House of Commons - Transport

Select Committee on Transport Seventh Report

4 STRATEGIC RAIL AUTHORITY

112. The SRA is a non Ministerial government body set up under the Transport Act 2000 to provide strategies, planning and co-ordination for the railway, and to guard passengers' rights.[152] It purchases rail services and infrastructure, effectively deciding on the industry outputs; it also provides standby financial facilities for Network Rail. The Secretary of State may give the SRA guidance and directions on a range of matters.[153]

113. The Government's Directions and Guidance to the Strategic Rail Authority explain its purpose which is to "provide leadership for the rail industry and ensure that the industry works co-operatively towards common goals."[154] The SRA's "primary objective" is increasing rail use; and its "equal primary objective" is to "work with the rail industry to achieve substantial lasting improvements in performance"[155] In order to achieve its purpose and objectives the Directions and Guidance state that the SRA "will need to address all aspects of the operation of the railway".[156] To do this a number of means are identified:

influence

in some cases to direct

to guide the industry

157

This is done by means of activities such as the creation of strategies for the railway and rail passenger franchise management.[158]

114. Our predecessor Committee concluded two years ago that, "The Strategic Rail Authority has failed to date to provide the leadership, priorities and precise timetable for implementation of improvements to the railways that were the main purposes of its establishment."[159] In the remainder of this Chapter we examine aspects of the SRA's franchise management; its formulation of strategy; and its ability to work "co-operatively" with other rail bodies, in order to take a view of its current approach to structure, leadership and vision.

Franchises

115. The letting and management of passenger rail franchises is at the heart of the SRA's work and where its impact can be assessed most clearly. It is also an area where the private sector is most directly involved in providing railway services and where its freedom to innovate is greatest.

TRAIN OPERATING COMPANIES' COSTS

116. The nature of franchises and the franchising process has changed radically since the current structure was last examined by our predecessors. Eighteen train operating companies received subsidy in 2002-03.[160] According to the SRA's last published Strategic Plan 2003, subsidy, net of receipts, was projected to grow to over £1.4 billion in 2003-04, [161] and nearly £1.6 billion in 2004-05.[162]

117. The original franchise bids assumed a decline in both staff costs and total operating costs.[163] In fact in the 4 years to 2001/02 staff costs rose 28% and other operating costs rose 22%. 29% more staff were employed by the train operating companies in 2001/02 than had been anticipated - 33,376 was the bid assumption, 43,027 was the actual total.[164] In addition, annual staff earnings increased by 18% over the same period. While franchise revenues outpaced predictions this was insufficient to cover the greater costs. The SRA states when franchises were let originally it was assumed that annual operating losses before subsidy could be reduced by £600 million per annum but this has not occurred. In 2001/02 the reduction was £222 million with the shortfall of £378 million being shared between franchisees in the form of lower profits and the SRA in higher subsidy levels.[165]

118. The Association of Train Operating Companies (ATOC) told us that train operating company costs have 'marginally increased in recent years' citing insurance as an example.[166] Mr Garnett of GNER said that "We [train operating companies] have held our costs static."[167] This is a far cry from the efficiencies originally predicted. The SRA's Strategic Plan 2003 states "In the short to medium term, SRA projections show an upward trend in costs and government support levels continuing."[168] We were given no indication of when subsidy for train operating companies would cease.

119. Some franchises have performed in the way that was expected. However, it is clear that the vast majority have not been able to produce the efficiency gains that were confidently anticipated at the time of privatisation. The network is now being run by a patchwork of companies, which operate in a variety of ways, with a variety of incentives. It is not for us to judge whether more efficient companies could have performed more creditably; however, the number of franchises in difficulties suggests something is fundamentally wrong with the structure of the industry. Either the private sector is no more efficient than the public, or it is being given tasks that no one can fulfil.

LOW BIDS

120. Some of the extra franchise operating costs come about, at least in part, because the infrastructure is not of the quality the bidders assumed. The failure to deliver the promised West Coast Main Line upgrade by May 2002 meant Virgin West Coast and Virgin Cross Country demanded and received substantial payments from the SRA. Mr Bowker confirmed to us that the sum set aside for Virgin was £291 million.[169] The SRA included this payment in evidence to us as one of the factors contributing to general cost escalation in the rail industry.[170]

121. Even without such infrastructure failures, the SRA states that "the costs of operating the current franchises have escalated and are substantially higher than bid levels".[171] Connex, for example - stripped of the South Eastern rail franchise by the SRA in 2003[172] - received £58 million from the SRA in 2002. According to Mr Bowker this was "Because the difference between their cost and revenue assumptions and the subsidy that they had bid for when they originally won their franchise had diverged in order to need additional support for that financial year. They had got their numbers wrong."[173] M. Olivier Brousse, Managing Director of Connex South Eastern Ltd, indicated that Connex would not be returning any part of the additional sum of £58 million to the Government.[174]

122. In our view, the essence of private sector involvement is that the private sector pays if it gets its sums wrong. It is outrageous that such astonishingly large sums of taxpayers' money have been used to prop up palpably failing businesses such as £58 million in the case of Connex. While we accept that failures in the initial franchise process may have been to blame originally, we cannot understand why action was not taken earlier by the SRA. As a result of this failure to monitor Connex properly the SRA bailed out a company using taxpayers' money only to strip it of its franchise a short time later. The SRA's management of this franchise has been woefully poor.

MANAGEMENT CONTRACTS

123. In July 2003 Mr Bowker estimated that out of 25 franchises, nine would be running on management contracts by the year's end.[175] The distinction between the provision of rail services by means of a successful franchise and a management contract is crucial and lies in which party assumes the revenue risk: in the former the profile of subsidy payments which the franchisee estimates is required at the time the bids are made means that he accepts the revenue risk; in the case of the latter the franchisee is paid a fee equivalent to his costs and the SRA as franchisor accepts the operational revenue risk. Nearly a third of the franchises were no longer expected to function in the entrepreneurial, risk-taking way that was one of the fundamental justifications for private sector involvement in running train services but simply to function as fee paid agents of the SRA. This indicates the extent of the present malaise.

FRANCHISE EXTENSIONS

124. Under the existing rules, franchises which have expired should be subject to further competition. In fact, many will be extended. Even now that the SRA and Network Rail have had over a year to produce stability, extensions continue, produced in part by delays in dealing with the new franchising structure. On 9 October 2003 the SRA announced a two year extension from 2004/05 to the Central Trains franchise held by National Express Group plc.[176] It appeared that precise cost figures were still being worked on, but the SRA stated that subsidy levels will be increased by about £54 million in 2003/04 and by £69 million in 2005/06; the entire subsidy bill for these two years will be around £600 million.[177] Mr Bowker, while agreeing that "as a matter of general policy competitive tendering will always get you the best results",[178] explained that amongst the reasons for the decision to extend the franchise, were "issues" around Birmingham New Street Station and with the West Coast Main Line and that was "most likely to deliver certainty for passengers, least disruption and best value."[179] More recently, there have been three further two year extensions.[180] Existing franchise agreements should be extended only if there are compelling operational requirements, or clear value for money justification. Extensions are a measure of last, not first, resort, and these examples suggest that the SRA has failed to plan ahead adequately.

NEW FRANCHISING POLICY

125. Since our predecessors' last inquiry into franchising,[181] a new franchising policy has been announced by the SRA, which considered that the old agreements set performance levels too low and lacked service quality standards.[182] The new model franchise has four levels of performance for service punctuality, cancellations and capacity: target level, remedial plan level, breach level, and "event of default" level. Each level demands an improvement in performance from the franchisee over the period of the franchise. The agreement contains a "Key Performance Indicator regime" which covers the passenger's journey.[183] The first franchise to be based on the new arrangements will be Greater Anglia which should begin in April 2004.[184] A major aspect of the new arrangements is that the franchisee, by achieving the "target level", is able to obtain an automatic three year extension but "In order to obtain an extension the franchisee … has to do the best that has ever been achieved on those franchise routes for every cause[of delay], every day."[185]

126. We asked Mr Bowker if the new arrangements would prevent the practice of unreasonably low bidding by companies for franchises which would later require additional financial support from the Government. Mr Bowker said that what he was seeking was the "best value bid, not the lowest price bid".[186] Mr Bowker had referred in a speech to the Rail Finance Summit on 23 October 2003, to the new franchises as removing risk for train operators.[187] We asked whether this meant increased risk for the taxpayer but failed to elicit a clear answer.[188] Professor Glaister of Imperial College, London, gave evidence of how removing risk transfer can weaken the incentive on the private sector to reduce costs.[189]

127. The new generation of franchises must be structured in a way which prevents franchisees returning for ever more public money, and ensures that costs are properly anticipated and controlled. Revenue risk should be assumed by the private sector wherever possible. The passenger must be the focus of the whole exercise. The SRA's record of franchise management to date is poor.[190] While the new franchise arrangements appear to be an improvement over the existing agreements in certain respects, we are particularly concerned that there is an automatic right of extension for three years if targets are met. If the new arrangements are to succeed, targets will need to be set sufficiently high that passengers notice a real difference in day to day performance of railway services; and SRA monitoring will require to be exceptionally accurate and rigorous. We have no confidence that the SRA is presently up to this task.

TRAIN OPERATIONS

128. The Connex South Eastern franchise will be absorbed into a new Integrated Kent Franchise which will run services in Kent, South East London and parts of Sussex, and include domestic services on the Channel Tunnel Rail Link. Meanwhile, the lines formerly run by Connex are being operated by South Eastern Trains, acting on behalf of the SRA and headed by SRA managers with private consultancy support, for a period before being re-let to the private sector in 2005.[191]

129. We questioned Mr Bowker closely as to whether, were the experiment with South Eastern Trains to prove successful, the SRA would consider running failing franchises directly.[192] He was willing to learn from the experience,[193] but thought that the private sector was invariably more efficient than the public sector, and in any case the policy that passenger train operations should be conducted by the private sector was clear.[194] Pressed further to say whether the policy should be changed even "if the public sector comparator shows that you [SRA] could do it [run services] more cheaply and more efficiently" than the private sector, Mr Bowker said he did not.[195] When we took evidence from the Minister of Transport, he, too, rejected any role for the SRA as an operator of trains.[196] The Government has undertaken to share the results of South East Trains with us and we look forward to seeing these.[197]

130. We were surprised at the evident unwillingness and timidity of the Government and the SRA to contemplate the SRA running train services directly, even if the SRA's experience of managing South East Trains demonstrated clearly that this could be done by the SRA at the best price and highest efficiency. It seems common sense that where benchmarking identifies the most cost effective solution to running a franchise then that solution should be adopted. The public are rightly concerned with excellent service and value for money. The record of the private sector in running trains overall is poor. To adhere to the policy of restricting such operations on ideological grounds does not appear sensible. In fairness, this evidence was given before the Government's recent announcement of its rail review. We trust that now a fundamental review is underway, the Government will consider this option much more actively.

CONCLUSION

131. Even where the SRA has direct responsibility, as with the franchising of passenger rail services, its imagination, focus, and performance are deficient. It has no day to day control of the delivery of passenger rail services, working, as it does, through the train operating companies. The degree to which the SRA is able to improve the journey of the travelling public directly is therefore limited by the sophistication of its contractual arrangements with franchisees. The extreme difficulties inherent in this process are obvious. The quality of the present franchises is poor; the new arrangements appear tighter, but their effect on train performance cannot yet be judged.

Strategies

132. The Transport Act 2000 requires the SRA to "formulate strategies"[198] which "should…cover both its own activities and those of the industry."[199] The SRA requires the consent of the Secretary of State before publishing its strategies.[200] The SRA's strategies embody its approach to various operational aspects of the railway. How effective are these strategies in grappling with key issues of today's railway?

"MIXED" RAILWAY

133. Britain's railway is a "mixed" system carrying freight and passengers. There is no absolute consensus about whether this "mixed" system is proving a brake on delivering performance enhancements on the railway. But our evidence suggests clear difficulties in certain areas. Amongst operators, FirstGroup plc considers that "congested daytime train paths…reduce day time passenger capacity".[201] The Royal Mail, whose commitment to rail freight appears uncertain, believes that "mixed" traffic is a significant problem for the railway.[202] Maersk's view is that there are problems with the 'mixed' mode because freight is disadvantaged due to "pathing incompatibility with some passenger services". In contrast, Freightliner believes that "mixed" freight/passenger traffic is most likely to "produce the intensity of utilisation which makes an expensive investment such as the railway system economically effective."[203] Mr Christopher Garnett, representing the Association of Train Operating Companies (ATOC), also supported a "mixed" rail system.[204]

134. Academic commentators suggested considerable problems with operations which contain a mixture of freight and passenger trains.[205] Professor Roderick Smith, Head of Mechanical Engineering, Imperial College, London, argues that capacity is limited because of the inherent contradictions of a "mixed" traffic railway which causes bottlenecks and a "huge number of conflicting movements",[206] a view shared by Professor David Newbery, Director of the Department of Applied Economics, University of Cambridge.[207] We heard a good deal of evidence about the importance and potential of a dedicated passenger railway. Professor Sir Frederick Holliday argued for the removal of rail freight to road on the basis that this would permit an increase in passenger rail performance sufficient to attract compensating traffic from road to rail.[208] Professor Smith argued for the construction of a completely new, high speed, dedicated passenger rail network.[209] The cost of the construction of such a network were estimated by him to be in the range £11 billion to £27 billion.[210]

135. The concerns about a "mixed" rail system, and a policy of pursuing performance improvements on such a system, are widespread. Dr Kim Howells, Minister of Transport, indicated that a "better option, [a] more realistic one" than building "brand new railways through this country" was "to make better use of the rail network that we have got now with better signalling and better technology".[211] The SRA told us that it spent £1.3 million last year investigating the case for a "North/South" high speed passenger line, but concluded that its "current budget does not cover the development or implementation of a high speed line". The SRA's Specification of Network Outputs strategy places emphasis on more capacity being squeezed from the existing rail network.[212]

136. It appears from the Government and SRA evidence that the railway will remain 'mixed' in the near future. Visionary proposals for passenger-only high speed networks have obvious funding drawbacks. Nevertheless, in the context of deciding on a railway future for the 21st century such ideas must be explored thoroughly. We agree that it may be politically and financially difficult to contemplate high speed passenger networks when the existing system is so clearly in need of overhaul, but there must be scope for imaginative thinking about the country's future transport needs. We hope that this issue will be revisited and the arguments set out clearly.

FREIGHT

137. Freight rail transport is not covered by franchise arrangements. It is undertaken by a number of private companies on the basis of access contracts negotiated with Network Rail. 18.7 billion tonne-kilometres of freight was carried by rail and 149.8 billion tonne- kilometres by road in 2002.[213] The SRA's freight strategy reflects the Government's objective of an 80% increase in rail freight by 2010 from 2000 levels, a target Mr Bowker thinks may be achieved.[214] Last year the SRA announced a revision in the "Sensitive Lorry Miles" (SLMs) values - the first since 1996. SLMs are designed to provide an assessment of the external benefits produced by moving freight from road to rail through the payment of Freight Facilities Grant (FFG) and Track Access Charges (TAG).[215] According to the SRA, SLMs 'form an essential tool in the appraisal of grant schemes'.[216]

138. As a result of pressures on the SRA budget, or an inability to manage its budget, and despite the policy of freight subsidies, the SRA suspended new applications for the FFG - which helps to offset the capital cost of providing rail freight handling facilities; and TAG, which helps to pay Network Rail track access charges, in England in January 2003. A new grant, the Company Neutral Revenue Support Grant, designed to encourage inter-modal freight traffic and due to commence in 2003,[217] will now not be brought in until later this year.[218] The Confederation of British Industry has queried how the SRA's decision to suspend FFG and TAG fitted with the Government's target to boost rail freight.[219]

139. We heard from two of the rail freight industry's customers, ASDA and the Royal Mail, about the importance of grants to their decisions about whether or not to place freight on the railway. ASDA told us that the savings the company makes by using rail freight facilities amounts to £1.33 million pa.[220] The performance of rail in Royal Mail's case was less than the company considered satisfactory. In ASDA's case the disparity between road and rail concerned the company, but appeared not to be considered critical to continuing with freight on rail because the time lost was made up later in the delivery chain.[221]

140. It was clear both that ASDA's decision to use rail freight was unlikely to have been taken without the assistance of grants;[222] and that had grants been available for the Royal Mail -an existing customer of rail freight and therefore not eligible for grants- this might have weighed in its decision to scale down, or even abandon, its historic reliance on rail.[223]

141. The SRA's suspension of rail freight grants at the very time that it was fulfilling its strategic remit by updating an environmental benefits methodology, shows the difficulties facing the organisation. In scrambling for short-term savings, the SRA had to compromise its ability to carry out its strategy which caused a loss of credibility throughout the industry in the Government policy on rail freight. Those responsible for the railway in future need to ensure much better coordination of budgetary management and strategy.

SPECIFICATION OF NETWORK OUTPUTS

142. The rail freight industry and the passenger transport executives felt under pressure from the Specification of Network Outputs strategy.

143. The aims of the SRA's outputs approach are stated to be faster train performance on key routes and cost efficiencies. The specification strategy is designed, first, to provide Network Rail with longer periods of time to work on the track ("possessions") intended to promote working and financial efficiencies; and, second, to target maintenance and renewals spending better. The top priority will go to: "Primary/London and South East commuter/main secondary routes"; a lesser priority to: "Other secondary/rural/freight-only routes".[224] The "main secondary routes" will include ports' links from Felixstowe, Holyhead, Immingham, Hunterston, Grangemouth, and Middlesborough (Teesport) to the main infrastructure network.[225]

144. Some freight rail users have been disturbed by this "differentiated" approach, seeing it as effectively down grading their own activities.[226] The SRA claims that cost savings of approximately £400 million can be made as a result of its policy, and up to £350 million from longer renewals.[227]

145. However, the SRA's scope to take decisions which affect freight operators appears constrained: "In the case of open access passenger and freight train operators, the SRA has no contractual relationship with them analogous to franchise agreements. It would require them to negotiate a lowering of Network Rail's obligations to them in their track access agreements."[228] In addition, the Rail Regulator specifically rejected the SRA's request to lower the budget for Network Rail maintenance and renewals expenditure on the basis of the anticipated savings arising from this strategy, considering that the extent of the savings was uncertain.[229] We make no judgment about the merits of the issue. The Rail Regulator's refusal to adjust Network Rail's expenditure to take account of the SRA's Specification of Network Outputs is an excellent indication of how severe the limitations are on any SRA strategy in the present structure of the industry when it affects the operation and budget of the infrastructure provider, which are effectively specified by the Regulator.

RESEARCH AND DATA

146. Network Rail has a clear view that "railway research has been neglected in the UK over the past decade."[230] According to Rail Research UK (RRUK), Government funding for rail research in the UK is "similar to the average in the EU on a pro rata basis" but less than half the Swedish level and 8 times less than Spain.[231] Professor Roderick Smith called attention to the contrast today's situation offered with 30 years ago where the UK was a world leader in the field.[232] In the aftermath of the Hatfield accident the necessary research rail engineering skills could not be found in the UK and had to be imported.[233] Extremely few UK sourced rail research papers are now published; research careers in the UK are limited; and there is a knock-on effect on the UK's "technical policy making and technical capacity."[234] Japan is the clear world leader in railway research.[235]

147. Research is vital to decisions about the future of the railway, as the Secretary of State's Directions and Guidance makes clear. The SRA is not given an explicit co-ordinating role in rail research but the importance of research to its activities is stressed, as is the need for it to be aware of the range of research activities in the UK and Europe generally.[236] The SRA should "encourage and as appropriate commission research related to its purposes and objectives' and should ensure that its research is developed in consultation with other bodies, including the Research Councils, HSE, Railway Safety [now Rail Safety and Research Board] and Government Departments…."[237]

148. RRUK receives £1.4 million of Engineering and Physical Sciences Research Council (EPSRC) funding annually which must be matched by the industry. On a wider field, the European Rail Research Advisory Council established in 2002 (on which the RRUK is represented) has led to the founding of the European Railway Research Network of Excellence covering 60 universities and research centres and which has attracted 6 million euros of EU funding over 4 years.[238] The RRUK's view is that more funding might be available if the industry itself were to organise better,[239] and though some maintenance and renewal firms were moderately upbeat about the current level of research, we were generally disappointed at the apparently restricted range of research and development being undertaken.[240]

149. While modest funding for rail research is available in the short term there are long term uncertainties. The result is that careers in the industry are not attractive and vital expertise may not be available. The present effort to stimulate rail research lacks focus. Rail Research UK's evidence suggests that the industry itself could do more. The SRA has not been given the direct task of co-ordinating and funding railway research. This was a mistake. One of the tasks of the body charged with industry leadership in the future must be to build on the efforts of the EPSRC to ensure that the United Kingdom has a sound research base to underpin railway developments. The Government needs to consider carefully future arrangements for the better co-ordination of rail research.

150. The key importance of making transport costs transparent was stressed by Professor Sir Frederick Holliday who said "if we do not try to make the costs transparent for every mode of transport then we are never going to have an objective appraisal of which mode to back."[241] It was suggested to us that insufficient data about the railway is being made available publicly by the SRA.[242] Professor Newbery, discussing cost benefit analysis, complained that there was not an "honest supply of statistics" for the railway.[243]

151. The Directions and Guidance provided by the Secretary of State to the SRA contains a Memorandum of Understanding on the "Collection and Publication of Data".[244] Mr Bowker told us that route and line specific information was available; but that he was anxious that information should be publicly withheld which "would not give anybody a competitive advantage".[245] He told us that "I believe the information that people do need is made available. If people do not think we are doing it they should ask; they do not."[246] It may be that there are good reasons for keeping some data at aggregate level, but the presumption should be that as much as possible is made available publicly. Without full and accessible data it is impossible to conduct a sensible debate about the future shape and purpose of the railway, a debate in which there is a wide public interest.

Working co-operatively

152. The severe limitations of its powers and the fragmentation of the industry into competing "baronies" means that the SRA needs to work closely with other bodies to maximise its leadership influence across the industry. We highlight briefly below examples where the SRA has been sidelined, has little or no influence, or has failed - because of the fragmented structure of the industry - to cooperate effectively with another transport body. These failures are not confined to the bodies directly concerned, but have important, knock-on effects on the rail sector as a whole, and the travelling public.

ENHANCEMENTS - WEST COAST MAIN LINE UPGRADE PROJECT

153. The SRA has a role as a chief customer for railway enhancements. However, as we have seen, its discretion is fettered by the ability of the Rail Regulator to specify Network Rail's outputs in some detail. One example of this confusion is the West Coast Main Line upgrade project where the SRA has sought to exert control but does not have the power to do so.

154. This project is one of the most important underway currently on the railway. It was described to us by Mr Andrew McNaughton, Network Rail's Chief Engineer, as a process of revitalising an "essentially life-expired railway".[247] SRA published its strategy consultation for the project on 5th September 2002, and its final strategy document nearly a year later on 16th June 2003.[248] In our report, Railways in the North of England, published later that month,[249] we praised the SRA for appearing to have exerted control over this complex, troubled project. On 8th July, in evidence to us, Mr Bowker indicated that progress appeared to be going as planned.[250] However, more recent developments on the project place parts of the timetable in doubt again.

155. The SRA's strategy for the project published on 16th June 2003 stated the cost as capped at £9.9 billion.[251] The SRA has told us that recent scoping and efficiency reviews have resulted in savings of around £2 billion.[252] The scope of the WCML upgrade is wider and more complex than the East Coast Main Line (ECML) electrification which took place in the 1980s. However, critics are right to query the substantial difference in cost per mile between the WCML - £16.68 million - and the ECML - £1.8 million - in 2000-1 prices.[253] Even more telling are the comparisons with British Rail's earlier plans to upgrade the WCML; in 1990, for example, the cost was put at only £750 million, or £1.034 billion in 2000-1 prices.[254] The SRA's published strategy document carefully defined the governance, roles and responsibilities of the respective parties in the project as follows: "specification" - SRA; "prime contractor" - Network Rail; "efficient project costs" - Rail Regulator.[255]

156. On the 24th July 2003 the Regulator and SRA issued press notices in which the former indicated that he was, "asking Network Rail to evaluate options for improving the efficiency of the West Coast route modernisation project";[256] while the latter stressed that, "there will be no delay in delivering the strategy and its benefits for passengers and freight customers."[257]

157. On 29th October 2003 the Regulator expressed the view that the upgrade allowing 125 mph running between Liverpool and London by September 2004 might not happen.[258] He was clear why: "The position that I have taken in relation to the west coast is that I am concerned that the work which Network Rail is doing involves a considerable amount of inefficiency and waste."[259] When we asked Mr Bowker about this on 5th November he said that, "the strategy which everybody is working to for September 2004 is the SRA strategy and nothing else"; but, pressed, admitted that, "It is possible that September 2004 is October 2004 and that is a matter of risk."[260] But the Regulator's comments indicate that he was not working to the SRA's strategy.

158. On 12th December 2003 the ORR published the Rail Regulator's Final Conclusions on Network Rail's funding requirements in the period 2004/05 to 2008/09. On the WCML project he concluded that:

Beyond these specific improvements, however, the Regulator has concluded that in order to reduce the risk of cost escalation and non-delivery, and to ensure delivery at an acceptable level of cost, it is necessary to extend the timescale for their delivery by 18 - 24 months. This effects in particular the capacity enhancement work between Rugby and Stafford on the Trent Valley route

261

Mr Winsor reduced the allowance for Network Rail expenditure on the WCML by £640 million.[262]

159. On 19th December the SRA issued a press release noting the Regulator's view that the "latter stages [of the project]should be deferred by 18/24 months, a view that the SRA has consistently resisted" and stating that there was an agreement with Network Rail that there would be "no changes at all to the agreed programme of works on the ground" until the SRA had reviewed "options" for the WCML project.[263] On 23rd December Mr Winsor countered, "I am aware that the SRA has consistently resisted rephasing of the outputs of the project. However, my decision has been made and is final (emphasis added)".[264]

160. We are deeply concerned by the nature of the decision making process revealed by the recent events on the West Coast Main Line upgrade project. Even now there appears to be no agreement on the entirety of the project. Neither the SRA, the Rail Regulator or Network Rail seems to have power to make a final decision. The Government seems powerless to intervene. It is hard to think of a more telling example of the divided leadership of the railway and the powerlessness of the SRA.

NETWORK RAIL'S DECISION TO TAKE OVER RAIL MAINTENANCE

161. On 24 October Network Rail announced that it was to take direct charge of rail maintenance and dispense with private sector contractors.[265] This is a crucial change in policy. When we asked Mr Bowker about this on 5th November he said "It was a matter for Network Rail to decide, but they are a professional company and they sought the views of their senior colleagues. So, yes, it was discussed with me and I supported it."[266] However, shortly before, Mr McAllister, Chairman of Network Rail, had maintained that "this was a decision for Network Rail and we did not discuss the issue with either the SRA or the Government….It was our responsibility. We advised the Government of what we were considering and we also advised the SRA."[267]

162. Irrespective of the exact nature of the exchanges between Network Rail and the SRA over the company's decision to take rail maintenance in-house, it is clear that the present structure of rail governance reduced the SRA in this crucial decision to a bystander. This is yet another example of the utter impotence of the SRA.

PRIVATE SECTOR INVESTMENT

163. The SRA has placed great emphasis on private sector investment, "Rail investment strategy has at its core a substantial role for the private sector."[268]

Rolling Stock

164. Mr Bowker told us that the "vast majority" of that investment has been in rolling stock.[269] We examined the role of the Rolling Stock Leasing Companies (ROSCOs)in some detail in an earlier inquiry.[270] Here we simply note that between 2001 to 2003 the private sector invested £1,488 billion in rolling stock.[271] According to the SRA "The average age of rolling stock is seen as a indicator of comfort on the railways."[272] The investment has produced a decline in the average age of the rolling stock fleet (all operators) from 20.67 years to 19.35 years.[273] This compares unfavourably to an average life of 16 years prior to the rolling stock leasing companies.[274] For a private sector investment of almost £1.5 billion since 2001/2, the average age of the UK rolling stock fleet appears to have declined by approximately 16 months only. This seems to us a rather modest achievement.

165. The SRA published its Rolling Stock Strategy in December 2003 too late for us to take specific evidence on it.[275] However, we did receive evidence on rolling stock, in particular, from the PTEs expressing their view that leasing charges were too high.[276] The Strategy sets out the SRA's position which is to encourage "an efficient and sustainable market" but which avoids imposing any detailed plan for rolling stock provision or "cascade" arrangements, "It is not appropriate for the SRA to meddle where the market does a better job."[277] However, that strategy also suggested that it was unclear that the market was doing an entirely perfect job. It noted "there are a number of factors that suggest that the ROSCOs may well enjoy a degree of market power, in some cases quite a high degree, in relation to the negotiation of leases for existing stock" and that "over the next few years, when the majority of transactions are likely to involve the re-leasing of existing stock…competition is often unlikely to be strong."[278] The SRA has said that it "will advise TOCs and franchise bidders if it perceives that proposed lease prices and terms do not constitute good value for money, while protecting the commercial confidentiality of prices agreed between TOCs and ROSCOs."[279] We wish to stress that it is essential that the ROSCOs do not receive more than a reasonable return, and that their market power does not lead to abuse. The cost of excessive returns for the ROSCOs is less money for the railway. We are concerned that the market may not be acting appropriately to provide rolling stock at economic cost; and that the SRA's rolling stock strategy may have missed an opportunity to rationalise rolling stock requirements.

Funding by 'Special Purpose Vehicles'

166. The SRA was also keen to bring in private sector money from so-called "Special Purpose Vehicles" (SPVs) - privately-financed companies established to finance and build major railway enhancement projects. While the Department for Transport has said that there is some prospect of an SPV for the East London Line Extension later in the year,[280] firm plans have yet to materialise. When giving evidence to us on the Department's Annual Report, the Secretary of State for Transport claimed that the Channel Tunnel Rail Link was an SPV,[281] although that project was put in place before the policy on SPVs was announced,[282] and is underwritten by the taxpayer with more financial risk recently transferred to the public sector. While the private sector has indeed participated in this project, we have already noted recently that ultimately the Government needed, in effect, to guarantee its cash flow.[283]

167. We tried, but failed, to identify private sector investment which is neither rolling stock, nor infrastructure funded by Network Rail. The Department for Transport has told us that such investment has been made in "plant and machinery" but that details are not available for reasons of "commercial confidentiality".[284] It is clear that the policy of Special Purpose Vehicles has failed to attract private sector investment into the industry as originally intended. The SRA can only bring in private sector money if it has suitable projects and, we suspect, if the public bear most, if not all, of the risk.

STAKEHOLDERS

Passenger Transport Authorities

168. The fragmentation of the railway means that it is vital for the SRA to work well with stakeholders. It does not appear able to do this. In our report Railways in the North of England[285] we deplored the SRA's poor relationship with local stakeholders.[286] In July Mr Bowker had told us of the efforts he had been making to involve stakeholders, including forming a "regional team" in the SRA to be the 'focus point' for consultation.[287]

169. It was disappointing to learn from the Passenger Transport Executives later in the year that, while relationships with the SRA were better, concerns remained. The guarded judgment of Mr Roy Wicks, Director-General, South Yorkshire PTE, speaking for the PTE Group in November, that the SRA are "listening more and are working much harder with PTEs and the local authorities"[288] was radically different from the up-beat view of Mr Bowker earlier in the year that "Our relationship with the PTEs is really good."[289]

170. In part, this concern of the PTEs was rooted in a deep mistrust of SRA policies, for example, the SRA's Specification of Network Outputs strategy which the PTEs saw as 'naïve, simplistic and arbitrary'.[290] The PTEs' discontent was not rooted in any unwillingness to work with the SRA, but was the result of what they saw as structural flaws in the rail industry which resulted in a mismatch of objectives between franchises and local transport plans as in the case of the Northern franchise.[291] The Passenger Transport Executives saw two roles in the rail industry, "setting policy" and "delivering."[292]They considered that because the operations of Network Rail were funded by the SRA, directly through grants or by subsidy to train operating companies which fed through to Network Rail, consideration should be given to drawing the responsibility for delivering train operations and infrastructure together under one organisation.[293]

Merseyside

171. Where the SRA does make an effort to co-operate with local stakeholders the results can be promising, though even here vigorous follow up action seems lacking. We were told about the unique experiment with the train operating company Merseyrail Electrics involving the local Passenger Transport Authority and Executive (Merseytravel) and SERCO/NedRailways in a 25 year long franchise, in which the franchise specification has been devolved by the SRA to the PTE and the franchisee is seeking to operate on the basis of the "whole journey", passenger-focussed approach of the Dutch Railways.[294] The "whole journey" approach includes, for example, a so-called "clockface" or regular interval timetable, a focus on cleanliness, safety and convenience for passengers within the station environments operated by the company, a co-ordinated approach with other transport modes, and is also similar to the transport approach presented to us by Jonathan Tyler of Passenger Transport Networks reflecting the experience of the railways in Switzerland.[295] Mr Scales, Director-General, Merseytravel, identified integration as one main advantage of the new arrangements, "We do not have to go 200 miles down to London to get a decision; it is all done in Merseyside. It is local solutions to local issues by local people."[296]

172. The emphasis here is on strong partnership with other operators, the local authority, the British Transport Police and the PTE which seeks to go beyond the basic fulfilment of contractual obligations.[297] For example, the company maintains its own rolling stock; and is developing its relationship with Network Rail to seek operational integrations that approach "vertical integration" in order to improve Public Performance Measure (PPM) results. The results achieved for passengers by the Merseyrail operation since its start on 20 July 2003 so far appear promising with a PPM for the period July - September 2003 of 94.2%.[298]

173. A "high level" SRA objective is to contribute to the development of integrated transport, and the Secretary of State's Directions and Guidance to the SRA enjoin it to give weight to measures to improve "door to door" journeys when examining franchise proposals.[299] While the SRA is to be commended for facilitating the Merseyside arrangements by relinquishing the specification for the franchise to the PTE, we are worried and puzzled that the SRA indicated in a press release that this interesting example of local, public/private partnership initiative in Merseyside, was something which could not readily be repeated.[300] We accept that the nature of the Merseyside franchise area makes it an obvious candidate for devolution of rail services. But the SRA's position on closing the door to the approach adopted here appears highly unimaginative. We hope that the Government - in line with the reference in Mr Darling's Statement of 19 January to seeking devolution of rail to PTEs - will ensure, wherever possible and with appropriate local adjustments, that the arrangements in Merseyside can be repeated not only with the PTEs, but wherever they appear workable. More generally, we think that there are lessons to be learned by all franchisees in the absolute focus on passenger service which lies at the centre of this operation. Any devolution of rail to the PTEs should also ensure financial flexibility and the possibility of modal change.

CONTROLLING COSTS

174. The SRA is the conduit through which Government investment in the railway flows. Its purchasing power should help it achieve its strategic objectives. As the SRA itself notes, costs are rising more quickly than performance:

"The total cost that Railtrack/Network Rail and passenger and freight operators incur to provide the national train service has risen from £6.1 billion in 1999-00 to a projected £9 billion in 2002-03. But this increase is not being matched by equivalent growth in revenues. The consequence is a financial imbalance which the measures set out in this Strategic Plan are designed to put right….The operating surplus/deficit …has declined from a small deficit in 1999-00 to an estimated deficit of £1.5 billion in 2002-03…."[

301

175. The Strategic Plan 2003 spells out that these increasing costs place projects at risk, and put the Governments targets for rail in doubt.[302] This is bad enough, but it is clear that the reasons for these cost increases are not understood precisely by the SRA, "A better understanding of the causes of the cost pressures is needed to distinguish those arising from providing improved outputs and those arising from inefficiency." The SRA state that the reasons for cost escalation were "believed to include increased safety and quality standards, rising staff costs, a more conservative approach to managing the infrastructure and the overall growth in train mileage…(emphasis added)."[303] Even the responsibility for arriving at such an understanding is not the SRA's: "This is a key issue in the Interim Review which the Rail Regulator is undertaking working closely with Network Rail and the SRA. The SRA cannot pre-judge its outcome."[304]

176. Even though the areas in which costs appear to be rising are not under SRA control, an intelligent customer should have a grasp of where savings can be made. Even though there remains some confusion in the SRA about the causes of the cost escalation in the railway, it is clear that the greatest increase is in the cost of rail infrastructure. As we have pointed out earlier, this is presently the responsibility of Network Rail and the Regulator, and the SRA has no direct control.

Conclusion - vision, structure, and leadership

177. In order to provide coherence and morale for the industry, the SRA needed to articulate a clear vision for the railway of the 21st century and the goals needed to achieve that vision. This vision required to be sufficiently broad to be shared by the travelling public and the Government, and precise enough to energise and inform the operational work of the railways. The SRA also needed to take account of, and lead, the debate about the nature of rail that our work uncovered. Has the SRA led that debate? Does the SRA have a vision for the railway?

178. There is wide and vigorous debate taking place about the future of the railway and this was reflected in the evidence submitted to us. For example, Dr Tim Leunig of the London School of Economics was critical of the degree of subsidy which the railway attracted and was prepared to contemplate a much smaller railway with higher passenger charges.[305] Professor Newbery argued that there had been a "massive misallocation" of investment in rail based on over estimates of demand and underestimates of costs.[306] In contrast, Jonathan Tyler laid emphasis on the social potential of the railway "as an underpinning of a civilised way of life".[307] Chris Nash, Professor of Transport Economics, University of Leeds, also argued that the economics of traffic density provided a case for rail subsidies, and stressed that the growth of rail depended upon improved quality of service and additional capacity.[308] Professor Phil Goodwin of the Centre for Transport Studies, University College, London, pointed to the buoyancy of railway demand against a backdrop of press hostility; the fundamental changes road charging policies would be likely to have on the economics of the railway - including a larger role for rail; and the absence of any work "which projects forward a dynamic, long term view of the interactions of supply and demand, road and rail, in a timescale in which road pricing would interact with rail demand."[309] We had evidence of the environmental case to be made for rail from English Nature and Professor Sir Frederick Holliday, though English Nature pointed to the need for more research;[310] and from Dr Leunig on the relationship between relative environmental benefits and passenger densities.[311] We found little evidence of the SRA leading the debate in the development of new thinking about the railway, or even engaging fully with many who are contributing to that debate.

179. Mark Casson, Professor of Economics at the University of Reading said that "When you look at the SRA's view of what the railway system will be in 20 years' time, there is no view at all. In other words it is very much authority now to sort out problems, but not much strategy in terms of long-term thinking",[312] which summarises the opinion of many who talked to us. That we should have found no strong, organising vision for the railways is depressing but, in the light of the evidence we received, not surprising. The SRA was set up to provide leadership through strategy direction - in other words, to provide this vision. On the evidence received in this inquiry it simply does not have the power to do so.

180. Last July Mr Bowker told us "It is not necessary in any circumstances to have to be able to direct somebody as to what to do in order to achieve a desired result. That is the lesson of every other industry";[313] and last November he said: "I believe that the industry we have is now capable of operating efficiently. I have never really held the view that structure is the primary cause. People, management, and process is what is needed to be fixed."[314]

181. We agree that successful leaders need not, and indeed, usually cannot, control everything. But the leader needs to be able to control some significant part of his organisation. The SRA does not control the day to day activities of franchisees; the infrastructure; the contracts by which companies get access to that infrastructure, the resources that are put into that infrastructure; or the measures to ensure the safety of the industry and the travelling public. All it controls directly is the letting and monitoring of franchises, and the giving of various grants.

182. It is clear to us that the SRA does not have the powers and responsibilities to provide it with the commanding position of leadership that the industry requires, and to drive through the improvement in rail operating performance which the Government and the travelling public are entitled to expect. Consequently the SRA has failed to provide the scale of improvements which it was set up to deliver. Mr Bowker's assertion that the railway is structurally sound is unfounded. Restructuring the railway to enable output specification and control over the means of delivering infrastructure improvements to be exercised within a single management structure should be the core of the new arrangements for the railway, as we discuss in more detail in Chapter 6. Structures emphatically do matter. "People, management and process" do not exist in a vacuum. A rational framework for the railway is required which allows the industry to work together to improve railway services for passengers.

152 A body carrying out public functions but which is not a Government Department Back

153 Directions and Guidance to the Strategic Rail Authority may be found on the SRA 's website Back

154 Directions and Guidance, para 2.1 Back

155 Ibid, paras 5.5, 6.2 Back

156 Directions and Guidance, para 6.3 Back

157 Ibid, para 6.4 Back

158 Directions and Guidance, Chapters 7 and 9 Back

159 Transport, Local Government and the Regions Committee, Passenger Rail Franchising and the Future of Railway Infrastructure, para 12 Back

160 On Track, October 2002 - March 2003, p 20 Back

161 SRA Annual Report 2002-03, Appendix 3 Back

162 SRA Strategic Plan 2002-03, p 52, Table 10. Public subsidy paid to train operating companies in 2002-03 was £1,320.8 million, On Track, October 2002 - March 2003, p 20 Back

163 Ibid, p 48 Back