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
