EXAMINATION OF
WITNESSES (QUESTION
NUMBERS 80-99)
DEPARTMENT FOR
TRANSPORT AND
OFFICE OF
RAIL REGULATION
Q80 CHAIR:
What does that mean?
MATTHEW HANCOCK:
Why haven't we changed them?
BILL
EMERY: It means that
the way that they do possessions, the way they contract out—there
are lessons they can learn—
Q81 MR BACON:
The amount they spend on paying people off with confidentiality
agreements in sexual harassment cases—that is another cost,
isn't it? When you look at the management side of Network Rail
there are enormous costs there in all directions and you, as the
regulator, are the supervisor and the scrutineer of them. What
have you done to draw the attention of the public and Parliament
and taxpayers to these concerns that have been widely reported?
BILL
EMERY: We have—we
are aware of what Rick Haythornthwaite and his non-executive director
colleagues on the Board are doing on these particular things and
how they, with their auditors, are looking at that. That is as
far as we have gone on these matters. I go back to the point that,
as a regulator, we are holding Network Rail to deliver on all
its licence obligations—
MATTHEW HANCOCK:
But, hold on, could I just, before—
BILL
EMERY: —and
all the outputs.
Q82 MATTHEW
HANCOCK: You have been down that
route before. You just listed a series of reasons why Network
Rail has high infrastructure costs and whilst you have been in
place for five years, you are still saying that these have not
been addressed and I would like you to comment on that.
BILL
EMERY: Although Network
Rail has been making progress since its inception in 2002, along
the efficiency trajectory that set for it in the last control,
when we looked at this and compared it against its peers across
the world, it was clear that there was still a substantial gap
to do.
Q83 MATTHEW
HANCOCK: So, do you regret not
putting more pressure on earlier in your period in office as its
regulator and only value-for-money driver?
BILL
EMERY: No, the settlement
that was made for the last control period was a combination of
outputs and revenue.
Q84 MATTHEW
HANCOCK: In which year?
BILL
EMERY: In which it
required Network Rail to improve its efficiency by 30%.
MATTHEW HANCOCK:
In which year was that?
BILL
EMERY: That
was in 2004.
Q85 MATTHEW
HANCOCK: In 2004. And so we are
now six years after 2004 and still you have listed a series of
very broad reasons why Network Rail has very high infrastructure
costs and is not a value-for-money organisation.
BILL
EMERY: We are saying
that we have pushed Network Rail further and faster to address
the issues on its costs and drawing attention to where the practices
elsewhere—
Q86 MATTHEW
HANCOCK: So, do you accept the
NAO Report where it says that these levels of efficiency savings
were not supported by bottom-up evidence of actual costs, their
trends over time or their current levels relative to comparators.
BILL
EMERY: We accept that
there are elements of the—
MATTHEW HANCOCK:
Do you accept that statement in the Report?
BILL
EMERY: We accept that
there are elements of the work that was done on the enhancement
programme that were not—that the judgments that we took—the
expert judgments we took, supported by consultants on what was
an appropriate level of cost to incorporate within the settlement,
sometimes are not fully backed up by all the data, and we are
addressing that and going forward in any event.
Q87 MATTHEW
HANCOCK: I would put it to you
that having the NAO being able to scrutinise Network Rail might
help you support evidence of savings with bottom-up evidence of
actual costs and trends over time, etc. If you are so keen to
improve value for money in Network Rail as you said that you are—although
given the track record over the last five years, there is not
much evidence of that so far—I am surprised that you are
not supportive of the idea of more scrutiny of value for money
within Network Rail. After all, you are the regulator and you
are virtually the only person at the moment in the current structure
who can scrutinise Network Rail for value for money. Its members
can't.
BILL
EMERY: And that is
what we are doing.
Q88 MATTHEW
HANCOCK: Why don't you want any
help with doing it? I don't understand why there has not been
a—
CHAIR: I think
we are going circular here. Let me bring Nick into the discussion.
NICK SMITH:
Thank you, Chair. Mr Emery, you and the Department are co-sponsoring
a study of the cost structure of the railway sector—page
30 of our Report. How have you been able to challenge Network
Rail up to now, when you have not had this information?
BILL
EMERY: We have, for
Network Rail, spent a lot of time looking at other infrastructure
managers. The Rail Value For Money Study is building on our look
at Network Rail and, in fact, the McNulty Study is saying that
the work that we have done should be extended to all other aspects
of the railway, be it the train operators and all the supply chain,
to look holistically across the whole of the railway sector and
look at the contractual side arrangements and all that. So, the
Rail Value For Money Study starts off with looking at what we
have done; it will scrutinise what we have done and, in fact,
it is extending the levels of international benchmarking into
the whole industry costs rather than just the infrastructure manager
side. So, we have been doing it on the infrastructure manager
side; the Rail Value For Money Study is going to look across it
all and look at all the reasons why, within this complex arrangement
we have, we are not delivering value for money, and why it is
that railways elsewhere in Europe can offer and do a job substantially
lower, and what are the steps necessary. That is why we are really
keen that this study comes up with answers and a programme to
go forward.
Q89 NICK
SMITH: Why did you not do this
study five years ago?
BILL
EMERY: There
was certainly work going in to look at the structure of the industry
for the 2005 Act and some of the problems there. There was a settlement
made for improving on Network Rail. Our role was on Network Rail,
and that is what we did, and I think it is possible that could
have been done five years ago, but that is hindsight. We are at
this position now. Part of that has been informed by a really
close look at international benchmarking to demonstrate the gap.
That has exposed this kind of thing much more clearly than it
ever has been before.
Q90 JOSEPH
JOHNSON: I have some concerns
about governance at Network Rail. In your answer to Matt Hancock's
question as to why the NAO should not audit Network Rail, you
said, "Well, we have reporters who do that sort of thing
for us." I was not quite sure what you meant by that—do
you mean journalists?
BILL
EMERY: Reporters are
essentially engineering consultants and other people who look
at the detail and give us a view on the robustness of the regulatory
terms that Network Rail provides for us. So, it is a technical
and a cost audit of Network Rail, to test whether or not it is
actually—what it says to us in its returns to us are a proper
reflection of these matters, and it can pursue those things and
other aspects. We have a number of people looking at enhancement
programmes, looking at the overall information flows and looking
at the approach to asset management as well.
Q91 JOSEPH
JOHNSON: Great. Turning to the
governance questions, reporters who have been looking at Network
Rail, including a June/July issue of Private Eye do point
up to some rather unusual goings on there. Reading a column called
"End of the Line", it reports that someone called Iain
Michael Coucher, the former Chief Executive, was paid £1.2
million a year, which made him the highest paid public sector
manager in the land. What did he do to deserve that much money?
Was his performance so exceptional?
BILL
EMERY: The remuneration
of Network Rail executives is a matter for Network Rail's remuneration
committee.
Q92 CHAIR:
But that is why the thing is not accountable. I know it might
seem to you a small point, but I think what we are trying to get
you to is you are the only body that holds this hugely important,
odd organisation to account, which spends a lot of money and certainly
is of massive importance to all our constituents in the service
it provides.
BILL
EMERY: Absolutely.
CHAIR: And it
is not your business and the advantage of having the NAO examine
it is it would put all its expenditure and its efficiency, and
its value for money in the public domain—right well and
truly bang in the public domain, through us.
BILL
EMERY: I think there
is a substantial amount of information on Network Rail's performance
available on all the regulatory returns.
CHAIR: And it's
rubbish. It is the worst.
Q93 STEPHEN
BARCLAY: The basic salary reported
in the director's remuneration for Iain Coucher is £613,000,
which is obviously very different to the £1.2 million quoted
in the Eye. Now, I would assume part of the gap is around
the management improvement programme and what was paid for that.
Is that £1.2 million figure correct and, if so, do you know
how that breaks down—how much of it was incentive based,
how much of it was core pay?
BILL
EMERY: I think if you
look at Network Rail's annual report, it describes its whole approach
to executive remuneration. It describes how it has benchmarked
total remuneration packages of its executives against a whole
series of companies.
STEPHEN BARCLAY:
I have it here, and it is very opaque. We are asking for your
help, as the regulator. Do you have clarity as has just been asked
as to whether it was £1.2 million?
BILL
EMERY: I think
the actual number is around that number. We would not normally
pick that up. It would come out of the accounts. We are aware
of Network Rail's management incentive plan, and we provided information
to Network Rail.
STEPHEN BARCLAY:
So it is for the individual members—these same members that
are being negotiated with by Network Rail from the companies,
or members of the public?
Q94 IAN
SWALES: Who is on the remuneration
committee? That is the key point of what Mr Barclay is saying.
BILL
EMERY: The remuneration
committee is led by a non-executive Director called Steve Russell,
and it is made up of all the non-executive Directors of Network
Rail.
Q95 CHAIR:
Are they from the operating companies?
BILL
EMERY: No, no, no.
These are non-executive Directors of the Board of Network Rail.
The members are separate from that and it is the Board reports
to—
Q96 MATTHEW
HANCOCK: In a dividend paying
private company, the shareholders have the opportunity to look
at and scrutinise, and veto, both a wider plan in terms of driving
value for money and specifically on director and management remuneration.
And you have just said—and you are effectively the only
people who can scrutinise this—that it is not to do with
you how much people are paid at the top. Your first response to
Mr Johnson was, "It's up to the remuneration committee",
who are accountable to nobody.
BILL
EMERY: The company's
AGM with its members—
Q97 MATTHEW
HANCOCK: The company's AGM with
its members? Those 100 people? These 100 people—but they
have no interest in scrutinising.
BILL
EMERY: They have certainly
got an interest, and I think the reports of their AGM show that
it was a reasonably close thing as to whether they would approve
the remuneration package and bonus decisions on that, because
we had identified a whole series of questions when I wrote to
the Chairman of the remuneration committee at the back-end of
April on the reforms. I identified a whole series of things that
had gone well and a whole series of things that had not gone well,
and drew attention to all these issues, to inform the remuneration
committee of Network Rail on the performance of the company, to
assist it in its task. Now, that seems to us to be an appropriate
position for the regulator to be in. We were recommending that
the remuneration committee look quite carefully at what the company's
executives were saying about the progress on efficiency because
we did not think the evidence at that stage pointed out that they
were achieving that—and further analysis we published last
week reinforces that there is scope for improvement. And we also
were drawing attention to issues around the problems on the integrated
train planning system and all the other bits, which were the flip
side of what was quite a strong performance from the company in
terms of taking the functions of railway and punctuality and passenger
satisfaction to very high levels.
CHAIR: Right—we
will have Austin, then Stephen and Richard. And then I want to
draw it into another area.
Q98 AUSTIN
MITCHELL: Well, I think that is
a fascinating can of worms that Stephen has opened for us. I think
he is in danger of becoming the new Richard Bacon, but, as the
Chair pointed out, this is a complex, messy structure, and of
their nature, complex, messy structures are both more expensive
and more cumbersome than simple, straightforward structures. That
brings in the question of regulation. The Americans seem to me
to regulate almost on the assumption that the people you regulate
are bastards. In this country, we always seem to regulate on the
assumption that the people who are being regulated are chaps—honest
chaps who do their best. The regulation of chaps by chaps is the
basis of our system. Here we have a structure which, on the evidence
that you've dragged out of the witnesses, isn't producing efficiencies,
isn't producing low costs, is producing excessive remuneration
and other problems. So, let me turn the heat on Mr Devereux now
and ask him: are you happy, Mr Devereux with the cost, the efficiency,
the executive rewards and the value for money of Network Rail
and wouldn't it benefit from having the National Audit Office
turned loose on it.
ROBERT
DEVEREUX: If I might
observe, when you talk about it being a complex structure—
AUSTIN MITCHELL:
Well, you pump a lot of money into it. You must have answers.
ROBERT
DEVEREUX: Well, I am
going to answer you. Let me just observe though that we have now
been through a period when the entire thing was nationalised.
We went through an entire period when it was a private company
that went into administration; and it is now in Network Rail.
We are working with what we have at the moment, but the straight
answer to the question, why have we asked Roy McNulty to have
a go at the entire industry, over and above simply looking at
Network Rail, is because it is a really interesting question right
now, when we are really pressed for cash, whether we have got,
as it were, almost by architecture, problems in the system that
we need to address. So, that work which he is doing, I am really
expecting to produce some useful material on which we can make
an analysis of whether there is indeed a much better way of doing
this.
Q99 CHAIR:
You are putting us off. Where are you thinking?
AUSTIN MITCHELL:
Yes. Are you happy?
ROBERT
DEVEREUX: Well, I am
not putting you off, but I am simply observing that we asked him
to report by the end of March next year. We asked him to give
us a progress report by the spending review. I am hoping to see
that very shortly. As things currently stand, two things might
be true. One is actually, it being complicated, you are probably
right to assume that there are some frictional costs in there
that we might do something else with. We might just be a little
bit humble, but three times we tried to design the way the railway
works and each time we have reached: do we do it again?
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