THE DECLINE OF RAIL AND THE CASE FOR CHANGE

  9.    The Commission's motivation in publishing the White Paper was, in the words of the European Commissioner for Transport, Mr Kinnock, "the survival of rail". Without "a substantial increase in the attractiveness of rail, freight and passenger, then ... by 2010 there will be terminal decline". The consequences of such decline for the economy, for employment, for the environment and for the efficiency of transport within the Single Market and beyond would be "devastating". The Commission's aim was to "retain rail as a significant transport mode because life without it would be less efficient, less clean, less competitive, more costly, more crowded".

  10.    The success of the strategy set out in the White Paper depended, Mr Kinnock said, on the implementation of all its main elements. Without relief of debt burdens, for example, rail was unlikely to present an attractive commercial alternative to road transport and so would not attract the additional custom on which other parts of the strategy depended. The technical improvements that would lead to greater interoperability were also vital (QQ 297-98).

  11.    Mr Koopman, of Mr Kinnock's cabinet, added that the measures proposed in the White Paper, while necessary, would not be sufficient. In particular, success would depend on whether the railway companies adopted a more commercial approach. Additional investment would be required, some of which would be channelled through the Community's Trans-European Network (TEN) programme, but considerable improvements could be achieved by more efficient use of existing infrastructure and without large-scale new investment (Q 314).

Rail freight

  12.    The Commissioner said that the White Paper's principal emphasis was on freight, both because it could be easier to achieve change in the freight sector and because of the immediate benefits to be gained from reduced pressure on the road system. There were greater complexities in passenger rail, which required more consultation and study (Q 301). The Rail Freight Group, which represented a wide range of freight interests, welcomed the White Paper's emphasis on introducing market forces to the freight sector, but was concerned that by excluding specific financial support for freight, it might jeopardise the United Kingdom's existing system of freight grants (Q 2)[6].

  13.    There was some disagreement about the potential for attracting freight to rail. The East Coast line's new private passenger train operator, Great North Eastern Railway (GNER), believed that the lower cost and greater convenience of road gave it a built-in advantage and that without significant changes in road freight pricing, there was little prospect of a major shift of freight onto rail (Q 99). English, Welsh and Scottish Railway (EWS), however, which as inheritor of four of British Rail's freight businesses was responsible for moving the "vast majority" of the UK's total rail freight, was confident that it could treble the amount of freight carried on rail in the next ten years. It also believed that substantial increases in international freight were possible (QQ 33-4, 47-58).

GENERAL REACTIONS TO THE WHITE PAPER

  14.    Almost all witnesses gave a general welcome to the White Paper. The Government, in their Explanatory Memorandum[7], said it successfully identified many of the issues that rail had to address if it was to develop and increase its market share. The recognition that rail "must be more efficient, customer oriented and attractive to users, whilst at the same time reducing their burden on the State for subsidy" was particularly welcome (paragraph 8). The Minister for Railways and Roads, Mr John Watts MP, said it was much closer to a Green Paper than most White Papers; it did not contain formal legislative proposals, and many important points of detail were not addressed (Q 287).

  15.    Noting that the White Paper contained proposals that had already been translated into effective action in the United Kingdom, the Rail Regulator, Mr John Swift QC, was struck by how far behind the rest of the Community was in rail restructuring (Q 256). Some means of introducing market forces or increasing efficiency needed to be found, as "the burden on the State in continuing to provide a subsidy for State-owned enterprises would, ultimately, not be faced". Someone had to "take the initiative in shaking up the inefficient, State-controlled enterprises" and the Commission was "making a bold move in that direction". He had been impressed by the Commission's willingness to listen, and hoped that it would take account of "the differences between Member States and the experiences of those who have tried restructuring and found it can work" (QQ 256, 262, 267).

  16.    Mr Koopman said that early reactions to the White Paper had been "generally very positive". Mr Kinnock was confident that the changes it advocated, despite some strong opposition, would be accepted by Member States. But as the proposals in the White Paper would mostly be advanced on the basis of Article 75 of the EC Treaty, which did not require unanimity, the Commission could not rule out having to enforce the implementation of measures in countries which had voted against them (QQ 309, 335, 349-50).

The implications for the United Kingdom

  17.    A key factor for most domestic rail industry witnesses was that, in the words of the Freight Transport Association, "many of the structural changes called for in the White Paper have already been implemented within Britain's railways as a result of their privatisation" (p 105). The Minister believed that the changes made in the United Kingdom were "in line with the policy objectives set out in the White Paper" (Q 286). But France's national railway, SNCF (Société Nationale des Chemins de Fer), warned that the Government's reforms derived "to some extent from principles other than those of Community law" (p 51).

  18.    The United Kingdom had been "in the forefront, not only in developing policy on the restructuring of railways, but also in implementing it", according to the Rail Regulator (p 69). Railtrack expected to be able to offer other railways and the Community institutions the benefit of its experience, and the Minister hoped there would be opportunities in Europe for other British companies, either in consultancy or in running rail services (QQ 148, 292).

The Community of European Railways

  19.    The Community of European Railways (CER), an association of 20 European rail companies, described the White Paper as "a constructive set of principles" (p 37). Despite the differences in circumstances and organisational structure between its members, which helped to explain the variety of ways in which they approached the problems faced by rail, there was a common recognition of those problems and of the need for change. The CER regarded many of the White Paper proposals as positive, particularly in terms of relieving past debt and increasing the transparency and autonomy of Europe's railways (Q 174).

The view of SNCF

  20.    There was one dissenting voice, however, from among the CER's members, namely France's national railway, SNCF, which said that its view was shared by the French Government. The White Paper, it believed, presented a good analysis of the problems faced by the railways and was right to claim that a "real revolution" was needed in methods and organisation of rail and in the quality of service offered to customers; indeed, without such changes, the future was "black for the trains". Some of the measures proposed in the White Paper, including those intended to address the financial problems faced by railways, make them more independent, ensure separate accounting of services and infrastructure and open access to other States' infrastructure, could be supported. But those parts of the White Paper which advocated liberalisation, and which would lead to open access on some parts of domestic networks, a system of Community-wide tendering for the right to provide services in cases where open access was not appropriate and the establishment of "rail freight freeways", were unacceptable (QQ 199, 207).

  21.    The Commission was confident that the French Government's position, although officially negative, was moving in the direction advocated in the White Paper and that many individuals within the French Government and SNCF recognised the need for change and for similar measures to those proposed in the White Paper (QQ 336-37).

The trades unions

  22.    The response of the trades unions in Europe had been "a very strong reaction of deep concern", according to Mr Jimmy Knapp, General Secretary of the National Union of Rail, Maritime and Transport Workers (RMT) and Chairman of the Railway Workers' Section of the International Transport Workers' Federation (ITF). The unions were not opposed to change, but the Commission's call for "a new type of railway" was a "newspaper headline approach" that was unlikely to prevent rail suffering what Mr Kinnock had described as "a lingering demise" (QQ 240-1, 247-48). The Transport Salaried Staffs' Association (TSSA) also had "strong reservations about the direction in which the document appears to be pushing the Community", which was towards a fragmented railway more concerned with its shareholders than its customers (p 111).

RAIL IN A WIDER CONTEXT

Competition with road

  23.    Most witnesses agreed that the principal competitor for rail, both freight and passenger, was road transport. GNER said competition for its customers did not need to come from rival train operators: "the competition is there already and it is called the motor car, the plane, the bus and the coach". The car would always be more attractive for some journeys, such as on cross-country routes, and passenger rail should concentrate on areas where it could have a real commercial advantage, particularly commuter and inter-city services. Better links were needed between the rail and road networks, for example by building "parkway" stations close to motorways (QQ 95-6, 99, 111-13).

  24.    Witnesses as diverse as Banverket (the Swedish rail infrastructure authority), the Road Haulage Association and the TSSA argued for a "level playing field" between rail and road, but differed on what was needed to bring this about (pp 98, 110, 111). The CER said that fair competition between road and rail had not yet been achieved in such areas as safety, working time and social regulations (pp 37-38). GNER was particularly concerned about tax incentives encouraging high mileage business car use, while the RMT believed that dissatisfaction with the high price of rail travel was partly attributable to "the unfair advantages of road vehicles" (pp 17, 59).

  25.    The Rail Freight Group accepted that taxes on road users might cover the provision and maintenance of roads, but not the external costs such as pollution and other environmental costs, accidents and policing. In addition, the burden on road users was not evenly distributed and heavy goods vehicles, in particular, did not pay their share (Q 8). Mr Watts recognised the importance of environmental costs, but said that the Government had not yet succeeded in developing a rigorous method for identifying and allocating those costs to particular transport users (Q 283).

  26.    Ensuring that transport prices reflected the real costs was not enough, in the CER's view. Organisational changes and improved presentation of rail were also needed, so that it was seen as the more attractive option rather than second best. Member States now recognised that rail had suffered historically from a lack of investment in infrastructure, and that this could be addressed by diverting resources from road building (QQ 194-95).

  27.    An important difference between road and rail, according to EWS, was that the road infrastructure was seen as effectively free at the point of use. Most of the costs paid by road hauliers were fixed costs, while the marginal costs of each additional journey were very small. With rail, by contrast, the price paid was based on the number of units moved (QQ 61-3).

  28.    The Road Haulage Association (RHA), although "not anti-rail", did not accept that the angle of the playing field needed further adjustment in rail's favour. Road hauliers had "no difficulty in competing with rail" but wished to do so on equal terms, and so opposed "subsidies for rail, distortions of the market and artificial inflating of road costs to make rail more competitive" (pp 109, 111).

Environmental benefits

  29.    Despite the Road Haulage Association's assertion that the railways were "not as environmentally friendly as claimed" (p 111), the Community of European Railways (CER) was one of a number of witnesses which saw clear environmental benefits in increasing rail's market share, particularly in freight (Q 172). Indeed, this was "the whole purpose" of the White Paper: the Commission was "only really interested in railways in so far as they can, as a business, help solve future environmental problems" (Q 192).

  30.    The Government believed there would be "a disproportionate benefit on the road network if we could shift more heavy goods vehicles onto rail", but the relatively small volume of freight carried on rail meant that even large increases would represent only one or two years' growth of road traffic. It would therefore be "wrong to look upon the revival of railways as a panacea for the problems we all have with road traffic" (Q 288).

REFORMING RAILWAY FINANCES

  31.    Rail could only achieve its full potential, according to Mr Kinnock, with significant debt reductions and restructuring, together with reduced reliance on state subsidy. Making the necessary changes would be a lengthy process that would have to be carefully managed (Q 303).

  32.    A major element in financial restructuring would be reducing the burden of historic debt. This would not be easy, as the CER pointed out, particularly given the financial pressures on Member States to meet the convergence criteria for Economic and Monetary Union. The importance of the issue, however, was illustrated by the fact that for some railways the cost of servicing their debts accounted for a quarter of their total costs (p 38). The Minister contrasted SNCF's current debts of around £22 billion with British Rail's debt before privatisation of less than £3 billion (Q 290)[8].

  33.    The Commission had chosen 1 January 1993, the date on which Directive 91/440/EEC came into force, as the cut-off date for historic debt. In so doing, the CER believed, it had signalled its intention of eliminating all such debt, however caused. This was "sensible", but the CER was doubtful about the particular date (Q 173). The Commission explained that it had chosen that date for "fairly complex legal reasons", but also to give a clear political signal that normal state aid rules would be applied in the rail sector. Although it said it had not received any particularly strong reactions to the date, it was aware of the need to tread carefully in issues of state aid and to interpret the cut-off date flexibly (QQ 338-40).

  34.    The Government, in their EM, also said they expected normal state aid criteria to apply but did not accept that successful financial restructuring required the elimination of all past debt (paragraph 9). The Minister promised to be vigilant in ensuring that debts were not written off "in a way which gives a competitive advantage to other European operators as compared with our own privatised rail companies" (Q 293). The Road Haulage Association went further, describing the proposal that Member States should remove railways' debt and improve their finances as "outrageous" (p 110).

INTRODUCING MARKET FORCES

  35.    The Rail Regulator welcomed "the policy emphasis in the White Paper on a `new kind of railway', with railways as businesses with management independence, subject to market forces, and with clearly defined public service responsibilities and public interest accountabilities" (p 69). The Freight Transport Association believed it was important to the future success of the railways that, like the road haulage industry, they were run on commercial grounds and were "able to trade with industry with the flexibility and freedoms of a commercial company" (p 106).

  36.    The Rail Freight Group said that market forces were "a potent force" for increasing efficiency but could be "very destructive" unless accompanied by measures to relieve railways of their debt burden and give them freedom to invest. They would not alone deliver the necessary increase in rail freight or the environmental or social benefits of increased passenger traffic. Some regulations were needed, for example to restrict goods vehicle access to town centres, although these would not be popular (QQ 2, 8, 18). Mr Kinnock saw a place for regulations, but since there was a rigidity about such an approach and prohibitions were likely to be circumvented, he preferred to make rail a commercially attractive alternative to road by means of good organisation, effective marketing and a business-oriented approach (Q 302).

Privatisation

  37.    Mr Kinnock emphasised that the Commission was required to be neutral on the question of whether railways should be publicly or privately owned (Q 305). Although the Minister accepted that privatisation was not "a pre-condition for achieving the objectives set out in the White Paper", he believed that it had been "very much more successful" than the Government had thought possible, and urged other Member States to be "a little more adventurous", as they would also benefit from the contribution privatisation could make to making rail more viable (QQ 278-79, 290).

  38.    Since privatisation, both the Minister and the Rail Regulator had noticed a distinct change in the attitude of visitors from other European countries, from "incredulity marked with sympathy for what appeared to be an extraordinary development" to interest in how similar changes could be made (QQ 262, 286). The Regulator cautioned, however, that, in restructuring a railway, it was "extremely important to determine clear objectives at the outset". The process of privatising or introducing market forces to a subsidised industry was quite different from the process that could be applied to profitable industries. In rail, a role for government subsidy would continue, even if privatisation increased efficiency (Q 256).

  39.    The main benefits of privatisation to EWS were the company's ability to concentrate on freight, its freedom to invest and to raise capital, and its greater flexibility in the services it could offer; on the other hand, it could no longer rely on the state to provide special treatment, subsidy or protection from bankruptcy (Q 92). These sentiments were echoed by GNER, which said that state-owned companies, would "never operate as efficiently as good private sector operations" and would always provide lower levels of service and be subject to excessive interference (p 17). A private company could adopt a more commercial approach and be more prepared to take risks in investment (Q 115). GNER's current franchise term of seven years, however, made the necessary investment in new technology, such as high-speed tilting trains, difficult to justify (Q 121).

  40.    The unions were more sceptical of the benefits of privatisation. The RMT saw "nothing to prevent railways operating as a public service whilst adopting the best and most innovative practices of private business"; similarly, the TSSA did not accept that "a publicly owned and publicly accountable rail network cannot respond to market changes or customer needs" (pp 59, 111).

  41.    Rail operators recognised general benefits in dealing with a privatised infrastructure authority rather than a public sector authority. For GNER, the principal benefit was that Railtrack was prepared to share commercial risk; privatisation did not resolve, however, the issue of long-term investment in infrastructure (Q 116). EWS pointed to Railtrack's incentive to be efficient, but suggested that a nationalised provider whose policy was imposed by the State was more likely to safeguard the interests of operators (QQ 12, 30). Railtrack itself saw the main benefit of its privatised status as the ability to operate on a clear financial basis "without the murkiness of financial relations between traditional railway administrations and Government that is still characteristic of the railways in many of the European Community countries at whose practice the White Paper is aimed" (Q 146).

Track access charges in the United Kingdom

  42.    Track access charges in the United Kingdom were too high, according to the RMT, costing freight companies around a third of their revenue and "actually preventing new traffic from coming onto the railways in this country, particularly on the freight side". Mr Knapp argued that these charges should be abolished for both passenger and freight services in favour of direct grants or subsidies to the infrastructure provider (QQ 227, 233-34). The Rail Freight Group was particularly concerned that high charges for new freight business were deterring traffic which might otherwise be encouraged away from the roads (QQ 25-6).

  43.    There were also concerns about the system for establishing access charges by negotiation between Railtrack and individual operators. The Rail Freight Group had originally advocated a system of published tariffs on the grounds that they were simple, not open to abuse, clear and predictable, but had been persuaded that rail freight barely covered its cost and hence that whatever tariff structure was chosen, some freight would be priced off the railways. It now believed this argument to have been mistaken and was confident that a tariff system could work. The negotiated system, the Group claimed, had not always led to sensible prices and the regulatory mechanism was cumbersome, expensive and time-consuming (Q 29). For EWS, negotiated access "was probably the only regime which could have been introduced" in the early stages of privatisation, but it also now believed the Rail Regulator should reconsider. In order to promote rail freight, it advocated a system of simple and predictable track access charges which could be quoted to customers in advance (QQ 61-3).

  44.    The Rail Regulator, however, believed the case for a negotiated system, which had been "broadly endorsed" by the industry in 1994, remained valid. "The potential merits of a tariff-based system (and variants thereof) such as transparency of rates were recognised but outweighed by the disadvantages of inflexibility and inability to take account of the circumstances of individual customers and flows". The negotiated regime would, however, be kept under review (p 79).

  45.    Both EWS and the Rail Freight Group were unhappy with Railtrack's response to suggestions for changes to the charging regime (QQ 12-14, 73). Railtrack defended its record against these criticisms, saying that the flexibility of negotiated access charges allowed it to find a financial package appropriate to the particular customer. Published tariffs might deter new customers and might make agreement on the use of rail freight freeways more difficult. The company's aim was to attract all the business it could get and to treat all customers equally, according to their contract. It was up to those companies to decide what services to run, and Railtrack would develop its own investment plans on that basis. This commercial approach was also useful in its dealings with the Government, when they sought to procure services or facilities for wider social or environmental reasons (QQ 150-51, 157).

OPEN ACCESS

  46.    Mr Kinnock said that open access was required by Community law, but was also a practical way of making the necessary changes to the culture of rail. The principal beneficiaries would be new entrants to the market, whose presence would lead to "a real economic contest for the provision of services and the attracting of custom in freight or in passenger". This was "the kind of stimulus that rail has lacked for most of this century" (QQ 308-9).

  47.    Rights of access to the rail infrastructure were "essential", in Banverket's view (p 99). The Rail Regulator believed they were "a spur to greater efficiency and customer responsiveness", but the benefits of greater competition in passenger services had to be qualified by a recognition that overall subsidy levels might rise if profitable services were subject to "cherry-picking". There was also a potential for loss of "network benefits" such as through ticketing, which required the participation of all relevant operators (pp 70, 78).

  48.    GNER recognised that open access would improve standards and competition on some parts of the rail network, but "strongly disagreed" that it would help long-distance domestic passenger operation. In most cases, competition between train operators was less important than competition with road, and there was in any case little spare capacity that new competitors could exploit (p 18, QQ 132-23).

  49.    Open access was, to the RMT, "a mythical solution to rail's problems". It "would destroy the economics of the Channel Tunnel operation overnight among international passenger trains" and was "ruled out here in Britain even as part of the privatisation process" (p 60, Q 246).

7   Submitted by the Department of Transport on 1 October 1996. Back

8   See also Annex I/2 to the White Paper, p 40. Back