Present confusion

210. The present confused and fragmented state of the railway meant that we found no satisfactory answers to the four questions with which we started. However, our inquiry has enabled us to be confident about changes that will be required to ensure the future of rail.

211. The current railway structure blurs responsibility for policy and railway services and is not fit for purpose. Rail policy can never be divorced from decisions about overall public expenditure which are the responsibility of Government. The Government's function of adjudicating on the public interest has been passed to the Regulator who acts as a "proxy for the public interest". The Government is presently compelled to carry out his funding decisions; Network Rail is required to carry forward and manage the operational consequences of his financial planning; the SRA has struggled to determine railway outputs because the Regulator has effective control over the infrastructure. In addition, however well advised, the Regulator is ultimately not professionally equipped to take detailed operational and managerial decisions about the railway. Our evidence has shown in detail how this present rail structure, far from focussing the various parts of the railway as a whole on improving services to the passenger, has meant that valuable energy has been diverted to intra-industry squabbling and "buck-passing", while co-operative moves by the various rail bodies governing the industry have had little or no demonstrable effect upon improving performance.

212. Further restructuring of the railway will be disruptive. Nevertheless, we cannot see how the railway can ever be made to work significantly more effectively and transparently under present conditions. It is imperative that the Government uses the review of the railways announced on 19 January 2004 to address these fundamental problems. A model of railway governance is required which restores to the Government control over the public interest, public expenditure, rail policy, and objective setting; while allowing the railway industry full operational responsibility for the delivery of improved infrastructure, train service outputs and strategy objectives.

Focussed economic regulation

213. One of the most negative aspects of the present railway governance arrangements is the Rail Regulator's autonomy and its undermining of the SRA's strategic role. When we asked Mr Winsor why the accountability of Network Rail is stronger with an unelected regulator than under ministerial control he said:

"It is stronger because the powers of the Regulator are much more precise and reach far more areas of the activities of the industry than ever did the powers of any elected minister. Under the days of nationalisation, ministers could usually hire and fire the board and give general directions to the board of a nationalised authority. I believe that the cases in which general directions were given could be counted on the fingers of one hand. It has been told to me by senior civil servants that general directions were never given because they were not quite sure how general they would need to be. Independent economic regulation of the railways is much more precise in many other respects than ever was the power of a minister. For example, in relation to the financial framework of the industry, in relation to asset stewardship, in relation to the allocation of capacity, the abuse of monopoly power, anti- competitive practices and much else besides."[365]

214. However, the success of the present regulatory regime in fundamental aspects of controlling costs, laying down strong incentives, providing for secure knowledge of the industry's assets, quantifying investment arising from it, and working well with other railway bodies under Government guidance, has been abysmally poor. It did nothing to prevent the appalling débâcle of Railtrack when the railway came close to collapse. The costs of the industry have still to be brought under control. In addition, as we have demonstrated, it is the Government and not the Rail Regulator which guarantees the railway and the private investment. Finally, the Regulator appears to have extended his role in setting track access charges into the forward management of Network Rail's business - something that was surely never envisaged to be a part of his function - thus subverting the proper function of that management and risking a further confusion of roles.

215. It is unlikely that the Government will wish to be involved in running railway operations directly.[366] But regulation by the Government is not the only alternative to the present regime. Other railway networks have regulatory regimes which do not involve governments losing so substantial an amount of control of railway funding. We looked, for example, at regulation on the Dutch Railways, where the equivalent Dutch regulatory body appears to have more limited room for manoeuvre, for example, the Dutch Government sets the infrastructure operator's budget.[367] Even if experience were to show that direct public sector train operation was effective in certain circumstances, some private train operating companies have performed well. It is difficult to envisage a situation in which the private sector will not be involved in providing some train and railway services and will not need to negotiate a range of contracts with a unified infrastructure provider. In those circumstances, the role of an independent regulator will be required. The question is, what will that role comprise?

216. In 1998, the Environment, Transport and Regional Affairs Committee, reviewing the prospect for a new Strategic Rail Authority, and the potential for entanglement with the responsibilities of the Rail Regulator, expressed its concern.[368] It recommended a reduced role for the Regulator "umpiring contracts and fair competition issues with a heavily reduced staff"; and considered that "restoring the original requirement in section 4 of the Railways Act 1993 for the Regulator to take into account guidance by the Secretary of State" would provide an adequate safeguard. That requirement was restored by the Transport Act 2000 which includes a provision for the Secretary of State to give the Regulator guidance,[369] but, as we have shown in this inquiry, this appears to have been ineffective.

217. We consider that there may be some continuing role for independent regulation of the railway to ensure that contractual obligations are met, that access is properly controlled, and to perform a speedy arbitration function in the event of contractual disputes. However, we think that the Government in its present review of the railway structure needs to cut back severely the present, highly interventionist, regulatory regime. In particular, we consider that it is completely inappropriate for the Regulator to determine alone the funding which the Government must set aside for the railway infrastructure, given the size of the sums concerned and the knock-on effect on other areas of public expenditure. The planned move to a regulatory board structure with the same functions as the Regulator later this year does not, in our view, affect this argument.

Unified delivery for the passenger - Railway Agency

218. If there is to be any prospect of a significant improvement in performance discernible to the travelling public, then the present unstructured relationship between infrastructure provision and output specification, needs to be disciplined within a formal, structured framework. If the Government, for ideological or other reasons, will not operate the railway directly, a unified and powerful rail delivery organisation - a Railway Agency - which includes relevant railway expertise with the wider public interest and regulatory functions, and combines the present functions of the SRA and Network Rail, should be created in the public sector.[370] We think, therefore, that an Executive Agency model for such a body is likely to be appropriate. The top management of the new body should comprise a small executive team with clearly focussed strategic and functional responsibility for the delivery of key operational elements of the railway, for example, infrastructure, passenger operations, customer service, freight development. It should be led by a chief executive and a chairman of world class professional stature. Those leading the UK railway industry in future should be highly knowledgeable and internationally respected professional railway men and women. It will be essential that the new body re-establishes public respect for the railway in order to attract talented and committed individuals to all levels to the industry. Sweeping away the present confused organisational arrangements and substituting a single delivery body responsible for a unified railway, offers the hope that lines of responsibility and funding will be clarified, strategy and operations will be "joined-up", and the potential for performance improvements radically maximised. The record of British Rail in the 1980s when subsidy was reduced, financial targets met, investment increased, and service quality improved, demonstrates that an integrated railway can function efficiently.[371]

219. Many of the passenger train franchises are being run as management contracts; franchises have been extended; and Network Rail has taken over rail maintenance directly. This all suggests that the present, fragmented state of the railway is forcing consolidation incrementally on the industry. Whether or not this amounts to "creeping re-nationalisation", our proposal for a unified public sector Railway Agency responsible for train outputs and the rail infrastructure, sits well with the industry's present evolution.

220. We do not envisage that this new body would necessarily be required to run all the infrastructure and passenger train services directly. The Government will wish to consider the merits of continuing to involve the private sector in infrastructure provision and passenger train services, where clear benefits exist for doing so; equally, its mind should be far more open than before to the public sector providing services directly where appropriate. Privately owned rail freight companies would continue to operate freight services. In some cases a measure of so-called "vertical integration", where track and trains are operated by the same body might be appropriate, as in the case of Japan's regionally based passenger rail companies; and in rural areas the specification of services might be devolved to the local bodies, as in the case of Merseyside. A wide variety of service provisions, tailored locally to passenger requirements, could be accommodated within the arrangements we propose. In general, the provision of rail services needs to take much greater account of local and regional needs. Unifying the delivery of railway services emphatically must not mean bureaucratic centralisation; nor, of course, does it mean breaking up the network. Responsibility for the infrastructure and the delivery of all railway outputs should rest clearly with an Executive Railway Agency acting as the unified train service delivery organisation.

Safety

221. The Secretary of State has pointed out that safety is integral to the railway.[372] It is right that this should be so. It is also right that those regulating rail safety should take full account of the industry's safety achievements and problems in order to target future effort accurately and use resources effectively.

222. The evidence we have taken in the course of this inquiry indicates that the relationship between the HSE and the industry has broken down. We cannot see how fully effective railway safety regulation can be carried out in these circumstances. It should be a priority for the Government's review of the railways to consider whether Her Majesty's Railway Inspectorate should be removed from the HSE and made, either an independent Agency of the Department for Transport, as is the case with the newly established - but regrettably delayed - Rail Accident Investigation Branch, or merged with the new Rail Agency body we have proposed.[373]

Rail Passengers Council

223. A mature industry needs a strong and constructive consumer voice, particularly at times when the industry's performance is weak, its structure fragmented, and it lacks any strong vision for the future, as at present. We were frankly disappointed with the contribution of the Rail Passengers Council (RPC) to our inquiry. In addition, the profile of the RPC throughout the network is too low. We likened the Council to a 'secret' which the industry likes to "keep to itself".[374] We were concerned, for example, that members of the public who wanted to complain about train services would not find the RPC's contact details readily available. This needs to change. If this organisation is to make a significant contribution to the debate about the future of the railway, then it will need to represent passengers' concerns much more powerfully than at present. It may be that a body representing interests of passengers which is not sponsored directly by the body responsible for the railway, as the RPC is presently by the SRA, would find a more insistent public voice.

366   The Secretary of State has said, 'Of course no Government Department can or should attempt to operate the railways...' HC Deb 19 January 2004, col 1078 Back

367   FOR 91A Back

368   Environment, Transport and Regional Affairs Committee, Third Report of Session 1997-98, The Proposed Strategic Rail Authority and Railway Regulation, HC 286-l, para 140 Back

369   Section 4(5)(a) of the Railways Act 1993 as amended by section 224 of the Transport Act 2000 Back

370   European Directive 91/ 440 of July 1991 is not in conflict with this proposal. The Directive insists that the accounts of rail infrastructure and operations should be separately identified, Gourvish, op cit, p 262 Back

371   ANNEX 1  Back

372   Transport Committee, The Departmental Report 2003, Ev 10 Back

373   Section 3, Part 1, Railways and Transport Safety Act 2003 Back

374   Q1353 Back