Rail 2020 - Transport Committee Contents

3  Improving efficiency

McNulty's analysis

33. The McNulty report's analysis of what the railway should cost "if it was operating at the frontier of efficiency" estimated that savings of between £2.5 billion and £3.5 billion (in 2008/09 prices) are achievable.[46] Table 2 shows how the higher level of estimated savings (£3.5 billion) breaks down.

Table 2: Higher estimate (£bn, 2008/09 prices)[47]

Train operating and rolling stock companies Network Rail Total
High estimate of efficiency gap 1.22.3 3.5
Network Rail savings in control period 4 (2009-14) -1.2 -1.2
Network Rail savings indicated in control period 5 (2014-19) -0.6 -0.6
Remaining Efficiency Gap 1.20.5 1.7

The Government has tasked the rail industry with meeting the full £3.5 billion efficiency gap identified by McNulty.[48]

Is it achievable?

34. Many witnesses agreed that the higher level of efficiency savings identified by McNulty could be achieved. Examples were given of savings from reform of franchising,[49] standardisation of rolling stock,[50] and more efficient freight operations.[51] However, ATOC, representing many of the firms expected to deliver savings by 2018/19, cautioned against the scale and deliverability of the efficiencies.[52] The Campaign for Better Transport warned that the savings "could be counter-productive to the overall vision of increasing rail's share of travel".[53]

35. Many witnesses argued that complex, bureaucratic interfaces between Network Rail and train operators needed to be addressed in order to achieve the McNulty efficiency gains.[54] Manuel Cortes of the Transport Salaried Staffs' Association argued that "further tinkering" with the system could not deliver efficiency gains and that renationalisation was necessary instead.[55] The McNulty report rejects renationalisation because "major cost reductions and value for money improvements can be achieved without sweeping away most of the present structure - this latter course of action would take years to complete, cause major diversion of effort, incur massive costs, and delay progress on improvements that are now being initiated or which could be initiated in the relatively near future".[56] The DfT has also ruled out further structural change, arguing that "the rail industry is not broken. The case for a further round of major structural change ... has not been made".[57]

36. The £3.5 billion savings which the McNulty report identifies are undoubtedly challenging, particularly as their achievement would require a large number of companies to work together to make the railway's current structure work more efficiently. We support the general approach recommended by McNulty, but with concerns about some specific issues which we set out in this report. If these savings do not materialise, the arguments for more far-reaching structural changes will be compelling.

37. McNulty made a number of recommendations aimed at "creating an enabling environment" for savings to be made, including the establishment of a senior change management team, the Rail Delivery Group (RDG). This group brings together for the first time the senior management of Network Rail and the main passenger and freight train operators.[58] The RDG is in the process of formalising its status as a company limited by guarantee.[59]

38. The Rail Delivery Group is expected to play a crucial role in achieving more effective cross-industry co-operation and delivering the savings identified by McNulty. However, the Government must not lose sight of the fact that it is dominated by firms whose principal interest is profit-maximisation and which have a vested interest in maintaining the industry's current structure.[60] We recommend that the DfT and ORR keep a close eye on the work of the RDG to ensure that it acts in the best interests of the farepayer and taxpayer, rather than of established rail interests.

How to do it

39. The McNulty report makes numerous recommendations for greater efficiency on the railway, covering over 20 pages in the summary report. We have not examined each in detail but looked instead at some of the most significant themes. In the remainder of this chapter we look at the impact of savings on staff, alliances between Network Rail and train operating companies, and opportunities for more commercial development of stations and rail services.


40. The rail trade unions did not respond positively to the McNulty report's recommendations on staffing. These included calls for ticket office hours to be reduced, driver-only operating to be the norm, and salary restraint.[61] The unions argued that over 20,000 jobs were at risk leading to a "reduced service to passengers and a reduction in customer-facing staff that runs directly in contrast to what passengers want".[62] Mr Cortes warned that taking staff out of stations would enable them to become magnets for "petty crime, antisocial behaviour and vandalism" and reduce the service provided to people with impaired mobility.[63]

41. We have two concerns in this area. Firstly, any changes to staffing, terms and conditions and salaries should be made within the context of a wider programme of changes made throughout the industry and after full consultation with trades unions. Any changes in the numbers and duties of station staff should not be pursued solely to reduce costs but should reflect changes in passenger ticket-buying behaviour and be designed to improve the passenger experience at stations, including safety.

42. In addition, we are very concerned that proposals to reduce staffing at stations and on trains could make the railway less safe, particularly at night, and deter women and vulnerable users from travelling by train. We recommend the Government develop a strategy for improving the security of the rail network, as well as perceptions of how safe the network is.


43. One of the innovations which has arisen from the McNulty report is the formation of a variety of alliances between Network Rail and train operating companies in certain parts of the network. As at 26 November there were eight alliances in place on the network.[64] The first and most high-profile is on Network Rail's Wessex route, where a joint senior management team has been formed comprising staff from Network Rail and South West Trains.[65] Paul Plummer, Group Strategy Director, Network Rail, said the alliance "will certainly deliver benefits" in terms of innovation and new ways of working although he did not think it would save tens of millions of pounds.[66] The ORR said that it was too early to say whether alliances would deliver savings.[67] We also heard from Balfour Beatty about alliances between contractors and the rail industry, for example to reduce the disruption caused by engineering work.[68]

44. The Government has welcomed this development and intends to encourage alliances in future franchise agreements. It said "on more complex routes, with many operators or no single dominant operator, such arrangements may be more difficult. Nonetheless ... in principle most franchise routes are suitable for some form of alliancing arrangement".[69]

45. We have no objection in principle to the development of new models of working between Network Rail and train operating companies and believe such arrangements could represent a sensible evolution of railway management. However, the Wessex alliance raises two concerns which will need to be addressed if such experiments are to succeed in cutting costs and become more prevalent. Firstly, we note the concerns expressed by the trades unions that alliances between Network Rail and train operating companies will create "mini-Railtracks" which cut corners on safety measures in order to deliver profits to the train operator.[70] This was refuted by Network Rail and South West Trains who described safety as their "first objective" in the Wessex alliance.[71] The ORR must ensure that the high standard of rail safety achieved in recent years is not jeopardised by different ways of working between Network Rail and train operators. We recommend that the ORR devote additional resources to monitoring safety in areas where Network Rail and a train operating company have formed an alliance.

46. Secondly, there is a risk that an alliance which benefits Network Rail and the principal train operating firm will not be in the best interests of passengers and may disadvantage other operators. This is of particular concern to freight operators. The Freight Transport Association expressed concern that freight could become "second class citizens on the network".[72] The ORR is responsible for approving proposals for alliances.[73] We recommend that in considering proposals for alliances and joint working between Network Rail and train operating companies the ORR pay particular regard to protecting the interests of passengers and firms outside of the alliance. There must be clear procedures for revising alliances' working practices or ending such arrangements if it can be shown that they are disadvantaging passengers or other operators, particularly freight.


47. ATOC expressed concern that the McNulty report had not paid sufficient attention to proposals for increasing the industry's ability to generate income.[74] However, Sir Roy McNulty told us that the rail industry was under-exploiting its commercial assets.[75] We share this concern and specifically sought oral evidence from Select Service Partners (SSP), the firm which operates many of the retail outlets and concessions at stations.[76] We also discussed this issue in the Netherlands, where we heard that 25% of the income from the Dutch stations division comes from retail and land sales. They were clear that retailing at rail stations is a specialist activity and that standard retail approaches, such as aiming to maximise customers' in-store time, are inappropriate. Station retailers must be incentivised to speed passengers through.

48. We were surprised to hear that the market share for SSP was as high as 30-40% and that many of the brand names found at stations are actually franchises run by SSP.[77] Joel Brook, SSP's Property Director, said that there were stations where SSP provided the only retail outlet but emphasised that his firm was "a long, long way from a monopoly" position.[78]

49. Witnesses noted that retail facilities at major stations were evolving to become destinations in themselves, particularly new developments such as St Pancras International and the redevelopments of King's Cross and Waterloo stations in London.[79] However, in our view there remains scope for Network Rail and the train operating companies to generate more income from the railway. Retail offerings at stations can be tired and uninspiring or at many stations non-existent. On-train retail is often similarly unimaginative. The facilities at St Pancras International station, now a destination for shoppers and people eating out, have set a standard to which other major stations should aspire. We recommend that the Rail Delivery Group, working with Passenger Focus, develop and publish a clear strategy for improving retail facilities on stations and trains. This would be welcomed by passengers and could generate extra revenue to contribute to achievement of the McNulty targets.

50. There is also scope to raise money by selling off or developing redundant railway land. We took evidence on this issue from Simon Rutter of Solum Regeneration, a joint venture between Network Rail and Keir Property which aims to use the commercial development of rail land to pay for improvements to existing rail infrastructure.[80] We do not object to selling redundant railway land in principle, but note with concern that the rail depot we visited in Allerton, Liverpool, was nearly sold off for redevelopment some years ago but has now been brought back into use because of the growth of the railway. Mr Rutter explained that the ORR had the final say in land disposals.[81] We recommend that the ORR take a cautious approach to approving the sale or redevelopment of former railway land, given that with the growth of the industry that land may be needed again for rail in future, while responding promptly and positively to proposals for disposing of genuinely surplus land.

46   McNulty summary pp25-26. Back

47   Ibid, p26. Back

48   Command Paper paragraph 11 and CP5 HLOS and SOFA paragraph 2 Back

49   ROR 7 (Railfuture) paragraph 2.1. Back

50   ROR 2 (Angel Trains). Back

51   ROR 17 (DB Schenker Rail) paragraph 16. Back

52   ROR 25 (ATOC). Back

53   ROR 22 (Campaign for Better Transport) paragraph 2.1. Back

54   ROR 22 (Campaign for Better Transport) paragraph 2.2 also ROR 18 (TravelWatch NorthWest). Back

55   Q94. Back

56   Realising the Potential of GB Rail: Report of the Rail Value for Money Study, detailed report, May 2011, p283; and Q3. Back

57   Command Paper paragraph 7 Back

58   www.raildeliverygroup.org and their submission to this inquiry, ROR 1. Back

59   http://www.raildeliverygroup.org/Formalisation.aspx. Back

60   See ROR 19 (Local Government Association) paragraph 3.2 and ROR 24 (trades unions) paragraphs 10 and 26. Back

61   McNulty summary section 6.9. Back

62   ROR 24 (trades unions) paragraph 31. Back

63   Q118. Back

64   ROR 26B (letter from the Minister of State to the Committee Chair, 26.Nov 12). Back

65   http://www.stagecoach.com/media/news-releases/2012/2012-04-30-south-west-trains-and-network-rail-alliance.aspx.  Back

66   Q226. Back

67   Qq723-24. Back

68   Q228. Back

69   Command Paper paragraph 4.11. Back

70   Q95. Back

71   Qq232-34. Also see Q39. Back

72   ROR 21 (Freight Transport Association) paragraphs 14-15 and see ROR 17 (DB Schenker) paragraph 19. Back

73   Command Paper paragraph 4.12. and Alliancing: ORR policy statement, Mar 12 (see http://www.rail-reg.gov.uk/server/show/ConWebDoc.10854).  Back

74   ROR 25 (ATOC). Back

75   Q42. Back

76   Qq431-36.  Back

77   Qq 433-34. Back

78   Qq434, 440. Back

79   Qq448, 450. Back

80   Qq 417, 426. Back

81   Q418. Back

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Prepared 4 January 2013