Strategic
Rail Authority
40. 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. (Paragraph 115)
41. 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. (Paragraph 119)
42. 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. (Paragraph 122)
43. 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. (Paragraph 123)
44. 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. (Paragraph
124)
45. 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. 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. (Paragraph 127)
46. The Government
has undertaken to share the results of South East Trains with
us and we look forward to seeing these. (Paragraph 129)
47. 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. (Paragraph 130)
48. 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.
(Paragraph 131)
49. The Transport
Act 2000 requires the SRA to "formulate strategies"
which "should…cover both its own activities and those
of the industry." The SRA requires the consent of the Secretary
of State before publishing its strategies. 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? (Paragraph 132)
50. 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. (Paragraph
136)
51. 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. (Paragraph 141)
52. 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. (Paragraph 145)
53. 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. (Paragraph 149)
54. 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.
(Paragraph 151)
55. 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. (Paragraph 152)
56. 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. (Paragraph 160)
57. 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. (Paragraph 162)
58. 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. (Paragraph 164)
59. 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. (Paragraph 165)
60. 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. (Paragraph 167)
61. 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.
The Passenger Transport Executives saw two roles in the rail industry,
"setting policy" and "delivering." 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. (Paragraph
170)
62. 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. 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 PTAs should also ensure financial
flexibility and the possibility of modal change. (Paragraph 173)
63. 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. (Paragraph
176)
64. 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?
(Paragraph 177)
65. 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. (Paragraph 178)
66. 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. (Paragraph
179)
67. 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. (Paragraph 181)
68. 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. (Paragraph
182)
69. While the HSE,
Network Rail, the RSSB, could readily tell us their
administrative budgets for rail safety, no one could provide us
with a sum totalling the cost of safety to the industry as a whole.
In Network Rail's case this was because "the needs of safety
arise in every activity we carry out as a company". We
asked the Secretary of State for Transport who said, "It
is difficult to put a precise figure on it….Frankly, safety
should be in with the bricks". In the absence of a credible
overall figure for the costs of rail safety -which may be extremely
difficult to arrive at- it is impossible to conclude that safety
on the railways as a whole may be costing too much, or that insufficient
is being spent. This does not mean that judgements on the cost
effectiveness of particular projects are not possible. However,
we have received evidence that the HSE has caused unnecessary
extra cost by "gold-plating". (Paragraph 190)
70. All safety standards
applied by the HSE must be constantly updated and be the result
of proper and rigorous risk assessment. Unless this is carried
out the HSE's service to its railway customers will be unacceptably
diminished. It is also completely unacceptable that the industry
should risk incurring huge costs for inappropriate safety measures
because of relatively small budgetary considerations in the HSE.
Where such costs are incurred there will be an inevitable knock-on
to the travelling public who are therefore made to bear at least
a part of the costs of the safety regulator's poor practice.
(Paragraph 193)
71. It is extremely
disappointing that Network Rail's representations on the inappropriateness
of designating the industry as a "major hazard" appear
not to have been brought to the attention of the current HSE Director
of Rail Safety. (Paragraph 197)
72. We do not accept that parallels exist
between the rail, nuclear and chemical industries. We certainly
do not underestimate the extremely serious consequences of any
train accident; but the scale of nuclear and chemical accidents
is not likely to be similar to those on the railway. In our view,
this places in doubt HSE's designation of the railway as a "major
hazard" industry which we think could result in a "gold
plated" approach being taken to rail safety. The HSE needs
urgently to rethink its approach to the classification of rail
as a 'major hazard' industry and generally to adopt a more nuanced,
railway-specific approach to such matters. (Paragraph
198)
73. We are not convinced
that the HSE's approach to TPWS demonstrated a reasonable balance
of costs and safety. Further, we were appalled to see so profound
a disagreement between Network Rail and the HSE over the extent
of the TPWS system to be fitted on the network. (Paragraph 201)
74. The Government
funds rail safety research but, in effect, hands the money over
to the rail industry to spend. We think that the Government needs
to examine the use that is being made of such research funding
against the overall objectives for rail safety to ensure that
these sums are being put to best use. For example, we wondered
why the function of rail safety research could not be taken into
the Railway Inspectorate and those sums administered directly
in order to promote research which would then inform policy directly
for improving rail safety regulation. (Paragraph 204)
75. The highly disturbing
evidence of our inquiry is that the rail industry's confidence
in the HSE is at a low ebb. (Paragraph 206)
76. It is a matter of profound concern to
us that the person appointed to the key post of Director of Rail
Safety, leading the Inspectorate in the HSE, left his post after
less than a year with the clear perception that the HSE's regulation
of the railway industry was so flawed as to require it to relinquish
its responsibility . (Paragraph 207)
77. Safety measures must take proper account
of the ability of the industry to pay for them, and be clearly
proportionate to the risk. The justification for such measures
must be based on cost benefit analysis principles that are agreed
across the industry, and such calculations need to be shared between
the relevant bodies. Benchmarking to establish best practice needs
to be extended to other transport modes, and not only to apparently
inappropriate comparators such as the nuclear industry. It is
apparent that the HSE has lost the confidence of the industry.
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 either made an independent Agency
of the Department for Transport, or merged with the new unified
rail delivery body we propose in the final Chapter.
(Paragraph 209)
The
Future of the Railways
Present Confusion
78. 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.
(Paragraph 210)
79. 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. (Paragraph
211)
80. 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.
(Paragraph 212)
Focussed economic regulation
81. 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. (Paragraph 213)
82. 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.
(Paragraph 214)
83. 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?
(Paragraph 215)
84. 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. (Paragraph
217)
Unified delivery for the passenger - Railway
Agency
85. 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. 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. (Paragraph 218)
86. 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. (Paragraph
219)
87. 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.
(Paragraph 220)
Safety
88. The
Secretary of State has pointed out that safety is integral to
the railway. 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.
(Paragraph 221)
89. 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. (Paragraph 222)
Rail Passengers Council
90. 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". 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. (Paragraph 223)
