UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 329-ii

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Transport Committee

Rail 2020

Tuesday 26 June 2012

Christian Wolmar, Nigel Harris and John Nelson

Tom Smith, James Colman and Ian Yeowart

Tim Shoveller, Paul Plummer and Peter Anderson

Evidence heard in Public Questions 136 - 234

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Oral Evidence

Taken before the Transport Committee

on Tuesday 26 June 2012

Members present:

Mrs Louise Ellman (Chair)

Kwasi Kwarteng

Mr John Leech

Paul Maynard

Iain Stewart

Graham Stringer

Julian Sturdy

________________

Examination of Witnesses

Witnesses: Christian Wolmar, Railway author and broadcaster, Nigel Harris, Managing Editor, Rail Magazine, and John Nelson, Chairman of First Class Partnerships Limited, gave evidence.

Q136 Chair: Good morning and welcome to the Transport Committee. Would you first give us your name and organisation? I know you are all familiar faces, but it helps our records.

Christian Wolmar: I am Christian Wolmar. I am a writer and broadcaster, mainly about transport matters. I write history books on the railways.

John Nelson: My name is John Nelson. I am a lifetime career railway person. I am a director of a number of railway companies, a managing consultancy and an open access train company. I am also an occasional writer for a publication called Passenger Transport magazine.

Nigel Harris: I am Nigel Harris. I have been a railway journalist for 31 years now. I am the Managing Editor and Events Director at Rail Magazine.

Q137 Chair: Do you think that the Government have set out a clear vision for the railways and the future of the railways?

Christian Wolmar: No. It is hardly surprising that they have not set out a vision because there is nobody to set it out. We have a very strange situation where we have a kind of Ministry of Railways, which we have never had before, run by the Government, but much of the actual work involves other bodies. We have nobody to articulate a long-term vision for the railways.

The abolition of a body like the Strategic Rail Authority was a big mistake. We now have something called the Railway Delivery Group. Tim O’Toole gave evidence at your last session. I do not conceive that a body that consists of a few CEOs and senior railway people can articulate the future vision for the railways. So, no, I think the Command Paper was a mishmash of half-baked ideas that were supposed to be delivered by somebody or other-and I will maybe give some examples later when we talk about McNulty-who did not have a coherent idea of what the railways should be.

We could put HS2 in that context. I do not particularly want to discuss HS2 and you are probably going to steer clear of it, but it was plonked as a solution to some problems of the railways without a wider context. That is something that Eddington referred to. There isn’t that visional context of what the railways should be and how they fit into the rest of the transport structure over to 2020 or whatever.

Q138 Chair: "A mishmash of half-baked ideas"-does anyone else agree with that?

John Nelson: I am going to agree with the thrust of what Christian said, but I am going to put a slightly different spin on it. I do think that there are elements within the Command Paper that could construct a vision that we could all recognise. There are elements in it that are quite significant. It recognises, for example, the reality that the railway is going to continue to grow in its use. It makes important points about the environment. Crucially, it recognises the importance of getting much better value for money from the taxpayers’ point of view. This may be mundane and workaday, and we may not like it, but it is an essential element of any vision for the railway in the current context. Although I agree with Christian that it could be much better expressed and perhaps better defined, I do think the elements are there.

The other important element that is there is the vision for more localism. Devolution may not be the word, but it is important to recognise that the railway is not the railway. There are railways. The railways perform different roles and different functions in different areas in different parts of the country. The nod in the direction of localism is important.

I do see elements there that may not be an emblazoned vision, but they are elements that could be constructed as an important vision that will help the industry forward.

Q139 Chair: Mr Harris, have the Government presented any vision for the railways?

Nigel Harris: It is implicit rather than explicit. If you look at where we start from, I would repeat the point that Tim O’Toole made last week. The railway is an unqualified success in every respect save one: cost and efficiency. We have the safest railway and the best looking railway we have ever had, and it has grown 5% since 2008. There is not a country or an industry in the world that has managed the railway’s growth. As the Command Paper acknowledges, the railway is not broken. If it is not broken, it does not need a new vision. What it does need is the bits that are not working fixing, and the bit that is not working is the cost and efficiency.

In the Command Paper briefings, I asked Justine Greening whether she was saying that, if the industry steps up, the Government will step back, and she said, "Yes, I think we are." That is not a big headline but it is a fundamental shift. If that can be made real and the Government will stop their day-to-day intervention in the railway, and if the railway can grow up and take advantage of that, it is where the railway needs to be. Paragraph 7 in the executive summary of the Command Paper virtually says just that. Let’s get this the right way round. The railway is an immature business in a mature industry. The railway is, if you like, 180 going on about 12. The mature relationships of trust that you need to run something like this are only now just starting to emerge after, certainly from my point of view, watching it for 17 years from day one.

Q140 Chair: Is it the industry’s responsibility to present a vision or to make the system work better?

Nigel Harris: It is a joint vision, isn’t it? You cannot have an industry presenting a vision on its own when there is so much public money involved. When you have so much public money involved you are always going to get Government activity, which in itself represents political risk, which the finance industry doesn’t like and prices accordingly. Unless you have a genuine partnering arrangement between industry and Government and within the industry, it will not work. The Command Paper puts its finger on that.

What Christian is reacting to is that there are no big headlines. A wider media likes big headlines. The Command Paper represents some genuine changes taking place certainly within the industry, and I hope within Government, that will make that possible. If the Government want the railway to be accountable, they cannot keep all control themselves. You cannot control something and then have somebody else being accountable for it. That has happened too much and too often, certainly with regard to some of the franchises.

Q141 Kwasi Kwarteng: With regard to the state’s involvement, you suggested that the Government would step back. This is addressed to the entire panel: what is your view of the optimal relationship between the state and the railway? It is more specifically with regard to the scale of subsidy, if you like.

John Nelson: You can never separate the Government from this industry for as long as it is "loss making". It always has been, and I suspect it always will be. So long as there are large amounts of public money going into the rail industry as subsidy, or however you care to describe it as, there will always be a relationship.

My opinion is that the Government will need to prescribe the amount of money that is going into the industry. To some extent it will be what it can afford, and what it can afford may not be what it would prefer. It is the industry’s job to respond to that. At the same time it is the industry’s job to inform the development of Government policy in terms of what can be delivered. It is a kind of iterative relationship between the industry and the Government.

The Government’s role, undoubtedly, is to define a vision. As long as there are large amounts of public money going into the industry, it essentially belongs to the taxpayer and to the Government or to local government, depending on how it is organised. It is for those bodies to prescribe what they wish to see the railway deliver.

Christian Wolmar: Can I add something there because I know it is something that has gone on through history from writing my history books? Railways never pay for themselves. There is just a fundamental problem about that. Even the London underground, which has trains packed with a thousand people at a time, still cannot pay for itself. That is because the infrastructure cannot come out of their operating profits. There are very few examples across the world that are profitable. There is the Hong Kong metro, Indian freight and one or two other railways that are profitable, but essentially they are not. We have to recognise that. There is a fantastic level of dishonesty about that.

Going back to the days of Beeching, Governments are always trying to say, "If this happened and we cut that, or if we invested in that and then that happened, we would have a core of railway that would be profitable and pay for itself." It won’t. We have to work on the basis that we recognise that.

There was a very good example yesterday. I got a press release about Warwick Parkway station. It is a great success. It was only opened a few years ago and now they want to expand the car park. The Government are putting £1 million into that, and Chiltern is paying for the rest. You can’t even expand a car park without Government aid, so you are never going to get the Government out of the railways. That is the absolute key point. It was one of the aims of privatisation, but it was never going to happen.

John Nelson: I want to make a point about the difference between the social railway and the commercial railway. Whilst it is true that the railway as a whole is loss-making, there are elements of it that are quite profitable and operate in a commercial environment. My own view is that we need to draw a distinction in the relationship between the Government and the different parts of the railway that are either in the social or the commercial category. Beyond that, the railway as a whole is loss-making, but it is open to the Government to determine different rules of operation on a commercial railway, and I wish they would.

Nigel Harris: In the widest sense all that is true, but we never hear too much discussion about the incredible value delivered by the railway. There is a massive cost-yes, that is true-but we have only to be without our railways for a couple of days, be it through the 20 mph restrictions post-Hatfield or the latest RMT tube drivers’ strike, and the world grinds to a standstill. We cannot survive without our railways. I don’t think the intense use that is made of them is appreciated. Look at the footprint at Heathrow for 70 million people. Liverpool Street does twice that in a year in a space smaller than Terminal 1. We cannot do without our railway. It is almost a sterile discussion. If we have, as I believe we have, the best railway we have ever had, other than on cost and efficiency, the Government and industry really need to park some of their differences and genuinely partner an alliance to solve that efficiency problem.

Some of the things are very obvious. Just to correct some information that was given in this room last week, Network Rail has 150 delay attribution clerks who are counting delayed minutes. They play pass the parcel with them as to whether they get them or the operators get them and where the penalty payments go. The operating community has about the same. So there are 300 people costing the thick end of £20 million a year just batting delay moneys back and forth so that they do not land on their desks. We need that information collected to improve the performance of the railway, but we do not need to spend for ever arguing about who gets a penalty payment for it.

There is a whole string of things like that across the railway that needs a real good hard look at. The industry can do some of it, but it also needs real leadership and some air cover and support by the Government.

Q142 Kwasi Kwarteng: You have said that the state will always be involved and that there will always be a measure of subsidy. With regard to the actual price of the tickets, to what extent do you think we have the right balance today between getting money from passengers and relying on Government subsidy?

John Nelson: I am going to duck that by saying that is a political question. But if you take the view, which I do, that the industry is currently costing far too much for what it does, the argument needs to be made-this is the heart of McNulty-that, if you can reduce the cost to the taxpayer of the way the industry is supported and operated, with no impact on the performance of that railway, as I believe you can, by the way, that quite clearly leaves it open for the Government and the industry to operate a fares regime that is more favourable than it has been in the recent past. To me, the issue of industry structure and the costs of that structure are absolutely fundamental to the question about fares. If you are not going to do anything about that, you will be very limited in what you can do about fares.

Q143 Chair: But there is still the principle behind Mr Kwarteng’s question about where the balance should be between the taxpayer and the fare payer.

John Nelson: My answer to that is, where the commercial railway exists, the balance of the argument should be in favour of the train operating companies who are operating in a competitive marketplace. In the social railway it will always be regulated.

Nigel Harris: I will answer the question specifically. We should return to the 50:50 Government and fare payer. Moving it to 75% is a perfect example of the last point that I made-that the Government need to lead on this. Implying that the user should pay implies that anybody who doesn’t use the railway derives no benefit from it. Even if you never get on a train in your life, your life is of much better quality because we have a busy railway. It is the same as if you never use a hospital; your taxes still pay for a good health service. The non-users derive just as much use because, as we have seen, when the railway was shut after Hatfield, the A1 came to a standstill. When there were 20 mph restrictions at the same time, the road users were massively inconvenienced. To put more of the weight on the user skews that equation.

Q144 Chair: So you are saying 50:50.

Nigel Harris: Yes, and I think the Government should lead on that.

Christian Wolmar: I would go further than Nigel. As somebody who studied economics, I would say the externalities of having an efficient railway are far greater than that and deserve much more subsidy even than the 50%.

Q145 Chair: How much more?

Christian Wolmar: We should have lower fares, even on the commercial railway. I do not necessarily agree that the commercial price of the railway should be determined by the competition and how much it costs to drive your car up the M1. It should be determined by trying to attract as many people on to the railways as possible. The problem, of course, is that, if you had 25% coming from the fare payer and 75% from the taxpayer, the demand on the railway would go up and put pressure on requiring more investment and so on. That is the problem.

Certainly if you look at London, where fares and particularly season tickets are quite heavily subsidised, it would be complete chaos if we didn’t have the railways. That should be recognised. The money that you are effectively saving-the externalities-should then be used to invest in more capacity.

Q146 Chair: You made a comment before, Mr Wolmar, that virtually all railways needed subsidies. In that Command Paper, the Government state that their aim is to reduce and eliminate the subsidy. Is that a pie-in-the-sky wish or is it something that is possible?

Christian Wolmar: As an amateur historian, I look at the past and past attempts. In 1955, there was a great modernisation programme of the railways, where they invested the equivalent of something like £10 billion or £12 billion in today’s money saying, "If we invest this money once and for all, it will be sorted and then the railways will pay for themselves." Seven or eight years later we get Beeching and had to cut again. It is a fanciful idea. It is just not going to happen. What is more, it distorts the idea of what the railways are for. As Nigel says, the railways perform a fantastically important function. It is an economically illiterate way of looking at it because it doesn’t look at externalities, which is a very basic concept that any Government should understand.

Q147 Paul Maynard: One of our pieces of evidence suggested tearing up all the rails on the commuter routes into London and putting in a fleet of express coaches that would magically transform capacity and then somehow the railways certainly would pay for themselves but perhaps not in a way that any of us would agree with. You have already mentioned the idea of a commercial railway versus a non-commercial railway. Do you think it is possible any more for a Government to have a coherent, single national rail policy, given that three specific types of railway are emerging?

John Nelson: Basically, the answer is no. As I said earlier, there are railways. Okay, there is a national rail network and the Government must ensure that the national rail network is optimised, but to run the railway as if it were only a centralised entity is a huge mistake. All evidence of the last 20 or 30 years-both pre-privatisation and post-is that railways operate best when they are closest to their markets, whether they be local metropolitan social networks or long-distance routes like an open access company. All the evidence shows that railways work best when they are organised in that very focused way. Obviously the Government must have a policy, because ultimately the Government are funding the whole thing and need to take account of how it is working across the piece, but I think my answer to your question is no. The railway must be recognised as operating in different environments and in different markets. Therefore the rules need to be bespoke to those situations.

Christian Wolmar: It is a mistake to separate out the railways too much. Yes, there are different railways. It was David Higgins who was defining them at your last session. The intercity services are different from the suburban services and from the regional services, but they do feed upon one another. The idea that you could just have a commercial railway and cut away all the rest would probably not make it viable, because so many people who travel on the intercity services then want to use the regional and suburban services and so on to get to their ultimate destination. It would be a mistake to try to separate them out so neatly.

Q148 Paul Maynard: I would ask, therefore, what lesson you drew from the now infamous table in the McNulty report showing different levels of subsidy for London, intercity and regional that set a thousand hares running that somehow the obvious answer was now to shut down non-regional railways. What lesson did you draw from that table?

Christian Wolmar: I kind of knew those figures anyway. We always know that the journeys on Northern Rail were more subsidised than those on Southern Railway and so on. That was the Beeching mistake. Beeching said that you cut off the branches and the core tree will be profitable. It doesn’t work like that. A second reason to not do that is because there is a social purpose for the railway. We have to recognise that. If you cut towns off from the rail network and from any access to the next biggest town, or indeed to London, they will suffer from that. There have been studies into towns that have lost their railways and they have declined. You can’t just look at the railway as a commercial entity. I would really like to emphasise that point. We never say, "Oh, that road to that village has only five cars a day so let’s not bother to maintain it any more. Let’s let it be a sandy track again." We don’t do that, so we shouldn’t do that with the railways.

Chair: It might give somebody new ideas if you say things like that.

Q149 Paul Maynard: One message that came over clearly last week was that we have a particular issue around load and utilisation factors where we are allegedly doing less well than in some of our European counterparts. The point was then made that that is partly because we provide many more off-peak services. I was trying to make the point that it is expensive to cater for the peak if you then don’t use your trains appropriately during the daytime. Do you have any views on why we should be subsidising passengers to utilise off-peak services that, if you did not run the train, would not cost us any more in infrastructure terms? Should we just be catering for the peak or not?

John Nelson: In my opinion we are not subsidising people who travel in the off-peak because, as you pointed out, we are funding the peak. The operation of the railway outside the peak is essentially a marginal cost operation. In the vast majority of cases the marginal revenues exceed the marginal cost.

Q150 Paul Maynard: Would it not be cheaper just to park them in marshalling yards?

John Nelson: Generally no. Over the years you might park four carriages of an eight-coach train somewhere, but you would still operate a train. The marginal cost of not running those four coaches is an avoidable cost.

Nigel Harris: There are leasing charges.

John Nelson: Yes. The big difference pre and post-privatisation is the leasing charge for the train. One of the reasons why we are operating far more trains to a far greater frequency is because, if you are paying the lease charges on the train, it is costing you wherever that train is-whether it is sitting in the depot, in the siding or if it is operating revenue traffic. In my view, one of the benefits of the privatisation era is that it has encouraged the use of the assets.

Christian Wolmar: The marginal track access charges are quite low as well. Network Rail with the regulator could change it to charge extra, but why? This is a resource. We are much better than in many places on the Continent, though not Switzerland, but in areas of rural France you will find there is no train between 11 o’clock and 3 o’clock in the afternoon. The train is available, the drivers would not cost very much and the fuel would not cost very much. Why not run those extra trains? One of the reasons why railways lose money is because they have enormous fixed assets, and you might as well use and sweat those fixed assets.

Nigel Harris: You might otherwise be asking us why we have all these hundreds of carriages at £1.5 million to £2 million a pop sitting around doing nothing for seven eighths of the day. There is a real argument that we subsidise the peak, but it is the other way round. Your average fare in my part of the world, from Peterborough into London open return, is the thick end of £100. If you buy those in bulk in a season ticket, you will get something like a 70% discount. Now, yes, a cheque for a season ticket is a lot of money, but if you work it out per journey, it is the bargain of the century.

You could put that the other way round. Should a single mum in a Toxteth tower block be subsidising somebody’s desire to live in leafy Gloucestershire and work in London? There are all sorts of ways you could look at this.

Q151 Paul Maynard: I have a final question on that point. In terms of the fares review, its specific remit is not to increase the overall revenue base of fares. Is that credible if you are trying to subsidise and encourage off-peak travel without-and I underline that word-penalising peak-time travel? Does two plus two not equal five in this fares review?

Nigel Harris: You are starting to get into real quarts-in-pint-pots territory with regard to how many people you can get on a train. There is some degree of management, which I am sure John could tell you about, that has been attempted over the years to get people to move from peak trains to shoulder peak-from 8 o’clock to 7 o’clock. You could manage that by price for sure, and maybe some people would get up earlier, but you won’t completely solve the problem. The fact remains, and this is where political reality runs into harsh economics, that the season tickets represent a 70% discount or thereabouts-you would have to work it out because it varies-but it is a big discount compared with what everybody else pays. That question is never asked for very obvious political reasons. That is not the railways’ doing.

Q152 Graham Stringer: Mr Harris, you mentioned the attribution clerks. These are the 300 solicitors that were referred to.

Nigel Harris: They are not solicitors.

Q153 Graham Stringer: That was what the trade unions told us last week.

Nigel Harris: They are not solicitors.

Q154 Chair: Who are they?

Nigel Harris: They are administrative management staff-clerks.

Q155 Chair: We won’t quibble about who they are.

Nigel Harris: They are not lawyers; I promise you that.

Q156 Graham Stringer: I just wanted to clarify that because we asked last week for the objective basis of that. I am confused about this, both by the written evidence and what I am hearing now. I think everybody is agreed that the railways are very expensive at the moment, but actually the images you are offering of lower fares would be likely to cost more. The railways have been a financial catastrophe over the last 10 years, haven’t they?

Nigel Harris: Have they? It is a view but-

Q157 Graham Stringer: It is 3% of the gross national product just held on Network Rail’s balance sheet. There is a subsidy of nearly £4 billion a year. It is quite a trick to get extra passengers, extra fares and extra subsidy at the same time, isn’t it?

Nigel Harris: But the railway is a success. You can bat numbers around the room for ever. When Railtrack was sold, its value was about £2 billion. Normally when a company is sold its value is based on the replacement value of its assets.

Q158 Graham Stringer: The National Audit Office said that it was sold at something like 30% of its value, from memory.

Nigel Harris: Nowhere near. You couldn’t build 22,000 miles of railway for £2 billion.

Q159 Graham Stringer: It was not sold at any realistic commercial value. The point I am trying to get at is this. Why do we have railway success in terms of passengers and extra train services-we can all agree on that-but, at the same time as you are getting all these extra passengers paying money, you are putting in considerable extra amounts of money?

Nigel Harris: This ties back into your question you asked last week about where the £27 billion had gone.

Q160 Graham Stringer: Yes; I was coming to that.

Nigel Harris: I thought you might. Typically, BR should have replaced something like 2% of its rails each year. Usually it did about 1%. By the time you get to Hatfield and thereafter, when 3% had to be replaced, it has all gone on infrastructure. That is where the money went. It is coterminous. If you look at the sums involved, all the chickens came home to roost. The other way of looking at your £27 billion is that a lot of it wasn’t spent in the decades running up to Hatfield because BR was very good at doing a lot with not a lot but underspent on its infrastructure. I sense John getting twitchy.

John Nelson: I am getting twitchy about that. I go back probably 20 years in the BR period and 15 years in privatisation. I have experience of both systems. I am not claiming for one against the other, but it is undeniably the case-it is factually true in fact-that the structure of the industry that was put in place from 1994 to 1997 was a fragmented structure. It was not an effective structure. In my opinion, the escalation of costs that has occurred in the industry since then is a direct result of the structure that was put in place at that time. I have no doubt about that whatsoever. The subtext of McNulty is precisely that. If you read McNulty, it can be summed up as saying, "The structure of the industry has got us into this place; the structure needs to be changed." The difference is that he is not saying renationalise the industry, as some would say. He is saying restructure it in ways where there can be a coming together of the various elements in a way that will work-not motherhood and apple pie about "Let’s work together", but effective structures that will work.

That is the challenge for the industry. I have my doubts as to whether the industry can deliver that for itself. As part of the Government’s strategy for the industry it must make sure that the industry does precisely that. If it does not do that and the Government need to save money, and you do not have the structures to deliver more cost-effective railways, then it will be a complete and utter disaster because the Government will say, "We can’t afford it", the industry won’t be in a shape to deliver it and it will be a complete mess from the passengers’ point of view.

Q161 Chair: Is major change possible without a massive restructuring like renationalisation?

John Nelson: The answer is yes. It does not have to be a massive restructuring but it does have to be an effective restructuring. McNulty proposes a number of different formulae for different situations that can and will work. Undoubtedly, yes, it can be done; there is no question about that. It is the Government’s responsibility to make sure it is done, in my opinion.

Q162 Graham Stringer: Isn’t part of the structural problem that there is no equivalent of either shareholders or elected politicians pressing on behalf of the public? The structure of Network Rail and the Rail Delivery Group is effectively the industry talking to itself. There is nobody from outside saying, "You shouldn’t be doing that; that is really very expensive and inefficient." Shouldn’t that structure be in place?

John Nelson: I think so, yes. There are obviously different views about this. I don’t myself subscribe to the "Physician, heal thyself" philosophy, which in my view is the Railway Delivery Group. I hope it can work. I would like to see it work but I have my doubts. I am more in the camp that I think Christian is probably in, saying there needs to be a small, not a large, bureaucratic SRA type of organisation, but there needs to be some type of leadership organisation within the public sector that is responsible for making these things happen.

Christian Wolmar: I am well known and on the record as saying that the structure is dysfunctional. I am not quite as sanguine as the other two witnesses about the ability of the industry to bring about a solution without some structural change. Again, looking at it from an historical point of view, railways have been an integrated structure for most of their history. Most railways most of the time have been an integrated industry. There is a very simple reason for that. There is always this trite comparison with aviation that airlines don’t own the airports and so on. It is a completely different type of industry.

Railways are controlled by signalling; they are on track; they are an integrated operation. This real rail interface separation is an artificial distinction brought about for various political and ideological reasons. There is no doubt that that clear separation, as John just said, has resulted in enormous extra costs. There are very good reasons for that. Each of these entities becomes very risk-averse. They only look at their own bit of industry themselves. I cannot see how this structure of alliances will work because you will ultimately always get either Network Rail’s interests or the train operator’s interests being different and coming up against legal problems. The only way to run the industry is through some kind of integrated structure where the notional "Fat Controller" can make balanced decisions between different types of investments and different requirements of the industry throughout time rather than saying, "We’ll spend billions on rail and then we won’t have the trains to run on top of them," or vice versa, as has happened under this structure.

Q163 Chair: Is that decision maker the Government, or should it be?

Christian Wolmar: No, absolutely not. It has to be under the aegis of a relationship with Government. British Rail operated in such a way whereby the Government set a figure and said, "Thou must not spend more than this." Then experienced railway people like John had to go into conflab and say, "This year we can afford to do this but we can’t afford to do that. This structure might fail in the next 10 years, but let’s do it next year and not this year," and so on. That was the discipline and that worked. Network Rail has no such discipline. Effectively, it is given Soviet-type five-year programmes with vast amounts of money to spend, and towards the end of that it is going to spend the money like billy-o.

Q164 Chair: What about the Rail Delivery Group? Can that do the job?

Christian Wolmar: The Rail Delivery Group is a kind of voluntary group of a few very bright and senior people, but they ultimately are beholden to their various shareholders.

John Nelson: I think we have ended up with the Railway Delivery Group because politically it was deemed unacceptable to have something that might be perceived to be a second generation Strategic Rail Authority.

Q165 Iain Stewart: My questions neatly follow on from that exchange. I want to pick up on a couple of areas where you have expressed different views about reducing costs. Mr Harris, you have written in praise of the alliance between South West Trains and Network Rail. You wrote in March that it is too early to say if major savings are going to flow from that, but we would get an initial view after the first six months’ review, which concluded last month. Are we in a position yet to have any evidence from the alliance?

Nigel Harris: Probably not. To use your words from last week, Chair, we are where we are. In the Command Paper, the case for big restructurings is not made. The deep alliance is the only game in town that stands any chance of being a real game changer. We have tried a Strategic Rail Authority. We have tried the DfT Rail Group being in charge. We have tried Network Rail being in charge. There is no one else left to create a body to do that. We have maturing relationships within the industry. It was a really pernicious move to dub the deep alliance "mini Railtracks" recently because I do not think I have come across a phrase more calculated to try and destroy something at birth. There is a real potential game changer there and it will hinge on what goes on in South West Trains.

The savings are blindingly obvious from the word go. I have talked about the delay attribution clerks. Network Rail’s own route managing director for Wessex has said, "If this works, my job is gone," and he accepts that. There is inbuilt a whole stream of efficiencies that can come out of that. Incidentally, on the "mini Railtrack" thing, I am a bit confused about how if you put something together, as Christian and the unions want, this is a good thing-it is nationalisation and it works, but if you put everything together regionally and do exactly the same, it is a "mini Railtrack". It is bizarre, because we have put in the same things there, and big savings and efficiencies can flow from that. It needs to be germinated and it needs Government air cover. All the points that John made earlier are absolutely right but, as I said earlier, the Government must lead and give some air cover to enable these changes to take place.

John Nelson: I do not think that there is too much disagreement here. What you have just articulated is precisely what my Government body would be doing. The way the railway would work would be precisely on the basis of the type of structure that you have referred to in South West Trains.

Nigel Harris: They are crucial. Don’t underestimate them.

John Nelson: They are absolutely fundamental to the future of the railway in this country. If that does not happen, I think we are looking at a blank cheque situation. In a sense we do the argument a bit of a disservice by talking about things like-and I am not having a pop at you here-the performance clerks. They are symptomatic, but they are very peripheral. What you would say there is important, but it is an illustration.

Nigel Harris: It is an illustration.

John Nelson: You would save hundreds of millions of pounds if you went down the road of these more integrated structures, without any question.

Q166 Chair: Is that where the efficiencies are to be found?

John Nelson: That is where the efficiencies are to be found.

Nigel Harris: Through the alliances.

John Nelson: They are to be found through the alliances looked at from the point of view of bottom line railway operations, infrastructure and rolling stock, revenue and operations-the whole deal. That is where the benefits are in performance. That is where the cost savings will be found.

Nigel Harris: I would like to add a bit to that. As Christian said, if you have a nationalised railway or a single railway, you can maintain things to an organisational whole. You can take a strategic view of what your plan is and come up with a strategic maintenance plan that is then based on your knowledge of all your assets together. As John said, fragmentation does disrupt that process and drives the cost up. Given that we have the situation we have, we need to find ways to mitigate the problems that that structure brings. The alliances are the only show in town to do that. I am convinced that they can do it, but they need time and support to get properly embedded. I am convinced that people like Tim Shoveller can do that on South West. The minute the McNulty-style savings start flowing out of that, there will be immense pressure to do that everywhere. That is why they are so important.

Q167 Iain Stewart: I want to widen this concept of alliance and pick up on a lot of Mr Wolmar’s initial comments that we do not look holistically enough at transport planning in this country. As well as having this integrated alliance within the railways, what scope do we have to start actually adding in other transport modes? At a very local urban level you might bring in bus operators to work in concert with the railways. At a larger level you might look at links between airports and the centres of cities, to bring them in. Do we have to sort the railways first and then move on to that-

John Nelson: No, I do not think so. Let’s call it "devolution" for want of a better word. Hand in hand with devolution within the industry, which we have just been talking about-and alliancing is effectively that-should be political devolution in terms of how that works in transport planning within regions of the country. To me, the two things go hand in hand.

Q168 Mr Leech: How realistic is the 30% reduction in costs by 2018-19?

Christian Wolmar: I wanted to say something that clearly carries on from Mr Stewart’s remarks. Yes, I agree that alliances might make some savings, but what I am really worried about is this global 30% figure. First of all, although there are inefficiencies in the railway industry and some of the McNulty research has been well challenged, for example, by Michael Schabas in an article in Modern Railways, comparing it with Europe is a bit trite. It does not necessarily highlight where the waste is.

The bit that really worries me is expecting these savings out of franchises. In a way, we will know about the savings out of the Network Rail budget in the next month or so when the HLOS and the SoFA come out. I just do not understand where that level of savings on franchises is going to come from. How does McNulty know that the franchised bits-a lot of which, as we know, are up now-are going to come out so much lower than they are at the moment? Where are those savings going to come from? Is it going to come from cutting back services, frequencies, the number of new trains that are coming on stream and so on?

When I asked this question of Justine Greening at the press conference, she got rather cross with me and said, "Of course we can see where the savings are coming from," but if you read the Command Paper there is no detail or explanation of how the bit that is supposed to come from franchising is made.

Mr Leech: Do any of you believe-

John Nelson: I do. I am sorry but I do.

Q169 Chair: Mr Nelson, tell us how it is going to happen.

John Nelson: It is structural. The comparisons with Europe are a complete smokescreen. Although I have served on McNulty’s advisory board, I did say to him that I thought these comparisons were potentially confusing and would get us into quite deep water in terms of economists’ arguments and what-have-you. Stick to the high level facts of what has actually happened. Don’t look abroad. Look at what’s happened here. Look at what’s happened since 1995-96 when the industry was restructured to where we are today. Look at how the costs of the industry have increased during that period of time.

If you take the view, which I do, that the major reason for that-not the only one-is structural, if you do something about the structure, it is perfectly logical that you should be able to reduce those costs. So I am in the yes camp on that.

Q170 Mr Leech: But can you do it by 2018-19?

Nigel Harris: You could probably do the 20%, as David Higgins committed to in his first answer to your question last week.

John Nelson: Yes, I think you probably could.

Nigel Harris: Whether there is 30% remains to be seen. That is a big number. This Committee would be leading the party if 20% savings had been flushed out of the railway. There are those savings. We could sit here with a litany of examples from delay attribution clerks to all sorts of things.

Q171 Chair: On the question of whether those savings are achievable, Mr Nelson is saying yes and Mr Harris is saying yes.

Nigel Harris: Yes. The alliance is where-

Christian Wolmar: But I don’t understand the process by which it will happen. We are going to get these franchise bids in for 60% or 70% of the railway over the next two or three years. Are these private companies-maybe they will tell you later when you speak to ATOC-really going to be able to bid on the basis of savings that are going to be made in some nebulous way about which we are unclear over their 15-year franchises? I do not think they will be able to do that. I am not blaming them now; I am just saying that I think it’s impossible for them to be able to do that.

John Nelson: This is why I keep coming back to the Government’s involvement in this. Whether we like it or not, there has to be Government involvement because the Government themselves can set the ground rules for those franchises.

Nigel Harris: And we don’t know what that is going to be yet.

Q172 Chair: Can we have one speaker at a time or we will get confused? Mr Nelson, you are saying that the Government need to be involved.

John Nelson: I am saying the Government can determine the nature of a franchise. If, for example, the nature of a franchise is a deep alliance, it is perfectly reasonable in the context of that alliance over however many years to manage it in a way that it has a bottom line that takes account of all of the costs of that railway, which, over that period of time, results in a reduced subsidy.

Q173 Chair: So you are relating it to the alliances.

John Nelson: Absolutely.

Q174 Chair: You are not looking at franchises in isolation.

John Nelson: No; correct.

Q175 Chair: Is that where you are coming from, Mr Nelson?

John Nelson: Correct.

Nigel Harris: Viewing everything in isolation has led us to where we are.

Q176 Mr Leech: Last week there was a massive discrepancy between the views of the unions and others on the potential job losses to achieve these sorts of savings. Where do you three stand on which group of witnesses were right?

John Nelson: I am sorry but I feel really strongly about this. The industry is not going to save a third of its costs through massive redundancies. That is not where the inefficiency lies. The inefficiency lies in the deployment of finance in the direction of unnecessary investment and things that are perfectly avoidable cost-wise. It is not so much in terms of more DOO or more labour productivity. In fact, I am personally of the view that, if the railway is going to continue to grow, the likelihood is that there will be more job opportunities for people in customer servicing at stations and all this sort of thing. The cost savings don’t particularly come from labour productivity. In my judgment, the cost savings come from the more efficient use of funds.

Q177 Mr Leech: Is the union view of 20,000 job losses wide of the mark?

John Nelson: I would say it is a figure plucked out of the air.

Q178 Chair: Does anyone else have a view on that?

Christian Wolmar: Yes. I would say it is largely fearmongering. Paradoxically, one of the ways that the railways are going to become more efficient is for investment. A lot of that investment might well result in additional people needing to work on the railways. It may be on different things like IT or whatever, but I don’t see massive job losses. I do not think it is feasible to have massive job losses. Every train needs a driver. There is a certain number of-

Nigel Harris: Does it?

Christian Wolmar: It certainly does in our lifetime on the national railway network. Let’s not go into that.

Q179 Chair: We will assume that every train will have a driver.

Christian Wolmar: We will assume that every train needs a driver for the moment. There are a certain amount of control rooms and you need a certain number of people. Yes, that will be a bit fewer than currently but not massively. I don’t think there is going to be a massive depopulisation of the railway infrastructure.

Q180 Chair: Mr Harris, do you have a short answer?

Nigel Harris: There will be some job losses because in any industry that modernises, be it newspapers-

Q181 Chair: What about the scale that has been suggested?

Nigel Harris: Roy McNulty said it was more in the region of 5,000 or 6,000 than 20,000, but who knows? We are on the verge of real technological benefits to be had in terms of things like remote monitoring of assets, so you don’t need to have chaps go and look at them every week. There are going to be big savings and benefits there. It would be foolish and we would not be honest to ourselves if we didn’t say there are bound to be job losses, as there are in any industry that modernises. As we said with the alliance, the first redundancy will be the MD from Network Rail, who said, "If this works, my job has gone."

Q182 Chair: So you are thinking there will be some job losses.

Nigel Harris: There are bound to be because there always are; let’s be honest about it.

Q183 Mr Leech: I have one last question. Is there an alternative to this? Is there a better way of using and exploiting the existing assets of the railways to grow the business rather than just make it more efficient?

Chair: I am going to ask you for quick answers on that one.

Nigel Harris: No, because what the alliances do is to handle and mitigate the risks that are there as a result of a fragmented structure, as John so eloquently put it. You could end up ideally with the best of both worlds. This is really the last chance.

John Nelson: The answer is no. McNulty represents the best opportunity for two generations, in my opinion, to put the railway right.

Christian Wolmar: As I said, you need to invest in certain things to improve the railway. It should not be about cuts.

Chair: Thank you very much, gentlemen, for coming and answering our questions.

Examination of Witnesses

Witnesses: Tom Smith, Chairman, Association of Train Operating Companies, James Colman, Director of Corporate Affairs and Sustainability, Gatwick Airport, and Ian Yeowart, Managing Director, Alliance Rail Holdings, gave evidence.

Q184 Chair: Good morning and welcome to the Transport Committee. Would you give us your name and the organisation you represent to help our records?

Tom Smith: I am Tom Smith, Chairman of ATOC-the Association of Train Operating Companies.

James Colman: My name is James Colman. I am one of the executive directors at Gatwick Airport. I am responsible for corporate affairs and sustainability.

Ian Yeowart: I am Ian Yeowart, the Managing Director of Alliance Rail Holdings, which is an open access aspirant.

Q185 Chair: Do you accept that UK rail is 30% less efficient than it could be and 40% less efficient than other European rail systems?

Tom Smith: I would agree with the panel that you have just heard in saying that the European comparisons are something of a smokescreen. It is very difficult to be sure of reliable data that gives a genuine like-for-like comparison. As to the 30% that relates to what the industry should cost, it is also very hard to say for sure that that figure is right. There were a lot of assumptions that went into Sir Roy McNulty’s work. There were a lot of different consultancy studies done in quite short time order. While I am not going to say to you that there is not efficiency to be had in the industry-there certainly is-I wouldn’t want to say that it is 30%. That does not seem to me to be a 100% reliable figure at all.

Q186 Chair: Do you have a figure you would like to suggest?

Tom Smith: The industry has set out in its initial plan that it can reduce annual costs by about £2.5 billion by 2019. That would represent more like 20%, which I think again was mentioned by your previous panel.

Q187 Chair: Mr Yeowart, do you have a view about efficiency?

Ian Yeowart: I would basically agree with Tom. A lot of the comparisons are not like-for-like comparisons. One of the concerns I personally have about the McNulty report is that there is a deal of input but no actual output. It seems to me to be quite a leap of faith to assume that the savings can be made with no detail and direction as to where they will come from.

James Colman: From Gatwick’s perspective, I am here representing an airport. The Arup study we commissioned was not focused on the McNulty report. It looked at ways of using the Brighton to London route much more effectively, efficiently and smartly to try and increase the usage of both commuter and airline passengers along that line. Clearly there are things that can be done, not least around timetabling, to increase efficiencies.

Q188 Chair: You are looking in those directions for improved efficiencies.

James Colman: Yes.

Q189 Iain Stewart: Mr Smith, you have suggested as a way of having more efficiency in the railways giving train operating companies much more of a free hand in shaping timetables and service patterns. Looking at the West Coast franchise, you have suggested some concern that, although the DfT has said it wants to take a step back from specification, there is still going to be too much of that by requiring a certain number of station calls at each stop per week. Would you not agree, though, that on the West Coast Main Line and others like it there are different needs that need to be balanced out between, for example, the non-stop fast services from Manchester and Liverpool to Euston against intermediate stops on the line? If you gave complete free rein to the TOCs, someone is going to lose out and you need someone to police those competing needs.

Tom Smith: Yes, I would agree with that. I do not think I or anyone in our organisation has called for a complete free rein for TOCs. You are absolutely right that running an effective railway service is about getting the balance and the trade-offs right between various competing demands. The point that we and our members have been making consistently for a couple of years is that it is the operating community-the industry itself- that can best make and adjust that judgment over time as circumstances change, and not officials at the DfT prescribing, before a franchise even begins, a very precise and set timetable that is rigidly required year after year through to the end of the franchise, with the possibility for change very difficult and time-consuming to agree.

You refer to my call for a freer hand to be given to the TOCs. It is in that context. We are not arguing that there should not be some specification. There does need to be some specification, not least because of the reasons that you mention about balancing competing demands. The detail and the working system that operates and evolves should be left to the train operators.

Q190 Iain Stewart: I want to probe a little further on that. At what point should someone be able to step in? Say that whoever wins the West Coast franchise comes up with a wonderful service pattern from Manchester and Liverpool, and Louise, John and Graham are thrilled to bits, but I and my colleagues in Rugby, Coventry, Tamworth and wherever would say, "Hang on, this is not fair." Who-and at what point-should be able to step in and say, "No, think again"?

Tom Smith: That is not going to happen because there has been quite a high degree of prescription for this West Coast franchise.

Iain Stewart: I am just giving that as an example.

Tom Smith: But, in another example, at the moment with the way the industry is structured-and you have heard some interesting views on structure-that is clearly the role of the DfT, or, to be very precise, it is the role of the franchising authority. At the moment the franchising authority is embedded in the DfT; it has not always been. We would see no reason why that would not continue to be the right way to do it. That authority must have the ability to set out what it requires. It must have the ability to police it. Our point is that the balance has drifted too far towards every last detail being prescribed by that authority.

Q191 Iain Stewart: I want to pick up on some of the points made in the previous panel about the alliance between a TOC and Network Rail. We have the example of South West Trains, but that is in a single operator area. Do you think that model would work on other lines where you currently have different franchise operators on the same line, or would those need to be combined into one for that model to work?

Tom Smith: You are going to hear from witnesses who are very much involved with alliancing and who in some ways are better qualified than me to speak on that. The point about alliancing is finding better and more efficient ways to work together. A good starting point is where there is one dominant train operator whose operations fit neatly with one of Network Rail’s devolved routes. That is the case in Wessex. There are other operators who use that railway and they have to be taken account of in the alliance’s working and thinking. That principle can apply even where you have a route that has more of a mix of operators. The essence of alliancing is not to form a new entity that excludes other parties, but to find ways within the industry to work better together and in a more aligned way than has been the case under the very noticeable infrastructure-train operations split that was created at privatisation.

Q192 Paul Maynard: Mr Colman, could you explain a little bit about what your concerns are regarding Gatwick’s rail links into London?

James Colman: The main concerns we have are trying to ensure that, as the franchise discussions continue, airline passengers are considered as well as commuter passengers. We have had a real concern over the last few years that the Gatwick Express service has declined. We have seen our rolling stock go back in age. We now use rolling stock that is 20 years old. We have seen the Gatwick Express extend down to Brighton, which means that if you get off a plane and then get on the Gatwick Express at 7 o’clock on a weekday, the Gatwick Express is full. It is a significant inconvenience to our customers and passengers. It is one of the things from our perspective, as probably the busiest train station connected to an airport, that the investment we are putting into customer service in our airport itself and what our airlines do is not reflected on the railways.

Our airlines say the rail link to the airport is one of the top three things. It is strategic and really important. It is one of the things they use as a decision-making tool as to why they choose Gatwick. So we have concern that the passengers are not being considered. We are concerned that there is not a lot of joined-up policy. We have lots of discussions in different forums about the importance of connecting an integrated rail policy and air policy, but we are concerned that that does not seem to be as integrated as it could or should be. There is a wider concern with our local stakeholders, especially our businesses, that we might lose competitive advantage for the south-east if the needs of both communities and airline passengers are not considered.

Q193 Paul Maynard: Given those concerns, why was your chief executive telling the press yesterday-and I quote from The Times-"We are blessed with excellent connections into London and to the rail network"? Was he spinning to the press or are you spinning to us today, because they cannot both be true from what I have just heard?

James Colman: We are blessed with good connections. It is 30 minutes into Victoria, 28 minutes into London Bridge and 35 minutes into City Thameslink.

Q194 Paul Maynard: If you can get a train.

James Colman: The challenge for us is that we have seen a degradation of that service, especially on the Victoria line. The carriages we have are 20 years old. We have invested a lot in the airport on facilities for PRM, which is passengers with restricted mobility. The carriages are up off the station. You cannot get wheelchairs through. They are not designed for air passengers. If you look at Heathrow and Stansted and the quality of the service and the carriages they have, it is significantly higher. We seem to be going backwards. From our perspective, we think there is a strategic need within the franchise agreement for some specification around supporting that very important connection between the airport and the city. There is not an inconsistency. We are blessed with what we have, but we want to see it improved because we feel it is going backwards.

Q195 Paul Maynard: I will take your word for it. I want to turn to you, Mr Smith. We heard from Mr Harris, citing Justine Greening, that, as the industry steps up, the Government will step back. Is that not a bit of a chicken-and-egg situation? How have you seen the Government step back so far and how do you think your section of the industry has stepped up? Who needs to step first for this to occur?

Tom Smith: The Government need to have some confidence in the industry in order to step back, but that confidence must be generated by their belief in the industry’s ability rather than hard and tangible evidence. If they wait for the hard and tangible evidence, we will get the chicken-and-egg situation that you describe. The reason the Government need to step back is because, as I think you heard very fully from the previous panel, there is too much Government involvement in day-to-day issues of running the railway. There are extensive decisions and programmes run to buy rolling stock. There is very close involvement with a number of projects that arguably can and should be left to Network Rail. In my part of the industry there are highly prescriptive and demanding franchise agreements that themselves contribute to the costs and inefficiency that we see in the industry today.

The Government need to step back from all those sorts of details and believe that the industry has the maturity, ability and desire to step up and provide leadership and solutions within a framework that is strategically set by the Government. We are not arguing for the Government to be uninvolved. The point was made very clearly, and I agree with it, that the railway is subsidised. It has a financial stake in it. The state needs a presence in decision making about the railways.

Q196 Paul Maynard: Have you seen any evidence of the Government stepping back in the West Coast Main Line franchising process? Has that lived up to the pre-election rhetoric of franchise reform or not?

Tom Smith: No, definitely not, but, in fairness to the Government, they did say very clearly to us, "Do not judge reform of franchising by the West Coast. It is a stepping stone-a staging post-because it is the first one we have had to do since assuming power."

Q197 Chair: What are you saying about the West Coast franchise? Is it very similar?

Tom Smith: Yes. If you read the invitation to tender-I have probably read too many of those in my life for sanity-it is very similar to the ones that were let under the previous Administration. In some respects it is even a step back. The Government are requiring even higher levels of capital at risk in the form of subordinated debt, equity bonds and parent company guarantees, which obviously can be procured and put in place, but that kind of capital requirement has a cost. Ironically in that respect, they are driving the cost of franchising up in the West Coast case.

Q198 Chair: Mr Colman, when you were replying to Mr Maynard’s questions about Gatwick and access to rail, you said there was not proper integration between rail and air services-rail and aviation. Why do you think that is? Is it to do with the way the franchises are put together? Who is responsible and how can we put it right?

James Colman: From our experience over the last couple of years we have been trying to have conversations with, for example, DfT aviation and DfT rail, and in recent months we have managed to bring them both together in a much more strategic way. You have the National Infrastructure Plan, the Command Paper and the South East Airports Taskforce all talking about rail and air and the importance of why they need to be connected and integrated. The first challenge we have found is that it is a case of putting these bits of paper together and making sure, both at ministerial and official level, that it is cross-fertilising so you are getting that integrated view.

Down into the franchises our discussions with the train operators are fruitful in one way, in that we are having very good sessions with them talking about the needs of the airport. There have been some suggestions. The Arup Study, which I think Members have copies of, talks about some of the innovations we can do to use the rail network more efficiently between Brighton and London. They have come back to us and said that, because there is not the specification around the airport or within it, they are worried they are going to be judged purely on value and not necessarily on quality. Whilst they recognise that where you have an airport joining a rail network there is a significant premium associated with those customers and they can charge a significant margin, the challenge is how they can do both of these things and deliver for one set of customers at the airport, which they know they can pay a premium on or passengers are willing to pay a premium on, as well as serving the general commuter population. Without the level of specification, they feel that they are caught between a rock and a hard place.

The challenge is joining the dots at a senior level and making sure that that percolates down through to the actual franchise agreement itself. We are seeing it on the officials bit more and more. That is credit to the DfT. On the franchise side, if the train operators are willing to talk, and to talk about how we can change from the 4-4-2 carriages, which are recognised as poor, to a different sort of world vision for Gatwick, that is where my concerns come from.

Q199 Chair: Is it the DfT or the rail companies? Where do the problem and the solution lie?

James Colman: Our view is that it is what the specifications and the undertakings are within the franchise agreement itself in terms of where that is set within DfT. We are having good conversations with the train operators. The challenge they have is that they feel they are going to be judged purely on the value and price and not necessarily on the quality side of things. They are encouraging us to see how those sorts of things can be put into it.

Q200 Chair: Are you talking about the new Thameslink service as well?

James Colman: Both, yes.

Tom Smith: I would like to comment on what Mr Colman has said. I think you are referring to talking to prospective bidders for the new franchise.

James Colman: Yes.

Tom Smith: The concern that they are expressing to you about being judged purely on price rather than quality goes right to the heart of one of the reforms that we have urged the DfT to take, which is to evaluate bids on a more equal basis between the quality and robustness of plans and the wider impact on them in terms of passenger benefits and the premium price that they are willing to pay under the bid. At the moment the DfT’s competition is run very much on the basis of highest bid wins. As we have seen, that does not always lead to the best outcome.

I would make one more point about this. It sounds as though, unfortunately, Mr Colman has given up talking to the current operator under the existing franchise. If he has, the reason might be that they have been told-

Q201 Chair: He is shaking his head. Have you given up, Mr Colman?

James Colman: No; we are always in active consultation with our rail operator.

Tom Smith: I am sure it is reciprocal. The existing franchise tells Southern exactly what they must do, and their ability to change it is heavily circumscribed by the terms of that franchise. Had that franchise been let on the more hands-off basis that I was describing earlier, allowing greater freedom to the operator, I would suggest that BAA-sorry, I do beg your pardon-Gatwick Airport and its owners would have been able to make considerable progress already under the existing franchise. It is a good example of overprescription harming passengers and third party interests as well.

Ian Yeowart: There are a couple of issues that have come up from questions. Clearly Gatwick requires some commercial competition. In the same way that Heathrow has an excellent service, Gatwick requires an excellent service. After all this time there is clearly an opportunity here, I would have thought, for the Government not to be involved in the Gatwick Express and for Gatwick to step out of that and decide to run the service commercially at its own risk.

In relation to whether or not the Government step back when the industry steps in, I would say unfortunately the evidence would be exactly the opposite. Two years ago our company sought to run direct services to Blackpool. As a result of that, the Government via the DfT submitted an application of their own on behalf of the incoming franchise to run services to Blackpool. All those applications were rejected at that particular time, but when the West Coast ITT comes out within a few months Blackpool doesn’t even appear now in the West Coast ITT. There is no strategic thinking within the DfT but it is very reactive. Whenever an open access operator appears on the network, the DfT appears quite comfortable to allow the operator to try and compete with that new operator, but it is very reluctant for the franchises, as Mr Smith has said, to use their own commercial abilities to be able to develop their own network.

York is another example. York now has a higher service than Leeds, for example, because Grand Central operates open access services to York. The work that was done by the ORR indicated that Blackpool services would be best served for the country as a whole if they were operated by an open access operator.

Q202 Paul Maynard: You mentioned Blackpool, so I thought I would clearly leap in.

Ian Yeowart: I saw your eyes light up.

Paul Maynard: What is your view on the DfT’s argument that open access cannot go ahead if the consequences for it are what is called abstractive-that is because I get on at Blackpool and I don’t get the train from Preston on Virgin, Virgin lose out? What is your view on that argument against open access?

Ian Yeowart: It is an argument that they use every time, but open access has been about since just before 2000. Hull Trains was the first operator on the network. Grand Central arrived in 2007. You are right that the argument has always been used. The outgoing regulator at the time, Tom Winsor, put together a series of very difficult tests for a new entrant to access the market, which included passing what was called a "not primarily abstractive" test. Therefore, are the benefits as a whole outweighed by the revenue that will be abstracted from the incumbent operator?

There are very few open access operators on the network because of that test. It is a very complex test. Indeed, the beauty of open access is that they take that commercial risk. Wrexham in Shropshire took that commercial risk, but was unfortunate in not being able to continue because it was prevented from calling at certain stations.

In relation to the argument, if that was true, then when East Coast was relinquished by GNER in 2008 or whenever it was, and NatEx stepped in to take on the franchise, you would have expected them to offer a lower premium because Grand Central had now arrived on the network. But indeed they offered a higher premium than was offered by GNER. The only example that you have in practice has shown the exact opposite to what the DfT will say. I would say that, after all these years, for them still to be unable to produce one piece of firm evidence to support that argument is quite damning.

Q203 Julian Sturdy: Following on from that, the Government are saying that they do not want to increase open access competition. They have come out and said that. Ultimately, obviously, you feel that is a mistake.

Ian Yeowart: They have always said that. To be honest, it does not matter what colour the Government are, that has always been the stance. The DfT, I am afraid, sets itself up now as the BRB. If it is going to be the BRB, we should have the BRB. As we have seen in some actual instances, the DfT does not always correctly specify the network.

In relation to Grand Central, Sunderland, the east coast and certain parts of west Yorkshire are some of the poorest performing economic areas in the country. They have been greatly improved by the arrival of direct services to London. Whether we like it or not, the country is very London-centric. HS2 wants to come out of London; it does not want to go between Leeds and Edinburgh.

For most towns and cities that are not linked to the network-and it partly comes back to Gatwick-they have good access to the network, but not necessarily a very good service. Halifax, for example, have cited the case that, had Grand Central not provided direct services to Halifax, RBS may well have closed its entire operation at Halifax, with the loss of thousands of jobs. It is a case of whether or not you want a very contracted and commercial railway that is specified by Government, or whether you want some competition on the real commercial part of the railway. Where there has been competition, it has shown that the increase in passenger revenue is significantly greater than in comparable markets where there is no competition. Coming to London from York, where there is competition, if you want to arrive in London at around the same time from Leeds, you will pay more where there is no competition, even though it is on the same route.

Q204 Julian Sturdy: The other argument is that open access impacts on the franchise. Do you think that is a fair argument, or again is that a bit of a misnomer?

Ian Yeowart: No, because that is assuming that the franchise operators themselves can’t live in the real world and they very much do live in the real world. Each franchise operator, where it has open access competition, tries to prevent it in the first place, as I suppose anybody would, but, when it arrives, it steps up to the plate and competes. You only have to look at the East Coast now and the number of services from York, for example, which are far greater than the number of services before Grand Central appeared. That market is growing faster than most of the other markets on the East Coast Main Line because of competition. It is vital. Everything we do in this country is driven by competition. If you sit in a competition every five years, you know what you have to do to win that competition. You step up to the plate. If there is no competition-and this is one of the arguments that you have in relation to the costs of the industry-it is very difficult to drive out costs.

Q205 Chair: Mr Smith, do you agree with that?

Tom Smith: Among our membership we have both many franchised operators, but also some open access operators, so the companies I represent have a foot in both camps. With their open access hats on, they would very much agree with what Mr Yeowart is saying. With their franchised hats on, they would not say, "No open access; it’s not fair; we don’t want it." That is a Government judgment, as I think we have heard-or along those lines. What they would say is, "When we bid for a franchise, we need to have the clearest understanding that it is reasonable to give about the potential for open access operators to come on to this bit of the franchised network and we will make a commercial judgment about how that might impact our costs and revenues, reflect that in our bid, and then we will live with it. If there is competition, we will respond to it." As has been said, that has happened and it has been to the overall benefit of towns and cities in Britain and railway economics.

Q206 Chair: Do they think they have been given adequate information?

Tom Smith: There have been instances in the past where, no, they feel it has been problematic. We would now look to the DfT, and to the extent that there is a role for the ORR to be as clear as possible about the prospects for open access operations.

Q207 Iain Stewart: I have one supplementary question on open access. We had a discussion with the previous panel about the different types of railways. There was the main trunk and then the branches. Beeching cutting off the branches was designed to make the whole more efficient. There is a counter argument that you can strengthen the railway as a whole by linking up branches that have not traditionally been served by the intercity network. Mr Yeowart, what other routes around the country are potentially able to be linked to the national intercity network by open access operators?

Ian Yeowart: I am happy to tell you the ones that we have in the public domain at the moment but perhaps not those we are currently working on.

Q208 Iain Stewart: What scale is there?

Ian Yeowart: In relation to where Mr Smith is coming from, we fully agree that there should be some clarity for the franchise operator. Indeed, Alliance’s applications just recently were made at the time the regulator suggested in order to give clarity for the West Coast Main Line. The DfT in effect, by causing all the confusion during the first year with what you can only call a spurious bid for Blackpool, has delayed the entire process. The West Coast bidders now don’t know whether or not Alliance will be successful with its very large application to operate on the network.

Currently we are looking at providing services from West Yorkshire into Lancashire and then on down to London; from Bradford through places like Rochdale and Manchester Victoria on down; from Huddersfield, which is probably the largest town certainly in England without a direct service; coming out of Leeds and providing a little bit of competition down the west coast. It will be linking up places like Leeds and Milton Keynes but will also be providing additional capacity on the west coast.

One other thing that open access has been very good at is forcing Network Rail to identify capacity. This is where competition comes back into it. Clearly if you are the main operator on a route, and this is a concern I have about alliances-no pun intended of course-it is not in your interest to have additional capacity identified on that route if it is liable to open it up to competition. The routes that we are looking at are in effect to link up places that are poorly performing economically but with direct links both into the capital and somewhere else big on the route. That is how the process works. The Cumbrian coast is without doubt the worst performing economic area in Britain, or certainly in England, and we want to provide direct services up there. But it cannot support it purely from direct services to places like Workington, Whitehaven and Maryport. Tied in with that are direct services to Blackpool.

The beauty from an open access point of view is that we don’t mind competition when it comes because we think we can deal with the competition. To be fair to the franchises, once it’s happened, they think they can deal with the competition because they are mature people working in an industry that is now a mature industry. It is a long time since railways were privatised and it needs a time of settling down.

Q209 Mr Leech: Mr Colman, have you made any assessment of what a 30% cut in costs to the railway would have on passengers going to Gatwick airport?

James Colman: We have not done that level of analysis in terms of what the implications would be for us, because we are hoping that that will not happen. We know with the Thameslink route that we will see a significant increase in usage and the number of trains going into London. We are not so much worried about the number of trains going into London from Gatwick. We are more worried about the quality of the service going in. It is things around the fact that the Gatwick Express arrives at Gatwick full, which is a bit of a problem for passengers. What we have been trying to do with the potential bidders, for example, is trying to work out and discuss smart ways of finding solutions-whether, for example, when the Gatwick Express leaves Brighton and arrives at Gatwick, at the station there are already five carriages that are dedicated for passengers and it joins together and then continues into London. So you are serving both the commuters coming from Brighton as well as passengers.

Our focus is more about finding solutions than looking too much at particular scenarios at that sort of level. It is one of the top three reasons why some airlines do choose an airport and particularly Gatwick. We have been attracting significant Asian airlines into the UK at Gatwick as well as increasing the number of short-haul European flights. We expect to grow another 11 million passengers at Gatwick over the next 10 years. We already put nearly 13 million passengers through that train station today, so the focus for us is more about quality and ensuring we preserve the service.

Q210 Mr Leech: But is the uncertainty having any impact on your ability to attract new customers? I know you have had new customers and new airlines. Is any uncertainty over rail links impacting your ability to grow?

James Colman: Not at the moment. It is something that airlines raise as a concern. That is partly because if you go into Gatwick station at the moment, or have been going into Gatwick station itself, it is a poor relation to the airport. I am trying to be polite, but it looks awful in comparison. When passengers go on holiday or on a business trip, when they leave their house to when they get back to their house is their journey-it’s their holiday. The concern from our airlines and from the airport is that the weak link is increasingly becoming the station and the Gatwick Express service. The franchise and the discussions now going forward give us a once in a lifetime opportunity really to turn that around and for us to be at least be as good as Stansted and Heathrow. If you compare us to other international airports around the world, we have some way to go to get back up there. You currently don’t even get simple things like free wi-fi. It is not yet impacting. The airlines are hoping the sorts of discussions we are having today will have an impact, but it is something that they are monitoring closely.

Q211 Mr Leech: My final question is to Mr Smith. It is the same question I asked our previous panel: are savings of 30% deliverable by 2018-19?

Tom Smith: We have set out a plan as an industry that gives 20% savings by that time in our initial industry plan. It acknowledges that there may be more that could be achieved if the benefits from reform come through quickly and deliver as intended. As far as the part that needs to be delivered by the train operating companies, that 20% is contingent on meaningful reform of franchises to enable a more efficient business model for TOCs that are franchised.

Q212 Mr Leech: Can it be done without impacting the service to the customer?

Tom Smith: Yes, I think so.

Chair: Thank you very much for coming and answering our questions.

Examination of Witnesses

Witnesses: Tim Shoveller, Alliance Managing Director, South West Alliance, Paul Plummer, Group Strategy Director, Network Rail, and Peter Anderson, Managing Director, Balfour Beatty Rail, gave evidence.

Q213 Chair: Good morning, gentlemen, and welcome to the Transport Committee. Could you give your name and organisation please for our records?

Paul Plummer: My name is Paul Plummer. I am Group Strategy Director at Network Rail.

Peter Anderson: My name is Peter Anderson. I am the Managing Director of Balfour Beatty’s rail business in the UK.

Tim Shoveller: I am Tim Shoveller. I am the Managing Director of the Network Rail/South West Trains alliance.

Q214 Chair: We have heard a great deal about the potential of alliances to produce efficiencies and solve all rail’s financial problems. Could you tell us how that could work and how it could deliver savings without cutting services and without being to the detriment of passengers?

Paul Plummer: We have heard a lot about the structure of the industry and I see alliancing as fundamentally about making that structure work effectively. It is about getting the best of both worlds, having much more mature relationships between the parties and aligning the interests of those parties. It is leading to very tangible initiatives rather than fluffy working together in a nice cosy way. It is now starting to show real momentum in changing the behaviours on the ground between Network Rail and train operators.

There are some really important principles in making it work-managing tensions between localism versus the network; between the multiple operators versus a closer alignment with them; and between the long term versus the short term. We are designing our approach to alliancing to try to reconcile those and, fundamentally, to get the best of both worlds, as I say.

Q215 Chair: Mr Plummer, could you tell us if it is factually correct, as has been said to us before today, that Network Rail has 150 staff dedicated to attributing delay costs and compensation?

Paul Plummer: I don’t know the precise number, but a substantial number is working in that area. As Mr Harris said, the purpose is to get management information that you need to understand performance. That is the critical thing.

Q216 Chair: Is it likely to be 150?

Paul Plummer: It is of that order. In the context of alliancing, one of the things we are doing with the performance incentive regime is prompting conversations at a local level between Network Rail and the route about whether we can do some of that more effectively so that we remove some of that cost without losing the management information.

Q217 Chair: How is alliancing going to work? Mr Anderson, I know you have sent us some written evidence about this. Could you tell us more?

Peter Anderson: Yes. I come at this as an infrastructure construction provider. Balfour Beatty has a number of alliances. In fact, we have done an internal review of more than 45 alliances that Balfour Beatty across its group has been engaged in. They range from alliances with National Grid to provide power transmission services, with gas networks and with organisations such as the Post Office to provide infrastructure service and facilities management support. What we find from the alliances that we have been involved in is a real drive for cost efficiency and a real engagement of teams for mutually the best benefit outturn for the project, aligned objectives, no man marking and best man for the job. These are all phrases that come out of our alliancing experience. I am delighted to see that from our perspective, in Balfour Beatty Rail, we are starting to engage with Network Rail in alliances for construction projects.

I can cite the South East Spur as an example of an alliance, where we are absolutely aligned in one organisation office to deliver the outturn of the project. There have been a number of changes associated with that particular scheme. It interfaces with Crossrail. The team have worked jointly to design and develop the scheme and progressively assure the costing model, and we are moving forward with that alliance towards construction delivery. From our perspective, we absolutely applaud the benefits of entering into an alliance because we have seen experience of that across our group.

Q218 Chair: Mr Shoveller, what can you tell us? How can it work and how can all stakeholders feel that they are being treated fairly?

Tim Shoveller: There are a couple of questions there. First of all, how can it work? It is working. The alliance has been formed for eight weeks. The word "alliance" is used very frequently and it has been used much today. In terms of what we have created with Network Rail, it almost does not do justice to what we have done. We have created one organisation where we have 6,000 people delivering a railway service and everything that comes with that-both the track and the train. We have overview of all of that. We are providing services to half a million passengers a day and our customers, who are the freight operators and some of the other passenger operators who operate trains over the tracks for which I am responsible. It is actually happening and that is fantastic. It is absolutely the game-changing thing that we needed to do within industry.

What is it about? Of course it is about working together. It would be easy to say that this is common sense. The railway is an incredibly complex organisation and yet we have been labouring under a structure that has achieved notable success. We have been labouring under a structure for a long time where people have been too focused on only and purely their own interests because that was the way the system was organised.

What we have now with the alliance is an opportunity for organisations to work commercially and sensibly together for the best effect for those organisations and ultimately for the passengers we deliver services for. It is a very different approach from what we have seen for 15 or 16 years now.

Q219 Chair: What kinds of processes are built into this to make sure that the passengers do benefit and that this is not something of help to the industry and not looking at the passenger interests?

Tim Shoveller: I would start from the pretext that if it is good for the industry it is good for the passengers. The 6,000 people who work as part of our organisation get up in the morning, or very often in the middle of the night, and come to work to do a job. They do that job to run the trains and the railway safely. Everything that we do is geared towards doing that better. That is why we exist. We don’t differentiate between what we are doing for our own organisational self-satisfaction and what we do for the customer. We live to provide a safe, reliable train service and we do that as best as we can.

If we can provide that through having fewer disputes, by having people lined up, by people working together and through joint objectives, it must, without a shadow of a doubt, result in a better service for the passenger.

Q220 Mr Leech: The unions say that alliances would increase fragmentation, transaction costs and inefficiency, and reduce economies of scale. Why are they wrong?

Tim Shoveller: The reason for doing the alliance is because, rather than guessing or taking a view on something, we are going to do it and we are doing it. In time we will demonstrate one way or another that either this works and we can save money and be more efficient with new services, or this model does not achieve that. I am not going to judge why others may have taken a view; I am going to deliver it.

Paul Plummer: I will add to that. Of course we do need to drive efficiencies. That is not affected by alliancing or anything. The industry needs to drive improvements in efficiency and value for money. That is the reality of the situation we are in. I do not think alliancing changes that. It is one of the ways in which we think we can achieve it.

In terms of fragmentation, we certainly see devolution within Network Rail to the routes and alliancing as fundamentally inseparable. One is an enabler for the other. That is not about fragmentation. What we are passionate about, as well as pushing accountability locally and creating partnerships with customers locally, is maintaining the focus on the network. That is absolutely critical in terms of getting the maximum network benefits for passengers.

It is critical in the context of multiple operators, even where it is relatively straightforward. Wessex has one main operator, and, even there, there are other operators on other bits of the railway. It is much more intense. Likewise, in terms of long-term stewardship of the network, we want devolution and alliancing to create challenge and pressure to identify opportunities to improve efficiency, but not at the expense of simply cutting costs now and having the problem later. We do not want to recreate those problems of the past. That is why I keep saying it is about the best of both worlds and getting that balance right.

Peter Anderson: If I could add to that, it is also about flexibility. When partners come together in an alliance, they bring together the resources of their respective organisations for the mutual benefit of the alliance. That necessarily means that their resources have to be more flexible. They have to meet the demands of the overall alliance. This is not siloed delivery models; this is an alliance response. The organisations’ own resources have to be more flexible. For us, that means we have to tackle the terms and conditions of our work force. We have to make our work force more flexible in terms of the rostering hours that we can use them for. That involves engaging with the unions. Yes, job cuts are an inevitability of that as mechanisation and flexibility of the work force increases. That is an inevitable benefit of alliancing.

Tim Shoveller: We have to make sure that through hearts and minds we deliver a railway service. I do not see people that work for the alliance as the enemy. This is not somehow a problem. Our people are our greatest asset. I know that is an overused phrase but it is absolutely true. Throughout my railway career I have focused very much on the technical gadgetry of trains and gadget details but, fundamentally, as a railway we perform well if our people work well. If our people work well together, and are motivated, enthused and have good leadership, we can deliver a good railway. If our people are frightened and scared for their jobs, or if they think the change is negative, then we will not deliver a good railway. Uncertainty, of course, is an issue for people. It is absolutely essential as we move into this period of change that we put a lot of effort into providing that guidance, support and explanation for all our people so that they can be confident in what they are doing. What we do not want to have is people being distracted from their core task of maintaining the railway, driving the train or looking after the customer. We do not want to have those people distracted from that task because they are worrying about what might or might not happen in five or six months. This is a period for mature debate.

Q221 Mr Leech: I was talking to somebody at the weekend who works for Network Rail. He gave me an example of an overnight work project that needed to be done. Either five or six different organisations were managing a project that ended up with two members of staff carrying out the work overnight. Will those additional levels of management be thrown away with alliances, or will it be necessary to change attitudes within the industry to make sure that the alliances just carry on with the same managerial merry-go-round without achieving any efficiency?

Paul Plummer: A lot of it is about attitudes. Without a detailed example, it is difficult to comment, but there will be reasons as to why that has happened. Some of those reasons are often about the different parties involved not being properly aligned. In that context, it may be around our contractors, suppliers, Network Rail and the train operators. Are we putting in processes that are not necessary because we have not had a sufficient understanding of each other’s problems? Do we have sufficient openness to say right at the beginning, "What are we trying to achieve? What is the best way of achieving that in partnership with Network Rail and operators and then with its suppliers?" That is a lot of what alliancing is about.

There are lots of examples similar to the one you have described. You can have greater transparency between Network Rail and an operator about where value lies for an operator in running additional services at the weekend, for example, and where cost lies in terms of Network Rail keeping the railway open very late at night. That simple transparency, without any extra money flows, is identifying mutual benefit, which is doing the sort of thing that you are describing. It is not going to wipe it out overnight.

Q222 Mr Leech: As a follow-on question from that, are alliances absolutely necessary to do this, or could it be done with just a different attitude from all the different players in the rail industry? What value do alliances add into the system that makes it easier to deliver?

Paul Plummer: Alliancing is a very broad term. At one end of the spectrum we have the arrangement that Tim has, which is a very deep alliance. I will come to that at the end of this narrative, if I may. At the other end there is the simple, "Let’s talk; let’s understand each other better and get a mutual understanding of the opportunity. I can help you and you can help me." That is happening more now as a result of this dialogue being created. Going on from that, we have said that we want to give some support, some process and some tools to people to help them when they identify a particular opportunity to follow that through, declare it as a project, work on it together and share the gains from it. We have referred to it as a framework agreement for alliancing that builds on that.

Beyond that again, you might have much bigger projects. If you think about some of the refranchising coming up, there are major programmes of enhancement. How do we get the conversations together between Network Rail, its suppliers and customers about the opportunity there and sharing the benefit of that, which ultimately then flows to the taxpayers and so on?

At the other end of the spectrum, as I stated, there is the very deep alliance, which is what most people talk about. You could not do that in many places. Instead of having lots of specific deals where you say, "I can help you, you can help me and we will share the benefits," you say, "Let’s have an overarching deal that says that we agree our baselines, and if we beat our baseline we share it, and if we beat your baseline we share it." That then changes the dynamics in an even more fundamental way. I stress that you can only do that extreme where you have a very close alignment between Network Rail’s route team and the train operators. In other places you need to do something a bit different.

Q223 Paul Maynard: We heard earlier from Christian Wolmar about the importance of investing to save, if you like, or to meet the McNulty challenge. I am a regular customer of South West Trains on the Kingston Loop every day. I have not noticed any improvements yet, but you are only eight weeks in, so I will give you time. None the less, I pass through Clapham Junction. It is the busiest train station in Britain, so we are told by the big sign at the end of the platform, yet it has one of the weakest retail offers of any large train station in the UK and certainly across the developed world. Is not the danger of alliances that you will be focusing on the engineering and the railway side, and not on the idea of driving revenue up and expanding employment opportunities, for example? There is a big fear on the part of the unions and the left that alliances are cloaked to sack loads of people, when surely an alliance is an opportunity to drive investment in these locations. Every single station on the Kingston Loop probably sees more footfall than a local town centre. What are you going to be doing to drive the potential that your stations represent and actually grow jobs?

Tim Shoveller: We are starting from a high base, it has to be said. Taking the railway generically, if you look at the railway retailing offer now compared with what it was 10 or 15 years ago, it has been transformed. There is a lot more that can be done. Clearly there are places-and Clapham is a great example-where a railway station is begging for redevelopment. Let us come back to Clapham specifically, because it is a really good example of an area where an alliance can have a big impact in helping to shape Government policy.

In terms of your comment about the eight weeks, we have 15 or 16 years of culture, regulation and expectation of our teams that we have to change. Our drivers and signallers who interface with each other on a daily basis have been working in a certain way for 15 or 16 years, and that clearly is going to take some years to change, I expect. Passengers will not notice tomorrow that things have suddenly got better.

The most important thing we can do by working together is improve performance. You will notice that a lot of the platforms for those services are growing every day. As you go into Waterloo, you will notice that a lot of them have been transformed from eight-car to 10-car. Over the next two years, many of the services that use that route will be extended to provide more capacity. That is being done by working together. It is more than just Network Rail staff and South West Trains. The Department for Transport is involved. Alstom is involved through working on the trains. There is a whole number of organisations working together to deliver better capacity.

Finally, in terms of Clapham Junction itself, it never ceases to amaze me that it is not dissimilar today from when I joined the railway over 20 years ago. The big issues at Clapham Junction that cause problems for passengers are about the capacity of the station and the way the railway lines approach the station. There is the fact we cannot stop the trains there that we would like to, and the fact that some of the gaps between the platforms and the tracks are too wide. There is no doubt that Clapham Junction needs an incredible redevelopment scheme. The reason why it has not been done is because the complexity of doing it while keeping the railway open-as you say, it is one of the busiest in Europe-is just enormous, the costs would be great and there have been other calls on that demand. One of the things we are focusing on very much within the alliance is that we have a commercial director to focus on today and a business development director to focus on tomorrow by working with Paul’s colleagues in planning in Network Rail and with the Department for Transport. We have been in to see them just last week to discuss how we can move forward plans to develop the capacity of the railway between Waterloo and Clapham Junction. To my mind, that is one of the single biggest challenges that we have.

Peter Anderson: From our perspective, we are starting to have approaches from train operating companies as they approach the rebid on their franchise. Increasingly, Balfour Beatty are being approached by train operators to understand what services we could offer in terms of enhancements to the infrastructure, the station infrastructure and facilities management. Station leaseholds and the operation of the stations are increasingly going to move towards the train operator. Looking at the project we are developing for the South East Spur at Abbey Wood station, we are remodelling it with Network Rail to provide the right level of footfall. How do we increase retail space? How do we move passengers through that station environment, because we have expertise in doing that across airports and stations globally? We are increasingly being brought into that debate to help improve both the infrastructure for the train operator and the station environment for the passengers.

Q224 Julian Sturdy: We have heard a lot of words about alliancing so far. We have heard that alliancing is a very broad term. We have heard about deep alliances. Ultimately, to me, it just seems like it is about working together, which is basic common sense and which I think was mentioned. The big impact really is what it is going to save us, and I still have not heard anything about that. You have obviously come into this. You will have done the cost analysis as businesses coming into this. You have to think it is beneficial to you as businesses. Ultimately, what is it going to save?

Paul Plummer: We certainly think it is beneficial to us, and then ultimately to taxpayers and users. I am not going to give you numbers and I will explain why. Some time ago we came very much to the view that we could not keep driving improvements through incrementally while working the way we were. We needed something to achieve a step change. That resulted in the devolved accountability to a local level and saying we wanted these sorts of alliances. We have a belief that that will identify things that we could not do without making those changes. Fully quantifying that is an issue because, almost, if you could quantify them, you would not need to go through all that process-you would just implement it.

Q225 Chair: But, Mr Plummer, you must have made some assessment.

Paul Plummer: The way we approached, for example, the alliance with South West Trains was to say very explicitly, "This is what we think we can achieve over the next few years without an alliance." Then we said, "If we can achieve more than that by working together, we share the gains." That is fundamentally the approach.

Q226 Chair: But you must have made some assessment of what you think you can achieve by having an alliance.

Paul Plummer: I don’t think that over the next few years in the Wessex alliance we will be saving many tens of millions of pounds, but it will certainly deliver real benefits in that time. It is certainly already resulting in people working together in a different way to the benefit of users. It is certainly resulting in ideas that are going to result in further benefits in terms of our capex programme, which is not yet within the alliance programme. It is certainly resulting in lots of ideas that we are able to deploy elsewhere across the railway. Devolution and alliancing together is changing the way we work as the industry at a local level between Network Rail and operators. How you identify it and say, "This change is because of devolution," or, "This change is because of an alliance," is almost impossible.

Q227 Julian Sturdy: I am just interested to see what the other members of the panel have to say on that.

Peter Anderson: I want to come at it from a track renewals perspective. It is not called an alliance, but we are in a partnership arrangement with Network Rail to deliver track renewals. Balfour Beatty delivers track renewals across the south-east of the country. Out of our cost base, we have demonstrably taken 20% out over the last two or three years. We intend to target taking another 10% out of the remaining-

Q228 Julian Sturdy: But you have already done that before entering into these alliances. You have taken 20% to 30% out already, haven’t you?

Peter Anderson: We have taken 20% out by working closely with Network Rail and by rationalising the work bank-the programme of work that we deliver-and normalising that, by introducing mechanisation, and by changing the process of delivery. We are working with train operating companies to negotiate better access so that we can do our work quicker, leaner and more efficiently. Most importantly for us, it gives access to the train operators, who can run a service on the Saturday.

For instance, when I started in the rail industry only six years ago, the majority of our weekend work was 54-hour weekend possessions. That is the whole of the network down for the weekend-Saturday and Sunday. I guess I could count on one hand the number of 54-hour possessions we now have across the south-east. What that means for Tim and his colleagues is that he can run a rail service on Saturday. I then take possession of the track from Network Rail at midnight on Saturday and hand it back on Monday morning. We have demonstrably shortened the time period that we take and have consequently reduced the cost.

Q229 Julian Sturdy: I do not think anyone is arguing that working together has to be the right way forward. It is the common-sense approach, and you have already demonstrated that you have been doing that over a number of years and it has been working, as you have just said, so you deliver more efficiency both for you as a company and also for the rail network as well. My question is: what do you feel you can get out of this alliance, as we term it, now going forward? Do you have any hard facts and figures that you can deliver? As companies, you must have come into it thinking, "This is a good idea and we can deliver efficiencies." You must have worked those out before going into it. Again, that is common sense.

Peter Anderson: Yes. Working in an alliance where we are jointly incentivised to reduce the cost absolutely has a benefit for organisations such as mine-there is no doubt about that. We enter into alliances where there is lots of uncertainty. That works for both sides. A project that is not absolutely defined in terms of scope and programme is an ideal candidate to enter into an alliance. There is uncertainty, but both sides of the alliance work together to resolve all of the issues jointly with the most efficient solution.

On occasion-repeatedly and increasingly-there are situations where you move beyond an alliance. We are seeing some of our National Grid frameworks moving beyond alliance, where there is a challenge thrown down by the customer to take another 10% out of the cost base. We are incentivised to do that so that we get in a huddle and work out with the client how to take 10% out. That is the challenge. When you have a mature alliance, you can address challenges such as that in a much more joined-up way and from the perspective of saying, "This is the challenge that the alliance faces, so how are we going to solve it?" You then work together to do that.

Q230 Julian Sturdy: I want to come back on a slightly different angle. You said you have had 20% efficiency delivered over the last four to five years by closer working together, which is brilliant. Could you put it in percentage terms of where you want to be and what you think this new alliance would deliver? Are we talking about another 10%?

Paul Plummer: Over the past two control periods, including this one, we have delivered savings of over 20% in each five-year period. In the next five-year period, in the initial plan that we have put forward within Network Rail, we said we thought we could achieve at least 16% further efficiencies on top of that 20%-plus in each five-year period. The work we are doing with train operators through the Rail Delivery Group and at the local level between the route and the train operators is to say, "In developing our strategic business plan how much further can we go?" We are at the stage where that plan is being developed. It is drawing in all the work on alliancing, whether it is a deep alliance or very much more specific stuff. It is drawing on the work that Peter referred to in terms of what we are doing with our suppliers. It is drawing on all those things to say, "How much funding do we need in the next price control period to deliver the outputs that the Government want?" We know that we have to achieve very substantial efficiencies from that. Some of it will be enabled by the alliance.

We can talk about lots of specific examples that will inform our judgment, but it is still very difficult to say that it is because of separating out what it is that is driving this. We know what it is that we need to do in most instances to drive efficiency. Alliancing is about lubricating that; it is about enabling it. It is about having a conversation so that we can help each other to make it much easier to implement the things that we all know need to happen.

Q231 Iain Stewart: I certainly agree that the alliance you have between South West Trains and Network Rail has very exciting potential. Where I am less clear is how this model can apply to other routes on the network where you have a much greater degree of competition between different TOCs and with freight, particularly on the West Coast line with Virgin, London Midland and the freight operators. I want to ask you all how you see this model in South West Trains applying on other routes like that.

Paul Plummer: Even in this case it is important to refer to a key principle underpinning the model. We are working much more collaboratively and closely together in the alliance but, even then, there are some decisions that ultimately have to be made by Network Rail, including in relation to other operators. That is fair enough in terms of a bit of railway because of the fact of the close alignment between the physical geography. There are relatively few places like that. One of them is Scotland and another would be the Essex Thameside franchise that is coming up. In that sort of place, you could imagine something very similar to that deep alliance. We are discussing with DfT and with Transport Scotland how you would embed that into the refranchising process.

Elsewhere it is very different, as you say. West Coast and East Coast are at the other extreme. You have many operators on the route. There are absolute premium services combined with commuter services and freight, and open access operators. At the end of the day, we have to balance those conflicting requirements. If we fail to do so, the regulator is there to make sure we are doing that properly, but we have to make those trade-offs. That doesn’t mean to say that you can’t do anything, but the nature of the alliance is going to be much more focused on specific areas, specific opportunities and making sure we do that in a very transparent way. It might be around the delivery of an enhancement project-that it delivers additional capacity that an operator pays for and how we incentivise ourselves around that. It might be how we work together on particular stations. It could be a whole range of things.

In the middle you have some other bits of railway. I am thinking particularly of Thameslink and Western, which are coming up for refranchising. The big opportunity there is how we get Network Rail and the operators working together on the delivery of a massive programme of investment. In one case there is a very large project in one place; in another place there is an integrated programme in relation to power supply and a whole load of other blockages on the network that have to be delivered in a very integrated way, bringing in new rolling stock. The integration of that programme on the infrastructure side with the trains is a different sort of conversation.

The point of alliancing is not to say, "Here is a universal solution; go and apply it." It is to say, "Make sure you have the right people in the room talking about what the problem is at the beginning," and coming up with a mutual solution to that. We need a lot from the regulator and the Government in terms of framework, but at the end of the day it is far more down to Network Rail and the operators working together openly to solve those mutual problems while respecting the network issues, the long-term sustainable stewardship of the network issues and the other operators to get that balance right.

Tim Shoveller: I would absolutely agree with Paul’s comments. Within the alliance we have to demonstrate that we can provide access, services and a good-quality railway for the freight companies and passenger train operating companies that use the network. We are putting a lot of effort into doing just that. Time will tell. We have our first stakeholder board next week and they are going to give me feedback on how we have done in the first eight weeks. We will learn and adapt. Right from the beginning I have set out to make sure that this is an inclusive alliance and that the other train operators feel as though they are very welcome on Wessex. Indeed, they pay an income to my organisation-my business-for using those tracks. I want to encourage them to use more. I can grow my top line by adding more track miles from other train companies on Wessex, the same as I can if more SWT services run. That can only be a good thing in terms of growing my top line.

Let’s see what happens over the years, but I would like to get to the point where we can demonstrate that by having a joint profit and loss account through the alliance, as we have in effect, then if we organise our railways in a slightly different way, we can create efficiency through organisation. McNulty and many others have commented on the fact that some of the inefficiencies are as a result of the organisational structure that we have and the misaligned incentives and objectives. What we are trying to do in the alliance organisation and pull-together is to bring together the objectives and responsibilities that Network Rail has and those of SWT.

Q232 Chair: But, if you are left to your own devices to do it, I do not think that it logically follows that the passenger benefits from all that. For example, how are we to make sure that you don’t cut corners on safety?

Tim Shoveller: Our first objective is safety.

Q233 Chair: You might say it is an objective, but how can the public be assured that the alliance, which sounds a very good idea, is not just a cosy arrangement, whereby the businesses involved are very happy but passenger needs are not necessarily at the centre of it? Mr Plummer made reference to the Rail Regulator when he was talking about freight. There is going to need to be regulation there to watch what you are actually doing. How are we going to be assured that it is not just going to be a cosy inward-looking arrangement but is going to benefit the passenger?

Tim Shoveller: Clearly the law would not allow us to do that.

Q234 Chair: Mr Shoveller, I am looking for answers here as to how it is actually going to be done. It is no good just saying, "This is all going to be great. We are all going to work together and automatically everybody is going to benefit." Life just isn’t like that. Organisations and businesses have their own interests. Unless there is somebody watching that and looking at the public interest, that does not automatically follow. I am asking you how that is actually going to happen.

Tim Shoveller: Let me explain what we have done in putting the alliance together then. As I was starting to say, the law sets out through the ROGS-the railway operation legislation specific to railways-as to how we operate our businesses. We have developed something called the principle of ultimate accountability. Within the alliance organisation all of the things that are the responsibility of Network Rail-the regulatory and legal responsibilities relating to the employment of those staff-remain the responsibility of Network Rail. All of the things that previously were the responsibility of South West Trains remain the responsibility of South West Trains. I and my team of executives have the responsibility through our governance board to Network Rail and to South West Trains for all of the things that we previously had responsibility for. So there is no doubt-no dubiety.

To demonstrate that process, we ran a very comprehensive series of workshops, including trade union representatives, facilitated by the rail industry safety body, RSSB, at which the ORR were present and we had an independent observer to validate all the work we were doing. That very substantial process over three or four months led to the development of a safety certificate-a detailed document describing exactly how safety is administered and where the responsibilities lay within the alliance organisation. I suspect there is greater clarity now because, for the first time, we have Network Rail’s responsibilities and South West Trains’ responsibilities for safety in one place. By creating the alliance, we have been able to look at safety objectives and take a better view of it overall.

For the avoidance of doubt, I am a duty holder for delivering railway services, as is Network Rail. We clearly would not take risks with our own liberty, with our staff or our passengers. We have been at pains to demonstrate throughout the process that the validation of the changed process we have followed has been done with great diligence, as all of our staff and customers would expect. The great news is that we have involved many of our staff in that process so that they can have the confidence that we were understanding the issues and looking for risks that perhaps we had not seen. When we were thinking about setting up the alliance, because this had never been done before, we said to our employees and other train operating companies, "What might we have missed? Perhaps there are some concerns you have about how we will manage safety in this alliance that we might not have recognised." We gave them that opportunity for input, and through those workshops and the validation process that we used we were able to satisfactorily answer all of those questions. We would not have gone live with the alliance had we not been able to do so.

Chair: Thank you very much for coming and answering our questions.

Prepared 29th June 2012