a genuine concern about that. The Minister said that relatively few episodes in the past had required fines to be levied; none the less, the order opens the way for more.

I recognise that these proceedings will be brief, but may I take the debate fractionally wider? The Minister mentioned towards the end of his speech the transfer of this whole business along with everything else from the Strategic Rail Authority, which is in the process of dissolution, to the ORR, the office of the relevant Minister and the corresponding Scottish Ministers. However, we are dealing with some of the most controversial aspects of the railway business—companies being fined because passengers have suffered—and there is concern about the transfer because the SRA has been fairly accessible on this and wider issues. Indeed, it brought a roadshow to Kent at one point. What assurances can the Minister give that the slightly more nebulous group of officials who are taking the SRA’s place in his office and in his Scottish counterpart’s office will be equally visible and, above all, accessible to people with concerns about the railways?

9.5 am

Tom Brake (Carshalton and Wallington) (LD): I, too, start by saying what a pleasure it is to serve under your chairmanship, Mr. Chope. I welcome the opportunity for a brief debate on the draft order, which strikes a sensible balance between the rights of Government and commuters to receive a decent service and the rights of operators to run their business. It demonstrates flexibility with the levels of fines that can be levied.

However, I seek the Minister’s clarification on the maximum two-year period for which turnover can be considered. If an operator deliberately and in spite of repeated requests chose not to rectify errors, such as those that were identified in 1997 in the national rail inquiry line, and persisted in breaching conditions year after year because the cost of rectifying the errors would be greater than the cost of the penalties, might it not be appropriate to extend the period of turnover beyond two years?

9.6 am

The Parliamentary Under-Secretary of State for Transport (Derek Twigg): Taking the point made by the hon. Member for Carshalton and Wallington (Tom Brake) first, in such matters it is important to strike a balance on the severity of the penalty. It must not be a disincentive for competition or affect people’s willingness to enter the railway industry. Given that turnover is substantial for most operators of rail activities, a 10 per cent. penalty would be sizeable. We could also, as I mentioned, make an order against an action plan. It would be unusual for an operator to flout the franchise agreement for a long period and not to meet the requirements put on it, so the measure is
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reasonable is in context. The final penalty could be that we would end the franchise. As the hon. Gentleman knows, we did that to Connex. Clearly, we would want to avoid that if we can get improvements in the service and deliver a railway service on that line or franchise.

I turn to the points made by the hon. Member for Canterbury (Mr. Brazier). The train operating companies found the two-year upper limit acceptable and have not objected to it. The adjustments in the order are intended to limit the risk of higher subsidy bids because of the prospect of higher penalties. The size of penalties and how they affect subsidies is an important issue.

The hon. Gentleman spoke about the viability of rail businesses. Providing for a penalty of 10 per cent. of current turnover is supposed to ensure that rail operators do not face excessive penalties. However, the additional requirement that the penalty is reasonable means that the authority is likely to consider the impact on an operator’s business when deciding whether to impose a penalty and for how much. There is no set circumstance in which the penalty would be X amount. The Secretary of State, the ORR or the Scottish Minister will have to take account of the circumstances at the time.

The order does not allow the period taken into consideration to be extended beyond two years. Another mechanism is available to deal with persistent breaches, such as the failure to meet national rail inquiries targets, which mean that operators are failing to comply with enforcement action. That could, as I mentioned, lead to the termination of the franchise, which has happened.

The hon. Gentleman spoke about rail investment and performance. The performance of our railways is improving considerably, as he and most people
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recognise. There are benefits from trains being more punctual and the service being better. A record number of people use the railways—more than 1 billion people did so in 2004. The Department for Transport rail group will be accessible. As the railways Minister, I will be accessible on empowerment. We shall discuss issues with Members of Parliament, as I have done in the last few weeks. We want to be accessible and to make sure that we have discussions.

Mr. Brazier: When considering the new railway schedules for Kent, Richard Bowker brought his team down to county hall and there was a good exchange of views with county councillors and MPs. Does the Minister envisage the equivalent team engaging in that degree of dialogue with the wider public?

Derek Twigg: As the Minister responsible, I certainly want the Department to be very accessible. We would have to consider at the time what we would do in certain circumstances. Clearly, if we needed to meet, I am sure that that would happen. However, the hon. Gentleman has to understand that the Department for Transport rail group will be responsible for setting the policy and determining the resources available, whereas Network Rail will be responsible for managing and operating the network. Clearly, we have to work closely with Network Rail. I certainly want to ensure that the Department is accessible. I can give him that assurance. We will put teams in place to interface with the industry and deal with issues that matter to Members of Parliament and members of the public.

Question put and agreed to.


    That the Committee has considered the draft Railways Act 1993 (Determination of Turnover) Order 2005.

Committee rose at eleven minutes past Nine o’clock.


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