Written statement to Parliament

Rail industry review

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

McNulty's value for money rail review published and high level group established.

This government is determined to secure a sustainable and efficient railway. The spending review settlement has demonstrated our commitment to rail transport. The sustained financial support we have offered now needs to be matched by a relentless drive for efficiency on the part of the industry.

Sir Roy McNulty’s value for money review has reached some important interim conclusions. In his interim report being published today (7 December 2010) and being made available in the library of the House he finds that:

  • the railway is costing more than it used to and more than it ought to; greater efficiency would realise savings of £600 million to £1,000 million per annum by 2018 to 2019 without cutting services or lowering quality
  • the key to securing these efficiencies is a cross-industry focus on reducing costs and improving value for money
  • that in turn demands 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

The most pressing need is to ensure that incentives across the industry are aligned, so that all parties strive to improve the quality of services and to provide value for money for taxpayers and passengers. Train operators are too narrowly focussed on franchise specifications (which are often over-detailed). Network Rail has concentrated on network performance and safety targets. These are important objectives. But there is no cross-industry focus on the fundamental purpose of the railway - moving people and goods efficiently across a network while securing the best long-term value for money for farepayers and taxpayers.

The second phase of the value for money study will focus on identifying opportunities for greater alignment and changes that will secure greater efficiency and better value for money. Sir Roy’s final report is due to be published in April 2011. These initial conclusions, however, are so important that it would be wrong to wait until then before starting to respond.

Today (7 December 2010) I am announcing the establishment of a high level group, which I will chair, that will examine the options for getting those responsible for track and train to work together to drive down the cost of the railway for the benefit of passengers and taxpayers, while improving the quality of services. Sir Roy McNulty’s final report will inform the group’s work.

This group will consider options for structural reform in the industry. My presumption is that, at an operational level, there are some network-wide planning and technical functions which can only be discharged by a single national body, acting as custodian of the network. That should not preclude reforms which allow route or area based alliances to be established, focussed on aligning specific track and train operations where this best serves the needs of customers.

I am clear, however, that no changes should be made which would jeopardise the impressive improvements in safety and punctuality achieved across the industry in recent years. There is a spectrum of options which could contribute to achieving a better alignment of incentives. We expect that the optimal solution will vary for different parts of the network, reflecting the diversity of our railways and differing local needs. A one-size-fits-all model is unlikely to be the right solution. I am also clear that the changes we are proposing must protect the interests of freight operators on the network.

I envisage that this work will lead to the publication of proposals for industry reform by November 2011 - as set out in my department’s Business plan.

In parallel with the value for money review, my department has been consulting on possible changes to the franchising system. We have invited views on moving to longer franchises with less detailed specifications and greater incentives for operators to act efficiently and invest in the improvements passengers want. These principles have been widely welcomed and they will form part of our plans for making the railway more efficient and more responsive to passengers’ needs.

However, franchising reform needs to be coordinated with Network Rail reform: they are 2 sides of the same coin. We also need to co-ordinate the programme of franchise renewals to take account of major planned railway projects which will inevitably disrupt operations in certain franchises.

A number of franchises will fall due for re-tendering over the next couple of years. Because we intend, typically, to let longer franchises of at least 15 years duration it is important that the reforms we wish to make following the McNulty review, the franchise consultation and the work of the high level group are incorporated into the terms of these franchises.

I therefore propose to use a short contract, openly competed during 2011, to run and improve services in the Greater Anglia franchise whilst we carry out this work. I then expect to award a new long term franchise for the operation of services in East Anglia to commence in 2013. In 2012, I propose to award a franchise to operate Inter City West Coast until the planned opening of HS2 in 2026. Then, in late 2012, I propose 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 my department and existing operators on the termination dates of current franchises. We also need 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 five years beyond 2012: my department is discussing a proposal for an extension with the current operator. Alternatively, this 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 expiry of the existing franchise agreement in accordance with its terms. In the case of Thameslink and South Eastern it is not currently appropriate to let long-term franchises, since both will be heavily affected by Thameslink work at London Bridge station. So these franchises will be retendered on a short-term interim basis as they fall due. My department will then let long-term franchises to cover the operation of Thameslink and South Eastern services, once the London Bridge Station reconstruction is complete.