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8 Jan 2008 : Column 194

Mr. Harris: I am grateful to the right hon. Gentleman for giving way once more. Would he like to share his thoughts on the fact that European legislation prevents the ownership of trains and tracks together?

Mr. Redwood: I am not an expert lawyer on that issue; nor am I any kind of lawyer. However, my understanding and reading of the situation is that European legislation does not prevent that. That legislation requires more competitive challenge than a nationalised monopoly would allow, so I find myself in the curious position of supporting the thrust of those European regulations and that legislation, because competitive challenge is a good thing.

I turn to the second myth that I want to dismiss before going into the future, where the Minister wants to tempt me. That is the myth, which we have heard throughout this debate, that the particular problems of the constituents of my hon. Friend the Member for Rugby and Kenilworth (Jeremy Wright) and others were caused by fragmentation. That is complete nonsense. If Network Rail had been British Rail recreated, owning the trains that could not run, that would have made absolutely no difference to its mistake over the engineering works at Rugby and Liverpool Street. The same people would still have made the same miscalculation of failing to deliver enough engineers to sort out the complicated project within the deadline.

I am afraid that Labour Members who think that fragmentation caused the problems during the Christmas and new year are simply wrong. The problems were caused by Network Rail’s gross management miscalculation, and would have happened whether there had been fragmentation or not.

Jeremy Wright: I agree entirely with my right hon. Friend. Does he accept that if Network Rail’s management themselves say that there has been a management failure, there is no need for the Government to look for any other explanation?

Mr. Redwood: I agree, and I hope that the Government will not waste money on that. If Network Rail were a business reporting to me, the problem would be so obvious and would be sorted out with a timely and lively exchange with the senior management. I shall come to that when I discuss what power the Government have over that particular creature.

First, however, I should like to dismiss the fragmentation argument. If we compare the rail industry, which has all the problems that we have described—not growing quickly enough, fares too high, inadequate service for many people—with the aviation industry, a successful public transport industry in this country, the contrast is telling. The aviation industry is completely fragmented; on the Labour analysis, it should not work at all—it should be delaying passengers, putting fares up and doing all the bad things that the Labour Members I mentioned seem to expect.

The aviation industry is totally fragmented: there are competing public and private owners of airports, there is a privatised company dealing with air traffic services and a range of competing companies deals with luggage, other services and the retail offer at airports. Furthermore, competing companies own the planes and fly people around.

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Aviation is more complicated to control. If there is a mess on the railways, all the signals can be put on red and problems can be sorted out. However, if a mess is made at an airport, a load of planes will stack up without much fuel and things cannot suddenly stop for a couple of hours so that problems can be sorted out. There would be a real disaster on our hands—the aviation system is much more complicated, working in three dimensions with limited runway space for landings. An awful lot of people would be at risk as they flew above the airport without much fuel in their planes.

The system shows that if we trust competition—what the Labour Members I mentioned would call “fragmentation”—we get much lower fares, much faster growth and much better passenger satisfaction. There is a much better range of offerings at a typical airport than at a typical train station. Airports usually offer a more pleasurable experience, except when the Government intervene on the security side. Aviation attracts a lot more people and delivers far more.

The Government’s problem is that aviation is a runaway success. They do not like that, as they do not think it green enough and it uses a competitive challenge model. Railways, which they think a greener way to travel, are not a sufficient success. Whether railways are greener is arguable; that depends on how many people are travelling and how old the train is, although they could well be greener in some cases. The Government have problems with the rail industry because a lot of monopoly is still left in it.

Let me turn to the main focus of the debate, which is Network Rail. Ministers would lead us to believe that this business is an independent private sector company—that it just happens to have a different structure from all other private sector companies, that it just happens to be set up by the Government, that it just so happens that the Government own all the shares, and that it just so happens that the Government give it the bulk of its revenue. Ministers must be living in cloud cuckoo land. It is a Government creature—they can do anything they like with it. They can come to this House today or tomorrow and change its whole structure, and nobody will object because all the people on the board, the membership list and so forth are creatures of this Government, put there for some strange purpose—presumably to try to pretend that its borrowings are not properly public sector borrowings but are in some mysterious way private sector borrowings. Of course, they are as public as any borrowings could be, because they all have a Government guarantee. The only reason that Network Rail has been trading without qualified accounts and having access to banks is that it gets a guarantee from the taxpayer.

The company’s financial structure is remarkable. It is a rather tiny company, as its net assets are only £6.3 billion. After all the billions of expenditure and with potentially billions in assets—or so one would have thought, given all these fabulous routes—the company’s net asset value is £6.3 billion. To put it in context, that is just two years’ worth of the revenue subsidy that the Government tip into the business. However, the business has more than £18 billion of net borrowings, or net debt, because it has a Government guarantee routing private sector money into it.

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Even more remarkable is the revenue account. Last year, 90 per cent. of the operating costs were paid for by a revenue grant. Those who confuse investment and revenue subsidy complicate the debate to no little extent. Yes, the business needs investment, and yes, it is making investment, but it survives only because a colossally high proportion of its operating costs are being paid by a revenue subsidy. That does not happen to the competing road haulage or road passenger industries in the way that the Liberal Democrats imply; they seem to have mistaken investment money for revenue subsidy money.

This business is not efficient or well run, and it is not in robust financial health. It is there entirely because the Government support it with revenue and with guarantees on capital account. Its management do not seem able to make their business more efficient or, despite endless fare increases, to be able to do enough to grow the business so that the revenue strand from the fare payer overtakes that from the Government and becomes the dominant influence in the way one assumes that Ministers would like, given that they too must be rather worried about its huge dependence on revenue subsidy.

We are also led to believe that Railtrack failed because it did not invest enough. If the Minister looks at the figures, he will see that there was a quantum leap upwards in the amount of investment going into the railways after privatisation compared with pre-privatisation performance under Labour, Labour-Liberal and Conservative Governments at the time of the nationalised industry. In the last two years of its existence, before it was so rudely terminated by the Government, Railtrack had invested £5 billion, and then £5.3 billion in successive years. That shows that it was making a substantial commitment to the improvement of the railways, bearing in mind the fact that in the last couple of years of the nationalised industry the investment level had been about £2 billion. The privatised industry managed to invest at two and a half times the level achieved by the nationalised industry in its dying years. If Members wanted to rush to their feet— although they do not seem to be—to say that that was because there was a Conservative Government, I should say that the investment record under Labour and Labour-Liberal Governments was equally gloomy. There was not a sudden big reduction in railway investment when the Conservatives came to office in 1979.

Quite a lot of the railway investment under nationalisation was ill-judged. It went on glamour projects and on switching traction methods—particularly electrification, where the benefits are somewhat arguable—rather than being concentrated on better types of train, such as lighter or better braking trains, that could be used more frequently on the network, which must be the answer.

I now wish to be a little more creative and say what should happen from here. First, we all want the management of Network Rail to be made accountable for the egregious errors that we all agree have occurred in recent weeks. Those are not new errors, as my hon. Friend the Member for Chipping Barnet (Mrs. Villiers) pointed out. It did not learn the lessons from previous mistakes when engineering works had similarly overrun. As my hon. Friend the Member for Rugby and Kenilworth pointed out, they were eminently foreseeable errors. Those involved
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had to undertake a survey of quantities. They needed to know how many man and woman hours of good engineering skill they needed, and to understand the complexity of the task ahead of them. The main thing that management should do in such a situation is break the job up into manageable units of work, and create a contingency for things going wrong—people not turning up on new year’s day because they may be preoccupied, a bit hungover or whatever. Instead, they crammed too much into a limited time, and on two separate occasions they had to come to industry and the travelling public to say, “We’ve overshot. We can’t actually manage it.”

Some Labour Members seem to think that it is a sufficient excuse to say, “Oh well, some of this work entailed private contractors, which again shows that fragmentation was wrong, but it was a mistake to use private contractors.” It was the call of Network Rail, the Government’s own creature, whether to use private contractors or to hire the staff in-house so that they were permanently on its books. That is a matter for Network Rail; I do not have an ideological bias on that. Sometimes it is better to have one’s own people in-house, and sometimes it is a good idea to use private contractors. People need to form a judgment based on how often they use them, how much they cost and how competitive the consultants and contractors are.

We pay very large salaries to Network Rail senior executives so that they can decide such matters for us. Ministers should be supervising that process. If senior managers cannot make such judgment calls sensibly—if they get the balance between in-house staff and private contractors wrong, if they get the bills of quantities wrong or if they cannot work out how long a given type of engineering will take—they simply are not up to the job.

The defence of Ministers is to say that that is not really any of their business because they have created an independent private sector company, and it is up to the board of the company and the remuneration committee of the board to take the necessary decisions. My view is very simple, and I think that it is shared by most members of the public. If a business is 100 per cent. owned by the Government, if 90 per cent. of its operating costs are paid for by taxpayers’ subsidy and if all its borrowings are guaranteed by the public, we should expect our representatives—the Ministers—to hire the best managers, and fire them if they get it wrong, or to find a way of making sure that they do not get it wrong again.

I found the evasive answers from the Secretary of State on the matter of remuneration and bonuses both surprising and depressing. If I were running a private business and my managers had done something wrong, the first thing I would say to them, after one had got to grips with the magnitude of the error, would be, “Of course, there won’t be any bonuses this year.” I think that they would then say, “Well, if that’s all you’re going to do to us, boss, we’ve got off quite lightly. Can we keep our jobs?” One might hear that sort of thing in the private sector context. Why do we not have that sort of feeling in the public sector? Ministers should have a private but lively conversation with the managers in this company to tell them that this is not only unacceptable, but that there has to be some visible financial penalty on senior managers.

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We are talking about people earning exceedingly large sums of money. I do not want to penalise those at the bottom of the heap who did all the work and did not get paid much for turning up on a wet and cold December night, but the people at the top, who have made the misjudgments, have to feel the penalty in their pocketbook. The least that one would expect a Minister to say is that the performance pay element will either be abolished or much reduced, because performance has been sadly lacking in this situation. I do not know of anyone who will write to me saying, “How disgraceful of you to say that these highly paid people cannot have their full bonuses this year”, given the suffering that people went through when they could not get their trains at Christmas and new year, and when they saw their stations and services so disrupted.

We need Ministers to tackle the rather ramshackle structure of Network Rail and to put in place a serious board with a limited number of really good people who can provide a critical appraisal of senior managers and provide focus through the remuneration committee and board meetings to ensure that such things are unacceptable to the board and, therefore, are less likely to happen in future. It will not help to have 100, 1,000 or 20,000 “members”, or whatever. That is completely bogus. It is mock democracy, whereas I am a true democrat. If it is to be proper democracy, all 60 million people, or all 45 million taxpayers, have to be involved because we are the stakeholders. We are the ones who are paying the bills. However, that is not realistic. We have representatives to carry out the process for us, and they are called Ministers. Ministers have to appoint a limited number of really good people, who can ride the business hard and ensure that it performs to proper commercial disciplines—if they want to carry on doing things the Network Rail way.

Let us get away from the myth that Network Rail is a completely private sector entity, and let us see Ministers laying down, at least once a year, at corporate plan and Budget time, what they expect for the £3 billion-odd of Revenue subsidy and what they expect for the several billions of guaranteed investment moneys borrowed on the taxpayer tab. We need to see performance, and there have to be results to show for such a sum of money going into the business. I see no evidence from today’s debate, from reading the papers, or from previous debates on the subject that Ministers have seriously entered into the complicated but important task of setting feasible, limited objectives for the expenditure of that money, and determining how they will hold people to account if they do not achieve them.

Mr. Tom Harris: On a point of clarification, the right hon. Gentleman may have missed the publication in July of the Government’s White Paper, which contained the high level output specification. That specifically states what we expect to buy from Network Rail in terms of performance and efficiencies. It sets out explicitly the statement of funds available. It sounds to me as if he has just described what we have already produced in July. He referred to that being done on an annual basis, however, and we are doing it on a five-year control period basis.

Mr. Redwood: The Minister put it very nicely, but of course I have seen the high level outputs. I would not come to such a debate and do the House the discourtesy of not having read a little of the background material.

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The Minister outlines the first part of the process, but it is necessary to take the high level outputs and the five-year plan and turn them into something that relates to the half-yearly and annual reporting cycle of a proper company—the Government say that Network Rail is, but I say that it is not. That process has to take place at a more detailed level through the eyeballing of senior management in the ministerial office.

When I was a middle-ranking Minister, one of the main things I did was to have annual corporate plan review meetings with the bodies that reported to me, and those were very serious meetings. I prepared very strenuously for them; I trust that the people on the other side did, too. They were rather foolish if they did not. I used those meetings to say, “You’ll be very pleased to hear from a Minister like me that you are going to get some money, but I really expect you to make that money work very hard. This is how I expect you to make it work hard. These are the rewards for success, and these are the penalties for failure.” That has to be a ministerial function, and if the Minister is going to insist on doing it through a so-called independent remuneration committee, he will have to hand pick that committee and brief its members so that he knows they are in line with his wishes.

As far as the top people are concerned, it is more important for Ministers to get involved. We need to see performance, and the Minister needs to see it in return for all this money. The money has to be limited. It is a huge task: we have a massive railway that needs injections of cash for growth and development. It is very clear that it is not being well run or managed at the moment.

I want to see medium-term reform. Even with the improvements I have suggested, I am sceptical about how well a Network Rail monopoly would work. I have been honest with the House. I do not think that Railtrack was brilliant, either, but Railtrack and Network Rail are not very different. They have the same principal problem, which is that they are monopolies, and it is difficult to make them responsive.

I have a slight preference for Railtrack because it had more of the disciplines of the market. It was driving efficiencies a bit better—decreasing subsidy and increasing investment. It had to respond to market disciplines on many of its borrowings and activities in a way in which Network Rail does not. The Government have relaxed the constraints on the railway track monopoly and that is why they have problems with overruns, delay, poor service and high costs.

The costs have mushroomed massively since the Government took office. The Government tell us that they have been fighting a battle over the past two years to get them down again, but the costs took off in the early Network Rail period because the disciplines were relaxed.

I would prefer a system whereby track and train were reunited and there was more contestability so that no one in the business felt they had a monopoly right in perpetuity. Of course, one has to give a regional train company, which also owns the tracks, a reasonable run at it or it will not make the necessary investment. One has to give such companies specific guarantees and they have to have a decent opportunity to make
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investing the capital worth while. However, they must also know that, at some point, they have to try again to maintain the franchise. The quid pro quo is that one has to tell them that they can sell on the capital that they have invested and the capital that they bought and inherited so that they know that, if they are unsuccessful, they will not wipe out their shareholders. There must be a penalty but it must not be so harsh that no one will take the risk or make the venture.

Contestability is also required. The ability to run across other people’s regions and to use the track more intelligently and better is necessary. An independent regulator or adjudicator, who can decide how the track can best be used, is also needed.

At the beginning of my speech, I referred to the tragedy of having fabulous routes that are not used enough. If one flies over southern England in a light aircraft at peak hours in the morning, one sees completely jammed roads, with vehicles bumper to bumper as people try to use cars, buses and motorcycles to get to work, and practically empty train tracks. The way in which the railways are currently run means that few trains an hour can be operated on those tracks. Typically, only 24 trains an hour can run given the existing technology. We need to operate far more than that to deal with peak hour demand. The railway is better for that than for dealing with off-peak demand because frequent services are required to make rail travel attractive. The best green advantages and time advantages of using the railways are obtained at peak times because the roads are congested and therefore polluting more. We need much more peak time rail travel.

How do we achieve that? There is an easy answer in the short term, before the technology and structure are fundamentally changed. If lighter weight trains are used, more of them can be run because they accelerate and brake more quickly. That happens on many networks abroad. In Britain, our system is over-engineered and heavy. Other hon. Members have referred to the complexity and absurdity of many of the rules for taking possession of the track for engineering works. I agree, but there is another set of rules for operating a railway that militates against using modern, state-of-the-art lighter weight trains, which are perfectly safe when used elsewhere and mean that more trains an hour can be operated.

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