Oral statement to Parliament

Sir Roy McNulty report on rail value for money and the West Coast franchise process

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

Announcing the publication of Sir Roy McNulty’s study into value for money in the rail industry and update about the West Coast franchise process.

The Rt Hon Philip Hammond MP

With permission Mr Speaker, I would like to make a statement about the publication today (19 May 2011) of Sir Roy McNulty’s independent study into value for money in the rail industry and also 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 numbers of passengers and in passenger satisfaction, and huge improvements in reliability and safety.

This government wants to see Britain’s railways continue to prosper and has demonstrated by its actions its 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’ve announced electrification on the Great Western Mainline and in the north west of England
  • we’ve resumed the Intercity Express Programme to improve reliability comfort and journey times on the East Coast and Great Western mainlines
  • we’ve given the go-ahead to the Ordsall Chord project in Manchester and the Swindon to Kemble re-doubling
  • we’ve confirmed the purchase of over 2000 new rail vehicles for Thameslink, Crossrail and for other franchises and the cascading of 100’s more
  • we’ve begun the HS2 High Speed Rail consultation process

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

Many of Sir Roy’s recommendations are directed to the industry, and the open and inclusive process that the study has 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 which Sir Roy has noted as lacking in the past; and 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, set by my predecessor and the ORR who co-sponsored the study, was narrowly focused on the cost-base of the railway. He makes a large number of recommendations and over the coming months, the government will consider those of Sir Roy’s recommendations that are directed to it and will deliver its response later this year. Many of the recommendations on franchises reflect the changes the government has already announced and 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, including addressing anomalies in the current system and the potential for much greater use of smart technology.

In parallel, the government is developing a wider rail strategy to ensure the affordable, sustainable, safe and high quality railway, that will deliver a better deal both for taxpayers and to farepayers and set out clearly the roles of government - both central and local - train operators and Network Rail in securing the future of the railway.

Mr Speaker, this is urgent and vital work. Let us be in no doubt - the excessive cost base that Sir Roy has identified is the reason that UK Rail fares are already by some margin the highest in Europe, even though levels of taxpayer subsidy are also among the highest in Europe. And let’s 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.

But achieving the challenging targets for cost reduction and industry-wide efficiency gain that Sir Roy has identified will need all players in the industry to work together. The train operators, Network Rail, rolling stock companies, unions and government - none of them can avoid playing their part if we are to deliver a sustainable and affordable railway for the future.

In the case of my department, Sir Roy is clear that we need to step back from excessively detailed specification of train services and micro-management of rail operations. I recognise this will represent a major culture change - but one I am determined to deliver.

Mr Speaker, 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 today the publication of the draft invitation to tender and stakeholder briefing document for the Inter City West Coast franchise, which lays out the train service specification I am minded to procure for this route.

As I have said, the government has already adopted Sir Roy’s recommendation that franchise specifications should become less prescriptive. The proposed train service specification for Inter City West Coast represents a relaxation from 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. This marks a significant shift from the micro-management that has, under the current system, prevented operators from maximising capacity and reacting to the changing demands of their passengers.

Amongst 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 GDP-based risk-sharing arrangement and a profit-share mechanism which will ensure the taxpayer benefits from any unexpected profits over the term of the franchise.

Because relaxation of 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 these proposals again, starting today, and ending on 17 August. As a consequence of this decision, Mr Speaker, I can inform the House that the new franchise on 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 this decision, I have deliberately avoided a change of franchise immediately ahead of or during the Olympic period and 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 Mainline 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 to 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 and appetite for investment and risk taking by train operators. But I want to send a clear message that the new culture of cooperation in the rail industry, and the focus on cost reduction, is here to stay and it is mandatory, not optional. So I can today announce 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.

Mr Speaker, the facts are clear: our railway costs too much; 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 this 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.

Published 19 May 2011