EXAMINATION OF
WITNESSES (QUESTION
NUMBERS 100-110)
DEPARTMENT FOR
TRANSPORT AND
OFFICE OF
RAIL REGULATION
Q100 AUSTIN
MITCHELL: Yes, but we are where
we are. You are putting a lot of money in, so are you happy with
the way it is being used by Network Rail, and wouldn't it benefit
from an analysis by the National Audit Office?
ROBERT
DEVEREUX: I can't be
comfortable with a situation in which the regulator tells me that
they are off the pace of European comparisons. What the regulator
has told you has been that in successive periods they have improved
Network Rail's efficiency; I am pleased with that. He has also
told you that there is still a gap. So, you have been pursuing
the question: could they have done better? Could they have got
them down there faster? That is ultimately, in the current structure,
a judgement for the regulator between how big the target is and
what is the art of the possible from where they are. Now I can
see, and I share your sense, that insofar as there is any gap
at all, the answer must be—not enough work so far, but the
regulator has been making those judgments.
Q101 CHAIR:
What is your view?
MR BACON:
What is the answer about the NAO?
ROBERT
DEVEREUX: Well, my
view—
CHAIR: On the
NAO? There are two things.
MR BACON:
The Financial Services Authority was not scrutinised by the NAO,
and if it had been it is quite possible that many of the inadequacies
that contributed to the 2007 banking crisis would have been spotted
earlier and dealt with—like not having enough legislation
of the right kind on the book to take over a bank quickly. Now,
we are asking you, as an accounting officer, do you think there
would be value—in the way, personally, I think, there would
have been with the FSA earlier—in having the National Audit
Office having the right to audit Network Rail?
ROBERT
DEVEREUX: I would pause
on assuming the answer to that question is yes because I am not
sure what the technical competence of the National Audit Office
is in that regard.
Q102 MR
BACON: The National Audit Office
employs 850 people and also, may I point out, their staff is not
a static entity. It changes according to needs. They have economists,
statisticians and, for all I know, social philosophers, but they
employ a range of people according to need, and when their needs
change they ask Parliament for the extra resources to employ more
people. If they had a new audit client, Network Rail, I imagine—and
I do not want to speak for the C&AG—they would structure
themselves accordingly. And if that meant hiring a few rail specialists,
I think it is probably not beyond their wit to do that. So, can
we get back to the question, which is: do you think there would
be value in the main watchdog of taxpayers' money—and after
all, you are putting a lot of taxpayers' money into this body—having
the ability to audit Network Rail?
ROBERT
DEVEREUX: It would
be very easy for me to say yes. Why wouldn't I? But let me just
observe that most of the questions you have asked have not actually
been as to information—they are actually to do with governance
and who is making decisions, and who is accountable. What the
regulator is saying to you is that they put an awful lot of information
into the public domain. It is not in this Report because that
is not what this Report was about. So, I am not sure that the
problem of Network Rail is a lack of publicly available data.
I think probably you are teasing away—
Q103 MR
BACON: The NAO Report says it
is.
ROBERT
DEVEREUX: I'm sorry?
MR BACON:
The NAO Report says that one of the problems is a lack of publicly
available data. Paragraph 16, page 7: "We are concerned that
the regulator's ability to assess whether Network Rail is providing
value for money is limited by the level of detail available on
Network Rail's costings." They say that in terms.
ROBERT
DEVEREUX: Okay, then
in that case, the National Audit Office would add value if the
powers that you gave it to do this exceeded the powers of the
regulator that has been set up by the previous Government, I am
guessing that the NAO is implying that the regulator does not
have power to do this. So, if you gave either the regulator more
power or the National Audit Office, it would be much the same.
Q104 CHAIR:
Can I just tell you the relevance of this and then I'll bring
in Stephen? The relevance is that there is an issue around efficiency
of Network Rail.
ROBERT
DEVEREUX: There is.
CHAIR: We think
that is linked to governance because there does not appear to
be proper accountability and we then think—and the impact
of that, going back to passenger capacity—is that, when
you come to cuts, which you are doing, you cut services. So, our
constituents are all affected by this. Whether it's Barking or
whether it's Orpington, whether it's Norfolk or whether it's Grimsby,
we are all affected by this. Our constituents are suffering from
overcrowding, lack of capacity, because we do not have an efficient
Network Rail—the least efficient in Europe. So, that is
why we are asking questions around governance. It is not just
that we are interested in it for its own sake.
ROBERT
DEVEREUX: No, please—that
is exactly why I would be interested in it too. So, the reason
we are doing the McNulty Study right now across the entire industry,
because there is more to life even than the regulator, is to get
to the bottom of what could you do differently that would address
these systemic issues to do with whether those cost comparisons
are right. The story as it is now is these things are not well-compared.
In respect of OMR, there is actually some quite decent benchmarking
data out there and we know that that—and the regulators
are pressing down on it—it has not got to zero, an interesting
question. When it comes to big capital works, actually that is
the stuff which the work on the HS2 that was published back in
January began to dig into why is it that these things cost so
much in the UK. That is, in a sense, the jumping off point for
the work we have commissioned. So, I am entirely with you that
we cannot assume that the three or four parties who are currently
comprising the current British rail network are optimally organised
if actually, in one part of the forest, you get this evidence
and in another part of the forest, you are not sure whether our
people have actually got aligned incentives. I am not wholly sure
they do. McNulty is saying, "Okay, let me just think about
where this might be". And the only thing I say about making
changes is it is always easier to vote for "Let's all change
it round again" and by and large, when you change things
round radically you lose several years in the process. Which is
essentially what happened when Network Rail was created post-Railtrack.
It is essentially what happened when you had the privatisation.
We need to be careful that we choose the right solution, but we
are actively looking at the evidence about what that solution
should be.
Q105 MR
BACON: Two very quick questions
for Mr Emery. First of all, you mentioned these reporters or consultants
who you send in to check that the costings of Network Rail are
reasonable. In your terms and conditions for employing these reporters
or consultants, do you prohibit them from working for Network
Rail separately?
BILL
EMERY: They are not
allowed to work for them on similar items of work. If we prohibited
them from doing any work on the railways then we would have a
very small number of reporters, so there is a balance here to
be struck.
Q106 MR
BACON: But you actively try to
make sure that these reporters do not have conflicts of interest?
BILL
EMERY: We certainly
actively try to make sure that they do not have a conflict of
interest and we look to make sure that if they are engaged in
one part of our reporting role they are not engaged doing that
type of thing with Network Rail. That is the way we have finessed
it. Otherwise we would end up having to employ consultants who
did not have a detailed railway knowledge. So, we struck a balance
there, which says that if they are dealing with, say, our monitoring
side, that they are not going to be working for Network Rail on
those sides. If they are dealing with the enhancement side then
they are not going to be working on that, and that is the way
it works.
Q107 MR
BACON: One more question. Are
you satisfied that, as regulator, you have adequate powers?
BILL
EMERY: Yes.
CHAIR: Okay,
Stephen.
Q108 STEPHEN
BARCLAY: Just on that and on the
last point, I am trying to look forward, and to me one option
is to look at the structure, and I understand the difficulties
of that—it is another change and there are difficulties
around the debt and how that figures into red brick, and the attractions
of the existing structure, which is where I think the question
were coming from the Committee on "Where's the transparency?"
What I find amazing is that there seems a reluctance to have the
NAO or greater transparency on this as well. As the accounting
officer, it is clear that there are problems on the international
benchmark, on customer finance and on a number of things in the
Report. Given that problem, how realistic is it to expect dramatic
improvements in three or four years' time?
ROBERT
DEVEREUX: I don't know
why I'm bothering to argue this really, but the regulator has
just told you that he thinks he has enough powers to get the data
he needs. I perceive that behind your questions the suggestion
that somehow or other Network Rail is pulling the wool over somebody's
eyes. That comes down to a question of power. Can you actually
get what you want out of the organisation? The regulator is telling
you he has got that power and so one question might be, is he
using it enough? It is not self-evident to me why I give another
body essentially the same powers, which I deem to be enough. You
may say that therein lies the difference—that if I gave
them both the same powers, the NAO would do better. I guess I
am just not sure. The really important question is: do we think
somebody has actually got the fundamental right to ask all the
hard questions and get the truthful answers. That is the thing
that, as a matter of the way it has been set up, is what the regulator
was supposed to be capable of doing and what the regulator is
saying he can do.
Q109 STEPHEN
BARCLAY: But the Report itself
is saying, for example, on the affordability test, there is a
degree of circularity. So, the Report is talking of structural
issues.
ROBERT
DEVEREUX: No, no—I'm
sorry, what that says is there is a circularity if the person
who is trying to think what something might cost is the person
being regulated. That is a different point from: does anybody
have the right powers to see the information. It just is. There
is no point in asking me and the regulator to sit down and work
out what things might cost ab initio.
Q110 CHAIR:
I suppose the other question is: are you happy with the regulator's
performance to date?
ROBERT
DEVEREUX: Sorry?
CHAIR: Are you
happy with the regulator's performance to date?
ROBERT
DEVEREUX: Since we
are still in the position where there is a manifest shortfall
against the best practice, I would prefer that wasn't there. But
the regulator's judgement in reaching these determinations, which
of course would obviously be challengeable, is: is it a reasonable
degree of progress given the circumstances that prevail. Now,
I'm afraid I am not in a position to second guess that judgment;
all I can observe, exactly the same way as you, is there is still
daylight that I am trying to close. So, the reason for doing the
McNulty thing is to make sure there is nothing still going wrong
in this system, which I am perfectly happy to change, if that
turns out to be the right thing to do, notwithstanding the cost
of change. I want to know what those choices are, because the
thing I cannot abide is ending up with costs that are higher than
they should be. That is what I am paid for.
CHAIR: Okay.
Well, thank you. I think we have taken it as far as we can today.
Apologies for keeping you waiting whilst we voted, but I think
that was quite a lively session and thank you for answering our
questions in the best way you can. We will report as soon as we
are able to. Thank you very much.
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