Transport Committee - Rail 2020 - Minutes of EvidenceHC 329-ii

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House of COMMONS




RAIL 2020

Monday 12 NOVEMBER 2012



Evidence heard in Public Questions 718 - 856



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Oral Evidence

Taken before the Transport Committee

on Monday 12 November 2012

Members present:

Mrs Louise Ellman (Chair)

Jim Dobbin

Julie Hilling

Kwasi Kwarteng

Mr John Leech

Karen Lumley

Karl McCartney

Iain Stewart

Graham Stringer


Examination of Witnesses

Witnesses: Anna Walker, Chair, and Richard Price, Chief Executive, Office of Rail Regulation, gave evidence.

Q718Chair: Good afternoon and welcome to the Transport Select Committee. Could we have your names and positions, please, for our records?

Anna Walker: I am Anna Walker, chair of the Office of Rail Regulation.

Richard Price: I am Richard Price, the chief executive of the Office of Rail Regulation.

Q719Chair: I understand that you want to make an opening statement.

Anna Walker: I would like to make a brief opening statement, first, to say how much we welcome the opportunity to come and give evidence to this Committee and this review. It is very timely from our perspective because we are just embarking on a series of decisions that will lead to the new price control for 2014 to 2019 and a draft determination in June of next year. 2014 to 2019 are the dates that you are looking at, so we felt it was particularly apposite to be talking at this point in time.

Overall, our work has three key objectives: improving value for money for the taxpayer and passengers; improving the passenger experience; and ensuring that safety on our railways continues to improve.

There are just three points I wanted to make and I hope that we might have an opportunity to discuss them more fully in the coming session. First, a lot of ORR’s effort goes into improving efficiency. As you know, McNulty said that 70% of the efficiency savings that have been identified need to come from Network Rail. We are on the case with that as part of the price control review, but that leaves 30%. One of the things that is important to be discussed is making sure that 30% is delivered as well.

The second point I want to highlight is that both McNulty and the Government’s March paper highlight the importance of whole industry working. Clearly, there are issues about the West Coast Main Line, which I know your Committee has been looking at, but one real opportunity from Richard Brown’s review is to look at how franchising might encourage rather than prevent whole industry working, and that is an issue we would like to talk to you a bit about further as well.

Thirdly, the Government’s March paper stressed the importance of ORR’s role in transparency, information on the sector and improving the passenger experience. We are already doing a great deal in that area at the moment and we stand ready to do more, if that is in the best interests of the sector.

Q720Chair: Thank you very much, Ms Walker. You say that you are on the case to make Network Rail more efficient, but last year you were criticised by the Public Accounts Committee, who said you weren’t doing enough to get efficiency from Network Rail. What exactly are you doing, and what changes have you made since that report was published?

Richard Price: If I may speak to that, ORR’s record on getting efficiency out of Network Rail is a good one. As a result of our last two price controls we have reduced Network Rail’s costs by 40% over the last decade. We have been focusing on the McNulty savings, which we worked with him on to identify. McNulty identified that between £1.8 billion and £2.3 billion ought to be able to come out of Network Rail in efficiency savings by 2019. In our current price review we have identified with Network Rail where about half of that will come from. That leaves us in the current periodic review with the other half to identify.

We have worked with Network Rail to make sure that, through their initial industry plan, they identify savings that deliver the vast bulk of that; in other words, they will, on their own reckoning, be able to achieve 17% cost reductions through the next price control period. Therefore, what we are now focusing on is the remaining, essentially, £500 million a year, which would take Network Rail to the ambitious end of the McNulty savings. What we are doing is looking carefully at comparators for Network Rail, both international and in other sectors; we are looking at the way they organise and plan their work, including the basis of their understanding of their infrastructure and assets; and we are making sure that they are in preparation for the strategic business plan, which we will get from them in January. We will then spend three months reviewing that plan against what we expect them to deliver on our own assessment of their efficiency.

Q721Chair: But what are you doing that is different from what you did before? Again, the Public Accounts Committee said you had a very cosy relationship with Network Rail. Do you agree with that?

Richard Price: No, not at all. The work that we have been doing has been to get a range of independent views of what Network Rail ought to be costing if it were efficient. We have looked at a range of comparators in other infrastructure providers; we have used a certain amount of international evidence; and we have been employing a range of experts to look at different components of Network Rail’s planning to see how much more efficient it can get.

Q722Chair: Do you consider that they have enough funds to deliver the high-level output statement?

Richard Price: We will be reviewing that in the remainder of our price control. We are about halfway through the periodic review process at the moment. We will look at what they propose in terms of their account of how they will deliver the high level output statement when we receive their business plan in January. We then have a few months to assess that and see whether what they are asking for is what they actually need to deliver the high level output statement, and we will compare that with the funds available from Government.

Q723Iain Stewart: In your opening statement you referred to the opportunities for whole industry working. That obviously flags up the example of the alliance between South West Trains and Network Rail. Are you in a position yet to judge if that has been a success, or is it too early for that?

Richard Price: It is too early for that. The alliance is still within its first year, so we don’t have estimates of the efficiencies and performance improvements that we, Network Rail and South West Trains believe it has the potential to deliver. I have visited the alliance. What we are already seeing is that it is possible for different conversations to take place within the alliance, which is essentially trying to take a bottom line approach to the whole system for the first time in many years.

The kinds of things they are identifying are: different approaches to maintenance; areas where the train operator can give flexibility to Network Rail to give it better access to the track so that it can carry out its renewals and maintenance work at lower cost and more efficiently; and also identify areas where that work can be reprioritised so that, overall, there is a better train service, because that’s in the interests of growing revenue, which previously Network Rail wasn’t particularly responsive to. The discussion on prioritisation-what’s done in the interests of customers and how you grow revenue by making the whole system more reliable-is now going on.

Q724Iain Stewart: How quickly do you think we will be able to make a judgment on the efficiency savings that are realised so that a discussion can be had on how the alliance system could be rolled out in other parts of the network?

Richard Price: I think we will have a first sense of how it is working at the end of this financial year, so we will start to learn something at that point. The full scale of what is possible will pan out over a number of years, because that’s the time it takes for the planning of maintenance and renewals to improve for the full flexibilities that the train operator can provide to come through. We will see a part of it this year, but it will take a little longer to feed through fully.

Anna Walker: Could I add a couple of points to that? We don’t need to wait to see the results of the alliance between Network Rail and South West Trains before other alliances come into being. From a regulatory point of view, our job is to ensure that those alliances are transparent and nondiscriminatory; otherwise, against a backdrop of the devolution of Network Rail’s routes, what we would expect to see are alliances developing of different sorts potentially in different parts of the country.

There is one other very important point to back up alliances. One of the issues that we have been consulting on in relation to the price control review is a regional efficiency benefit-sharing mechanism. I am sorry that these terms are very complicated, but actually they are very important in terms of changing attitudes within the sector. There is an efficiency benefit-sharing mechanism at the moment, which is national, and the franchising arrangements don’t allow most of the franchise operators to participate in it.

For the next price control we would like to have regional mechanisms that the franchisees are allowed to participate in, because we believe that the coming together of Network Rail and the train operating companies to really identify savings is where some of the biggest savings are going to be made. We don’t think they should be allowed to keep all of those savings because some of them have to flow back to Government and the taxpayer, but to kick-start some of it they should be allowed to keep some.

Q725Chair: Is that something that would require a change in the franchises?

Anna Walker: Yes, it would.

Q726Chair: How far advanced is that?

Anna Walker: We have been talking to the Department for Transport for some time about the importance of them permitting sharing in these regional efficiency benefit-sharing mechanisms. The new franchises, of course, haven’t yet materialised because of what has happened on the West Coast Main Line. I think the Department for Transport was willing to put that into the franchises, but one of the points we have been making to Richard Brown is that it is very important it does go into the new franchises. It is a good example of encouraging whole industry-whole sector-working.

Q727Chair: So that is something you are discussing with Richard Brown for the future rather than something that has been agreed now.

Richard Price: The Department has shown every interest in making sure that the train companies are allowed to keep some of the gains from efficiency that they achieved jointly with Network Rail and also to expose the train companies to changes in the access charges to Network Rail so that, in a sense, they have got more skin in the game in helping Network Rail to drive through efficiencies.

Q728Chair: I am just trying to work out where that is up to. Was this a change that was going to be incorporated into the West Coast Main Line franchise that has now been halted?

Anna Walker: Yes.

Richard Price: Yes, it was.

Q729Chair: So it is something that has been left out.

Anna Walker: Yes.

Q730Iain Stewart: I have one more question about alliancing. The South West Trains example is particularly relevant because it is one operator in that section of the network. Do you foresee any issues for an alliance where on other parts of the network there will be more than one TOC operating, particularly if one TOC takes the majority of the access but there is a smaller operator and they may be disadvantaged?

Richard Price: Where that kind of alliance is proposed we would watch hawkishly-indeed, we do already in the South West case-to make sure there is no undue discrimination. It is interesting, though, it’s not an alliance, but if you look at the East Coast Main Line at the moment, where there have been problems about the punctuality of long-distance train services for a while, the Network Rail route for the East Coast and East Coast trains have run a trial of essentially giving signalling preference to long-distance trains to make sure they stay on time. Obviously, we have watched that very carefully to make sure that no third-party operators are being discriminated against. The experience has been that for long distance it has made a significant difference to punctuality, for others it has made some improvement to punctuality, and then for other groups it has made no difference. So there is a closer relationship which leaves everyone better off. In the South West case, for example, we are part of the stakeholder group of all the companies who run across that part of the network, and we have very good links with all those who, if there were concerns, would express them to us.

Q731Graham Stringer: The last time we took evidence, not in this report, we heard evidence that freight access charges in this country were about twice the industry’s best worldwide. Is that still the case?

Anna Walker: I’m not sure what the statistics are for international comparisons.

Q732Graham Stringer: You did mention before that you had taken evidence on international comparisons, didn’t you?

Anna Walker: Not for freight companies; it was for train operating companies. No, no, the evidence you are referring to is for passengers.

Q733Graham Stringer: You’ve not got international comparisons for freight.

Anna Walker: No. That doesn’t mean to say they don’t exist, but we haven’t actually got them.

Q734Graham Stringer: Isn’t that a bit surprising?

Anna Walker: We can look at that. The position on freight at the moment is that the freight companies only pay the costs of the train using the network. They pay the marginal costs only; they don’t pay any of the overheads of using the network.

Q735Graham Stringer: Is that what lies behind what seems strange? You dropped the access charges by a third, did you, in the last control period, and you have put them up by 400% for things like coal and iron ore in this period? Is that correct?

Anna Walker: No, that’s not correct. The access charges did come down last time.

Q736Graham Stringer: Was it by about a third?

Anna Walker: Yes, it was about that. There are two elements to it actually. We put some element of the freight charge up, but, by the time we’ve dealt with Network Rail’s efficiency and required that to come down as part of the process that Richard was talking about earlier, that was the net result. The 400% that you are referring to is a figure that was in our consultation document that went out in May.

Q737Graham Stringer: Can I quote the source? It is from the Freight Transport Association, which represent 90% of freight users of the rail system. They are saying they have gone up by 400%.

Anna Walker: I absolutely recognise the 400% figure. It was a figure in a consultation document for how much the prices could go up in an extreme case. It was absolutely only a consultation document. It was designed to ensure that those affected understood the range of the possibilities. So the 400% relates to putting up the charges by £10 a tonne, and there was a range of options put there. The really important point is that we have taken no decisions on that consultation document; we are in the process of doing so.

Q738Graham Stringer: If you were to go to the extreme case, have you looked at the implications of putting up charges by that much on modal shift? Would that be part of the criteria you would use before you came to a decision?

Anna Walker: Absolutely. Indeed, the reason that we wanted those figures in the document was precisely to enable people to think through what it could mean in terms of the freight company, the freight customer and the sector at the end of that supply chain, if you like. That was precisely why we put that amount of information into the document. We have been receiving a lot of representations back on this issue.

Q739Graham Stringer: In your proposed system of charging is it likely to be simpler or more complicated than the current one?

Anna Walker: As I say, a complex set of decisions needs to come from that document; there was quite a wide range of them. We are in the process of working through those all together. The concerns about complexity that we have had representations on have largely been in relation to the disaggregation of charging by route and so we have heard loud and clear the concerns on issues about complexity. There are two issues, as I understand it, from the sectors that have been giving us views, because it is more than one sector that has been giving us views. One is complexity of understanding what the prices would be in relation to rail, and the other is a question about a comparison of complexity between rail and road, because at some level there is clearly competition between rail and road.

Q740Chair: When do you expect to reach a decision on charges for freight?

Anna Walker: Within the next month or so, certainly this side of Christmas.

Q741Chair: Are you aware that the industry believes that you have changed your policy and you are not supporting freight on rail?

Anna Walker: We knew that these proposals were going to be controversial. We have put a very great deal of effort into talking to all concerned. We have made the point to them that our support for the freight sector remains absolutely there and consistent. These proposals are about whether it is right to move towards the freight sector paying some more of the costs it incurs to put trains over the network. at the moment freight only generates 1% of the revenues for Network Rail for the use of the infrastructure, compared with 25% for passenger traffic, and covers none of its fixed overheads. So there really is a question about what the freight sector is paying at the moment. But we have absolutely understood how important it is that we listen to the representations about the impact of any increase on freight companies, freight customers and the sectors that are supplying the goods as well.

Richard Price: If you look at what the Government has proposed in their high level output statements, and therefore what we are determined to deliver through the spending control, there is a whole raft of measures in there that ought to improve the lot of rail freight, including enhancements to the strategic freight network, improving the paths for freight and making sure there is better gauge clearance and of course the electric spine for freight, all of which ought to contribute to freight’s reliability across the network improving. If the reliability improves, that ought to help the industry to reduce its costs even further than it already has, because freight is one of the most productive parts of the sector.

Q742Karl McCartney: Richard, I want to pick up what you said about the 17% reduction in Network Rail’s budget. I worry that that might be savings versus safety as an issue. The reason I say that is that one of the ways any big organisation such as Network Rail might be able to make savings would be in infrastructure projects being cut. As for some of those infrastructure projects, you can think maybe of Newcastle with its recent unfortunate fatality and Network Rail being found culpable. That leads me on to Lincoln. We have five level crossings in the suburbs and in the centre of our city.

The first part of my question is: would you envisage projects being cut by Network Rail to make those savings? The second part of my question is that the other costs that big organisations carry are using staff. I want to make the distinction with internal staff, but do you think there are far too many consultants in the rail industry?

Richard Price: That is a fair question. First, I don’t accept that the efficiency improvements in Network Rail have any conflict with safety. The context of this is that Britain’s railways are safer than they ever have been. That is true for the national network; it is true for the underground. That’s not to say that we can in any way be complacent, because incidents that are of some risk still happen across the network, and we are continuing to apply pressure on Network Rail, the train companies and others on the network to manage those risks properly.

Of course, when we look at efficiency savings, we will always make sure that the industry is funded in a way that makes sure it can operate safely. In this control period Network Rail is adequately funded for safety, and that will also be true in the next control period. I think it’s worth saying that we have found that the effective management of safety risks really goes hand in hand with the aspects of management capability, which are also the right ones just for running a good business and for running businesses effectively.

We apply across the industry something called our risk management maturity model, which looks across a whole range of aspects of the effectiveness of management across businesses and its relationship with safety risk. We find a strong correlation between high performance on that model and compliance and effective management of safety risk. We focus on that and that guides a lot of our safety work across the rail industry. It is not surprising that a number of the things that you pick up about effective management, consistency, effective leadership and engaging staff competence are very much the same things that push towards safety.

The second part of the question was on-

Q743Karl McCartney: Let me remind you. In a nutshell, are there too many consultants in the rail industry? I am thinking about staff costs.

Richard Price: There are different sorts of external contractors in the industry. There are contractors who are employed on the maintenance and renewals of the network. There are then consultants who advise on strategy, regulation and so on. To be honest, I couldn’t comment on the second part of that. I have not met a great number of them, although there are a number of them around advising on things like franchise bids and so on.

If you look at the contractors used in Network Rail, it is quite interesting. One of the reasons that Network Rail have to use so many contractors is that they find it difficult to get adequate access to their network to maintain and renew it effectively. If you look at the time the last train and the first train run, they have a very short window in which to get access to the track. That means that they have to have a peak work force ready to come on to the track for just a few hours to get as much out of that time as possible. That means that, for a typical project turnout, they have about twice as many people on the track working at any time as you find on a typical European railway. Inevitably, at the moment, that means they make some use of contractors in order to meet those peaks. We think that, if that time was managed better and they got better collaboration from the train companies to give them better access, it would mean that they would be less reliant on them.

Q744Karl McCartney: Do you think we will ever get back to having a 24hour railway system like we used to have back in the day?

Richard Price: I’m not sure which day that was.

Q745Karl McCartney: When we had steam maybe, and we certainly had trains running a lot longer and maybe more frequently between the hours of, say, 10 and six in the morning than we do now. I am sure maintenance took place then as it does today.

Richard Price: That is true to a degree, although the level of renewals on the network is much higher now than it ever was under British Rail. One of the things the industry has been coping with over the last decades is dealing with those decades’ worth of backlog. There is a difficult balance to weigh here between the interests of customers who want those services to run through the night and making sure that the system is maintained in a way which means it is reliable so that the vast majority of passengers who use the network during the day are getting there on time and can rely on the railway.

Q746Chair: On safety issues, is anybody looking at the safety of the system and the interrelationship between Network Rail and the train operating companies?

Richard Price: Yes, we look at that, and there are a number of interfaces that are really fundamental to safety, one of which, for example, is the point at which people board trains and dispatch, which is one of the areas that we are concerned about.

Anna Walker: Of course there is a responsibility on every company-the duty-holder-to be aware of their part in system safety, as well as the risks in their own company.

Q747Chair: You say that you are looking at the system as a whole. Although the accident rates are satisfactory and we don’t want them to get worse, the precursors to accidents, like going through red lights, haven’t actually changed, have they? There are still underlying problems, although we haven’t had accidents.

Richard Price: It is true to say that the precursor risks have flatlined over the last five or six years or so. That is why we are focusing not just on the precursor risks but the underlying risk management in each of those businesses. Part of that risk management is the system as a whole and the interfaces between, say, the train companies and Network Rail.

Q748Chair: Who is responsible for that? Who is responsible for the bigger system that cuts across?

Richard Price: Each of the duty-holders has responsibility for the bits of the system that it interacts with. We monitor and make sure that they have that fully gripped.

Q749Chair: But that’s not good enough, is it? That is about the individual parts of the system. I am asking who is responsible for looking at the system as a whole and making sure that it is as safe as possible.

Richard Price: As I say, it is our responsibility to make sure that each of the duty-holders across the system is playing its full part in that system-wide safety. Each of the entities across the network has to take its part of the responsibility for the way it feeds across to each of the others that it interacts with.

Q750Chair: But you as the ORR are responsible for the whole system working properly in relation to safety.

Richard Price: We are responsible for making sure that each of those duty-holders takes its responsibilities and complies with what we-

Q751Chair: You are not exactly answering the question I am putting to you. I understand that different parts of the system have responsibilities. You say that you are monitoring that they do that, but there is a wider question, which is looking at the way the system as a whole is operating. Are you looking at the whole, not just the parts, so that you may come to a decision that you need to change the responsibility of individual parts or change the way certain things operate? Are you looking at the system as a whole?

Richard Price: We look at the system of risks across the whole system; that’s correct. The industry also has the Rail Safety and Standards Board, which effectively advises the industry on its own management of risks and each of the duty-holders across the system how they can best take their responsibility, both for their own components of the system and the way they interact with the others. So, yes, both we and RSSB are always looking at the way that can be improved.

Q752Chair: Have they ever made representations to you about the lack of a safety system looking at it overall rather than just as individual parts?

Richard Price: The RSSB have certainly pointed to areas in which the whole system approach can be strengthened. They have pointed, for example, to the complexity in the industry’s rule book where, in a sense, there are so many rules that it is very hard for any individual to hold all those in their head. This is an industry that has grown up with a complex set of rules by accretion, and both we and RSSB are very keen to make sure that the management of risk shifts to being much more competence-based than paper-based. We have discussed that with RSSB and others in the industry.

Q753Kwasi Kwarteng: With regard to safety, what undertakings have you made should my colleagues’ fears actually be realised and there is some compromise on safety? What would be the redress? What would you want to see?

Richard Price: There are a few areas that we have identified where we remain concerned. Remember, this is in the context of a railway that is still safer than it has ever been. The areas we have identified that are of concern to us, although the sector is making some progress on them, are the monitoring of civil assets and structures. In the case of structures such as bridges, we have served an enforcement notice on Network Rail to make sure they are carrying out the inspections of those structures that they ought to so that they understand their condition well. We remain focused on level crossings, which are one of the highest areas of risk across the railway. We have looked at on-track and off-track maintenance where recently we have seen a minor increase, but an increase nevertheless, in harm to workers, and we are very concerned about that. The process of dispatching trains and getting on and off trains is another area where we would like to see some improvements. One thing that is particularly striking is the industry’s management of occupational health where, in our assessment, it lags significantly behind other sectors.

Q754Karen Lumley: Can I move on to fares and ticketing? For those of us who use the trains, we know how difficult and complex it all is. How do you think fares and ticketing could be improved to make it more user-friendly for people?

Anna Walker: I think that comes in at a number of different levels. The very first point I need to make is that ORR are not responsible for setting fares. We have no formal role over fares and ticketing. What we do have are consumer protection powers. Where we think something is not working in the consumer’s or passenger’s interests, then we have the ability to intervene. The area that we have intervened on is in relation to ticketing complexity because there are some real issues for passengers in understanding what sort of ticket is the best one for them; what an advanced ticket does for you; what is peak and off-peak; and what the differences are between a return or single in terms of the payment. We have sought, first, to do some research into that area and are now talking to the train operating companies on the back of that research about what they can do to make these issues clearer to try to avoid, in other words, the kind of complexity that has clearly overtaken the energy sector in terms of consumers understanding those prices. At the moment we believe that the train operating companies recognise those issues and are willing to work on them. There is some real sign of that happening. If those issues don’t become clearer, then we will consider using our powers to intervene.

On the question of looking forward, we understand why it is that the Government set the fares, because in the railway sector a lot of the financing of it is through the taxpayer, and the Government act on their behalf. In the longer run we think the regulator could actually set fares. We have made that point to the Government as part of their fares and ticketing review. We stand ready to do that. If we were to do that, we would expect to work under guidance from the Government about what they wanted at the highest level and interpret that into the right sort of arrangements. We have also been saying to the Government that we think a lot of the issues which they deal with on ticketing-what ticket offices should or should not be open-and the handling of issues in relation to ticket machines aren’t things that Government in the 21st century should be deeply involved in, and we would be prepared to play our role in those too. Again, we understand the Government are looking at that as part of their fares and ticketing review.

Q755Karen Lumley: Do you think there is a case for deregulating more fares so that firms could choose how much to charge?

Anna Walker: Because we don’t actually do this area, we have not looked at it in detail. I suspect that over time the answer to that would be that, yes, you could look at greater deregulation, and I suspect you could also look more closely at those areas that still need to be regulated and the interaction of one against the other.

Richard Price: It depends partly on the kind of market you are talking about. Where you don’t have competition, deregulation can result in all sorts of monopolistic behaviour. On the other hand, if you look at the East Coast, where you have open access competition, it is clear that consumers appreciate having a real choice about which train they get, which operator they use for some destinations and some choice around which fare they pay. Where it exists, that kind of choice appears to be beneficial to consumers; you have to be careful, though, about deregulation where there is no real choice.

Q756Julie Hilling: Can I take you back to safety? You were saying that one of the issues you were concerned about was station safety and access on trains. I want to ask two specific questions, one about the self-dispatch of trains. What is the ORR’s opinion, particularly if it is driver-only self-dispatch?

Richard Price: It is perfectly possible to manage that safely provided the driver has a clear view of the whole of the train. There is usually a degree of investment that needs to go in to make sure there are proper monitors and a clear line of sight, but in principle there is no reason why that should not be safely managed within a proper safety management system.

Q757Julie Hilling: What about the issues that have been raised in terms of people still being able to access the platform? The driver may well have said that the train is safe, but people are still accessing the platform if you don’t have platform staff. What is your view of that?

Richard Price: That particular issue isn’t something I have looked at but I can get advice on what those risks are. It is obviously less of an issue where there are staff on the platform dispatching the train, but certain things can be done to make sure that the driver has some sight of when people are approaching the platform or not. Again, I am not clear that that necessarily means those things can’t be managed safely.

Q758Julie Hilling: The other question is about the proposal that the only person on a train would be the driver. Do you have any concerns about passenger safety? I guess it is not about the mechanics of the train but more about the passengers and the sense of that journey, if the only person on that train is the driver in their cab.

Richard Price: Many trains now have systems where passengers can communicate with the driver if there is any concern about their personal security as much as their safety. For example, on the underground, on most trains there are good communications between where the passengers are sitting and the driver. It is also possible for drivers to communicate with other staff at stations ahead, or with the British Transport Police, if there are concerns. I am also conscious that in some places, such as on the London Overground, staff have been deliberately added back to create an environment that is attractive to passengers, so in a sense it is also a commercial decision for businesses who want to make sure that they have an inviting environment for their customers.

Q759Julie Hilling: What about long-distance trains that are travelling at 100 mph or whatever, which is a bit different from talking to somebody who is driving an underground train?

Richard Price: This is true.

Q760Julie Hilling: A train maybe going another hour before it hits a station at 100 mph or whatever.

Richard Price: Those bigger trains typically have more staff on them, so I am not aware that there are particular concerns about that.

Q761Julie Hilling: I thought McNulty was suggesting that the ideal was that there would only be a driver on the train.

Richard Price: On a long distance in particular, it really is a commercial driver for the company. If there aren’t enough staff on a train to make the environment attractive for customers, to make sure they are getting the right sort of customer service on a long journey, then there is a trade-off between revenue and the attractiveness of that service for customers.

Q762Chair: From a safety point of view, would you be concerned if there was a reduction in staff?

Richard Price: I am not sure there is necessarily a safety issue there.

Q763Chair: But if there was a reduction would you be concerned?

Richard Price: If there was a reduction we would need to see the way it was managed. It is hard to deal with that in abstract. We would need to be convinced that the duty-holder-in this case the train operator-had a safety case that allowed that train to be managed efficiently and with access to staff when it was needed.

Q764Chair: Would you accept that the major increase in Government subsidy since privatisation is due to the costs of paying Network Rail a return on its regulatory asset base?

Richard Price: That is part of it. In a sense that is an indicator of other things that are going on.

Q765Chair: Is it a major reason for the increase?

Richard Price: Is it a major reason for the cost of Network Rail? It is certainly a component of what the subsidy covers, but what it symbolises is a huge amount of investment that has gone on, financed by borrowing against the regulated asset base, which is not necessarily a bad thing. What has been going on since privatisation is that a lot of investment has gone into renewing the system to bring it up to standard and on enhancements to meet the growth in demand that we have seen. A chunk of that has been financed by Network Rail taking on more debt, and that has been set against the regulated asset base. What it shows is that more investment has gone in and you’ve got a better railway for it.

As to remunerating the RAB, you have a choice about how to pay for that. You can either borrow and pay for it over time, reflecting the life of the assets you have invested in, or you can pay as you go, in which case there is a danger that you are susceptible to stop-start investment, it being conditional on last year’s financial performance of the railway rather than the needs of the future.

Q766Chair: Do you have a view about which is the better way to pay for improvements?

Richard Price: It really is a choice.

Q767Chair: Whose choice should it be? Is it something that the ORR should have a view on?

Richard Price: Yes. We have a view on the level of borrowing that is consistent with the financial sustainability of the railway. Indeed, that is also set out in Network Rail’s licence. This year, for example, Network Rail can borrow no more than 72.5% of their regulated asset base. At the moment they are well short of that number, but we are always watching to make sure that this is financially sustainable. It is also a choice for Government, because Government and other funders can either pay as they go for enhancements to the network or decide to spread the cost over the lifetime of the investment.

Q768Chair: Do the ORR have a view on how this should be done?

Richard Price: In a sense, we are neutral about the way people want to fund the railway. There are clear advantages in using the RAB as a part of the means of funding enhancements and renewals.

Q769Chair: You have been doing some work, haven’t you, about financing of the rail industry and where the subsidies go? Have you reached any conclusions in that work?

Richard Price: We can see a significant chunk of direct Government funding going into Network Rail, which is partly to fund enhancements and renewals, and it is partly as a way of financing the services that the Government are buying. By financing Network Rail in that way, the train operators have to contribute less through access charges. Our view is that, over time, we want to make the system much more transparent so that charges are more reflective of the actual costs that the train companies are imposing on the infrastructure so that anyone using the network has an incentive to collaborate with Network Rail to help manage those costs down.

Q770Chair: You are seeking more involvement in the letting and monitoring of franchises. Why is that? What will you change?

Anna Walker: The issue is not the letting of franchises; it is the monitoring of performance under the franchises. This issue was the subject of the joint consultation document-there were a number of issues in there, but this was one of them-put out by us and the Department for Transport in April/May time. The proposition was that ORR should have a role in monitoring the performance of the franchises, not so much the specific conditions that the Government write into the franchises but how a train operating company is delivering its services.

Our reason for wanting to do this is that the simple problems of performance on the network by Network Rail are getting better. There is no doubt that Network Rail’s performance at the moment is getting better. We have a crowded system. We find that, when there are delays, they are caused both by Network Rail and the train operating companies. We think it important that both Network Rail and the train operating companies are jointly held to account so that, when something goes wrong, we can tease through what both have got to do to put it right. That was why we proposed in that document that we had a formal monitoring role. That remains on the table, and there has been no response from the Department to that document.

What is happening on the ground is that we and the Department for Transport, whatever happens, are getting on with looking together at problems. Take London and the south-east where at the moment there is a deteriorating performance. We are looking jointly at what’s causing that and what can be done to remedy it.

Q771Chair: Are the Government’s assumptions of a reduction in costs of £3.5 billion by 2019 realistic? Is it going to happen?

Richard Price: We are confident that the low end of the McNulty savings from Network Rail is deliverable; indeed, Network Rail have confirmed that. What we are looking at is the additional £500 million a year from Network Rail.

In terms of the rest of the sector, for which we are not the economic regulator, the answer lies in the incentives that the TOCs have got to manage their own efficiency and work with Network Rail to manage down the costs that they currently impose on the network, and also the extent to which the franchises give the train companies the flexibility they need to tailor their provision of the services to make sure they are providing those that are franchised. One of the things we would encourage Richard Brown to look at in his review is the extent to which the train companies have that flexibility. We are about to publish some work benchmarking the costs across the different train companies. One of the things that that brings out is the extent to which their costs are to a fair degree locked in by the terms of their franchise.

Chair: Thank you very much for coming.

Examination of Witnesses

Witnesses: Rt Hon Simon Burns MP, Minister of State, Paul Collins, Head of Rail Network Strategy, and Steve Gooding, Director General, Domestic Transport, Department for Transport, gave evidence.

Q772Chair: Good afternoon and welcome to the Transport Select Committee. Welcome to you, Minister, and congratulations on your appointment.

Mr Burns: Thank you very much.

Q773Chair: Could you introduce yourself and your team for our records?

Steve Gooding: I am Steve Gooding. I am one of the directors general at the Department for Transport and I cover domestic travel within the country.

Paul Collins: I am Paul Collins, and I lead the rail network strategy team in the DFT.

Q774Chair: Minister, I understand you want to make a statement.

Mr Burns: If the Committee doesn’t mind, I thought I would spend just two or three minutes giving a general overview from the Department’s point of view of what is going on in the railways. I will hop through it very quickly. I want to give some opening thoughts on the rail industry, the rail service in this country, our reform agenda and the impacts on recent events.

I found the Sir Roy McNulty report and the evidence given to this Committee by him and others illuminating. I don’t want to underplay the reform challenges we face, but if one thing has struck me consistently it is that in rail we are in very many aspects dealing with a remarkable success story.

In recovering from the shock of Hatfield, the industry has delivered year-on-year improvements in safety and performance. In the years since privatisation in 1994-95 there have been considerable successes, to be fair, under both Administrations-the previous Government and then this one. To give you a few statistics, passenger miles since 1994-95 have doubled from 17.8 billion to 35.4 billion in 2011-12; the number of passenger journeys has also almost doubled from 735 million in 1994-95 to 1.6 billion in 2011-12; and rail freight has expanded by over 60% from 13 billion tonne kilometres to 21.1 billion tonne kilometres.

Successive Governments have recognised the central contribution that rail can make to growth, society and meeting our environmental goals. This means that what was once a cash-starved industry living from hand to mouth and sweating assets has been sustained and seen sustainable capital investment in infrastructure and operations. The Government announced in July, as I am sure the Committee will be aware, further capital investment in the railways in the period up to 2016, which makes the investment currently being put into railways the largest amount since the Victorian era, which is no mean achievement.

It is on that basis that we have a rail system that has significantly improved in the delivery of services both to passengers and freight, but I think all of us in this room today will accept that further strides, further improvements and greater efficiencies still have to be made to improve passenger experience but also to ensure that we get more freight off our roads and on to the tracks so as to deal with road congestion and environmental considerations. Thank you very much.

Q775Chair: Thank you for that, Minister. You are certainly correct in identifying the great increase in the use of rail. That certainly is true and it is correct that that is stated at every opportunity. at the moment about £4 billion a year of investment goes into the railways. The Government have said that they wish to reduce and eliminate the subsidy. Can you give us any indication of how and when you would want to reduce that figure?

Mr Burns: You are absolutely right. In recent years we have seen a reduction in the amount of money that the Government put into the railways in England and Wales. Off the top of my head, it is down from about £4 billion to £3.2 billion at the moment. We would like to see that go further. The key to this, as Sir Roy McNulty identified in his report, is to secure greater efficiencies. Sadly, we are playing catch-up with regard to investment in the infrastructure. We have been able to change the fare increases for last year and the next two years from RPI plus 3% to RPI plus 1%, which will certainly help fare-paying passengers, but we have to ensure that we upgrade the infrastructure-the track, electrification, rolling stock and stations-so that it is a first-class service, and then we can seek to maximise over and above the efficiencies we have already achieved. That is the challenge.

Q776Chair: You have said that you want to go further in reducing subsidies, but how much further? What reduction do you want to see in the subsidies to rail, and when do you want to see it?

Mr Burns: I would like to see reductions in the subsidies by the taxpayer to as low as possible as soon as it is viable to achieve that without cutting corners. We have to ensure that, once and for all, the investment continues to be made in the infrastructure to achieve a world-class modernised rail system. That is the challenge we are facing at the moment and we are achieving from year to year. I can’t give you an exact time scale, though on savings, which is a slightly different issue, I would like to meet Sir Roy McNulty’s target of between £2.5 billion and £3.5 billion by 2019.

Q777Chair: So you haven’t got a time scale to do that.

Mr Burns: Not a definitive one where I can say that, on 1 January, X, there will be no subsidies and everything will have been accomplished, because I don’t think it works like that. You will always have an element of subsidy. As you know, some of the subsidies are for social services, which it is important to continue to provide for communities particularly, but not exclusively, in rural areas. There are also environmental commitments. You are not going to see a situation-or I don’t suspect you will-where there will be nil subsidy, but we need to drive down the subsidies and get greater efficiency from the delivery of the service to protect the taxpayer and fare payers.

Q778Mr Leech: Can I add my welcome to your new post, Minister?

Mr Burns: Thank you.

Q779Mr Leech: Ministers have taken the view that the East Coast Main Line should be refranchised and go back into private hands. They have also resisted calls for scrapping the refranchising of the West Coast Main Line and running that as a public railway. What are the reasons for that?

Mr Burns: The reason is that we do not believe in renationalisation, to put it very crudely. We believe, and the record of the railways since privatisation backs it up, that there have been significant improvements and advances, not only in the number of people using the railways, the number of passenger journeys and the increase in freight, but-and this is the crucial thing-in investment in the infrastructure, where successive Governments of all political persuasions in the past failed to meet their commitments. I philosophically believe that in the private sector the system works better. I take comfort from the fact that this view was obviously shared by the last Labour Government. They were in power for 13 years from 1997 to 2010, and they made no attempt whatsoever to reverse the privatisation process; in fact they moved forward in involving the private sector and seeking investment.

Q780Mr Leech: How is the East Coast Main Line doing in public ownership in comparison with the previous private ownership?

Mr Burns: The service that the East Coast Main Line provides currently is a perfectly acceptable one, but there will be improvements to it in due course because of the commitments we have made to the purchase of new trains and rolling stock, investment in track and improving and enhancing the electrification process. If you are asking also about what the progress will be on the franchise, how long it will remain in effect under DOR management and when and if it will be returned to the private sector, it is premature to answer that question.

Q781Mr Leech: I was really thinking about how much money the East Coast Main Line was currently making or whether or not it was making a loss, and how that compared with the previous ownership under a private train operating company.

Steve Gooding: I don’t have the turnover figures for the East Coast Main Line. One of the things that is quite tricky in saying whether it is making a profit or loss is that it depends on both the investment it is making and the track access charges it is paying. For the business plan we set for the East Coast Main Line currently, it is running slightly behind the projections we were hoping for, but, as the Minister said, it is reasonable and covers its costs.

Q782Mr Leech: How does that compare with when it was in private ownership? How is it doing in performance terms relative to the private operator?

Steve Gooding: The great difficulty I have in answering that is that, if you think of the three lives of the East Coast Main Line through the different owners it had, it was doing pretty well under one; it ran into, frankly, catastrophic failure under another; and it has been in recovery under the current company. It is on a recovery trajectory. A key part of that, as the Minister has alluded to, is the replacement of the frankly rather aged rolling stock it now has, but in those circumstances it isn’t doing badly given the equipment it has to work with.

Q783Mr Leech: Minister, would you accept that, until we can see how well the East Coast Main Line is performing in public ownership, it is difficult to be absolutely certain that returning it to private ownership will provide a better service to passengers and a better return to taxpayers?

Mr Burns: No, not altogether, I don’t, because it is difficult to compare the current provision of the service with the experience of the companies that ran it in the private sector because of the record of those two companies that provided the service. If you wanted to compare it with how the West Coast Main Line has performed, you can’t make a direct comparison but the West Coast Main Line has performed far better.

Q784Mr Leech: The West Coast Main Line has had billions of investment.

Mr Burns: Yes, and the East Coast Main Line will also get hundreds of millions-plus investment in its line in the relatively near future. You can’t compare the current situation accurately with what happened in the past. Even if you could per se, I do not think that is an argument either for renationalisation of the railways or keeping the East Coast in public ownership if and when there is a viable private alternative.

Q785Karl McCartney: Maybe I can help out the Minister and my colleague a little. Answering in a different way, how many expressions of interest have you had from private companies for running the East Coast franchise, which I know has been put in abeyance for now, as my constituency is served by the East Coast?

Steve Gooding: We haven’t actually triggered the start of the formal East Coast competition, but all of the owner groups that we have been in touch with have expressed an interest at one time or another, and certainly we would expect all of the ones who bid for intercity services to show strong interest in bidding.

Q786Mr Leech: I understand the Government’s reluctance to maintain at least one of the lines in public ownership, but do they have a view on passenger transport authorities working in collaboration to run regional and local services, which is being proposed as a possible future option by Transport for Greater Manchester?

Mr Burns: Yes. There is a lot of work going on here at the moment, as you well know. The north of England is a particularly interesting case. We will see how that pans out and in due course we will respond to the processes and consultation on it. It is not something that we are per se against; we are watching it and seeing how it can develop in a positive and meaningful way.

Q787Julie Hilling: To follow up Mr Leech’s questioning but perhaps in a different way, how much money did East Coast return to the Treasury in the last 12 months? How much was returned to the Treasury in the previous period before it went belly up? How much money is the publicly-run railway now returning to the Treasury?

Mr Burns: To give you the specifics and accurate figures, it would be sensible for me to write to you and the rest of the Committee.

Q788Julie Hilling: You are happy to put it into the public domain.

Mr Burns: Yes, absolutely.

Q789Chair: Perhaps you would write to the Committee and that can be circulated.

Mr Burns: Yes. I will write through the Chair and to all members.

Q790Graham Stringer: I have one follow-up before I put the questions I want to ask. I respect the ideological purity of your wanting everything in the private sector.

Mr Burns: No; that is a slight reinterpretation.

Q791Chair: I think you said "philosophical"-

Mr Burns: I was saying it was not for the sake of it. It’s just that I think the record has shown since privatisation that the performance of the railways and the record amount of money being invested in upgrading the infrastructure and rolling stock far exceeded what the public sector was able to do prior to that. I am not confident that the public sector would be able to continue to meet what the private sector is doing.

Q792Graham Stringer: I think I understood the point. It led me to two questions. One is that you seem to have missed the fact that Network Rail is not in the private sector.

Mr Burns: It is not in the public sector either.

Q793Graham Stringer: It is in a funny place.

Mr Burns: Yes, it is. That is what your Government created.

Q794Graham Stringer: Quite. That was really the question I was going to come to. It is certainly not in the private sector. Given the position you stated, the large debt it carries and the criticism in the McNulty report, do you have any proposals to change it? The other side of the question about assessing what the railways have done is that there has certainly been a huge increase in passengers and investment. But, if you go back about 15 or 16 years, with those increases in passengers and some of the investment that has taken place, it is difficult to imagine that the railways would still need the subsidy they do now. First, I would like your comment on Network Rail and its future and, secondly, for you to take a step back and look at the increase in passengers and the large subsidy going in. I would be grateful for your comments.

Mr Burns: On the question of Network Rail, it is in an unusual position because of the way in which Stephen Byers was involved at the time. The reason is that there were special circumstances and it is a special case. It is not in the public sector, but, as you rightly say, it is not fully a private company like any household name that is a private company.

Having said that, it has a significant and important role to play, and I personally would not like to see it renationalised. I don’t see the reason for making a change to an organisation that is working at the moment, that helps to deliver efficiency savings and makes sure that the investment is going into the rail network that we all believe should be there.

What was your second question?

Q795Graham Stringer: There are lots more passengers on the railway at the present time and I was asking you to take a step back 15 or 16 years. If you saw that extra revenue coming in, would you have imagined that having such a large subsidy really represented an efficient system?

Mr Burns: I think it does in so far as part of the importance of the subsidy is to improve the infrastructure. What we are seeking to do-it has been going on for some years, and McNulty has reinforced it-is to drive down that subsidy. So it is now down to £3.2 billion from £7 billion a few years ago. It is going down. There will always be an element of subsidy, simply because there is a recognition by everybody that a social rail service needs to be provided and you have to have a subsidy to ensure that it is provided. If one were looking at a very narrow profit and loss system, those services would not be profitable but the social need for them warrants a subsidy to ensure they continue.

Q796Graham Stringer: Those were follow-up questions. If I can ask the question I wanted to ask, before you came in we had the Office of Rail Regulation here. We talked about freight charges. You said you wanted as much freight off the road as possible, but the Office of Rail Regulation is consulting on the basis of potentially putting up the access charges for freight by 400%, particularly for coal and iron ore. I would be interested in what you thought about that and whether you would intend in any sense to intervene.

Mr Burns: Yes, I am aware of it. As you have said in your question, they have put that out to consultation and are listening extremely carefully to the responses, of which there have been many, from a variety of sources. It would be wrong of me-in fact I have no role-to interfere in their consultation process. I think we should wait until they have concluded their consultations and announced what their final decision is going to be. I can’t anticipate what that will be, but I do know they are very well aware of the case that, in effect, you have made in your question and that many other organisations have made to them during this consultation process.

Q797Graham Stringer: Can I take it from that that you would be very concerned if they went to the extremity and put up charges by 400%, because it would make a nonsense of the statement that you made at the beginning that you wanted freight off our roads, wouldn’t it?

Mr Burns: No. You can take from my answer that I am fully conversant with the fact that they have had many representations on the very point you are making, that it is not for me to prejudge what their final decision will be, and we should wait and see what they finally decide in the light of their consultation process and the consultations they have received.

Q798Kwasi Kwarteng: I want to ask you about the structure. You will be relieved to know that I am not going to ask you when you propose to renationalise the railways, but I am interested in this business with Network Rail. You have been in the Department now for two months. Do you have a personal view as to how you want to see Network Rail develop? We have said that it is neither fish nor fowl. What do you think is its future?

Mr Burns: If you are talking about the structure and the position it finds itself in at the moment between the private and public sectors, from what I have seen I am content, for the reasons it was set up in that way, that there is no need to tinker or mess around with the fundamental structure in that respect. I want to see it continuing to work but working more with the Office of Rail Regulation and the rail companies to continue with the investment in improving the infrastructure, but also working with the rail companies to ensure greater efficiencies in the delivery of the service so that we can see a continuing reduction in the subsidies being paid by the taxpayer, and also to make the savings that McNulty has identified.

Q799Kwasi Kwarteng: On the particular issue of reducing the level of subsidy, what is the Department’s strategy to do that? Do you see most of the costs coming from efficiency, or do you expect the taxpayer to pay more, as it were, when he or she is using the trains at source? How do you see this reduction in subsidy transpiring? Where will it come from?

Mr Burns: To my mind, there is a balance. At the moment the ratio is probably about 30% taxpayer and 70% fare payer. I would like to see a completion of the investment in the infrastructure-the catch-up for the ageing and not-fit-for-purpose infrastructure-so that we have a first-rate modernised railway system. I would then like to see greater efficiency savings in the delivery of that service and a situation where we can then see far more modest passenger fare rises than they have been while we have been getting the money for investing in the future.

Q800Chair: Is RPI plus 3% now dead as a fares policy?

Mr Burns: RPI plus 3% has been replaced for this year, next year and up to 2014 by RPI plus 1%. If my memory serves me well, that was always where the policy went up to, because there hasn’t been an announcement for what happened in the years after 2014.

Q801Chair: So does that mean it’s dead-it’s gone?

Paul Collins: No; there is a long-term planning assumption around RPI plus 1% but it is just that. It is a planning assumption against which the forward budgets are set.

Q802Chair: The planning assumption is RPI plus 1%. Does that mean that RPI plus 3% has now gone away?

Mr Burns: In effect, yes.

Q803Iain Stewart: I would like to return to rail freight. Long-term growth of rail freight is going to derive from large-scale infrastructure projects, such as the electric spines, capacity and the classic lines that would be released by High Speed 2. Those projects are some way off from being delivered. What do you envisage in the interim period can be done to boost freight and rail?

Mr Burns: We will have to wait until the end of the consultations on future pricing policy and see what happens when the final decisions have been taken there. We will also see ongoing work being done around both England and Wales to upgrade the track and service, which will help with freight-for example, the electrification programme. In particular, if you take south Wales, electrification is going not simply from Cardiff to Bridgend but now on to Swansea. You will see that all the valleys are going to be electrified and there will be improvements elsewhere in the country. You have the cross-Pennine rail service as well. Although all those things won’t happen overnight, they will happen gradually and one will see improvements.

Also, although this is more in the longer term rather than in the context of your question for the shorter term, HS2 has a significant role to play in this. A lot of people have said that HS2 is marvellous because it is going to cut the journey time from London to Birmingham, London to Manchester and London to Leeds by x minutes. That is true, but they are missing an equally, if not more, important issue. That is a spine that will help considerably to improve the situation with regard to capacity, particularly on the West Coast Line. There will be passengers using the capacity of HS2; so it will allow more capacity on the existing tracks in that part of the country for both passengers and also for freight.

Also, in the longer term, this is a spine where one can have spurs to improve and enhance the rail network in getting goods and passengers from A to B. If the case is made, you can have spurs into south Wales, the south-west of England or wherever. At the beginning of this month, the Secretary of State in his speech in Birmingham announced that we are looking at the feasibility of moving beyond Leeds and Manchester to Glasgow and Edinburgh, but I accept that is longer term.

Q804Iain Stewart: I agree that it is in the long term that we will see that step change in rail freight capacity. You have been in the Department for a couple of months now. Are you content with the level of engagement that the Department has with business about how they might want to use that increased capacity? The reason I ask is that my constituency is home to many large national distribution centres: John Lewis, River Island and people that. Their business model is changing; their distribution chain is changing because of the advent of online shopping and all the rest. In planning their growth, they are not really thinking about using rail. Do we need to have more integration between business and your planners to make the best use of that capacity?

Mr Burns: The obvious answer is always yes. You can always do more if you want to increase the use of the service. We can help in practical terms. For example, there are schemes to enhance freight capacity between Felixstowe port and Nuneaton, and there is a further £20 million funding pot for enhancements to the strategic freight network. Those are positive things where one is putting one’s money where one’s mouth is to help, but, on the engagement side, am I content? No, because one can always do better and get more exchange of ideas, information and available knowledge as to how the private sector or business and industry can work to switch from using road transport, if that is what they are using, to rail transport, explaining to them the attractions and that it may be financially viable for them to do that at a time when they may not have thought about it because they have always resorted to using road haulage.

Q805Iain Stewart: Who should be taking the lead on that? Is it the DFT, BIS or industry?

Mr Burns: The short answer is all of us, but the DFT has a role to play and is playing a role at present. Should we be doing more? Yes, of course we should; we always should be doing more.

Q806Jim Dobbin: Just to get some clarity on the issue of decentralisation, I think there is cross-party support for the decentralised provision of services. Considering that the Committee has been to Europe a couple of times to have a look at rail networks over there, have the Government totally discounted the possibility of having a system similar to that in some parts of Europe-for example, having a regional aspect to the control of the railways?

Mr Burns: No, certainly not. We have consulted on the opportunity to devolve responsibility for local services to PTEs and local authorities. Given where your constituency is, I am sure you are aware of the interesting and exciting concept in the work going on in the north. As a result of our consulting, we have also received firm expressions of interest from a wide range of different bodies, including Centro, Transport for London and a consortium of northern PTEs and local authorities, which I already alluded to. We are continuing to work very closely with the local bodies on their proposals, and in due course we will publish our consultation response to the work that is going on and the proposals that emerge.

Q807Jim Dobbin: Has thinking gone into how this is going to be funded and whether that funding will be devolved?

Mr Burns: Yes.

Q808Chair: Could I get a bit more precision there? I am pleased to hear you say, Minister, yes, the funding will be devolved, but how much funding will be devolved and how are you going to work that out?

Mr Burns: In part, it will be subject to consultation.

Steve Gooding: Indeed. The longer answer is that we are in active discussion with the northern cities and the various bodies that the Minister mentioned. Part of that is working through with them the sort of model that would work for them, which would be different for the devolved Administrations in Scotland and Wales, and again different in London, from what would work across the northern cities. The principle that if they are going to specify the services we ought to devolve the budget is firmly in the Government’s thinking. The precise mechanics and the numbers that will go with that are necessarily part of the ongoing work that we are doing with them through to the end of the year.

Q809Chair: That is the principle you are working to.

Mr Burns: Yes.

Q810Chair: You are in discussion with them on that.

Mr Burns: For the nuts and bolts of the detail, one will have to wait until we have concluded the consultations and reported our responses.

Q811Jim Dobbin: That is an important issue for local government and decentralised models. On another point, is there any benefit in combining the franchising of rail and bus?

Mr Burns: I hesitate to answer that question directly for one overriding reason. As you know, as a result of the West Coast Main Line fiasco, the Secretary of State has asked Richard Brown to look into the issue of franchising. He will be producing a report by the end of December. To try to prejudge that, or throw ideas at ministerial level into the pot at this stage, is not a very clever thing to do. I think we should wait until he produces his report, which I accept will be on franchising and the railways rather than linking them with bus franchises. But we will have to wait and see what he says and whether that has any relevance to the question you have just asked.

Q812Karen Lumley: To go back to the subsidy, does the Minister think the taxpayer is getting value for money for it, and is it spread out fairly geographically?

Mr Burns: Certainly, it is getting far better value for money than it used to, and it is improving. That is reflected in the fact that it is coming down up to a point. Is it concentrated in the south-east?

Q813Karen Lumley: That’s not what I said. I said is it concentrated fairly geographically?

Mr Burns: I assumed from that you meant whether it was disproportionately in the south-east.

Karen Lumley: No, no.

Mr Burns: By and large, I think it is. It is distributed to meet the needs of the railways, and certain parts of England and Wales have a greater concentration of railway services and lines than other parts of the country, so the subsidy follows the service. If you are trying to divide it up and ask whether, to pluck two places out of one’s head, it is fair that Norfolk gets x but Worcestershire only gets y minus x, that isn’t a very realistic way to look at it. You have to look at where the railway service is and you will see the money there. By and large, the way it is distributed and the way the system works is a reasonable and fair one. On top of that, you do have some significant major investments. Some are in the south-east and some are in London-for example, Crossrail, Thameslink and HS2. These are outside the subsidy money; they are funded by central Government and other sources. They are being funded by the need. There is the work being done in south Wales to electrify all the valley railways and the Great Western line down to Swansea. It’s needs must.

Q814Graham Stringer: Minister, you gave a very fair explanation of demand-led investment and subsidy, but towards the end of the Labour Government Andrew Adonis had started looking beyond just the demand basis for investment to the economic impact of new investment. Investment in railways isn’t just a passive issue, is it? It creates jobs and investment. Do you agree that the potential economic benefit brought from it should be part of the assessment for investment in new rail schemes, as opposed to just following the demand?

Mr Burns: Yes, absolutely; I think it is crucial. Obviously, demand is important and is a factor, but one has to recognise that the railways are a very important and vital instrument to help develop and encourage economic growth. What flows from that is the flourishing of businesses, the creation of jobs and so on. That is critical.

Q815Graham Stringer: I don’t have the ratio at my fingertips but it has increased dramatically because of Crossrail and the money going into the London underground and Thameslink. The investment going into London and the south-east is a disproportionate amount on a per head basis compared with the rest of the United Kingdom. I agree with your answers, and they are fair answers. Would you see it as part of your responsibility and that of this Government to reverse or reduce that ratio?

Mr Burns: It is important that we identify the need, wherever it is in the country, for capital projects, if they are capital projects, and infrastructure on existing services where it will significantly help and enhance economic growth and so on and make sure that the investment gets there. You have mentioned Crossrail, Thameslink and so on, but there are a number of other significant schemes around the country, not simply in the south-east, that will bring significant benefits, not least the Northern Hub, the cross-Pennine improvements and electrification, and the fact that we are going to electrify 850 more miles of track in this country.

Q816Chair: If it could be shown that there was a growing disparity between, say, London and the south-east and the rest of the country, is that something that would give you some concern?

Mr Burns: I would be interested to see it, but I would also be interested to see on what basis the figures were drawn up.

Chair: That is something we may well return to on another occasion.

Q817Karl McCartney: You have mentioned HS2 a number of times and particularly Leeds. As a Lincolnshire MP, I don’t think Lincolnshire is particularly well served by any plans. We don’t have electrification, nor do I see any benefits from HS2. As a Lincolnshire MP, you might say there are benefits for the taxpayers of Lincolnshire, because if Leeds already has a very good service, which it does on the East Coast Line, with HS2 it is therefore going to see an even better service. Would you perhaps be saying to taxpayers in Lincolnshire that there are benefits because the East Coast capacity will be freed up to run more direct trains from Lincoln to London than the one we have per day currently?

Mr Burns: Yes, it could. If HS2 is going to go up to Edinburgh in particular, that will also create capacity issues for Lincolnshire from people further up the route. But people in Lincolnshire will also significantly benefit from the investment in the new rolling stock when it comes on line, and also the improvements in electrification on the East Coast Main Line.

Paul Collins: There is electrification on the East Coast Main Line. There is a series of funding pots available across the wider industry. Beyond the schemes that are specified at the top level in HLOS2, there is a whole list of further indicative schemes, funding pots and so on, and the challenge to the industry is to go away and work out the right application of those funds to deliver high-level services. That will be across the whole country, not concentrated on an individual area.

Karl McCartney: It is only 20 miles between Lincoln and Newark.

Q818Julie Hilling: I want to ask some questions about the efficiencies. You said you wanted the railway to be more efficient. What do you mean by "efficiency"?

Mr Burns: For example, I want to see a more effective and efficient delivery of the service and less waste in the provision of the service. Let me give you some examples. As you will appreciate, the ORR is responsible for setting Network Rail’s efficiency targets and monitoring their delivery, which is a crucial role. Here are some key areas in which Network Rail have identified the way in which one can make savings.

As we discussed earlier, the development of alliances and partnership working with train operators avoids unnecessary and wasteful duplication. Mr Tim Shoveller gave evidence to you in an earlier session. <?oasys [pc10p0] ?>He explained to you the work that he was doing in his area. I know it is very early days to get a full analysis of how successful it was, but the initial reports back are that it is beginning to make a difference and is an effective and efficient way of delivering services. Similarly, one has consolidation of signalling and control centre operations into a number of regional centres; reducing staffing costs; reorganising maintenance functions to reduce the use of subcontractors and staff costs as a result; reducing the cost of renewals by prioritising high-usage track sections; and renegotiating contracts from cost plus to fixed price. All of these are areas where one can seek to get greater efficiency and make savings.

Q819Julie Hilling: Do you also see that it would be efficient to close ticket offices in smaller stations? Is that part of your plans for efficiency?

Mr Burns: No, you are not going to get me to say that so you can write out and say, "Minister predicts the closure of ticket offices." There are some areas or stations where lack of use has shown that one needs to reassess their viability. That happened with the Midland Mainline where a decision was taken a few weeks ago, but that was on a case-by-case basis.

Q820Julie Hilling: Where do you see the balance between reports by passengers that they value staff being around on the stations-it makes them feel safer-and a recent study that has been done on women’s safety? It said that one of the big things that stop women wanting to use trains is staff not being there. In the "efficiency" bit, where is the passengers’ feeling of security compared with cutting costs?

Mr Burns: There is a balance; I fully understand that. If the demand and need is there, then it is up to the operators and stations to meet that demand. I can’t give you a blanket answer one way or another because that would be particularly foolish, however much you may prod me to try to say something unwise, which I am determined not to.

Q821Julie Hilling: McNulty talked about the default being driver-only-operated trains. Do you agree with that?

Paul Collins: There is an established presence of driver-only operation on the network. Of the order of 30% of existing services in the UK are driver-only operation. There is a good case to be made for that to be the norm, but we are trying to move towards that being challengeable on the basis of other necessary members of staff for the operation of the railway to be there. It is trying to find the right commercial drivers for the service to match going forward. Driver-only operation is only about the operational staff. There can be good commercial cases for there to be-

Q822Chair: What is the Department’s position on that? You said that a good case can be made but you want it to be challengeable. If I can cut through that a little, what is the Department’s position on it?

Paul Collins: I am probably just tangling the words. It is looking for the presumption to be the most cost-efficient operational staffing of the railway. That can be driver-only operation, and indeed we would expect for lots of services that to be the basis on which bids will be put forward. But it is for the bidding community to look at the services being procured and to decide what the right response and operational staffing level should be. It is making sure we put the right kind of challenges out when we are seeking the contracts.

Q823Chair: Who would decide? You are using a lot of pretty vague phrases there.

Paul Collins: Ultimately, it is the Department who would look at the bids put in by the franchises on that basis and decide where best value lay looking forward.

Q824Julie Hilling: You are saying that 30% of services are driver-only but 70% are not. We all know that train operators look to make the most efficient use of their services already, so presumably on 70% of services they have said they don’t think that is the best idea. Why are you then saying that the default is that it should be driver-only?

Paul Collins: We are not saying that it should be the default. As I say, the distinction is between specifying that it should be driver-only operation or multiple-only operation, and asking the bidding community to come forward with propositions that deliver the best value for money. We can presume in putting a contract out that driver-only operation would be the norm but have that challenged in practice. It seems like a terribly circular argument, but it is the basis on which you invite the bid to be put in. We are looking for the commercial drivers, not us sitting at the centre, to be shaping what the right operational response should be, whether that is a single driver-only operation, commercial staff on train, other staff on station platforms, and so on.

Q825Chair: So it is the Department who is saying that.

Paul Collins: Ultimately, we would put the contract into the public domain.

Q826Chair: It is ultimately the Department. Minister, you referred earlier to the fiasco-that was your word-on the West Coast Main Line. How much is that fiasco going to cost, and who is going to pay the bill?

Mr Burns: As the Secretary of State has made quite clear, we will reimburse the full costs to the four companies who put in bids. For the costs of putting those bids together, the figure that I have seen that is being mentioned is round about £40 million.

Q827Chair: Who will pay that bill?

Mr Burns: Unfortunately, the taxpayer will through the Department for Transport’s funding.

Q828Chair: So it won’t come from any programme in the Department for Transport.

Mr Burns: No, no. We will pay for it out of Department for Transport funding.

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Q829Chair: Do you accept that is an initial minimum cost? There may well be additional costs.

Mr Burns: That is the best figure I and, I believe, my officials have seen for the estimated cost that the companies spent in putting their bids together and submitting them.

Q830Chair: Yes, it is, but aren’t there additional costs that may well arise?

Mr Burns: We don’t know yet. Until they do, we won’t be able to assess them-if they do.

Q831Chair: But, if they do, who would pay for them?

Mr Burns: We will have to wait and see what happens, because as of now that is a hypothetical question. It is probably unwise to engage in hypothetical questions when one doesn’t know exactly what might or might not happen.

Q832Chair: There have been delays in franchises elsewhere. What implications will the delay in franchises have for alliancing and the efficiencies that were hoped for through alliancing?

Mr Burns: That is an unknown quantity until Richard Brown’s inquiry has reported at the end of the year. We have got to wait until we see what Richard Brown is recommending in his report before we can see the best way to move forward. We are keen, obviously, to move forward as quickly as possible, having seen what Richard Brown is recommending and considering that, not cutting any corners or taking any short cuts to move forward as quickly as possible for the sake of it. But we are anxious to move forward as soon as we can, because we do not want the situation we find ourselves in now and want to move on with the other franchises that need to be dealt with.

Q833Chair: Mr Brown’s remit looks very narrow. Are you saying that he can make recommendations on anything he wants to?

Mr Burns: It will be up to Mr Brown to look at the franchise process and system and make a report with any recommendations that he thinks are suitable to make. Until we see that report, it is difficult to speculate as to what he may or may not do or say.

Q834Chair: At this stage are you concerned that the delays to new franchises will have any implications for the efficiencies you were hoping to gain from the alliances?

Mr Burns: No, I don’t think they will be impaired over the longer term.

Steve Gooding: The better news there is that South West Trains, who have the first of the deep alliances, promoted that off the back of an extant franchise they held; it wasn’t because it was part of their franchise bid. In total, there are seven different versions of alliancing already in place, so there is no good reason why getting better working relations between the train operators and Network Rail can’t happen as a matter <?oasys [pc10p0] ?>of commercial interest between the two entities rather than it necessarily being us that forces it. That is, I think, the position.

Q835Chair: This Committee has previously looked at Thameslink. We were told about 16 months ago now that Siemens were the preferred bidder.

Mr Burns: Yes.

Q836Chair: Yet that deal has not been concluded. Could you give us the latest information about what is going to happen?

Mr Burns: We remain confident as a Department that the financial close can be secured with Siemens. As you will appreciate, for a procurement of this size it is normal practice to assess contingency options-I know that was of interest to your Committee at an earlier hearing and in recent press speculation-were it not possible to secure financial close with the preferred bidder, but we remain confident that the financial close can be secured and that it is moving forward on that basis.

Q837Chair: When do you expect that to happen?

Mr Burns: I find it is rather unwise to put a specific time scale. I would like to say as soon as it is viably possible.

Q838Chair: That is a very open-ended answer, Minister.

Mr Burns: I knew you would say that.

Q839Chair: Is it months, years? What does that mean?

Mr Burns: I would say a few months.

Q840Chair: A few months.

Mr Burns: A few months, and now you are going to ask me what "a few" means.

Q841Chair: Yes. What does "a few" mean, since you suggest that?

Mr Burns: I may be proved wrong, but my guesstimate would be early in the new year.

Q842Chair: We will note that, Minister. We spoke earlier about the costs of the rail system. It is the case that patronage has increased since privatisation-in fact it has nearly doubled-but the amount of public support to the passenger railway has increased by about 50%. Does that figure concern you?

Mr Burns: When you say "public support"-

Q843Chair: Public support-public subsidy-to the passenger rail system has increased by 50%. It hasn’t gone down at all since privatisation; it has actually gone up. Patronage has gone up, but so has the level of public support. Are you aware of that figure? Is that a figure you are not familiar with?

Paul Collins: On-the-hoof reconciliations are always dangerous. So, forgive me, I don’t quite recognise those numbers. Looking at the comparators, off the top of my head, the total level of subsidy, as the Minister described earlier, going into the railway has been coming down progressively over time. What is offsetting that is the investment being made in new infrastructure and so on. The total subsidy for the passenger rail services is a combination of infrastructure cost and train operation. Those are progressively, I believe-and we will take the question away and come back to you if that is helpful-moving in a positive direction.

Q844Chair: I think we would be interested in that. The Committee has conducted its own research on this issue, and that is where those figures come from. Clearly, those figures will be published, but are you saying at this point this is an unfamiliar statement to you?

Mr Burns: Yes. If it was agreeable to you and your Committee, it would be helpful if you could supply us with those figures and the basis for them. We will look at them and come back to you. The subsidy that we give is coming down and is down to £3.2 billion, but we would be interested to see your figures and the basis for them. We would certainly get back to you and the other members of your Committee.

Q845Chair: We will do that. Another figure that has been given to the Committee during the course of this inquiry comes from the unions, who say that privatisation is costing £1.2 billion per annum. Is that a figure that is familiar to you?

Mr Burns: I hesitate to quote Mandy Rice-Davies, but they would say that, wouldn’t they? Again, I would rather like-

Q846Chair: I think you have got to do a bit better than that.

Mr Burns: No, I haven’t finished. You have given me a figure out of the blue from a source without any analysis of how that figure was arrived at or exactly what that figure is. Again, if you would be kind enough to supply us with that figure, we will look at it and come back to you.

Q847Chair: We will do that, but I must make it very clear that that figure is not out of the blue; it is not without its support.

Mr Burns: It is to me.

Q848Chair: It comes from a published report, which had a lot of publicity when it was published, and it is in our papers because we received it. It was produced in June of this year. The report was called "Rebuilding Rail". That was a public report, published with a great deal of publicity around it. I didn’t expect you to agree with it, Minister, but I am just surprised that you and your officials perhaps are not aware of it. I just draw your attention to it.

Mr Burns: Can I defend myself first and then you, please? To be fair to me, at that time of the year I was dealing with bogus figures, again involving £1.2 billion, but that was to do with health reform and the cost of it. So, no, I was not aware of those figures in June of this year because of course I wasn’t at the Department for Transport. I am now about to invite my colleague Mr Collins to give the officials’ line.

Q849Chair: Mr Collins, are you aware of it? I am surprised you had not informed your Minister of it, if you were.

Paul Collins: I have no excuse for not being fully up to speed. I do recollect the report that came out. Casting my mind back, I think it was an attempt to try to establish what the various interface costs between the different parts of the industry were without offsetting those against the potential benefits going forward. Again, I would want to go back and have another close look at it and those numbers, but that was the basis on which it seemed to us that the numbers were being put together. It was totalling on the debit side everything to be found around interfaces without necessarily countering those with full benefits.

Q850Chair: It is good that you are aware of the report. It is a little surprising that your Minister was not made aware of it, knowing he was coming to this session and this is one of the key areas we are discussing. I accept he was not in this Department when it was published. We also discussed the fares policy earlier. When do you expect the consultation on fares policy to be concluded?

Mr Burns: In May 2013.

Q851Chair: When do you think you will be in a position to announce the Government’s decision on that?

Mr Burns: I honestly don’t know. It is too far ahead to give you a definitive, accurate answer. We will want to consider and reach conclusions and then we will make our views known, but it would be unfair to pin me down to a precise date because I don’t want to mislead you or for anything to happen that didn’t keep to whatever date I give you.

Q852Chair: Thank you. Members asked you a number of questions on freight issues. I have an additional question on that. What progress are you making on new intermodal freight facilities through the planning system? That is one of the concerns of business in relation to rail freight.

Steve Gooding: On this, we were remitted to go and work with the Department for Communities and Local Government to send a joint message from the Secretaries of State for Communities and Local Government and Transport, which did happen, and it was intended to give firmer guidance to planning authorities making their decisions. I fear I would have to come back to the Committee on whether, in the light of that, it has had the desired effect on the decisions that have been coming through. We have regular meetings with the freight sector and it is not something they have flagged up to us as their most recent concern, so we have reason to think it is having the desired effect.

Chair: Do any members want to ask any additional questions?

Q853Julie Hilling: May I just ask one going back to rolling stock? With the delay in rolling stock and the amount of electrification that has taken place, has the Department commissioned more rolling stock? It seems a little like, "Once we get that bit of rolling stock, everybody else in the world will get the cascade of rolling stock and we’ll all be all right", but trains don’t divide as they leave somewhere. Are orders being placed for additional rolling stock, or are we going to have the nonsense of diesels running under wires with all this increased electrification?

Mr Burns: Things are still progressing in other areas where rolling stock is needed. You haven’t seen everything coming to a grinding halt, no.

Steve Gooding: If I could add to that, for example, London Midland already have an order for rolling stock coming through for services north of Manchester, which again will allow a cascade of rolling stock to make sure that we don’t have the network electrified without the electric trains to run under the wires. We will obviously need to keep an eye on that. As the Minister said, we’ve got an aspiration to close the deals we’ve got on the books quickly. Were some problem to arise, we would need to look again at whether we are getting the trains through on time.

Q854Julie Hilling: Laudably, the Government are talking about electrification of smaller pieces of track, particularly in the north-west. Will there be enough electric units for that, or are they being procured currently?

Steve Gooding: I fear it is a mix of what is being procured now and what the cascade coming out of that is, but our aim is to make sure that the electric trains are there to take advantage of the electrified track as it comes on stream.

Q855Karl McCartney: I would like to take us back to figures, which I am always happy to talk about. You mentioned the figure of £40 million for the four companies who bid for the West Coast franchise. It seems quite a high figure to me. I know that in the grand scheme of things within Government it is a small figure, but for taxpayers that is quite a large one. Dividing 40 by four, we get 10 million each, which seems quite high. Has that figure been plucked out of the air? Is it a ballpark figure? Has a burden of proof been placed on those four companies, or do they have time for some creative accounting before they provide you with anything?

Mr Burns: No, I don’t think it will be the last. You can’t divide the figures by four; they vary. Off the top of my head and without going into the precise details, from memory, it has been estimated that for one company its bid cost more than the other three and was higher than £10 million. The second company was on the high side, and two companies were much lower. The total came to about £40 million. In due course they will be providing the full details of the costs incurred and how they were arrived at.

Q856Karl McCartney: Can I ask your two civil service colleagues whether they think those figures are high comparatively to other franchises that have been let in the bidding process for other companies, or in their experience are they the normal sorts of figures?

Steve Gooding: As the Minister has said, even in this competition we see quite a range in the claimed figures from the four companies. Their cost of bidding has run into several millions for the bidders of franchises over time. One of the specific issues Richard Brown is looking at in reviewing franchising is whether there is a better way of running that will reduce the cost of bidding for bidders and therefore reduce the overall value for money of the system.

Chair: Minister and officials, thank you very much.

Prepared 5th January 2013