Passenger Railway Services (Public Ownership) Bill

Lord Young of Cookham Excerpts

Report stage
Wednesday 6th November 2024 Lords Chamber

[Lord Liddle (Lab)]

My Lords, from listening to the noble Baroness, Lady Randerson, I think there is a misunderstanding about what the Government are trying to do. As I understand it as a humble Back-Bencher, we are trying to get rid of the franchising system because, as it is, it does not help us to run a railway in the way we want to. In his opening remarks the noble Lord, Lord Hendy, said that one of the points is to have a simplified fare system that will greatly raise the prospects of increasing passenger revenue and passenger use of the railway, because the fare system is an obstacle to that. We cannot do that while we have the franchise system, so we have to get rid of the franchise system.

If there is any fault in what is happening at the moment, it lies on the opposite side of the Chamber and with the Transport Ministers who gave operators such as Avanti the very loose targets that they have to meet. I advocate that we should be tougher with Avanti, have it in every month, and if things have not improved, we should take the risk of taking the franchise off it and saying, “See you in court”. That would be my approach, but the problem is what the Conservatives have left us with, and that is very difficult to solve. I do not support this amendment, which would result just in extending the existing system.

[Lord Young of Cookham (Con)]

My Lords, I am glad I let the noble Lord, Lord Liddle, speak before me, because I listened very carefully to what he said at Second Reading, when he made a powerful speech in favour of pragmatism. I think that was an expression that he used; I see him nodding in assent. Pragmatism is the reason behind Amendment 10. It is a question of whether we let ideology trump pragmatism. The amendment is very similar to one I proposed in Committee. It is less ambitious—the one I proposed in Committee would have allowed the franchise to be renewed for a longer period than 12 months—and therefore one that is it easier for the Minister to accept.

There is an additional reason that has not been mentioned so far, which is that there will be pressure within the Minister’s own department to absorb the franchises as they fall due. I think his department would welcome the flexibility under Amendment 10 to enable an existing franchise to be extended for a further 12 months, but no longer. The Minister will get his way: all the train operating companies will be nationalised and all the franchises will come to an end. What we are arguing about is some flexibility. If a franchise is being run perfectly competently, if the existing company would be happy to run on for another 12 months, and if the department is having to recruit more civil servants to absorb the existing ones, I honestly cannot see why the Minister has set his face against Amendment 10. If there is the word “resist” in his brief, perhaps he will reflect on whether a little bit of flexibility would be in order.

[Lord Snape (Lab)]

My Lords, I expressed some sympathy with this amendment, or an amendment similar to it, in Committee. Without repeating anything I said in Committee, I put it to my noble friend the Minister again—having said one thing, I now contradict myself—that it does not really make any sense to terminate instantly or as soon as it runs out, which is pretty close to instantly, a franchise such as Greater Anglia, which has generated enormous public support for the efficient way that it has run its train services, or c2c, the line from Liverpool Street to Southend, which recently scored a 94% approval rate as far as its passengers were concerned, although I imagine they, like most other sensible people in this country, think the franchising system has been pretty disastrous for the railway as a whole. Coincidentally, those two franchises run out fairly quickly. Although the noble Lord who speaks for the Opposition would not mention specific franchises for some reason, I will. I have been tormented by Avanti since the last Government were unwise to give it the franchise around 2017 and take it off Virgin, for no apparent reason. The last Government then gave Avanti a nine-year extension, despite all the complaints from both sides of your Lordships’ House. Does it really make any sense to terminate franchises that have enormous support from the travelling public, two of which I have just mentioned, and not take any action for another few years—about seven years or so—for companies such as Avanti? Surely there is some flexibility here that my noble friend could press.

If there are good reasons to terminate franchises then surely those reasons, good or bad, have been realised as far as Avanti’s performance is concerned. Perhaps my noble friend can tell us exactly how much it would cost in public funds to dispose of Avanti’s services and how the contracts were drawn up and interpreted in the first place, when a company like that can get away with the shoddy service that it provides daily.

[Lord Hendy of Richmond Hill (Lab)]

I thank the noble Lord, Lord Moylan, and the noble Baronesses, Lady Randerson and Lady Scott of Needham Market, for their amendments in this group—Amendment 2 and Amendment 10 respectively. The amendments seek to test the Government’s approach of transferring services as existing contracts expire. I also thank my noble friend Lord Liddle for saying that the intention is to get rid of franchises and for explaining why. He is right. I should also say that I and the Government do not believe that we should either pay compensation for termination or keep paying fees to owning groups of train operating companies when we do not need to.

I am happy to begin with a reassurance about the Government’s position. We will not hesitate to take decisive action if Avanti, CrossCountry or any other operator’s poor performance means that the contractual conditions that allow for early termination are met. The contracts we have inherited from the previous Government make it far too hard to get rid of an underperforming operator, but if we have the opportunity to put passengers out of their misery by ending a failing operator’s contract early and bringing their services into public ownership, we will do just that. In those circumstances, we will not wait for those contracts to expire.

The noble Baroness, Lady Randerson, and the noble Lord, Lord Young, asked whether the public sector operator will have the capacity to take in services from a failing operator whose contract has been terminated early, at the same time as other planned transfers. I reassure them that current contracts allow sufficient flexibility to accommodate this. All but two of the current contracts with private operators give the Secretary of State significant discretion to select an expiry date within a range of possible dates specified in each contract. The Secretary of State simply has to give the outgoing operator a minimum of 12 weeks’ notice of expiry. This means that if a contract can be terminated early for poor performance—be it by Avanti, CrossCountry or any other operator—the Secretary of State will be able to adjust the planned expiry dates of other contracts if necessary to ensure that the failing operator’s services can be transferred as quickly as possible without overwhelming the public sector operator. Of course, we also need a programme of return that is reassuringly steady for the good management of the operations as they come back into public ownership. I hope those observations will be sufficient to persuade the noble Baronesses not to press their Amendment 10.

In response to the noble Lord, Lord Moylan, my previous comments address the first part of his Amendment 2. The Government will not hesitate to exercise its contractual rights if an operator’s poor performance means that the conditions for early termination are met. The Secretary of State, my noble friend Lady Blake of Leeds and I have all made the Government’s position on the matter very clear and on the record. There is no need for a statutory obligation to cover this point.

The noble Lord knows very well that I cannot accept the remainder of his amendment because it would substantially delay the programme of transfers to public sector operation. As the noble Baroness, Lady Randerson, said, thanks to decisions taken by the previous Government, the two most poorly performing operators currently have the longest contracts, with terms that make it very difficult to terminate them early for poor performance. I cannot say quite what the cost is, but I will write to my noble friend Lord Snape to tell him the rough quantum. In fact, the amendment from the noble Lord, Lord Moylan, would mean it would be impossible for the Secretary of State to exercise any contractual break clause, as defined in his amendment, until after the worst-performing operator’s contract had ended. That could be as late as October 2027, so it is difficult to see this as anything other than a wrecking amendment. I hope the noble Lord will prove me wrong by withdrawing it.

[Lord Young of Cookham (Con)]

Before the Minister sits down, can he just clarify something that he said? Is it the case that under new Section 30A inserted by Clause 2(3) he has the flexibility already to renew two of the franchises mentioned by the noble Lord, Lord Snape, by using that particular paragraph in the Bill—namely, that he

“is satisfied that it will not be reasonably practicable to provide”

the services in any other way?

[Lord Hendy of Richmond Hill (Lab)]

Is that the two worst-performing franchises or two others?

--- Later in debate ---

[Lord Young of Cookham (Con)]

Any franchises. Can he use that section to renew the satisfactory franchises, because it would “not be reasonably practicable” to do so otherwise, and take them in-house?

[Lord Hendy of Richmond Hill (Lab)]

I thank the noble Lord, Lord Young, for his intervention. I think he is right, but he will forgive me if I consider it further and write to him.

--- Later in debate ---

Moved by

[Lord Young of Cookham]

9: Clause 2, page 2, line 23, at end insert—
“30ZA Annual report of public operator liabilities(1) The Secretary of State must lay before Parliament, within six months of the day on which this Act comes into force, and on each anniversary of that date thereafter, a report on the public sector financial liabilities arising from the award of public service contracts to public sector companies under subsection 30(1A).(2) The report published under subsection (1) must include details of rolling stock leasing liabilities.”Member's explanatory statement
This amendment would require the Secretary of State to publish an annual report examining the impact of train company rolling stock liabilities transferring into the public sector.

--- Later in debate ---

[Lord Young of Cookham (Con)]

My Lords, Amendment 9 in my name would require an annual report on public operator liabilities. This might sound rather a dry subject with which to lead the last group on Report, but it is an important one, as it has the potential to totally disrupt the Government’s ambitions for Great British Railways. I begin by thanking the Minister for the meeting that we had last week with the noble Baroness, Lady Blake. He listened patiently to my concerns and was able to allay some of them—though not, I am afraid, this one.

This amendment has grown in prominence since last week’s Budget with its clear fiscal rules, and these were needed to give confidence to the markets that the Government could borrow the substantial sums needed to fund their expenditure; we will debate all that on Monday. In a nutshell, my concern is that, if liabilities which are currently off the Government’s books cease to be off balance sheet, we will revert to the position when I was Transport Secretary, with transport bidding for investment against schools, hospitals and defence and always missing out because of political priorities.

I believe the noble Lord has conceded the risk of this happening, because he has said repeatedly that it will be for the Office for National Statistics to decide in the future how GBR liabilities impact the public sector balance sheet and, specifically, public sector net debt. However, it simply cannot be prudent for the Government to embark on a programme of nationalisation without fully understanding the financial consequences of the ONS classifying GBR as “central government” and without taking the necessary precautions.

We can have a shot at what the ONS will do, because it has stated that in circumstances such as GBR it would run what is called the market body test, and we know that GBR, as the Government envisage it being structured, would fail that test. The integration of track and train within a single entity, as set out clearly in Labour’s Getting Britain Moving document, will mean that GBR will fail the ONS market body test, meaning that its liabilities will be consolidated into the department’s accounts. The Minister has argued previously that the position will not be different from where we are now, but it will be. The creation of GBR as a permanent public monopoly will create a completely different system, which will change the way in which the ONS categorises expenditure.

The Labour document is clear that GBR will be a “single employer”. If so, it will simply fail the market test and its accounts will be classified as “central government”, rather than a public corporation, as LNER is currently. The accounts will then be required to be consolidated into DfT’s accounts, like other bodies that fail the market test, and then classified as “central government”. Crucially, these different accounting treatments will make investment, for example, in rolling stock harder, as it will be in competition with other demands for public investment. The Minister has made it clear that GBR will use its purchasing power to commission new rolling stock through the roscos: rolling stock that will then be leased to GBR. He stated:

“GBR will enable a longer-term view of the rolling stock market, and it will reduce the margins it needs to make”.—[Official Report, 23/10/24; col. 736.]


Those long-term liabilities, totalling potentially some £15 billion, will score immediately on the Government’s balance sheet, increasing national debt, even if the money to manufacture the trains comes from the roscos and is raised on the capital markets.

What I hope the Minister has done—and if he has done it, no one would be happier than me—is get an undertaking from the Treasury that, if the ONS so classifies GBR debt, the Treasury will ensure that the DfT is insulated from that decision. He may have such a letter in his breast pocket. If he has not, we know what is likely to happen because it happened to Network Rail, which was reclassified by the ONS in 2014. The Minister said at our meeting that there was scope for economies at Network Rail when it was reclassified, and I am sure he was right. But those measures were never going to compensate for all the consequences. Network Rail had to divest £1.8 billion by selling property assets; it had to defer renewal works; it had to postpone completion dates; and it had to renegotiate a lot of contracts. Do we honestly want that to happen to GBR?

So, in a nutshell, I am concerned at the gamble the Government are taking with the future of the railways by going back to the pre-privatisation system, where Ministers will have to compete against other spending departments for what the railways need. I beg to move.

[Baroness Randerson (LD)]

My Lords, I have one very brief question for the Minister, following the warnings by the noble Lord, Lord Young. Have the Government looked at this from the point of view not just of what I would call the finished product of the nationalised railway system but of how the categorisation of a mixed economy would work? We, the nation, will be in a situation of a mixed, some-and-some economy for a significant number of years to come.

--- Later in debate ---

[Lord Hendy of Richmond Hill (Lab)]

I thank the noble Lord, Lord Young, for tabling Amendment 9 and for our productive meeting the other day. I recognise that there is a question of whether public ownership will lead to certain liabilities moving on to the public sector balance sheet and therefore counting towards the public sector net debt. I cannot speculate about future balance sheet treatments and impacts as those will always depend on classification decisions that are a matter for the independent Office for National Statistics.

What I can say is that four train companies are already owned by DOHL, including LNER for six years and Northern for four, and the position has not changed so far. The Office for National Statistics recently considered the classification of TransPennine and concluded that it should remain classified as a public non-financial corporation. The mixed economy that we already have is relevant to the question asked by the noble Baroness, Lady Randerson, about the categorisation of a mixed economy. We are going to be there over the next several years as the train operations come back one by one.

It has been suggested in debate that, if liabilities move on to the public sector balance sheet, that would affect public sector net debt and unduly constrain future investment. The noble Lord, Lord Young, referred to events at Network Rail after it was reclassified, many of which I witnessed when I went there in 2015. In fact, a large number of the things that happened were really good. The organisation was not on the public balance sheet. It had spent an enormous amount of money: when I turned up in July 2015, it had debt of £54 billion, roughly equivalent to the whole of New Zealand’s national debt. With the last chief executive and the present one, we have put it into great order and reduced its expenditure. It has reduced capital expenditure too, which I think was also wise. The list of enhancements that it was proposing to carry out were beyond its capability then, and beyond the funding of even the unlimited amounts of debt that it could call on.

Nevertheless, the existing publicly owned train operators are the driving force behind the current multibillion-pound pipeline of new rolling stock orders. Network Rail is still investing in the railway infrastructure, and it shows that public ownership need not be a barrier to investment.

Looking more broadly across the public services, noble Lords may have seen that, alongside the Budget, the Chancellor announced changes to the fiscal rules to measure government debt in a way that recognises the need to better support capital investment. This Government recognise the pressing need to rebuild our economy and invest in our public services after years of underinvestment.

It might be helpful to provide the noble Lord, Lord Young, with some specific reassurance, and I can reassure him that we are not seeking to close the door on private investment. Where there are genuine opportunities for private investment—which, for example, might well be, and in the future should be, in relation to property development around stations or car park investment—we would expect Great British Railways to work with relevant local authorities and the private sector to promote these opportunities. I reassure the noble Lord that securing appropriate private investment will be an absolute priority for this Government. I hope that provides him with enough reassurance to withdraw the amendment.

Next, I will address Amendments 18 and 19 in turn. I thank the noble Lord, Lord Moylan, for these amendments. Amendment 18 would require the Secretary of State to lay a Statement before Parliament within three months of the Bill’s enactment. The Statement would need to set out the Government’s intentions concerning the terms, conditions and pay rates of staff of existing train operating companies as they transfer to become employees of public sector companies.

At that stage, it would be a very simple Statement. The Government fully expect that the TUPE regulations will apply, preserving employees’ existing contractual terms and conditions as they transfer from private operators to subsidiaries of directly operated holdings, in the same way as they have done in previous transfers. I can also confirm that the Secretary of State’s contracts with public sector companies would ensure that staff could continue to be members of the railways pension scheme. That being the case, there is no need for a further Statement of the kind mandated by the amendment.

The noble Lord asked what the Government intend should happen to pay, terms and conditions in the period after employees have transferred to a public sector operator. Although this is beyond the scope of the amendment the noble Lord has tabled, I am happy to address the question by saying three things.

First, public ownership under this Bill does not give rise to any imperative to harmonise or otherwise amend staff terms and conditions. Decisions about any such changes are for the future. In contrast to the previous Government’s approach, we would expect to discuss these matters openly and constructively with the workforce and their representatives before settling on any specific proposals. If the noble Lord was serious in his proposal, he would be able to tell me, for example, that the previous Government consulted the staff of LNER when it was transferred into the public sector. I think he will find that they did not. I am not going to speculate about the outcome of any such future discussions.

Secondly, resolving the long-standing disputes with the rail unions, as we have done and are doing, clears the way for vital workforce reform to modernise our railways and do away with outdated working practices. We do not need to wait for Great British Railways to start this essential work—although we have needed to clear up a number of disputes, including one so long-standing that it has been a dispute since 2015—and we will do this by working with the workforce, not against them.

Thirdly, looking further ahead to Great British Railways, the overall structure for GBR and the mechanics of how staff will transfer into it are still to be decided. We will want to make sure that GBR retains and treats fairly the committed and talented staff who are essential to keep the railway running for its customers. We will have more to say about this when we publish our proposals for the railways Bill.

Amendment 19 would require another report, this time on the impact of national insurance employer contributions on the operational costs of public sector companies. I am sure that the noble Lord will recognise that employer national insurance contributions are just one relatively small component of train operators’ overall costs—less than 2.5% of total costs in this financial year. Furthermore, other significant costs, such as diesel and electricity, are volatile. It would therefore take significant resource to routinely report on all these different costs, which are subject to change all the time.

This reporting would add little value, particularly when any national insurance costs incurred by a DfT-contracted operator are simply paid to another part of government. Public ownership will make no difference to the net cost to government of the relevant train operators’ employer national insurance contributions; the Government are already both the funder and the recipient of these.

Having said that, I will be pleased to provide an estimate of any impact as soon as I am able to. At that point, I will happily write to the noble Lord and place a copy of the letter in the House Library. In the light of this, I urge the noble Lord, Lord Moylan, not to press his amendments.

[Lord Young of Cookham (Con)]

My Lords, as this is the last debate and possibly the last speech on Report, I commend the Minister for the patient way he has dealt with the proceedings on Report, drawing on his unique knowledge of the industry we are debating. It has been a pleasure to watch the contrasting debating styles of him and the more flamboyant style of my noble friend Lord Moylan.

I welcome what the Minister said about private investment, but I have to point out that the Bill specifically precludes the sort of investment we saw with the franchise. For example, Chiltern widened single track into double track and built new railway stations. That sort of investment by a train operating company is specifically precluded by the Bill.

On the substance of my concern, he said right at the beginning that there is a question about how the liabilities will be classified. He then sheltered behind the well-known phrase that he “could not speculate” about what the ONS will do. I think there is a distinction between the present position with LNER within the department, with relatively short-term liabilities for rolling stock, and the position with a 20-year liability and GBR. I remind the Minister that, in order to avoid Network Rail being reclassified as public sector body, Treasury Ministers specifically asked—this is under the Labour Government—other Ministers not to criticise the salaries of Network Rail for fear that the ONS would classify it as a public body.

Having said that, the Minister has gone as far as I could have expected him to. He does not have in his breast pocket a letter from the Treasury giving him a guarantee against the consequences of reclassification, but against the good-natured reply he gave me, I seek leave to withdraw my amendment.

Amendment 9 withdrawn.