1. The rail industry is at a critical point of its development. Since our predecessor Committee's report in 2002 on the structure of the rail industry[1] a new private rail infrastructure provider, Network Rail, has replaced Railtrack. In December, the Rail Regulator determined the sums of money he considers the company will require for 5 years from April 2004.[2] In April 2003, the Rail Safety and Standards Board (RSSB) replaced Railway Safety as the rail industry's lead body on safety and standards matters. The Government's Spending Review decisions in the summer will determine industry funding to 2008.[3]

2. As part of our remit to monitor the performance of the Department for Transport and its associated public bodies, we took evidence last session from leading figures in the industry including the Rail Regulator and the Chairman and Chief Executive of the Strategic Rail Authority (SRA).[4] That preliminary work left us sufficiently concerned over the state of the industry to announce in July 2003 an inquiry into the "future of the railway".

3. The Government and Mr Bowker, Chief Executive and Chairman of the SRA, assured us that the structure of the industry was not going to be changed, and that the industry's focus should be on making the existing arrangements work properly. Nevertheless, we felt it was important to look at fundamental issues. To this end, we posed four questions:

is rail an outmoded form of transport?

is the present network the right one, and if not, will it have to be changed?

what sort of traffic is the network best used for?

how does our network compare with other railways and what lessons can we learn from other countries?

4. These simple questions provoked evidence raising a number of fundamental issues, including the role of the Rail Regulator, the capacity of the SRA to lead the industry, its relationship with the Government, the Government's capacity to direct the policy of rail in the current structure; and the effectiveness of Network Rail. The constant theme throughout our work was the complaint that the current structure of the industry is too fragmented to provide clear lines of responsibility and leadership and a satisfactory basis for improved rail performance.

5. The Secretary of State's Directions and Guidance to the SRA make clear that rail privatisation was "seriously flawed" in "many respects";[5] and that "The Authority will…need to address the problems caused by fragmentation of the railway industry's structure…". Our predecessor Committee highlighted the dangers of fragmentation in 2002, when it warned starkly that:

"The fragmentation brought about by privatisation contributed to the chaos and delay that paralysed the industry. It is essential that fragmentation is significantly reduced."[6]

6. Mr Bowker has sought to achieve a measure of industry co-ordination through regional "joint boards" involving Network Rail, the SRA and the train operating companies.[7] We also heard about the so-called "Group of 6" key industry leaders who have met regularly since 2002.[8] However, there is no evidence that this effort of co-operation is mitigating industry fragmentation, or improving service performance.

7. We have seen no evidence, since our predecessors reported two years ago, that fragmentation in the rail industry has reduced. Indeed, our evidence has suggested that it is getting worse. In addition, industry costs are increasing; performance remains in the doldrums; and the SRA appears utterly incapable of managing significant improvements. The evidence of the Rail Regulator's Interim Review of track access charges is that the Regulator and the SRA are not co-operating well.

8. The evidence of Dr Dieter Helm, Fellow in Economics, New College, Oxford, illustrates the appalling extent of the present confusion of responsibilities in the railway:

"the Department for Transport's role is subsidiary to that of the Treasury and spending review, leaving the status of the 10 Year Plan ambiguous;

the SRA's role depends on the Department for Transport's priorities, and the guidance provided to it;

the SRA's budget is notionally outside the main government borrowing calculations, but in reality is determined by the Treasury;

the Rail Regulator decides the track access charges which, in practice, are paid by the SRA at the margin;

thus, the Rail Regulator determined how much money the SRA pays Network Rail and the TOCs [train operating companies], and therefore how much money the Treasury pays the SRA via the Department for Transport;

the outputs are, however, determined by the SRA, which effectively carries out the capital planning function (which Railtrack previously did);

Network Rail therefore is largely responsible for the operations of the railways, and the SRA for its capital development, confusing the roles of management and responsibility;

the Rail Regulator and the SRA have a concordat which cements this confusion of roles between them.

As a result, it is not surprising that there are often sharp differences of opinion between all the main parties: the Treasury, the Department for Transport, the SRA, the ORR and Network Rail. Tom Winsor, Rail Regulator, sees himself as the 'referee', but one who has to take into account the aims of the SRA, and whose decisions ultimately determine public expenditure on the railways."[9]

However, even this picture does not represent the extent of the confusion, and lack of co-ordination between the main bodies, which we found.

9. It became clear that, as the railway system is currently governed, there is no one organisation capable of properly addressing the four questions with which we started. In our view, until there is a single body with the authority to deal with these questions, Government and the rail industry are condemned to spending energy debating structural issues rather than getting on and running the railway for the benefit of the travelling public and the country. This report addresses the fundamental questions: who does, and who should, run the railway?

The Government's Failure

10. Much of this report analyses in detail the flaws in the main pillars of railway governance: the SRA, Rail Regulator and Network Rail. However, responsibility for the railway rests ultimately with the Government. It has had six years to construct a policy and structure for the railway that works well, but our report shows that it has failed to do so.

11. The first missed opportunity was when the SRA was established by the Transport Act 2000. The purpose of the SRA, set out in the Government's White Paper in July 1998, was to provide a "clear, coherent and strategic programme for the development of our railways."[10] The SRA has not come close to achieving this, as we demonstrate later in this report.

12. The failure to address properly the effects of the establishment of the SRA on the Rail Regulator is a further, serious, example of Government policy failure. The SRA and the Rail Regulator were left with overlapping duties and powers which later led to a struggle to determine which of them ran the railway. In addition, the Rail Regulator is independent of the Government in regulating Network Rail but is also under a duty to "have regard" to the budget of the SRA in setting Network Rail's funding levels. He must also have regard to guidance from the Secretary of State, a policy stressed in the Government's 1998 White Paper.[11] It is no wonder that in a recent publication explaining the difficulties of reconciling these and other duties he said that "the Regulator's duties do not always point in the same direction and may conflict".[12] The Government appears to have assumed that the Regulator's duty to have regard to guidance would ensure that the Regulator considered the financial needs of the railway in the overriding context of Government and SRA policy and budgets. This has not happened.

13. The collapse of Railtrack gave the Government a further opportunity to address these problems. Instead, it added another fudge by creating Network Rail, a private company without any private sector disciplines, seemingly set up simply to keep the enormous costs of the railway infrastructure away from the Government's balance sheet. In addition, we have found that the Health and Safety Executive is regulating railway safety without full regard for the improving safety record of the industry or its ability to fund improvements. The result is that spending in this area is a major contribution to soaring costs but with progressively less safety gain.

14. Directly or indirectly, the effects of this failure of Government rail policy are evident in the huge rise in costs of the industry since 1990. In 2002, 6% of passenger kilometres were made by train in Great Britain; rail represented 47% of public passenger travel excluding cars, vans, and taxis; and approximately one third of total planned (public and private) expenditure on transport in the period 2001/02 to 2010/11 - £64.9 billion out of £181.9 billion - is allocated to the railway in the Government's Ten Year Plan.[13] The taxpayer is making a very substantial investment in the railway and it is therefore essential that the railway provides excellent value for money not only to the fare payer, but as importantly for the tax payer. Roger Ford provided the Committee with the following information:[14]

(1) Includes joint industry costs (2) Includes rolling stock leases but not track access charges

In addition, as the graph below demonstrates, the performance of the industry has become highly unsatisfactory over exactly the period when Mr Ford calculates that the industry operating spend was in deficit:

Source: SRA, National Rail Trends, 2003-2004 quarter three, Table 2.1 Public Performance Measure

15. As public sector support for the railway has tripled, underlying spend has doubled and revenue has remained static; while the SRA's graph reveals the industry's inability to sustain and improve its performance. The taxpayer has paid progressively more in this period for a declining service. Mr Ford points out that the enormous increase in the cost of the railway places its future in grave serious doubt.[15] It is essential that costs are brought under control for the future of the railway. Professor Roderick Smith of Imperial College gave evidence to us that the cost of one entirely new railway system was in the range £11 - 27 billion.[16] The sums which have been used ineffectively by the Government's railway structure in propping up the present, poorly performing system, could have paid for a large proportion of a new railway network.

16. The enormous public sector costs of the industry have been camouflaged. Network Rail's borrowing appears in the UK National Accounts as private sector borrowing owing to its classification there as a private non-financial corporation even though the Government, through the SRA, guarantees much of the company's borrowing. While the Comptroller and Auditor General has concluded that Network Rail should be accounted a subsidiary of the SRA, the National Statistician, relying on accounting advice from the Department for Transport, considered the present classification of the company was satisfactory.[17] This means that the Government does not have to account for the enormous debts of Network Rail - which we detail later in this report - despite guaranteeing them.

17. The damaging consequences of these and other failures for the sound regulation and governance of the railway are the subject of the remainder of this report. However, the fundamental failure of the railway is one of Government policy. The Government has not been able to exert control on the extra costs of the railway system, identify clearly the root causes of the extra costs, nor has it after two attempts produced a governance structure that has clear lines of accountability for public money and ensures appropriate transfer of risk to the private sector.

18. It is vital that the recent surge in costs for the railway is checked. The Government has told us that it is in control of the industry. But the swelling subsidy figures of recent years tell the real story of an industry that is out of effective control. The siren song of the SRA is that a "gradualist", evolutionary approach based on intra-industry co-operation will enable costs to be reduced and performance to improve. Others we heard from were in favour of restructuring. We publish the evidence of both with this report. Relying on incremental improvements may take many years to produce results; ill judged restructuring will damage the industry further. However the Government chooses to reverse the present position of the railway, it will be essential that in future it ensures proper control over the money it provides. The Government must ensure that the private sector assumes real risk where it is involved in providing railway services in future. The Government also needs to ensure that the funding of the railway is properly integrated with other transport modes. The Government has the responsibility to sort out the current mess; it needs to make sure that it has the powers required to do so, and that the powers and responsibilities of all the bodies involved in the railway industry are appropriately structured.

Secretary of State for Transport's statement of 19 January 2004

19. We were heartened that as our inquiry was in its final stage, the Secretary of State for Transport announced on 19 January 2004 an immediate review of the structure of the rail industry with "fundamental reform" in mind.[18] In a striking departure of tone and approach, Mr Darling referred to a fragmented, excessively complicated and dysfunctional industry with "too many organisations, some with overlapping responsibilities".[19]

20. The Government's proposed examination of the industry structure represents a welcome, if belated, reversal of its position as set out by the Secretary of State as recently as 10 September 2003 when he told us that he was "loathe to start spending overmuch time on structural changes when I really want everybody in the industry to concentrate on delivery"[20] and that "It is not so much the structures that are important; it is making sure that you have got the right relationships...".[21] We are delighted that the Secretary of State has changed his mind over the four months since he gave evidence to us and has also decided to review the structure of the railway.

21. In the course of this inquiry we received 126 memoranda from individuals and organisations and held five evidence sessions from October 2003 to January 2004, in addition to evidence sessions dealing with rail related issues. The volume of the evidence we received demonstrates the extremely high degree of current concern about the railways, and confirms our original view of the timeliness of this work.

22. Evidence was taken from Dr Kim Howells, Minister of Transport, Mr Richard Bowker, Chairman and Chief Executive of the Strategic Rail Authority (SRA), Mr Tom Winsor, Rail Regulator, Mr Len Porter, Chief Executive of the Rail Safety and Standards Board (RSSB), Mr Alan Osborne, Dr Allan Sefton, Director of Rail Safety, Health and Safety Executive (HSE), Mr Ian McAllister, Chairman, Network Rail, Mr John Armitt, Chief Executive, Network Rail, Mr Stewart Francis, Rail Passengers Council (RPC), Mr Christopher Garnett, Association of Train Operating Companies (ATOC) and Chief Executive, GNER, Mr Olivier Brousse, Chief Executive, Connex South Eastern, Mr Mark Beckett, Business Development Director, Chiltern Railways, Mr Patrick Verwer, Managing Director, Merseyrail Electrics, Mr Roy Wicks, Director-General, South Yorkshire PTE, Mr Neil Scales, Director-General Merseytravel, Mr Robert Crow, General Secretary, National Union of Rail, Maritime, and Transport Workers, Richard Rosser, General Secretary of the Transport Salaried Staffs' Association, Mr Mick Rix, Associated Society of Locomotive Engineers, Mr David Clarke, Strategy Director, Jarvis Rail, Mr Colin Carr, Engineering Director, Amey Rail, Mr Andrew Rose, Chief Operating Officer, Balfour Beatty Rail, Dr Keith Lloyd, Representative of Alstom Transport UK, Mr Per Staehr, Chief Country Representative, Bombardier Transport UK Ltd, Mr Anton Valk, Managing Director, NedRailways B.V., Mr Gerlof Den Buurman, Project Manager, ProRail, Mr Shaun Markham, English Nature, Mr Michael Hughes, Chairman, Railfreight Interchange Investment Group, Ms Philippa Edmonds, Freight on Rail, Mr Stephen Joseph, Executive Director, Transport 2000, Mr Robert Goundry, Director of Strategy, Freightliner Group, Mr Neil McNicholas, Managing Director, Direct Rail Services, Mr Michael Schabas, Director, GB Railfreight, Mr Graham Smith, Planning Director, English Welsh and Scottish Railway, Mr Paul Wright, Head of Logistics, ASDA-Walmart, Mr Allan Leighton, Chairman, Royal Mail, Professor Sir Frederick Holliday, Professor Roderick Smith, Imperial College, London, Professor Chris Nash, Institute for Transport Studies, University of Leeds, and Rail Research UK, Professor Mark Casson, University of Reading, Professor Stephen Glaister, Imperial College, London, Professor David Newbery, University of Cambridge, Dr Tim Leunig, London School of Economics, Mr Jonathan Tyler, Principal, Passenger Transport Networks. We are grateful to these witnesses and all those who contributed to our inquiry.

23. A Clerk and the Specialist Advisor made a brief study trip to the headquarters of NedRailways B.V., a subsidiary of Nederlandse Spoorwegen, in Utrecht. We are grateful

for the highly informative briefing they received there.[22] We wish to thank Dr Terry Gourvish, Director of the Business History Unit of the London School of Economics, our Specialist Advisor.

24. Regulation of the Railway is undertaken by three bodies: the Rail Regulator, the Strategic Rail Authority, and the Health and Safety Executive. The railway infrastructure is owned and run by Network Rail, a private company. In the following chapters we examine the roles of these bodies to highlight operational inadequacies in each, and their chronically poor co-ordination, which are rooted in the present deeply flawed structure of the industry.

2   The sum is determined by the Rail Regulator after an access charges review, also called a periodic review.This is the process in which the Regulator determines the income which the infrastructure operator - now Network Rail; Railtrack prior to 2002 - needs to earn mainly from train operators in the form of track access charges, and from certain other sources. Mr Winsor announced the access charges review which concluded in December 2003, in 2002. Further details may be obtained from the website of the Office of the Rail Regulator (ORR)  Back

3   HC Deb 19 January 2004, col 1076 Back

4   We produced two rail related reports in the last Session, Transport Committee, Fourth Report of Session 2002-03, Railways in the North of England, HC 782-l; and, Seventh Report of Session 2002-03, Overcrowding on Public Transport, HC 201-l. These reports, and in particular HC 239-I, are highly relevant to this work, and our present conclusions should be read in conjunction with them. Back

5   Directions and Guidance, para 5.3 Back

6   HC 239-I, para 53 Back

7   Q 247 Back

8   SRA, Rail Regulator, HSE, Network Rail, and representatives of the train operating and freight operating train companies, SRA Strategic Plan 2003, p 21. Engineering contractors and rolling stock manufacturers are not represented. Back

9   FOR 94 Back

10   Department of the Environment, Transport and the Regions, A New Deal For Transport: Better For Everyone, Cm 3950, July 1998, p 94 Back

11   Ibid, p 97 Back

12   ORR Interim Review of Track Access Charges: Draft Conclusions, p 10 Back

13   Transport Statistics 2003, pp 14, 25; and Specialist Advisor Back

14   FOR 88 Back

15   Ibid Back

16   Professor Roderick A. Smith, "High-speed Railways for the UK", The Utilities Journal, April 2003, pp 36-38 Back

17   Treasury Committee, First Report of Session 2002-03, National Statistics: The Classification of Network Rail, HC 154, para 9  Back

18   HC Deb 19 January 2004, col 1077 Back

19   Ibid Back

20   Transport Committee, Second Report of Session 2003-04, The Departmental Annual Report 2003, HC 249, Ev 9 Back

21   HC (2003-04) 249, Ev 17 Back

22   Dr John Patterson, Clerk, and Dr Terry Gourvish, Specialist Advisor, visited the headquarters of NedRailways in Utrecht on 25 and 26 November 2003.Their study programme extended over one full day and a quarter and covered the following aspects of the Dutch railway and transport structure: transport integration, electronic ticketing and gateing, staff training centre, long term vision, timetabling, rolling stock and maintenance, company culture change, regulatory and industry structure, human resources policy, aggression training centre, station visit - Den Bosch. Back