New civil engineer rail summit

Speech about the need to change how railways are run and the reforms being undertaken by government.

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

The Rt Hon Theresa Villiers

Thank you for that welcome, Antony.

I’m delighted to be able to join you today (29 September 2010).

Bringing together leading rail experts with specialists from other disciplines and backgrounds this conference has become an important date in the railway calendar.

In my contribution this morning, I want to explain why we need a reassessment of how we run our railways in this country.

And I would like to outline the direction in which the government is going towards delivering a pragmatic programme of reform to meet the key challenges of capacity, affordability and sustainability in the years ahead.

Because the coalition has put rail at the heart of its transport strategy.

We fully recognise the economic importance of both passenger and freight services.

And we also acknowledge that both freight and passenger rail can help us achieve our carbon and congestion goals.

The cost of the railways

The previous government used to highlight again and again the amount of taxpayers’ money going into the railways.

Between 1993 and 2009, the taxpayer’s contribution to running the railway more than doubled.

And there can be no doubt that the rail industry has achieved some major successes in the years since privatisation.

The dramatic growth in passenger numbers is an achievement worth celebrating.

And punctuality has gradually recovered from the post-Hatfield crisis to reach record levels.

For example, the most recent industry figures show C2C delivering the best ever performance for a train operator with a PPM score of 98.8%.

But while this is all very welcome, the inescapable fact remains that the cost of running the railways has risen dramatically over the past 15 years.

In rail, as in so many other areas of the economy, a failure to achieve value for money during the boom years has left the country with some very difficult questions to address now the lean years have arrived - not least the largest budget deficit in Britain’s peacetime history.

And the painful fiscal hang-over we’re suffering will impact on the railways as it will on all other areas of the government’s activities.

Our challenge is to deliver more for less.

To deliver an efficiently managed railway that plays its part in the government’s 3 biggest priorities of re-energising our economy, addressing the debt crisis and delivering our commitments on climate change

And if we’re to do that we first need to find out why the railways cost so much to upgrade, maintain and operate.

We are aided in this by the work underway by Sir Roy McNulty who I gather is speaking at this conference tomorrow.

Although the McNulty review was an initiative set up by our predecessors, the new government fully appreciates the value and importance of the study.

That is why the Secretary of State asked Sir Roy to bring forward the publication date for his early conclusions.

But even prior to publication of Sir Roy’s report there are some important themes emerging from the long running debate on the future of our railways.

It seems to me clear that we need greater clarity of the respective roles of government and industry.

And we need to find a way to give the professionals who run the railways more freedom to get on with their job without Whitehall looking over their shoulder all the time.

In setting out a programme for change, I’d like to touch on 3 areas today.

Firstly, reform of franchising.

Secondly, a realignment of industry incentives and reforming Network Rail.

And thirdly, cost effective delivery of upgrade and enhancement programmes.

Reform of franchising

Turning to my first theme, we recently published the consultation document on reforming rail franchising.

The proposals are aimed at moving away from a system which sees Whitehall specifying highly detailed and prescriptive inputs in franchises.

Let me emphasise that this won’t let operators off the hook on performance.

Franchises let under the new system will set demanding outcomes for train operators to achieve - including standards to be met on passenger satisfaction.

Those who fail to meet those standards will face sanctions.

The shift we want to see is away from a detailed specification of input to a stronger focus on the quality of outcomes for passengers while giving more flexibility to the professionals who run our railways to apply innovation and enterprise in working out the best way to deliver those outcomes.

We also need a more qualitative approach to assessment of franchise bids, one which judges the quality of the overall package of proposals they contain to invest in the railways, reduce costs and grow passenger numbers - rather than focusing solely on the binary question around the level of subsidy or premia to be paid.

We clearly need to reform the cap and collar regime.

The way the 80% revenue support system currently works is undermining one of the main reasons for involving the private sector in the first place - namely to harness its expertise to attract passengers to the railway and grow revenue.

Both coalition parties have long advocated longer franchises.

We expect 10 to 15 years to become the normal expected length, with the possibility of franchises running for up to 22 and a half years where significant investment is promised.

And we are looking at ways to make it easier for operators to receive part of the value of their investment at the end of the franchise, to lift another barrier to private sector funding of the railways.

I firmly believe that the increased certainty provided to train operators by a longer franchise will encourage private sector investment in the railways to help us deliver the improvements that matter most to passengers such as better services, better stations, longer platforms and better rolling stock.

Longer franchises will also enable train operators to invest in the long term relationships crucial to ensuring the railway works well relationships with their workforce and with Network Rail.

This advantage is often overlooked but is an important one.

As well as providing greater scope to address long-standing industrial relations issues which may be just too difficult with a short franchise, this aspect of franchise reform can also make a useful contribution to our strategy on Network Rail and improve the interface between the train operators and the infrastructure provider.

Reform of Network Rail

And that brings me neatly on to my second theme today.

We desperately need an infrastructure provider that’s more responsive to its customers, and able to deliver a high quality service at reasonable cost.

And it is - of course - crucially important to have regard to the interests of both of Network Rail’s customer groups, the freight operators as well as those who provide passenger services.

I recognise that Network Rail has made some welcome progress in recent years, particularly on punctuality and reliability.

But I am afraid that a number of mistakes were made when Network Rail was established.

To keep the company’s debt off the government’s balance sheet, a structure was created without strong enough accountability mechanisms.

While I fully recognise the valuable work the regulator has done within the constraints of the current framework, lack of rigorous enough accountability mechanisms must be one of the reasons why the pressure to reduce costs has not been strong enough to deliver the efficiencies we need.

Not even the high levels of taxpayer support we have witnessed in recent years have succeeded in turning the company into the modern, customer-oriented organisation that freight and passenger operators have been crying out for.

That fact was driven home earlier this month when the Office of Rail Regulation (ORR) published international data which showed that Network Rail is still well behind comparable European rail infrastructure companies, with an efficiency gap of 34 to 40%.

Now we all know that views tend to polarise whenever reform of the railways is discussed in this country.

But it seems to me that a degree of consensus is starting to gather around the certain propositions.

There is a widespread acceptance that a key driver of high whole-industry costs is the lack of a joined-up focus on costs and revenues, with no direct link between revenues that accrue to train operators and the infrastructure costs incurred by the industry.

It seems increasingly clear that an important part of the solution to the problems we face rests in aligning the interests of Network Rail and operators more closely and providing more effective ways to get them working together to innovate and reduce costs.

I have long recognized the value of a model that sees a more decentralised Network Rail, with its component parts working more seamlessly with local train and freight operators.

Drawing on the conclusions of the McNulty Report, we will be working closely with the ORR to do more to unify and improve the way Network Rail and operators are regulated, and to help them work together more effectively.

Our goal is to ensure the entire rail industry becomes more accountable and answerable to those who fund it… passengers, freight customers and taxpayers… all of whom deserve better better value for money in return.

I believe that if we get this point right, it will be a very valuable step forward in addressing a range of other cost drivers and improve the industry’s performance on issues like asset management, supply chain management and stations and property.

And greater efforts are also needed to ensure that engineering work reflects the needs of the job at hand and not simply a one-size-fits-all manual of how work should proceed.

We should also assess whether current standards which are uniformly applicable across the industry could be better adapted to the differing requirements of a railway network which performs diverse functions.

And finally, it seems clear to me that we need a rational and objective appraisal of whether the railways’ very impressive safety record can be delivered in a more efficient way.

Major projects

But reform alone is not enough to ensure that the railways meet the needs of 21st century Britain.

We must also continue to develop and enhance the network to address overcrowding and meet the longer term economic and environmental challenges of tomorrow.

As everyone here will appreciate only too well, the programme of upgrades we have inherited from our predecessors is under review as part of the CSR process.

The crisis in the public finances will inevitably impact on these programmes - some of which were promised without a clear idea of how they might be funded, despite the deteriorating public finance position.

However… there can be no doubt that where we get rail infrastructure projects right, they can be among the best value investments that the taxpayer can make - providing economic benefits many times their cost.

The Chancellor made it clear in his Emergency Budget speech that:

Well judged capital spending by government can help provide new infrastructure our economy needs to compete in the modern world.

He also confirmed in the Budget that the Coalition would not seek additional cuts in capital spending over and above those already set by the outgoing administration.

Now you’ll appreciate that there are significant limits on what I can say prior to the outcome of the spending review.

But there are some general themes that underlie our approach.

As ever, we need to strive continually to improve government procurement skills.

For example, we need to learn lessons from the IEP programme, which saw over £6 million being spent in consultancy and preparation costs without even getting as far as contractual close, never mind any trains coming off the production line.

And every programme needs to be tested and re-tested at every stage - and along every mile - to reduce costs and improve value.

A prime example of the application of this principle is to be found in the Crossrail project.

We have made clear our support for Crossrail, because we believe it can be a significant growth generator, with real economic benefits felt far beyond London.

Construction work is under way, and highly visible at various locations in the capital.

We are working closely with Crossrail Ltd and with the Mayor and TFL to get the very best return for money invested in the project.

CRL has already been successful in identifying savings through reducing staff and administration costs and renegotiating IT contracts.

You may have read of their further ideas on saving money with a more ‘off-the-shelf’ train and re-design of a stations like Canary Wharf and Whitechapel.

The ongoing challenge now facing all those involved in the project is to continue to find efficiencies through risk mitigation, more effective procurement, and value engineering.

The same goes for Thameslink.

Although this project has never attracted the same political attention as Crossrail… this important upgrade to the infrastructure of the south east can play a key part in relieving overcrowding and supporting economic growth.

Major work on this project is now underway at Blackfriars and Farringdon and the first longer 12 car trains are due to start on the Bedford to Brighton route from December 2011.

Progress is also being made on the long-awaited Birmingham New Street redevelopment. At long last the station is being transformed into a gateway worthy of serving the UK’s second largest city. It is set to provide a major boost to regeneration in Birmingham and across the Midlands.

Time prevents me from running through all the pending upgrade programmes.

But I should highlight that we fully recognise the benefits that would accrue with the progress on the Strategic Freight Network.

And I would also emphasise that the Coalition Agreement affirms our support for further electrification of the rail network although the pace of delivery will depend on what is affordable in the current climate.

High Speed Rail

But the last of the rail projects I would like to consider today is of course, high speed rail.

We will shortly announce detailed plans for a future high-speed rail network, with a view to starting a public consultation in the new year.

The commitment the Conservatives made to high speed rail in 2008 transformed the debate on the future of long-distance transport in Britain.

Demand for travel between major conurbations is set to grow rapidly over the next 20 to 30 years, and we need a solution that’s fast, reliable, accessible, and environmentally sustainable.

The work we inherited from our predecessors focuses primarily on London to Birmingham - but we also intend to set out a clear plan for delivering high speed rail to Manchester and Leeds.

This will provide the foundation of the genuinely national network we want to see delivered in the future.

Planned and developed by Michael Heseltine during the last Conservative government, HS1 gives us a taste of what high speed rail can deliver.

Integrating airports such as Birmingham and Heathrow into the new network can help us reduce emissions from transport by providing an attractive alternative to thousands of short haul flights.

And there is every reason to believe that we will soon see new operators, including international carriers, operating alongside Eurostar, serving new destinations like Amsterdam and Frankfurt, and improving connectivity between London and Europe.


Ladies and gentlemen, in conclusion, the days ahead are going to be difficult.

I can’t pretend that the spending review isn’t going to hurt.

It’s impossible to escape from the conclusion that the level of public subsidy we have witnessed over recent years is unsustainable.

Unless we rethink and improve the way we run our railways, we will be unable to deliver the service improvements and capacity enhancements that passengers want and that our economy needs.

Costs have to come down.

As a country, we have to re-learn how to live within our means, and the rail industry is no exception.

Everyone involved in the railways – from senior management to the trackside worker – needs a stronger focus by on reducing costs, making it a key objective alongside safety, reliability, and capacity.

The rail industry has achieved a huge amount since privatisation, turning managed decline into a 40% increase in passenger numbers.

I am convinced that you have the energy, the skills and the ideas to rise to the new challenges we all face in this age of austerity and some of which I have set out today.

Thank you.

Published 29 September 2010