Select Committee on Transport Tenth Report


5  Financial sustainability

Financing the High Level Output Statement (HLOS) objectives

125. The HLOS proposed a total level of Government subsidy for the railways in the 2009-14 period of more than £15 billion. This would represent a decrease against the 2000-2008 period,[215] where Government subsidy reached a peak of more than £4.5bn in 2004-05,[216] and generally remained between 40% and 50% of overall rail costs. By way of comparison, the Government had contributed just 25-35% of total costs in the second half of the 1990s.[217] The steep increase since 2000 has primarily been used to fund the very significant rise in capital investments, initiated after the Hatfield crash, to renew infrastructure and rolling stock.

126. The HLOS states that a high level of investment could be maintained over the 2009-14 period despite declining Government subsidies. This would be possible because fares income was expected to continue to grow as a result of the increase in passenger numbers, and because of efficiency gains at Network Rail would make the money invested go further. Network Rail is on target to increase efficiency by 31% over the 2003-09 period,[218] and the ORR believes that Network Rail needs to make further savings amounting to 21% in the course of the 2009-14 period.[219] Network Rail has so far contested the ORR's projections, arguing that it can save no more than 13% in this period.

127. The HLOS envisaged that the balance between subsidies to support passenger franchises and the network infrastructure would shift significantly. As illustrated in Table 1 below, at the beginning of Control Period 4, more than half of the Government subsidy for the railways will go towards franchise support, but by the end of the period, it is projected to be less than 25% of total Government spending. Given that overall Government support for the railways is set to decline year on year in real terms, this is a significant shift away from operational subsidies. Table 1: Planned distribution of Government subsidies for the railways 2009-14[220]
Statement of funds available per year
£m, nominal (prices of the day) 2009-10 2010-11 2011-12 2012-13 2013-14
Funds available3,156 3,0313,122 3,0432,977
Illustrative split:

Franchise Support
Network Grant


1,612
1,544

1,386
1,645

1,105
2,017

856
2,186

535
2,442

Source: Department for Transport: Delivering a Sustainable Railway, Table A1, p145

CONTROLLING COSTS

128. Numerous witnesses pointed to weak cost control as a key issue that the rail industry needed to tackle. Roger Ford estimated that although the total income of the railways was now twice the level in 1989-90, project costs were three times higher than at that time. He acknowledged that external circumstances beyond the control of the industry, such as health and safety legislation, had served to increase costs, but even so, costs were, in his view, effectively out of control.[221]

129. The RMT argued that one key reason for the spiralling costs of the industry was privatisation:

    The premise of railway privatisation, that it was going to bring private capital into the industry, is fundamentally turned on its head when you look at the reality, which is that it is taxpayers' money haemorrhaging out of the industry year on year on year, whether it is in the pockets of train operating companies or whether it is in the banks that underwrite Network Rail."[222]

130. A Periodic Review, conducted by the ORR, determines the precise outputs, revenue requirement and access charges for Network Rail in a forthcoming Control Period. The Periodic Review currently being undertaken (PR08) considers Control Period 4 (CP4) which will run from April 2009 to March 2014. PR08 is aimed at balancing the objectives and targets set out by the Government in the HLOS, the Statement of Funds Available (SoFA), and the funds Network Rail has indicated, in its Strategic Business Plan, will be required to achieve the Government's objectives. The ORR published Draft Determinations for the Periodic Review 2008 in June, indicating that it believes Network Rail can make significant cost savings during the 2009-14 period and still achieve the Government's objectives.[223] In the ORR's view, Network Rail should be able to increase efficiency for maintenance and renewal operations by 23% over the five year period whilst efficiency gains of 16% should be achievable in terms of controllable operating expenditure over this period. Network Rail had estimated that a gross revenue requirement of £26.1bn would be required to achieve the Government's objectives for rail infrastructure in England and Wales between 2009 and 2014, but the ORR believes that this revenue requirement should be just £23.8bn.[224] The Periodic Review process is ongoing, and Network Rail has protested vigorously against the efficiency gains proposed in the ORR's Draft Determinations.[225]

131. Improving efficiency and cost control at Network Rail will be crucial not only in financial terms, but also in order to achieve key objectives such as reducing the disruption to passengers caused by engineering works. A study commissioned by Network Rail to compare the performance of Network Rail in terms of renewal and maintenance operations to other rail operators in Europe and North America found that Network Rail's performance is poor in relative terms. It estimated that when costs are "normalised" to take account of differences in circumstances, an efficiency gap remains between Network Rail and the average of other operators amounting to £846 million per year for renewals, and £263 million for maintenance operations.[226] Key improvements suggested are to make planning and work programming more consistent and output focused; to make possessions more industrial engineering-driven; to achieve better economies of scale; to improve quality through an approach based on skilled labour, and better supply chain and contractor management.[227] In our report on Freight Transport, published on 19 July 2008, we noted the importance of reducing track access charges for freight operators in order to shift freight from road to rail, and we saw that in order to do so, it was vital for Network Rail to reduce its costs. UK track access charges for freight operators are the second highest in Europe, and this position is clearly unsustainable.[228]

132. In our 2006 report on Passenger Rail Franchising, we discussed both the poor record of franchise operators in terms of controlling costs,[229] and also the excessive cost of the re-franchising process.[230] The current stand-off between Network Rail and the ORR about the scope for efficiency savings is indicative of the presence of similar issues within the infrastructure side of the industry. We have little doubt that cost control has been weak across the industry, and we believe controlling costs needs to be the Government's top priority in terms of funding for the railways. The current funding discussions between the ORR and Network Rail may go some way towards controlling costs at Network Rail, but as we have said in the past, the Government needs to do more to ensure that franchises also control their costs tightly. As we have shown on several occasions past, the sheer complexity of the industry has made it prone to unnecessary cost escalation and waste.

FARES POLICY

133. The Government's funding projections for Control Period 4 are based on a 34% growth in passenger revenue, increasing total fares income from £6.7 billion in 2009-10 to £9 billion in 2013-14.[231] The Minister told us that the calculations in the HLOS are based on fares regulation remaining as it is at present.[232] This would mean that annual price increases on regulated fares (primarily commuter and Saver fares, which account for more than 80% of journeys) are limited to a maximum of one per cent above inflation.[233] Fares that are currently unregulated will, however, remain so, and individual operators are therefore free to raise prices as they wish.[234] In 2008, the average New Year's rise in rail fares was 4.8% for regulated fares and 5.4% for unregulated fares, which corresponds to RPI + 0.6% on average for regulated fares, and RPI + 1.2% for unregulated fares.[235] As a result, a Standard Open Return ticket from Bristol to London, with First Great Western, increased from £125 to £137—a 9.6% increase[236] whilst an annual season ticket from Canterbury to London increased by more than 11%, from £3,132 to £3,480.[237]

The balance between passengers and tax payers

134. The shift in the financial burden between passengers and tax payers attracted a great deal of comment and criticism from witnesses. Some, such as Peter Rayner, thought that fares increases would lead to increased expectations which could, if they were not met, lead to a fall in demand.[238] Both he and Paul Martin of the Railway Forum expressed concerns that the projected increase in fares revenue would entail increasing fares as well as passenger numbers, and that the Government might be trying to solve the capacity problem by pricing people off the railways.[239] The Campaign for Better Transport was concerned that fares increases, particularly for walk-on fares, would send the wrong signals.[240]

135. Others were not concerned about the principle of the passenger share of the funding burden increasing, so much as with the extent and the pace of the planned shift. Greengauge 21 believed that a change in the balance "from roughly 50% passenger funding up to over 70%" over the five year HLOS period was too radical and too fast.[241]

136. London TravelWatch pointed out that the White Paper's indication that the balance between funding from tax payers and from passengers should return to the historical norm was as good as meaningless because "there has been 80 years of a balance between that and it does not define which part of those 80 years is the historical level, and one could read that in any number of ways."[242] Mr Ford, meanwhile, told us that since the "historical norm" was based on a much cheaper railway, a shift in percentage costs then and now were two quite different things:

    paying 70% of a railway costing perhaps seven billion a year was one thing, paying 70% of a railway that needs ten billion a year is a lot more. So obviously although we are saying, "Fare payer, you are just paying a bit more percentage" it is the same percentage but of a much larger amount.[243]

The RMT also told us that an economic downturn was likely to reduce income from fares and thereby undermine the assumptions of the HLOS.[244]

137. Countering some of these criticisms, the Minister argued that there was no evidence of a negative link between fares increases and passenger growth, probably because of the preponderance of regulated fares where increases were comparatively low.[245]

138. We have expressed our grave concerns about the level as well as the complexity of fares in the past.[246] We are deeply concerned that the rapid shift away from taxpayer contributions and towards passengers paying a significantly larger share of the cost of running the railways will be detrimental to passengers and the future of the railways alike. We accept that the level of subsidy now paid by taxpayers is probably too large for the longer term, but a rapid shift in this balance will counteract any efforts to encourage modal shift. Furthermore, if a full-scale economic downturn were to develop, passenger numbers are unlikely to grow as fast as projected in the High Level Output Statement. This situation could jeopardise the current hard-won level of financial stability. We therefore recommend that the Government review the planned shift between tax payers' subsidy and the fare box with a view to pacing this transition over a significantly longer period of time.


215   Department for Transport: Delivering a Sustainable Railway, CM 7176, July 2007, p 7 Back

216   Department for Transport Annual Report 2007, CM 7095, May 2007, p 72 Back

217   Department for Transport: Delivering a Sustainable Railway, CM 7176, July 2007, para 12.16 p 126 Back

218   Department for Transport: Delivering a Sustainable Railway, CM 7176, July 2007, para 12.10 p 125; The White Paper indicates that £10 billion will be invested in the enhancement of capacity over the 2009-14 period. Back

219   Office of Rail Regulation: Periodic Review 2008: Draft Determinations: Summary, 5 June 2008, p 4 Back

220   The illustrative split of funds is based on access charges in Control Period 3. The access charges for Control Period 4 will be fixed as part of the Periodic Review 08 which is currently in progress. Back

221   Qq 34-35; see also Q 205  Back

222   Q 427  Back

223   Office of Rail Regulation: Periodic review 2008: Draft determinations, June 2008 Back

224   The gross revenue requirement is defined as: the total income derived from network access charges, the network grant as well as other income, for example from property. Back

225   "Network Rail attacks rail regulator", Financial Times, 5 June 2008  Back

226   BSL Management Consultants GmBH (on behalf of Network Rail): Network Rail: Rail infrastructure Cost Benchmarking: Brief LICB-gap analysis and cost driver assessment, April 2008, slide 28. Error! Bookmark not defined. Back

227   BSL Management Consultants GmBH (on behalf of Network Rail): Network Rail: Rail infrastructure Cost Benchmarking: Brief LICB-gap analysis and cost driver assessment, April 2008, slide 35. Error! Bookmark not defined. Back

228   Transport Committee: Eighth Report of Session 2007-08: Freight Transport, HC 249, July 2008, paras 66-67 Back

229   Transport Committee: Fourteenth Report of Session 2005-06: Passenger Rail Franchising, HC 1354, November 2006, paras 94-97 Back

230   Transport Committee: Fourteenth Report of Session 2005-06: Passenger Rail Franchising, HC 1354, November 2006, paras 59-64 Back

231   Department for Transport: Delivering a Sustainable Railway, CM 7176, July 2007, Table 12.1 p 128 Back

232   Q 824  Back

233   ATOC statement on January fares rises, 1 January 2008 Back

234   Q 824  Back

235   This average masks some variation, with Hull Trains and Heathrow Express keeping prices static whilst CrossCountry and East Midlands Trains have increased their prices by 7%.

See ATOC press release: ATOC Announces 2008 Rail fares changes, 28 November 2007. Back

236   "Anger as rail fares on some of busiest routes rise by up to 11%", The Times, 1 January 2008 Back

237   Passenger Focus Press Release 1 January 2008: Watchdog disappointed by new year rail fare rises Back

238   Ev 287  Back

239   Q 40  Back

240   Q 676  Back

241   Q 39  Back

242   Q 580  Back

243   Q 62  Back

244   Q 423  Back

245   Q 877  Back

246   Transport Committee: Sixth Report of Session 2005-06: How fair are the fares? Train fares and ticketing, HC 700, May 2006 Back


 
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