McNulty Report and West Coast Rail

Maria Eagle Excerpts

Thursday 19th May 2011 Commons Chamber

[The Secretary of State for Transport (Mr Philip Hammond)]

With permission, Mr Speaker, I would like to make a statement about the publication today of Sir Roy McNulty’s independent study into value for money in the rail industry, and to update the House about the west coast franchise process.

Sir Roy’s report notes that UK rail has enjoyed a revival in recent years, with strong and resilient growth in overall passenger numbers and in passenger satisfaction, and huge improvements in reliability and safety. The Government want Britain’s railways to continue to prosper and have demonstrated by their actions their commitment to them. Despite the difficult fiscal climate, we have allocated funding to complete Crossrail and Thameslink, and to support the upgrade of the London underground. We have announced electrification on the great western main line and in north-west England. We have resumed the intercity express programme to improve reliability, comfort and journey times on the east coast and Great Western main lines. We have given the go-ahead to the Ordsall chord project in Manchester and the Swindon to Kemble redoubling. We have confirmed the purchase of more than 2,000 new rail vehicles for Thameslink, Crossrail and other franchises, and the cascading of 100s more. Last but not least, we have begun the High Speed 2 consultation process.

But Sir Roy made another, less welcome, finding. Spending on the passenger railway has increased by 60% in real terms since 1996-97—that is more than £4 billion—and despite significant passenger growth, unit costs in 2009 were almost exactly the same in real terms as in 1996. Therefore, UK rail is now up to 40% more expensive per passenger mile than the railways of our European competitors. Allowing for unavoidable differences, Sir Roy estimates that UK rail costs are 20% to 30% higher than they should be, and that potential savings of between £740 million and £1.05 billion a year could be found by 2018-19 without any reduction in services. Those savings, added to the savings that Network Rail is committed to achieving up to 2014 and the savings that Sir Roy expects the regulator to seek from Network Rail over the period to 2019, should largely close the efficiency gap.

Many of Sir Roy’s recommendations are directed to the industry, and the open and inclusive process that the study adopted means that some of them are already being implemented. The industry has come together to form a rail delivery group to provide the leadership that Sir Roy noted was lacking in the past. Network Rail has announced its plans to devolve significant autonomy to route managers across the network, starting with the Wessex and Scottish regions.

Sir Roy’s remit, which was set by my predecessor and the Office of Rail Regulation which co-sponsored the study, was narrowly focused on the cost base of the railway. He makes a large number of recommendations. Over the coming months, the Government will consider the recommendations that are directed to them, and they will deliver their response later this year. Many of the recommendations on franchises reflect the changes that the Government have already announced. In addition, I can confirm today that my Department will accept Sir Roy’s recommendation that it should conduct a full review of fares policy, which will include addressing anomalies in the current system and the potential for much greater use of smart technology. In parallel, the Government are developing a wider rail strategy to ensure that we have an affordable, sustainable, safe and high-quality railway that delivers a better deal to taxpayers and fare payers. It will set out clearly the roles of central and local government, train operators and Network Rail in securing the future of the railway.

This is urgent and vital work. Let us be in no doubt that the excessive cost base that Sir Roy has identified is the reason that UK rail fares are the highest in Europe by some margin, even though our levels of taxpayer subsidy are also among the highest in Europe. Let us be clear about the potential prize. The successful delivery of cost reductions over the next few years on the scale set out by McNulty would enable us to reduce levels of taxpayer subsidy and, at the same time, put the era of inflation-busting fare increases behind us.

To achieve the challenging targets for cost reduction and industry-wide efficiency that Sir Roy has identified, all players in the industry will have to work together. The train operators, Network Rail, rolling stock companies, unions and the Government cannot avoid playing their part if we are to deliver a sustainable and affordable railway for the future.

Sir Roy makes it clear that the Department needs to step back from excessively detailed specification of train services and the micro-management of rail operations. I recognise that that will represent a major culture change, but it is one that I am determined to deliver. I would like to place on record my thanks to Sir Roy McNulty and his team for the excellent work they have done, and to welcome Sir Roy’s commitment to working with the industry on an ongoing basis.

I also wish to announce to the House the publication of the draft invitation to tender and stakeholder briefing document for the intercity west coast franchise, which lays out the train service specification that I am minded to procure for that route. As I have said, the Government have already adopted Sir Roy’s recommendation that franchise specifications should become less prescriptive. The proposed train service specification for intercity west coast represents a relaxation of the rigid timetable specifications of the past, while retaining obligations that protect the key elements of service such as principal first and last train services and minimum numbers of station stops per week and per day. That marks a significant shift from the micro-management under the current system that has prevented operators from maximising capacity and reacting to the changing demands of their passengers.

Among other proposed changes, we intend to replace the current cap and collar revenue-sharing system that has driven perverse behaviour by train operators with a gross domestic product-based risk-sharing arrangement and a profit-sharing mechanism that will ensure that the taxpayer benefits from any unexpected profits over the term of the franchise.

Because the relaxation of the full prescription of train services in line with Sir Roy’s recommendations was not signalled in the consultation document that we published on 19 January, I have decided that it is right and proper to consult on the proposals again, starting today and ending on 17 August. As a consequence of that decision, I can inform the House that the new franchise for the intercity west coast will now be awarded in August 2012, after a competitive process involving the four shortlisted train operators, and will commence operations on 9 December 2012. In making that decision, I have deliberately avoided a change of franchise immediately ahead of or during the Olympic period. I have also decided to take advantage of the short delay to complete the integration of the 106 new Pendolino carriages into the fleet prior to the commencement of the new franchise. The Department will seek to agree acceptable terms with the existing franchisee for a contract extension to 9 December 2012, but Directly Operated Railways Ltd, the Government-owned company that runs East Coast, will be ready to operate the franchise between April and December 2012 if necessary.

Copies of the rail value-for-money study and the draft invitation to tender for the west coast main line have been placed in the Libraries of both Houses and are available on the Department’s website. Our expectation is that future passenger franchises on UK rail will allow operators greater flexibility to meet passenger demand and pursue innovation, while protecting the key elements of service for passengers.

Longer franchises and a changed relationship with Network Rail will have a positive impact on the behaviour of train operators and their appetite for investment and risk taking. However, I want to send a clear message that the new culture of co-operation in the rail industry, and the focus on cost reduction, is here to stay and is mandatory, not optional. I can announce today that as a matter of policy for all future franchise competitions, a significant part of the assessment of bidders’ capability at the pre-qualification stage will be evidence of success in collaborative working and driving down costs.

The facts are clear: our railway costs too much, and in consequence fares are rising faster than inflation and taxpayer subsidy has reached unsustainable levels. To secure the future of the railway, we now have to tackle that problem after a decade of ignoring it and get costs into line with those of our European comparators, bringing relief to taxpayers and the prospect of an end to the era of above-inflation fare increases to passengers. I commend this statement to the House.

[Maria Eagle (Garston and Halewood) (Lab)]

I begin by thanking the Secretary of State for early sight of his statement. May I place on record the thanks of Labour Members to Sir Roy McNulty for the detailed and thorough work that he has carried out? As the right hon. Gentleman acknowledged, that work began under the previous Government.

I have said before that we would look seriously at the conclusions of the value-for-money review and support any sensible proposals to take costs out of the industry. I promise again today that we will study the details of Sir Roy’s report, and that it will inform our own transport policy review.

I agree with the Secretary of State that we should reduce the public subsidy to the rail industry, and we need to be clear about why much of that subsidy exists if we are to address it effectively. It is partly the result of the enormous structural fragmentation within the industry, and let us be clear that that fragmentation is the legacy of the botched privatisation carried out in the dying days of the last Conservative Government. The Secretary of State should have apologised today for the shambles of that privatisation and the staggering sums of money wasted as a result. Unlike him, I take our share of the responsibility for being too timid about addressing that fragmentation during our time in government.

Closer working between train operators and Network Rail makes sense, and I support the internal reorganisation that is going on at Network Rail and many of the proposals that have been made to ensure that costs are removed through greater partnership. I am pleased that the Secretary of State appears to have stepped back from his earlier plans for the wholesale breaking up of our rail infrastructure, which would have been a costly mistake and added yet more fragmentation to the industry. Can he confirm that he does not intend to proceed with an experiment of handing track over to train operating companies within any of the franchise areas? Previously there has been briefing that the East Anglia franchise would be used for that experiment. Can he reassure the House that that is no longer the plan?

I welcome the Secretary of State’s decision to establish a proper review of fares. Despite the efforts that we made, the current system is too complex and leaves passengers frustrated. However, does he understand why passengers will have very little faith that he does not intend to impose yet further hikes in ticket prices? At a time when families are feeling the squeeze on their household budgets, he has imposed fare rises of more than 30% over the next three years. I believe he was wrong to give back to train companies the right to average out the cap across their fares, rather than apply it to each fare individually as we insisted when we were in government. He was also wrong to increase the cap on regulated fares from 1% to 3% above inflation.

In opposition, the current Minister of State said that fare rises of such a level would

“price people off the railways”,

and the Under-Secretary of State, the hon. Member for Lewes (Norman Baker), promised below-inflation fare rises—more broken promises from the two Government parties. Will the Secretary of State reject proposals to give the train operating companies greater freedom to set the level of fares? Will he listen to his own consumer watchdog, Passenger Focus, which has today described the suggestion of reducing regulation on off-peak tickets as a “leap in the dark”? Does he share its concern, as I do, that if the plans go ahead, we might end up with affordable, flexible travel for longer journeys being confined to a brief window in the middle of the day?

Will the Secretary of State also reject the suggestion to remove any role for politicians in the setting of fares, which would effectively remove any public accountability for fares through the ballot box? The link between the fare box and the ballot box should not be broken.

May I urge the right hon. Gentleman to approach reform to staffing levels and pay and conditions within the rail industry in a spirit of partnership, not confrontation? That is something that we have not seen in the language and tone of briefings by his Department in recent days. I urge the trade unions to work with the Government as they look to carry out reforms within the industry, but will he ensure that he includes those who represent staff on the high-level group that he is establishing to take forward these reforms? As he considers staffing, will he understand the value that passengers place on staffed trains and open ticket offices, and the fact that women in particular feel safer in properly staffed stations, particularly late at night?

We have heard today the extent to which the right hon. Gentleman’s policy on rail franchising has descended into chaos and confusion, with his decision to delay the awarding of the west coast franchise. Can he confirm that First Group is to hand back its Great Western franchise three years ahead of schedule? Is the reason that it has given for that decision, as reported in the press, that it has calculated that it will make losses in the final years of its franchise period? Does he agree that that is unacceptable?

Will the Secretary of State confirm that there is a possibility that the east coast main line, the west coast main line and the Great Western franchises will all be run by the Government while he decides what his franchising policy is? Does that not make a mockery of the whole franchising system?

Does the Secretary of State understand why commuters in East Anglia are dismayed at the cost and chaos of his decision to award a contract for less than two years, risking three owners in as many years, with only the companies that supply the paint to redo the liveries benefiting? Are not the future of franchising, the massive public subsidies that go to the private train operating companies, and the vast sums that leave the industry in profits the big missing pieces of the work of looking at costs in the industry?

I welcome the Secretary of State’s decision to replace the current cap and collar revenue-sharing system, but does he agree that we will not get the costs of the industry under control until we look seriously at its structure and the future of franchising? The public want a simplified industry—one in which the driving force is less maximising profit and squeezing every last penny out of the fare payer and the taxpayer, and more the delivery of a world-class service. That is why I have committed Labour’s policy review to look at alternative models for the future of the rail industry, including not-for-profit models. I urge him to do the same.

Finally, the right hon. Gentleman’s statement was not the only announcement to be widely spun and briefed to the media in advance of his coming before the House. Several newspapers are reporting that he has abandoned his plans to close more than half the UK’s coastguard stations, yet the Opposition understand that far from abandoning the plans, he has simply put them on hold. Those plans were never agreed by Ministers in the previous Government, and I would not have approved them. Will he now take this opportunity to end the huge uncertainty facing coastguard stations and agree to abandon those reckless proposals?

[Mr Hammond]

I might get some guidance from you, Mr Deputy Speaker, on whether it is appropriate for me to respond to the hon. Lady’s comments on coastguards—I would be happy to do so if you indicate that that is in order.