Railway Industry

Baroness Clark of Kilwinning Excerpts

Tuesday 19th October 2010 Westminster Hall

[Katy Clark (North Ayrshire and Arran) (Lab)]

It is a pleasure to see you in the Chair, Mr Dobbin, and to have this opportunity to debate the future of the railways.

I want to set this debate in the context of the economic situation that we face and express the concern felt in many quarters that the policies we believe that the Government may pursue could make things worse. I hope that colleagues will join me in welcoming the thousands of trade unionists who are coming to the House today as part of the TUC lobby of Parliament. They include many rail workers. I hope that we will listen to what they say before tomorrow’s comprehensive spending review.

I pay tribute to the rail workers who work in all conditions to keep Britain moving. It is important that their voice is heard in this debate; I hope to discuss their concerns and those of service users. I declare an interest as a member of various parliamentary trade union groups organised by the railway trade unions. I have also worked closely on the issues with the National Union of Rail, Maritime and Transport Workers, the Transport Salaried Staffs Association and ASLEF.

It is important to remind ourselves of the three policy areas under consideration that involve the future of the railways. First, the previous Government, after the 2009 pre-Budget report, established a value-for-money review of our railways. According to the Government, the review, headed by Sir Roy McNulty, has no no-go areas; everything is up for grabs. The new Government have asked that the review be expedited. We understand that it will be published in March, but the Secretary of State has already been given the interim findings, which I am told are likely to be published in November. I also understand that Sir Roy told the Secretary of State that his interim report was not at a stage to be used to inform any decisions made in the comprehensive spending review, but will the Minister confirm that?

The second major policy context for this debate is the comprehensive spending review. Like other Departments, the Department for Transport will, we believe, be asked to make big cuts. There are understandable concerns that if we make cuts to our railways, we will damage the infrastructure needed to drive economic recovery and growth as well as to meet the ambitious targets that we set ourselves in the Climate Change Act 2008. There is also concern that the comprehensive spending review will punish UK passengers with even higher fares, although ours are already the highest in Europe.

The third major policy area is the Government’s review of rail franchising, which has generated headlines saying that the train operating companies are clubbing together to demand that the Government hand over longer franchises. The companies are also demanding more say in—and, we believe, eventual control over—our railways, including track, signals and stations. The suggestion seems to be that we should re-create the big, private, regional rail companies that the Labour Government eliminated in 1945 when we nationalised the railways.

Given those policy areas, I will use this debate to highlight some concerns raised by passengers and rail workers. We have read reports in the press that the protection afforded by regulated fares might be weakened, and that UK fares—already the most expensive in Europe—could rise by 30% or more. Passengers will find that hard to stomach, particularly as they know that senior directors of the big five transport companies that control most of the railways are still paying themselves salaries that most people, frankly, consider obscene. We know that the railways depend almost entirely on annual public subsidies and the revenues generated by fares. In effect, by awarding themselves such large salaries, railway executives are forcing taxpayers and fare payers to subsidise their excess.

The trade union RMT has researched the matter and provided me with some shocking figures. RMT says that Moir Lockhead—recently of FirstGroup, which runs First Capital Connect, First Great Western, Hull Trains, First TransPennine and ScotRail—was paid more than £500,000 last year, as was Ray O’Toole, recently of National Express, which runs c2c Railways. David Martin of Arriva, the highest-paid director, was paid almost £750,000, and Brian Souter of Stagecoach Group is paid more than that for running South West Trains and East Midlands Trains, but top of the tree is Keith Ludeman of Go-Ahead Group, who was paid a salary of £916,000 last year and whose salary has since increased by 35% to £1.2 million.

Will the Minister comment on those salaries and join me in agreeing that passengers, who face big fare increases and are likely to suffer the consequences of cuts in the subsidies provided to our railways, will find such salaries unacceptable? Those salaries are paid, in effect, by the taxpayer and fare payer. I hope that she will agree that transport bosses should be exercising pay restraint, particularly at a time when the Government are asking everybody else to tighten their belts. I also hope that she will agree to write to the transport companies asking them to exercise restraint.

My second point is about the behaviour of the privatised transport companies and the profits that they have made from privatisation. Over the past 10 years, the biggest five transport companies have paid dividends of more than £2 billion to shareholders. Over the past seven years, the three rolling stock leasing companies that own the trains have paid dividends of more than £1 billion. Professor Jean Shaoul of Manchester university estimates that since privatisation, dividends of more than £10 billion have been paid.

As colleagues will know, windfall taxes on utilities have been levied successfully in the past. The Government are also considering a levy on bankers. Will the Minister agree to consider imposing a windfall tax on the profits of the privatised railway system instead of penalising passengers with fare increases? At the very least, does she agree that instead of paying huge dividends, railway companies should be helping protect passengers and taxpayers at this time by agreeing to freeze dividend payments and invest all profits back into our railways instead?

Will the Minister consider the work of Richard Murphy of the Tax Justice Network? He undertook a study, a copy of which has been submitted to the value-for- money review, that considered the available sets of accounts for the six railway operating companies and three railway leasing companies operating in the UK between 2002 and 2006. He found that during that period alone, those companies owed £1.3 billion in unpaid tax that the Government had not chased. Will she read a copy of that study and examine its conclusions?

My third point relates to the future of Network Rail. The Minister will be aware from the McNulty review of the railways that the same companies paying their top directors such handsome salaries and making massive profits now hope also to profit by taking over the tracks and signals currently owned and operated by Network Rail. Although Network Rail is a private company, it is a not-for-dividend company. That means the £4 billion or £5 billion annual subsidy does not leak out of the industry in dividend payment; instead, any profits are reinvested in the railways. Whatever faults Network Rail may have, taking railway maintenance back in-house has clearly had the effect of reintegrating much of our railways. Indeed, I believe that that has been responsible for the significant improvements in punctuality since the Hatfield disaster.

[Hugh Bayley (York Central) (Lab)]

I congratulate my hon. Friend on securing this important and timely debate. When the track renewals company Jarvis went belly up earlier this year, some 1,200 employees were made redundant and only about a quarter of them have so far got another job in the railway industry. Does my hon. Friend agree that the Government will need the skills of skilled track-laying workers, if they build the new north-south high-speed railway that will run from London to Birmingham and on to Yorkshire and the north-west? I regret that I must attend another meeting at 10.30 am, but will my hon. Friend press the Minister on what the Government can do to secure jobs for those redundant workers who have not yet got jobs themselves, so that their skills can be retained in the railway industry and used to build new railways?

[Katy Clark]

My hon. Friend makes some powerful points, to which I will return later in my contribution. The privatised rail companies propose to threaten the progress that has been made in the railways in recent years. They want their companies to take over the infrastructure, perhaps on leases that would coincide with the length of the franchises. There is talk of trialling such arrangements in Merseyside or Scotland. The train operating companies have promised that that will incentivise them to invest in the railways, but they have provided absolutely no evidence to support that submission. Indeed, the evidence of the past and of their tenure with the railway passenger services shows that they simply seek to maximise profit and boardroom pay, as I have already mentioned. In fact, the Government’s own consultation document, “Reforming Rail Franchising,” states:

“European procurement law makes clear that contracts over 15 years require significant investment to be provided by the franchisee. Therefore, our starting proposition is that 12 - 15 years should be the standard length of franchises”.

That seems to say that we should extend franchises to the maximum length at which franchise holders have no legal obligation to invest significantly and leave investment completely at the discretion of the franchise holder.

[The Minister of State, Department for Transport (Mrs Theresa Villiers)]

I assure the hon. Lady that, whatever the length of the franchise, we will be pressing for the best deal for the taxpayer, including investment with longer franchises—whether they are for 10, 15 or 22.5 years.

[Katy Clark]

I am very pleased to hear the Minister say that. However, if we are going for franchises of approximately 12 to 15 years, there will not be that legal obligation, which must have a consequence for the decision that companies make.

[Mrs Villiers]

I am sure that the hon. Lady will appreciate that franchise documents impose significant legal obligations, and we expect those to include investment in the railways, particularly where a longer franchise is granted.

[Katy Clark]

I am pleased to hear the Minister say that. If the Government decide to go down the path of franchises of such a length, we will be actively scrutinising the situation to ensure that the contracts in place not only are legally binding but are enforced and deliver for the taxpayer and those who use the railways.

We know that the train operating companies are demanding further fragmentation and privatisation of our national railway structure. The former Network Rail chief executive talked about simply sweating the assets of the railway infrastructure. If franchises were coming to an end and existing operators were either not going to bid again or were not shortlisted for replacement, there is a great deal of concern that there would be little pressure on them to invest.

I also ask the Minister to consider carefully concerns that breaking up Network Rail would have a negative impact on rail freight. There is a real fear that passenger operators will be tempted to fill any spaces in the timetable with their own revenue-raising services, which would push freight to one side. Freight trains are often heavier than their transport equivalents and can do much damage to the track, which raises the possibility that the private operator could limit free access or leverage high track access charges on the movement of freight. That would force freight from the railway to the road, which would have a series of unhelpful environmental consequences.

Many people in the industry and in the rail trade unions are also concerned about the arguments of those who are making the case for breaking up Network Rail. In particular, they are concerned about the report of the Office of Rail Regulation, which is quoted again and again as stating that, compared with other European railways, Network Rail is up to 40% less efficient. I say to the Minister that hon. Members may make such points today because they have read articles in the press, but many in the industry, the RMT and the other railway unions have a great deal of concern about that report’s methodology. They believe it is flawed and that it has cherry-picked different aspects of rail infrastructure efficiency from abroad to paint our railways in a more unfavourable light. The report does not seem to take into account factors that determine efficiency, such as adequate investment over long periods, the need for a unified command structure and, most importantly, the continued fragmentation of our infrastructure compared with European railways.

We need to consider the benefits of having an integrated, publicly owned railway. I therefore hope that the Minister will ensure that those conducting the rail review—and the Government themselves—do not just look at the issue on an ideological basis, but consider the comparisons with other European railways. There has been some concern about the ORR’s report and I suggest to the Minister that she should be willing to receive more detailed representation from those who are concerned about that issue. It is obviously vital that we make the right choices for our railways.

In June, the Secretary of State said:

“Passengers and taxpayers will rightly ask why it is that our railways in the UK are so much more expensive than those in the rest of Europe.”

I believe that the answer is already there for him to see. For example, the 2009 European Commission report into the rail market made it clear that the structure of UK railways is radically different from that of railways in the rest of Europe. In terms of passenger operation and infrastructure, most of the railways in Europe are publicly owned and accountable, whereas in the UK they are not.

Compared with other railways in Europe, the organisation and structure of our railways is horrifically complex—they are fragmented and have numerous interfaces. We have 24 operating companies, three freight operators, three rolling stock leasing companies, two infrastructure controllers—Network Rail and Eurotunnel —and seven major infrastructure renewal companies. That must lead to huge inefficiencies. There is a duplication of function and a loss of economy of scale. In addition, the fact that there are so many individual companies means that there are increased profit margins and transaction costs—even the legal and consultancy fees are duplicated again and again. Skilled personnel validate and monitor contracts instead of getting on with the job and, perhaps most damaging, there has been a loss of a rail culture that focused on getting the job done, with one company and one stakeholder blaming the other when things go wrong. I understand that the rail review has already indicated that the railways could save hundreds of millions of pounds a year by reducing that fragmentation and the number of different organisations involved with them.

I hope that the Minister will look at what is happening to railways across Europe, which are overwhelmingly publicly owned and far more integrated than those in the UK. I believe that that would provide a better service and cheaper fares for the public, that it would be better for the environment and that it would lead to more high-speed rail and more electrification. Will she give an undertaking that there will be a transparent consideration of an integrated and publicly owned railway and that the methodology used to consider those matters will be made public?

I pay tribute to those who work on the railways. My hon. Friend the Member for York Central (Hugh Bayley) mentioned the Jarvis workers who have already lost their jobs. Thousands of Network Rail workers have been asked to make efficiency savings and many have already lost their jobs. I hope that we are now moving towards a period of stability and consolidation. We know, as he indicated, that many of the Jarvis workers are still without work and have lost their pensions. Given his comments, I suggest that it would be helpful if the Minister met me, him and other interested colleagues to discuss the plight of those workers and whether the Government can do more to ensure that alternative employment is available for them in these difficult economic times. Thousands of jobs have already been lost on our railways, on both the passenger and freight sides, and we are also seeing a gradual attack on train guards as companies try to introduce driver-only operations, which will reduce staffing levels even further and, I believe, raise significant safety concerns.

In Scotland, the Scottish National party Administration have taken advantage of the clause included in all railway franchises that allows railway companies to ask the Government to make good the loss of revenue caused by strike action. The Labour party in Scotland says that it will remove that clause from ScotRail franchises if it is successful in next year’s elections. Does the Minister agree that the current review of railway franchises should look at that matter and remove that provision from all franchises?

Many people who work in ticket offices are losing their jobs, with implications not only for them but for safety. We know that there is some protection for ticket offices, as train operators are required to consult passengers and Passenger Focus if they wish to shut offices or change their opening hours. Does the Minister agree that those protections must remain in place and should not be removed as a result of the review? Thousands of jobs are under threat in London Underground, many in ticket offices, as a result of the Mayor’s decision to renege on his election promise on staffing levels. Cuts will also fall elsewhere, including safety-critical railway maintenance jobs. As a result, there has been strike action on the Underground, as the Minister is aware. Indeed, the workers who were hailed as heroes after the London bombings in 2005 are now often vilified in the press as enemies of the state. I hope that there is a negotiated settlement to the dispute, and I pay tribute to those members of the RMT and the Transport Salaried Staffs Association who are taking a stand on behalf of passengers and rail safety.

I have put several questions to the Minister and am most anxious that she respond to them either today or, if she is unable to do so, in writing at a later date. I will mention those questions again, because they can often be lost in Adjournment debates. Will she clarify whether the McNulty review will inform the transport decisions in the comprehensive spending review set out tomorrow? Will she write to the executives of the big transport companies and ask that they practise pay restraint in the boardroom? Will she agree to a levy on the profits of the privatised rail industry or, at the very least, tell the companies to freeze their profits and invest them back into the railways? Will she meet me and other interested parties to discuss the continuing plight of the former Jarvis workers? Will she ensure that the franchising review results in the removal of clauses that allow taxpayers’ money to be used to indemnify train operating companies against losses incurred during industrial action? Will she ensure that the Government transparently consider the benefits of an integrated and publicly owned railway network and publish the methodology that they will use to consider the matter?

--- Later in debate ---

[Mrs Villiers]

I certainly recognise that the previous Government invested in the railways, and we would expect investment to continue under the current Government, given the huge importance of the railways to our economy and to our climate change ambitions. I covered the fares issue briefly in response to the shadow Minister, but I shall repeat my comments on it. The coalition is committed to fairness in rail fares, but the reality is that the crisis in the public finances means that we might have to take some difficult decisions on fares, as in other areas. As I have said, I am unable to give further details on the fares formula until it is announced for the coming years in the CSR on Wednesday.

There has been much discussion about the McNulty process, which is focused on trying to understand why the cost of the railways is higher in this country than in other parts of Europe, and I am sure that today’s discussion will contribute to and inform that process. It is important that a range of options be considered, and as part of our drive to deliver high-quality rail services at an affordable cost we need to consider how we reform Network Rail. Not even the levels of taxpayer support over recent years have succeeded in turning the company into the customer-oriented organisation that train and freight operators want. That fact was driven home when the rail regulator published the figures, to which the hon. Member for North Ayrshire and Arran referred: the potential 40% efficiency gap between Network Rail and European comparators. I acknowledge that there are always problems comparing Network Rail precisely with different railways in the rest of Europe, but these things should sound a warning bell that there is an issue to be addressed. If we are to be fair to passengers and the taxpayer, we need to find a way to make Network Rail more efficient.

[Katy Clark]

I think that it is accepted on all sides that there are issues to be addressed; indeed, that was why the previous Government set up the review in the first place. However, the Minister will have listened to what I said about the concern about the methodology used in the ORR report. Is she willing to hear further representations about that from those in the industry who have concerns? Given the publicity that the issue has had in the press, there is clearly a view that the Government will listen to the ORR report rather than taking a more forensic look at how other European railways operate.

[Mrs Villiers]

Of course I would be happy to accept further representations. One reason why we have continued with the McNulty study, which was set up by our predecessors, is precisely to find the true picture of the cost of Network Rail. The work done by the ORR is valuable, but it is just one point of view. Sir Roy is drawing on views and research from across the rail industry, including internationally, to find out what the facts really are.

Whatever reform we ultimately select, we will need to stress-test it in relation to the interests of freight operators. It is vital that we get the right balance between the interests of the railways’ passengers and freight customers.

In looking at the options for reforming Network Rail, it is interesting to look at what has been done north of the border. Network Rail has decentralised its Scottish operations, and accounting separation has been introduced. We need to look carefully at whether such decentralisation might improve Network Rail efficiency in other parts of the UK.

My officials are working with Merseytravel, the passenger transport executive for Merseyside, to explore whether to devolve the running of the track used by the Merseyrail franchise so that it is wholly governed by local decision making. That project could help to provide an important benchmark against which to measure Network Rail’s performance.

Another key issue is whether further contestability could be introduced for some of the work now carried out exclusively by Network Rail. Again, there is a Scottish example that is worth considering. In 2006, for example, Transport Scotland opened up about £20 million of rail funding for smaller-scale enhancements at stations and asked for offers from Network Rail and the train operators. By the end of the bidding process—if I recall correctly, this was under the Labour Administration— £19 million of the £20 million available was allocated directly to the passenger operators because their bids were judged to be better than Network Rail’s. A similar approach has been used for the national stations improvement plan in England.

The hon. Member for North Ayrshire and Arran talked at length about franchise reform, which is the second limb of our work to improve the railways’ performance for passengers and to get better value for money. The Department for Transport has recently concluded a consultation, and we are considering the responses. As I assured the hon. Lady during her speech, we want to encourage greater private sector investment in return for potentially longer franchises. We would continue to impose legally binding contractual obligations in franchises, including on the scale of the investment promised. We hope and believe that longer franchises will help us to deliver the investment and improvements that passengers want, including better stations. Longer franchises should also make it easier for train operators to invest in long-term relationships with Network Rail and their work force, which are crucial to running the railways efficiently.

We want to move to a system in which franchises are less heavily specified. In response to the shadow Minister’s questions, however, I can assure him that we will continue to set demanding outcomes for train operators to achieve in terms of the quality of service that they deliver. We will have demanding and legally binding requirements to protect the interests of the passenger and the taxpayer. The difference is that in setting those outcomes, we propose to give the people running the railway more flexibility over how they deliver them.

[Katy Clark]

The Minister will recall that, in my initial contribution, I quoted the Government’s consultation document, which said that European procurement law referred to 15 years and that that was why a starting point of 12 to 15 years should be the standard length of franchises. Does she not accept that that rings alarm bells? Will she explain why there is a link between European procurement law and her starting point?

[Mrs Villiers]

Obviously, the UK Government are bound by European procurement law to procure public contracts in a fair and objective way. In the context of rail franchises, it sets a top limit of 22 and a half years for contracts that involve investment. The reference to European procurement law was included in the consultation document because it governs the maximum that we can deliver in terms of rail franchises. Throughout the process of negotiating franchises, however, we will look to secure the best deal possible for the taxpayer, and we will ensure that we continue to protect the passenger interest. Train operators that do not comply with the obligations we impose on them will face sanctions, which, in extreme cases, could include removing the franchise.

In the few minutes that I have available, I want to talk a little about the inter-city express programme in response to the hon. Member for Angus (Mr Weir). I can assure him that we have no plans to scrap through services to destinations such as Aberdeen and Inverness, which he mentioned. As he said, the report produced by Sir Andrew Foster referred to one of the alternative strategies for the IEP, which involved ending those through services. As I said, however, we have no plans to do that. We recognise the economic value of such services, and we have certainly received strong representations from the Scottish Government and Scottish colleagues about the importance of retaining them.