Rail 2020 - Transport Committee Contents

1  Introduction

Defining the problem

1. In many ways the railway has been a success in recent years. The number of passenger journeys has almost doubled since privatisation from 735 million in 1994-95 to 1.6 billion in 2011-12; passenger miles travelled have doubled over the same period to 35.4 billion; and rail freight has expanded by over 60% to 21.1 billion tonne kilometres per annum, so that 11.5% of freight is now conveyed by rail.[1] There has been investment in major projects such as Crossrail and Thameslink in London and more to come in future, with work in hand or planned to electrify 800 miles of track and improve rail services in the north with the Northern Hub project.

2. Yet, rail poses a number of seemingly intractable policy challenges for Government. Increasing numbers of passengers have led to overcrowding on some routes. Capacity constraints can rarely be resolved quickly and cheaply. The provision of rolling stock is complex and expensive. Different approaches to the franchising of rail services have been tried - for example in relation to the length of contracts and whether they are let and managed by the Department for Transport or a separate organisation - without a consensus emerging about which approach works best. Open access operators, which compete with franchisees, have found it difficult to secure capacity and have failed to thrive. Network Rail's status as a private sector organisation reliant on state funding and a Government guarantee for its £42 billion debt is anomalous. Fares are complex, with a wide variety of fares often available for the same journey, from heavily discounted 'advance purchase' tickets to very expensive 'anytime' walk-on fares. The structure of the industry is byzantine: diagrammatic depictions resemble the cartoons of Heath Robinson. There is suspicion that the labyrinthine, opaque arrangements in the rail industry provide opportunities for money to leak out of the system, some of it in the form of unjustified profits.

3. In recent years, both the current Government and its predecessor have focused on the size of the public subsidy of the rail industry. This peaked at over £7 billion in 2007-08, but has since fallen back to stand at around £4 billion in 2011-12.[2] The increased level of subsidy in the mid-2000s has been largely attributed to the work required to address serious deficiencies in maintenance apparent from the fatal accidents at Hatfield in 2000 and Potters Bar in 2002.

4. In February 2010 the then Secretary of State, Lord Adonis, set up an independent review of the cost of the rail industry overseen by Sir Roy McNulty, formerly chair of the Civil Aviation Authority. The review was jointly sponsored by the Office of Rail Regulation. The principal element of its terms of reference was "to examine the overall cost structure of all elements of the railway sector and to identify options for improving value for money to passengers and the taxpayer while continuing to expand capacity as necessary and drive up passenger satisfaction".[3] The incoming coalition Government endorsed the general approach of the McNulty review. McNulty made an interim submission on rail costs to the Secretary of State for Transport in December 2010 and published his final report in May 2011.

5. McNulty's most striking conclusion was that there exists a 40% efficiency gap between the UK railway and four European comparators. He argued that "the industry should be aiming to achieve a 30% reduction in unit costs (ie costs per passenger/km) by 2018/19".[4] McNulty identified a multiplicity of causes of this efficiency gap, including the fragmentation of the industry, poor management, problems with franchising and cultural factors. He made numerous recommendations aimed at achieving a 30% cost reduction, emphasising that there was no 'silver bullet' which could save money in one easy move.

6. The Government's response to McNulty, Reforming our railways,[5] was published in March 2012, alongside consultation documents on fares and ticketing[6] and decentralising franchising.[7] The Government described the railway as "unacceptably inefficient"[8] and argued that the industry "can and should" close the McNulty efficiency gap by 2018/19.[9] Its "Statement of Funds Available" - published along with its High Level Output Specification for rail in July 2012 - took account of the greater efficiency aimed at in the Reforming our Railway Command Paper.[10]

Our inquiry

7. We launched our rail inquiry in March 2012. We took the McNulty report and the Government's rail Command Paper as our starting points but sought from the start to take a broad view of the rationale for Government support for rail and the strategic vision for rail for the rest of the decade. Our terms of reference posed the following questions:

  • What should be the Government's vision for the railways in 2020, taking account of likely spending constraints? How should the balance be struck between the taxpayer and the farepayer in paying for the railway?
  • How are the targeted efficiency savings (£3.5bn by 2019 on a 2008/09 base) to be delivered? What will be the consequences?
  • Will the reforms to rail franchises proposed by the Government, including alliances, deliver better services at lower costs?
  • How should fares and ticketing be reformed?
  • What are the implications of the proposals for rail decentralisation and how should responsibilities be devolved to local authorities?

8. We took oral evidence on seven occasions from June to November[11] and also received 47 written submissions. We visited rail facilities in Liverpool, Manchester and Birmingham on 2 July and in south London on 6 September. In October we travelled to the Netherlands, Germany and Switzerland to find out more about the railways in those countries, all of which were studied by the consultants advising on McNulty's comparative study of rail costs. The programme for this visit is published in Annex A. We are grateful for all of the evidence we received and for the assistance we received in organising our visits, particularly from the Foreign and Commonwealth Office posts in the Netherlands, Berlin, Munich and Berne.

9. We are grateful for the assistance we received in our inquiry from our specialist advisers, Bob Linnard and Richard Goldson.[12]

West Coast Main Line franchise competition

10. On 15 August the Department for Transport (DfT) announced that First Group had won the competition to run services on the West Coast Main Line for 15 years from late 2012.[13] The decision immediately attracted controversy, with Virgin Rail, the existing franchisee, complaining that the competition was flawed and that its bid was "more deliverable and financially much more robust" than that made by First Group.[14] We heard oral evidence from First Group and Virgin on 10 September and from the Secretary of State for Transport and the Permanent Secretary on 12 September. At that stage, we were told that the DfT would "robustly defend" any legal challenge to its franchising process.[15] However, on 3 October, the Secretary of State announced that the DfT had found significant flaws in the way that it had evaluated the bids and that the competition would therefore be aborted. The costs of all four shortlisted bidders, estimated by DfT to total £40 million, would be refunded.[16] He commissioned an investigation into what had gone wrong, led by Sam Laidlaw, Centrica Chief Executive and DfT non-executive director, and a review of franchising policy, conducted by Richard Brown, chair of Eurostar International. Three members of staff at the DfT were suspended in relation to the issue.

11. Mr Laidlaw's interim report was published on 28 October and we took oral evidence from the Secretary of State and the Permanent Secretary on its contents on 31 October. The report provided a damning indictment of the way in which the department had conducted the franchise competition, including the revelation that as early as the first quarter of 2012, DfT knew that its process was flawed and open to legal challenge.[17] Mr Laidlaw delivered his final report to the Secretary of State at the end of November. We arranged to hear oral evidence from Mr Laidlaw and his colleague in the investigation Ed Smith on 4 December but the DfT delayed publication of the Laidlaw report until 6 December. The oral evidence from Mr Laidlaw and Mr Smith was postponed until 18 December and we will also hear evidence again from the Secretary of State and Permanent Secretary early in the new year.

12. The collapse of the West Coast Main Line franchise competition has raised serious doubts about the DfT's capability to manage major procurements as well as about its internal organisation and governance. A number of franchise competitions have been delayed while the Government reconsiders its policy on franchising. There are likely to be significant costs to the taxpayer, well in excess of the £40 million to be repaid to the four firms which bid to run trains on the West Coast Main Line. Confidence in DfT has been badly shaken. Ministers, current and former, as well as senior officials, have many questions to answer about this debacle. We will be asking these questions, and expecting clear answers, in the weeks to come before reaching our conclusions on this matter.

Scope of this report

13. In this report we focus on three main issues:

  • Efficiency: where does the money go in the railway, where can savings be made, and how does Government spending connect with a strategic vision for rail;
  • Franchising: how should franchising be reformed, particularly in the light of the problems with the West Coast Main Line competition;
  • Fares and ticketing: what needs to be done to make fares and ticketing simpler and more responsive to consumer needs.

In our concluding chapter we set out the main aspects of our vision for rail to 2020.

14. This report is the first in a series of rail reports we expect to publish in 2013 arising from the work we have carried out for this inquiry. As well as concluding our scrutiny of the abandonment of the West Coast Main Line franchise competition we intend to scrutinise the outcome of the Brown review of franchising and the Government's decisions in this important area. We are also intending to examine the European Commission's fourth railway package of measures which is due to be published shortly and which concern the international connectivity of rail networks.

1   Q774 and ROR 17 (DB Schenker Rail UK) paragraph 4. Back

2   Annex B. Back

3   Realising the Potential of GB Rail: Report of the Rail Value for Money Study, summary report, May 2011 (hereafter McNulty summary) Annex A. Back

4   McNulty summary p5. Back

5   Reforming our railways: putting the customer first, DfT, Cm 8313, March 2012, (hereafter Command Paper). Back

6   Rail Fares and Ticketing Review: Initial Consultation, DfT, March 2012 (hereafter Fares and Ticketing). Back

7   Rail Decentralisation: Devolving decision-making on passenger rail services in England, DfT, 8 March 2012 (hereafter Rail Decentralisation). Back

8   Command Paper, paragraph 7. Back

9   Ibid, paragraph 11. Back

10   Railways Act 2005 Statement for Control Period 5, DfT, July 2012 (https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/3641/railways-act-2005.pdf) (hereafter CP5 HLOS and SOFA). Back

11   We have held two sessions to date on the collapse of the competition for the West Coast Main Line franchise, see below. Back

12   We also thank Philippa Bliss, a fast stream civil servant on attachment to the House of Commons, who prepared an analysis of our written evidence. Back

13   New operator for West Coast rail passengers, DfT announcement, 15 Aug 12, https://www.gov.uk/government/news/new-operator-for-west-coast-rail-passengers.  Back

14   Q460. Back

15   HC Deb, 17 Sep 12, c236WH. Back

16   The Laidlaw Inquiry: Initial Findings Report, DfT, 27 Oct 12 paragraph 1.1. Back

17   Ibid, paragraphs 5.3.3 - 5.3.5. Back

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Prepared 4 January 2013