News story

Government targets £1 billion savings from rail industry reform

Radical shake-up of railways could reduce running costs and lead to better and more efficient train services.

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

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Rail passengers and taxpayers alike stand to benefit from a radical shake-up of the railways which could reduce running costs by up to £1 billion per year and lead to better and more efficient train services, Transport Secretary Philip Hammond announced today (7 December 2010).

The potential savings of up to £1 billion - which can be achieved without cutting services - have been identified by Sir Roy McNulty after the government commissioned him to investigate the industry’s value for money. Sir Roy finds that the key to making these savings is much closer working and alignment of incentives between train operators and Network Rail and strong leadership across the industry. Alongside its response to Sir Roy’s interim findings, the government has today confirmed plans to reform the rail franchising system to make franchises longer, more flexible and more responsive to the needs of passengers while providing better value for taxpayers.

Philip Hammond, Transport Secretary, said:

Incentives on the railway have become blurred and interests mis-aligned, to the detriment of efficiency, value for money and passenger satisfaction. At present Network Rail answers to its regulator, not to its customers, the train operators. Meanwhile, train operators have no interest in Network Rail’s costs, since any increases or decreases are passed straight through to the government.

This situation cannot be allowed to continue. All the players in the industry need to be pulling in the same direction in the interests of passengers and taxpayers. Sir Roy McNulty has pointed the way and I am establishing a high-level group, which I will chair, to drive reform. The government is going to make significant investments in our railways in the coming years - but that support must be matched by a relentless drive for efficiency on the part of the industry.

In parallel with work on industry reform we will also continue to develop changes to the rail franchising system to make franchises longer, more flexible, more responsive to the needs of passengers and more efficient. Taken as a whole these changes will make our railways more efficient, more accountable and better for passengers.

Sir Roy McNulty’s final report - which is jointly sponsored by the Office of Rail Regulation (ORR) - will be delivered in April 2011. However, the government believes that its initial findings deserve immediate action and is therefore setting up a high-level government and industry group to examine the options for getting Network Rail and train operators to work together more efficiently. The reforms could lead to route or area based alliances, aligning track and train operations where such an arrangement best serves customers. Solutions will vary across the network and there will continue to be some functions which can only be discharged by a single national body, acting as custodian of the network. Final proposals for industry reform will be published by November 2011.

Bill Emery, ORR Chief Executive, said:

The interim Value for Money report indicates there is scope to significantly reduce costs across the entire rail industry, over and above the cost efficiencies the regulator is driving from Network Rail.

Sir Roy’s final report will play an important role in shaping the future of Britain’s railways, and in turn the independent regulation of our railways, helping to identify opportunities to improve incentives to bring down costs.

In parallel with the Sir Roy McNulty’s value for money review, the government has also been consulting with the industry on plans to reform the rail franchising system. The government confirmed today that it will be pressing ahead with plans to make franchises longer with less detailed specifications and greater incentives for operators to act efficiently and invest in the improvements passengers want. Franchises will typically run for 15 years, so long as performance levels are maintained. Operators will get greater commercial freedom to innovate in the way they deliver and greater incentive to make investments which benefit passengers. Details of the new franchising model will now be further developed alongside plans for wider industry reform.

The West Coast Main Line franchise which operates trains between London and the West Midlands, North West and Scotland, will be the first franchise to be let under the new franchise model. The new West Coast franchise will begin in April 2012 and run until the planned opening of a new high speed rail line in 2026. This will be followed by the East Coast Main Line franchise - which operates trains between London and Yorkshire, the North East and Scotland - which will be let as a new 15 year franchise in late 2012. The Greater Anglia franchise - which operates trains between London and Essex, Norfolk and Suffolk - will also be let as a new-style longer franchise in 2013 and other franchises will be replaced with new, longer, franchises as and when they expire in future years.

Further information

Rail value for money report

Sir Roy McNulty’s interim report finds that the railway is costing more than it used to and more than it ought to and that greater efficiency would realise savings of £600-£1,000m per annum by 2018/19 without cutting services. The interim report identifies the key to securing these efficiencies as a cross-industry focus on reducing costs and improving value for money in all aspects of train operation and in the operation, maintenance, renewal and enhancement of infrastructure. This, Sir Roy finds, demands much closer working and alignment of incentives between train operators and Network Rail and strong leadership across the industry. Inevitably, such alignment, if it is to be effective, will involve Network Rail working more closely at a local level with Train Operators.

This could lead over time to the creation of regional alliances focussed on bringing track and train together to serve customers. However, the Government believes that there are some network-wide planning and technical functions which in practice can only be discharged by a single national body, as custodian of the network and no changes should be made which would reverse the impressive improvements in safety and punctuality achieved across the industry in recent years.

Franchising

The Department for Transport consulted the rail industry on potential reforms to rail franchising from July to October 2010.

Details of the new franchising model will now be further developed alongside plans for wider industry reform and the department will publish a summary of responses to the consultation in early 2011.

A number of rail franchises will fall due for re-tendering over the next couple of years. Typically, the government intends to let longer franchises of at least 15 years duration and therefore believes it is important that the reforms coming from the McNulty review, the franchise consultation and the work of the high level group are incorporated into the terms of these franchises. The government therefore proposes to use a short contract, competed in open competition in 2011, to run and improve services in the Greater Anglia franchise whilst we carry out this work until a new new-style longer franchise is let in 2013.

In 2012 the government intends to award a franchise to operate Inter City West Coast until the planned opening of High Speed 2 (HS2) in 2026. Then, in late 2012, to award a franchise of 15 years to operate the East Coast Main Line services. The rest of the retendering programme for 2012 and 2013 will depend partly on decisions by the government and existing operators on the termination dates of current franchises. The government intends to avoid overloading the industry by inviting too many tenders at the same time.

The Trans-Pennine Express franchise could contractually be extended by up to 5 years beyond 2012 and the government is discussing a proposal for an extension with current operator. Alternatively, the franchise could be retendered for at least 15 years, possibly in 2013 alongside the Northern franchise. The Essex Thameside franchise will also be retendered by 2013 for at least 15 years. The Greater Western franchise will be retendered in either 2013 or 2016, again for at least 15 years, upon termination of the existing franchise agreement in accordance with its terms.

It is not currently appropriate to let long-tem franchises for the Thameslink and South Eastern franchises, since both will be heavily affected by Thameslink work at London Bridge station. These will be retendered on a short-term interim basis for periods of 3 to six years as they fall due. My department will then let long-term franchises to cover the operation of Thameslink services.

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Published 7 December 2010