Session 2010-12
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CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1036-i

Public Accounts Committee

Regulating Network Rail’s Efficiency

WEDNESday 11 May 2011

Bill Emery and David Higgins

Evidence heard in Public Questions 1 - 163

USE OF THE TRANSCRIPT

1.

This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

2.

The transcript is an approved formal record of these proceedings. It will be printed in due course..

Oral Evidence

Taken before the Public Accounts Committee

on Thursday 12 May 2011-1

Members present:

Rt Hon Margaret Hodge (Chair)

Matthew Hancock

Stephen Barclay

Joseph Johnson

Ian Swales

Mrs Anne McGuire

Austin Mitchell

Nick Smith

________________

Amyas Morse, Comptroller and Auditor General, and Alex Scharaschkin, Director, NAO gave evidence. Gabrielle Cohen, Assistant Auditor General, and Marius Gallaher, Alternate Treasury Officer of Accounts, NAO, were in attendance.

REPORT BY THE COMPTROLLER AND AUDITOR GENERAL

Regulating Network Rail’s Efficiency (HC 828)

Examination of Witnesses

Witnesses: Bill Emery, Chief Executive, Office of Rail Regulation, and David Higgins, Chief Executive, Network Rail, gave evidence.

Q1 Chair : Right, apologies for starting a little late; that is my fault, but we will see how we go. Can I welcome Bill Emery back for what will be your last performance-

Bill Emery: It will.

Q2 Chair : -before the Select Committee, and can I welcome David Higgins in his new role? I think lots of us have known you in your past role and appreciated your contribution with a number of hats on. Welcome for what will be your first appearance before the Public Accounts Committee. Can I just start straight away on the performance of Network Rail in relation to what the regulator wanted from you over the last spending period, over the last five years? You set a target of 31% efficiency gains; Network Rail only achieved 27%. The difference is about £1 billion, so it is a lot of money. Are you happy with that, Mr Emery?

Bill Emery: No, I do not think we were happy with that at all, in the sense that Network Rail made very good progress in the early part of Control Period 3, and then basically had problems finding solutions to lowering the costs of renewals. Our stance was then to look at the position as was in the runup to the next review and take account of that when setting the challenge for Network Rail for the control period we are in at the present time. Of course, we evidenced that with the innovative work we did on international benchmarking to establish the scope for improving efficiency when we set them the challenges for improving efficiency, and delivering the Government’s requirements on punctuality, network availability, safety and, of course, the largest enhancement programme that the industry has had.

Q3 Chair : Are you happy with what you have inherited then, Mr Higgins?

David Higgins: Yes, I think that is a very accurate description. While good progress was made in Control Period 3 which finished in 2009, clearly the cost savings we hoped to get were somewhat delayed, but that has been allowed for in the settlement for CP4, so we have to achieve higher than the CP4 settlement to account for that shortfalling.

Q4 Chair : And if they do not, Mr Emery? What is your sanction? It seems to me your only sanction is to fine, and that is not terribly sensible.

Bill Emery: We hold Network Rail to deliver on all the outputs, and the critical thing for Network Rail is to deliver on all the obligations and punctuality, safety and all the-

Q5 Chair : So you do not really care if they do not deliver on value for money?

Bill Emery: Oh, we certainly do care, because in fact, in a sense, we want Network Rail and the whole of the rail industry to become more successful.

Q6 Chair : So you care, but there is nothing you can do about it?

Bill Emery: I think that we will certainly be pressurising Network Rail, through all we are doing, to drive them forward, and as we are looking at it today the performance of Network Rail is ahead of the profile that we were setting them.

Q7 Chair : How do you pressurise them?

Bill Emery: We pressurise them through continuous international comparisons, which demonstrate where they are with their peers, monitoring their performance year on year and assessing how they are getting on, both in their broader-

Q8 Chair : And if they fail, as they have done in the past?

Bill Emery: If they fail in terms of meeting the obligations then we will take regulatory action on the company.

Q9 Chair : What?

Bill Emery: That is a whole range of things, and at the end of the day, where there has been a clear failure and we believe as a board that there is a need for them to learn those lessons and not do it again, then there is the penalty that Parliament has given us on fines.

Q10 Chair : But you have never exercised that. I said earlier on it seems to me to be rather a daft sanction because it is just taking public money away from investment in the railways. The one sanction you have you have never used, and it is a pretty daft one: what else have you got in your armoury?

Bill Emery: I think the issue we have, of course, is the financial penalty, which we have used, and we have fined Network Rail several times during my term of office, and it has had a significant effect in improving the way Network Rail runs.

Chair : But we are still-

Bill Emery: It is certainly, in terms of the performance of the railways-putting this into perspective, we have a railway that is performing better than it ever has done, and-

Q11 Chair : Not relative to Europe. Let me just put some facts to you: if you look at page 15, figure 3, and you look at real expenditure over the period that we are examining your performance, 2004-5 total expenditure was-as I read that-£5.8 billion; by 2008-9 it had gone down to £5.5 billion, so it has hardly changed. It is pretty pathetic: it is 5% over five years. If you look at the European comparators, our relative position has not moved at all. If you look at what Network Rail did in those five years, they got a little bit, but it is not much, and we will come on to how you assessed efficiency savings in a minute. But they got it in the first three years, and they got only 3% on the basis on which you have assessed it in the last two years. All that, to me, looks pretty pathetic.

Bill Emery: I think we take a different view on that, in the sense that following the obligations placed on Network Rail in the CP3 Settlement about restoring punctuality on the railways and putting the house in order, post-Railtrack in administration and Network Rail taking it over, they made a 27% improvement in efficiency, on our records, in that period. They did not make their 31%, and of course the costs within Network Rail were about the tasks that were placed upon it by the Government at the time, and in a sense, we go back to the issue that yes, we accept the railways need to become substantially more efficient, and that is a task that we have been hammering on with Network Rail for all my time, and we have set them a real test.

Chair : I will just reiterate, it is 5%-5.8% to 5.5%-5% is actually the reduction in costs over a five-year period.

Q12 Matthew Hancock: I want to question this point about costs, because obviously the improvements in efficiency are made within a context of what happens to costs and input costs. So given changes in input cost, how do you take them into account when you are deciding how effective Network Rail have been in meeting the efficiency targets?

Bill Emery: Clearly when you are setting up as a regulator the expected costs for Network Rail, or in my time when I was doing all this for the water industry, based on an improvement in efficiency, the costs fall out of both the improvement in efficiency and the challenge thrown down to the company to invest, to improve, to meet the Government requirements or whatever it is. You cannot make a direct parallel between the costs and the efficiency. With regards to input costs, you have a choice, as a regulator, whether you leave that risk with the regulated enterprise, so input costs could move in a different way than with the real Retail Price Index, or you can take a judgement on that, and you take a view as to how those costs are going to move over the five years of your settlement relative to the RPI and then, as you go year by year, you look at what has happened on input costs, you look at what they have done and what they have delivered, and your efficiency comes out of whether they have delivered and what, in their own cost terms, is happening, so it is quite a complicated process.

Q13 Matthew Hancock: So if input costs move against you that obviously makes it harder, but isn’t Network Rail a pretty big buyer of the services of the inputs that it buys in the country?

Bill Emery: It certainly is, and it is-

Q14 Matthew Hancock: So should it not have some ability to control its input costs?

Bill Emery: It is then a matter of looking at which index you use, because the attempt is to find an index that reflects, in Network Rail’s case, the movement in construction costs, or whatever it would be, and try to tease that out, and get a view on that.

Q15 Matthew Hancock: But that implies that those costs are outside Network Rail’s control, but if, as you say, Network Rail is a big operator, surely getting those costs down is a big part of making their organisation more efficient?

Bill Emery: And it could well be.

Q16 Matthew Hancock: But it hasn’t been in the past, has it? In page 33, paragraph 4.23-I am just going to quote for a minute-"The Regulator has made allowances for input price inflation of 8.14% above retail price inflation for operating expenditure." That is an enormous rate of inflation that you have allowed them, despite the purchasing power they have.

Bill Emery: In coming to that judgement, we are looking at-given all the challenges that we are facing in Network Rail-what the potential movements were.

Q17 Matthew Hancock: A potential movement of 8% above RPI?

Bill Emery: Yes. If you look at the movement in capital prices relative to RPI, over the five year period, these things can rise that much.

Chair : It is crazy.

Q18 Matthew Hancock: Why did Network Rail not ensure that its input inflation was lower than 8% above RPI?

Chair : Mr Higgins?

David Higgins: I think firstly, do we control the industry and control the price? Absolutely not.

Q19 Matthew Hancock: I did not say "control the price", I said, "Did you have some control over it?"

David Higgins: We would be 2% or 3% of the national market.

Q20 Matthew Hancock: So you are saying that you cannot drive down the costs of your inputs at all, despite the fact that-

David Higgins: Efficiency. But the biggest input costs into all of delivery in construction is energy costs, because energy goes into everything: it goes into the manufacturing of steel, it goes into petrol, it goes into every single contractor’s costs, so one of the best barometers to see what happens with underlying costs is to follow the price of oil, because that shows you what is going to happen. So yes, we have driven down costs during this period through effective buying, because you cannot fight energy costs or those escalating costs. Now, during that period of Control Period 3, we saw the price of steel skyrocket.

Q21 Chair : But hang on a minute, just if I can come in on this, because I am interested in energy as the driver-I do not know what proportion, you can come back-but if you read the rest of that paragraph, this is operating expenditure, which I assume is mainly people, whereas maintenance expenditure, still shockingly, was 6.55% above RPI, so that is where you are buying stuff, and renewals-which is really where you are buying stuff driven by energy costs-was 3.44% above. The one area that is people, you are 8.14% above RPI.

David Higgins: Let us deal with numbers. We agree with the numbers in the Report here, but if I can make it clear, when we exit Control Period 3-we are talking about Control Period 3 now-so when we exit Control Period 2, our figures, if you baseline them to today, are around £7.2 billion. If you look at those issues: opex is £1.3 billion; by the end of Control Period 3, it has gone from £1.3 billion to £995 million, so it has gone down about £320 million in real terms during that five-year period. That is the actual operating costs. You are absolutely right; a lot of the operating costs are wages and salary costs-

Q22 Matthew Hancock: Hold on, can I just hold you there, because you said "in real terms", and that is precisely my point: that this is deflating it-

David Higgins: This was RPI-

Q23 Matthew Hancock: RPI, not whatever is allowed for the regulator, RPI plus, "Here you are, here is a bit extra."

David Higgins: We have a settlement: this is discounted back at RPI, these figures I have here.

Q24 Matthew Hancock: So if I come back to the policy question: if, in the regulatory structure, you allow for increases in cost above inflation, and you explicitly set out that there are these costs that are allowed to rise, surely that takes the pressure off Network Rail and reduces the impact that you can have, because you are saying, "Do not worry about those costs, we know they are going to go up and we do not really care about them."

Bill Emery: No, I think these indices are used to come to a view, as a regulator, of what is the likely expenditure this company is going to have to deal with over the five years; it is indexed against RPI as a starting point. These are a set of assumptions you make and you have a choice: if you impose those risks on input prices moving differently to RPI and make no adjustment for them, the answer will come out as, "I will have to increase the cost of capital on the company, because of the risk"-so you make a judgement.

But actually when you get into the period you have set an assumption there. Now the task is for Network Rail to manage that totality to deliver it, and do it at the least cost it can do. Those are just a series of assumptions that help to tease out what would be the most realistic expenditure level, and forecasting what is going to happen to a business that is investing in a lot of things that do not run with RPI, at the time of periodic review, and then recognising that what will happen will then be picked up in the next period.

Q25 Matthew Hancock: I understand that, but then if energy prices are a big part of it-of course, we have all seen the rise in energy prices-then would it not be more helpful, in terms of the incentives on the company, to break down the different risks within the cost input? We all accept that Network Rail, whilst a big buyer of railway kit in the UK, is a very small player in the global oil market. If you break down those different input costs, you could have a much more sophisticated system that would have a better impact on the incentives of the company that you are supposed to be trying to drive costs out of.

Amyas Morse: That is a concern to me. Forgive me, I am not piling on, but it is relevant, and therefore if you do not mind if I just add this, both of you can answer at the same time, please. We commented on your model, and we gave full credit for the innovative features. Measuring efficiency here, with all of these inflationary factors, does depend on having very good unit cost information, and we were surprised how poor it was and how lacking it was in the growth that we expected to see now. Is it not true that if we are going to be able to talk on a level playing field and have a meaningful dialogue in the future about the way the industry is getting more efficient, we are going to have to improve our unit cost information considerably from where we are now? Is that your baseline intention, Mr Higgins?

David Higgins: You are absolutely right. We need to work within a very tight budget, and CP3 and CP4, I said when I was a nonexec director-

Chair : CP3, CP4?

David Higgins: Both of them in my mind are very tight. CP4 is a very tight set-

Chair : I’m sorry, CP is?

David Higgins: Control period. Sorry, I am into the slang of the railway industry already-it is not a very good start, is it? I went through all the numbers of the Control Period 4 settlement, which goes from 2009 to 2014, when I first joined the board as a nonexec, and I thought it was very difficult to achieve, whether it be the public performance measures, the delayed minutes; all the measures, I thought, were very difficult to achieve, but everybody is very focussed and motivated to achieve it. So has Bill set a tough standard? I believe he has, and it is something we are working very hard to meet. Did we meet it last Control Period? The answer is no; we went close on a number of areas, and there were substantial improvements, but we missed that, but everyone is focused on achieving Control Period 4, and to answer your question, the only way we are going to achieve that is get away from high level figures: 30% or 40% less efficient, who knows, against what, and benchmark. You are right, we have a lot of information, because you could well ask, "What the hell are you talking about? What don’t you know about the railways?" We have a massive amount of data, but we are working hard to make that better. Now, Bill and the RR have worked very closely with us to say we want more data on this now. We do a lot of accounts; we will look at out regulated financial statements in the next few weeks. I think there are something like 170 different schedules of information. But when you look at maintenance or operations, at the moment it is around 40% to 50% of the expenditure in both those areas where we do a detailed breakdown in a form that is easy to understand, and we are expecting both those areas to substantially improve within the next six months.

Amyas Morse: That certainly needs to happen, doesn’t it? Because the independent reporter’s comment is that there are "continuing limitations in the quality of maintenance unit cost information and completeness of renewals unit cost information." What I think we are going to be looking for in future is a real plan to get to the point where we have this information.

David Higgins: And we are very clear about that, and you are right: on maintenance at the moment we have very strong cost analysis on track renewal and on signalling, but we have not got the other areas, but we expect within a short period to have that much better level of granularity on that.

Chair : I think we will all want to pursue the unit cost issue, but can you just deal with Matthew Hancock’s point about looking at-although obviously unit costs will make it more sensible-a baseline for allowable inflation and then measuring performance efficiency; what do you feel about his comments on that?

Q26 Matthew Hancock: Having a more sophisticated assumption, given that some of the costs are controllable and some of them are less so.

Bill Emery: This debate has run long and hard in all the time I have-

Q27 Matthew Hancock: Yes, and what is your view on it?

Bill Emery: In the water industry, it is tackled by saying the water companies carry nearly everything apart from capital costs, and then the capital output price index is used, and essentially there is a central assumption made by the regulator, and then movement one way or another, and then there is an adjustment mechanism. The question is that works, and essentially, in some respects, that is a little bit like what we have got in railways. You just decide whereabouts you draw the line as to how much you want to put in the hands of the company to handle; you are still going to have to make a central assessment because you do not want to get, within the first period or year, it to be out from RPI and you are going to have to adjust. So you are going to have to make a central assumption; the question then is, is the risk of volatility on that so large that it cannot be managed within the risk buffer you set for the company. If it is, then you put in an adjustment mechanism; if it is not, you leave it as it is.

Q28 Matthew Hancock: Thank you, that was my question. The reason I ask for your view on it was because the answer to the broader question about, "Are you not giving too much leeway in terms of the cost increase that you are allowing?" the response was, "We have these big energy cost increases", and that makes it very clear that part of the costs are more controllable, and part of the costs are very hard to control. Would it not be better to have a regulatory framework in which there is a breakdown of some of those costs instead of an overall picture, so you are given the risk for the things that you can control, and do not have to shoulder the risks for the things you cannot control? Mr Emery?

Bill Emery: I think that this comes down to the argument of how much you control the things. In most other sectors what the regulators are trying to do is not to create a complete insulated company where it is-

Matthew Hancock: Absolutely, that is right, but-

Bill Emery: And the judgement we have taken-and we have taken it after extensive consultation-on the balance between which way you go, in terms of how far you insulate a company from these things, looking at what types of risks they can manage, recognising that there might be upsides and downsides, and come to a balanced package. Our whole approach to setting the price limit is that we have to make a whole series of assumptions, we want to set a clear set of outputs, which is a really challenging set of outputs for Network Rail to deliver.

Q29 Chair : So, are you saying yes or no to Matthew’s suggestion?

Bill Emery: We are saying that we think we have struck the right balance in terms of-

Q30 Chair : You are saying you have got it right now

Bill Emery: We got it right this time.

Chair : You do not think there is anything else. Okay.

Q31 Stephen Barclay: I really just want to come back to the Chair’s opening points about the ability to pressure the company, because, Mr Emery, you seem to be contradicting yourself. You started by saying that yes, you feel you can exert pressure over Network Rail, and a moment ago you were saying, "Well, there is a limit to how much we can do, we do not want to insulate the company", and obviously if it had shareholders they would exert pressure; if it was subject to Parliament the NAO would have fully scrutiny. But it seems that you are doing neither one nor the other. Really, just a very basic question: how can you be exerting effective pressure if this company is 37% to 40% less efficient than European competitors?

Bill Emery: I think the issue we were facing was do we look at widening the period in which we make comparisons with Network Rail, and we found, from our detailed work, that the arguments in previous peer reviews, that international comparisons were essentially debating points, were a credible useful approach. That has identified the gap, and we have set Network Rail’s challenging determination. Now, for Network Rail, from our point of view, when we set a determination we set the level of revenue that Network Rail is getting that is consistent with an improving level of efficiency, and we set the outputs that are needed to deliver year on year.

Chair : It would be really helpful, so that we are not sitting here all day, for you to just answer the question. If you cannot answer it, fine, but if you answer the questions we will move on to the next area of questioning.

Q32 Stephen Barclay: The fact that this Report is saying we are up to 40% less efficient than the best in Europe suggests that the pressure you have been exerting has not been effective, does it not?

Bill Emery: I think the pressure we have been exerting has been quite effective in what they have delivered, but we have clearly identified that Network Rail, as it stands today, are in the middle of the pack with European railways, and we have set Network Rail the challenge, over this period and the early years of the next period, to take it up to the best in Europe.

Q33 Stephen Barclay: Let me give you an example, because bonuses have been widely reported as a contentious issue; it is an issue on which you might have been expected to exert pressure. In 2008, the regulator made no view; in 2009 it expressed its surprise and disappointment but was ignored; and in 2010 the firm decided that it was going to take a fundamentally different approach-a fundamental variance of approach-and now in 2011 it is currently under review. Nine years after Network Rail set up, it is still under review, there has been no crystallisation and you have been ignored to date. It does not really smack of a regulator that is exerting pressure.

Bill Emery: That is not the way that we see it, although we do understand the amount of concern around management bonuses.

Q34 Stephen Barclay: How have you changed that? What has been the material output of the pressure you have exerted?

Bill Emery: In the discussions leading up to this Control Period, we discussed with the remuneration committee of Network Rail what they were going to do to widen the scope of their management centre plan, which they did. I think we expressed our surprise and disappointment about the judgements that they took for the last two years.

Q35 Chair : Was it an abuse of the system?

Bill Emery: There was a difference of opinion about the remuneration.

Q36 Chair : Was it a waste of taxpayers’ money?

Bill Emery: This is not a waste of taxpayers’ money. We believe in management incentives. We believe that these can be a powerful tool.

Q37 Stephen Barclay: The management were ignoring you, so the management have disregarded your view. In my view, it comes back to the fundamental issue, which is that we have the wrong structure for Network Rail. We have this bizarre structure where there are 100 or so members, made up of a mix of train operating companies and members of the public. So there is no accountability to shareholders, nor does the NAO have full scrutiny, so it is not fully accountable to Parliament; your debt is underwritten by Government, and as a result you are not asserting effective pressure. Would the answer not be for us to look again at the actual structure of Network Rail?

Chair : Mr Higgins, do you want to comment on any of this? The European comparison?

David Higgins: Let me start with that. As we say in this Report, great care should be taken with the high level number of 40%, great care. What it shows is that today we are middle of the pack on European companies. A number of major European companies do not even contribute to that.

Q38 Stephen Barclay: We know your own data is flawed, so you are disputing the numbers, but your own data is flawed.

David Higgins: What I am saying is that great care should be taken with a high level number of 40%. What we do agree with, however, is that substantial efficiency savings can be made, and if you look at the early drafts of the McNulty value-for-money report, what that flags up is that if we achieve what is set out in Control Period 4 and what we think can be achieved in Control Period 5 then we get to the top of European best practice. That is the target.

Q39 Stephen Barclay: But in year four and five of Control Period 3, what did you achieve?

David Higgins: In year four and five of Control Period 3 there was some slippage.

Stephen Barclay: What did you achieve?

David Higgins: The numbers are in the Report, I can tell you-here we are.

Q40 Stephen Barclay: Because my reading of the Report was that you did fairly well in years one, two, three, but not in years four and five.

David Higgins: That is right. In the final two years it did not achieve what was expected in the control settlement, that is right. So there was an under-achievement, so that is why there was the shortfall from 31% to 27%. Still, that is a substantial-

Q41 Stephen Barclay: Therefore, we cannot overly rely on what is going to happen in the future, which comes back to the point that the structure you have does not mean that you are getting shareholder pressure, nor are you getting full public scrutiny.

David Higgins: You are right about the structure; the structure is in the middle: it is neither a private company nor a publicly owned asset. But it is interesting that what the Report says is that "Network Rail reports efficiency gains compared favourably with other regulated industries." You do not always have to be a private company to run businesses efficiently.

Q42 Stephen Barclay: I am not saying that you do.

David Higgins: Of course, you do have the history of where this came from, so you can still run a very efficient and competent, heavily targeted organisation in this nearly unique structure that we have in Network Rail.

Q43 Stephen Barclay: It is your suggestion to the Committee that the structure we have at the moment is right, and as regulator, you think the existing structure gives you the necessary ability to put pressure on the company?

David Higgins: On the structure, the structure is what we have; it is not my position to propose a different structure to this Committee or to the Government. It is the Government’s decision; it has a White Paper further down the track. If it wants to change the structure, that is entirely the Government’s decision.

Q44 Stephen Barclay: Have you had discussions with Ministers on that?

David Higgins: No I have not. My job is to run this organisation as I see it, and to run it and deliver value for the public.

Q45 Stephen Barclay: Mr Emery, have you got the right structure?

Bill Emery: As a regulator, we have the structure that was decided upon by Government and we regulate that structure. I agree with you, and we agree and we have set out that the incentives on Network Rail need strengthening. We wanted to move away from the financial indemnity, to make sure there was a hard budget constraint. We have worked quite hard to make sure that the members of Network Rail are properly informed of our performance. We are an independent regulator, who hold Network Rail to account, and from the perspective of reporting on its performance on a quarterly basis, we are reporting more intensely on Network Rail than occurs in any other regulated sector.

Chair : Bits of paper do not necessarily make for good regulation would be my comment on that.

Q46 Joseph Johnson: Just a follow on from Mr Barclay’s line of questioning. I am very struck by paragraph 4.22, which says that "the reasons for the efficiency gap" relative to other European countries "are not fully explained", or really do not seem to be understood. I am particularly alarmed by that. Could you give for me, please, Mr Emery, what you think are the three most important reasons why this efficiency gap exists?

Bill Emery: The work we have done, when, of course, we went much further than just looking at the numbers and the econometrics, was to look at the practices, and the work that we exposed was that there were huge potential gains associated with how Network Rail did possessions to do work on the railways, when it took access to the railways and the time it spent on those. They do it differently elsewhere, and that leads to higher levels of productivity elsewhere. There are whole areas around the different ways that Network Rail manages its projects and its programmes, where its partners elsewhere in Europe have different ways of doing that-

Q47 Joseph Johnson: So the first reason I could not quite summarise, but the second reason I could just about get, which is bad project management at Network Rail. Could you just, in bullet point, explain what the first reason was again?

Bill Emery: The first reason is that, when Network Rail does work on the railways, they take access to the railways. The time they take in that limited period to get access to the railways and then do the work on it and hand it back is different in Europe; in European railways, the time it takes to take access can be minutes. In Network Rail it can be an hour or so. So you have a six-hour possession, or an eight-hour possession. In Network Rail you might get three to four hours’ work in that possession. You have to gear up all the resources to work on that four or five hours. If you go into European railways they can increase the working time. That has a huge impact on the productivity level, and essentially the work you can get done. That is possession management.

Q48 Joseph Johnson: Is this due principally to the separation of the ownership of the Network and the operating companies?

Bill Emery: No, it has nothing to do with it.

David Higgins: Can I have a go at answering that too? Firstly, one of the big differences in costs is operating systems. Our signal boxes are, on average, about 80 years old-which is great, but it is very historical-and if we can replace the current 900 signalling boxes, which we inherited through a very old legacy system and replace them with 12, which is what we should have, that would save £150 million plus a year. That would require at least a 10-to-15-year commitment to do that, but that is an obvious comparison.

Secondly, electrification: our network is dramatically less electrified than every other major European network: electrified networks there are more around 70% to 80%; we are closer to 50%. But fortunately we are now on a programme over the next decade to electrify more of the network. It is clear that an electrified network is cheaper to operate and more effective. Even our existing network, of course, has a lot of use of a direct DC electrical system, which is up to 70 years old: it is a very old electrical system. That is the second one.

Thirdly, renewals: we renew our rails more often than Europe. That is really interesting; we have to ask why we do use our network more intensively. We do not have any high speed network: France has 2,000 kilometres; it will be 3,000 kilometres before we even open High Speed 2. So our wear and tear and maintenance means that we renew it more, we have more inspections, we have a higher inspection rate. But that means we have, I think, the lowest-certainly one of the lowest-rate of broken rails, which from a safety point of view gives us one of the best safety records in the whole of Europe.

Finally on to projects, which I think is a really interesting thing, because the only way we are going to get the costs down in the railways is to drill into what the costs are. What we did was take three projects, three bridges, actually designed bridges, UK bridges. We gave them to three international companies and a quantity surveying company based in France. The report has gone to Infrastructure UK and also to the ORR. We gave it to France, Holland and the UK, and we said, "Price these individual projects and work out what they were", and sure enough, guess what? It turns out the UK was 30% higher than France and the Netherlands. The reason why is that labour rates were cheaper; materials cost, except aggregate, were on par, but aggregate was substantially higher. Of course we tax it substantially, we have an extraction tax dramatically higher than France, for example. But the single overriding factor why working on the railways and those three projects, in their factual reports, is much more expensive is because of access to the railway, which is Bill’s point. So a UK contractor is expected to use 30% of the time that French contractors would use and 10% of the Dutch time. So that means that we had to do the work that they would do in one tenth, in one third of the time, and guess what? The other reason is the French, as they move on to the railways, do not pay a penalty for going onto the railways. Now, last year we paid £180 million worth of penalties to access our railway to repair it and maintain it with train operating companies.

Q49 Joseph Johnson: Those are compelling answers that you have given. Are they sufficient, though, to explain why, for example, the NAO records that UK civil engineering work costs not 30% more than European companies but 60% more?

David Higgins: UK civil engineering?

Q50 Joseph Johnson: That is the cost of UK civil engineering on the rail network.

David Higgins: This Report showed that these projects on the surface were 30% higher in the UK, and when we had adjusted it they came out between 5% and 10% less than their European counterparts.

Q51 Joseph Johnson: Paragraph 4.23 suggests that "UK civil engineering works costs some 60% more than in Germany."

David Higgins: All I would say is you need to do the level of analysis and reports. What I would say, however, is that there is absolutely no doubt that in delivering capital projects to the railway there are substantial improvements that can be made. What the other thing our study showed is that our design time here is substantially longer than Europe, because we have an enormous number of hoops to go through. There are a lot of approval processes, checkings, various and multiple standards. It takes much longer and it is certainly more expensive. There is no doubt that substantial savings can be carried out on our capital projects.

Q52 Joseph Johnson: That are within your control?

David Higgins: Correct.

Q53 Joseph Johnson: Okay. Lastly, looking around the European landscape, what are the governance structures that really impress both of you as potential models as we go forward for Network Rail? To Mr Emery first and then to Mr Higgins.

Bill Emery: The vast majority of infrastructure managers in Europe are essentially state-run companies and Government Departments, and I am not certain that they present a long-term solution here to where we have got to.

Q54 Chair : And the regulation structure?

Bill Emery: There is minimal regulation: we are the largest regulator within Europe, and we are the only one that is a combined safety and economic regulator, precisely because the structure that Governments have decided is to privatise the railways, and the train operators need access rights, and established medium-term-

Chair : And Mr Higgins

David Higgins: When British Rail was split up, it split up into over 100 different companies; so a very fragmented approach. Europe did not have that, so Bill is absolutely right. A lot of them look very much like what BR was, although there is now a separation between infrastructure and operations, which is an EU requirement. I have only been here three months, but I have already had a number of visits from European operators, from European rail companies, saying, "We need to understand how it works over here; the level of scrutiny, regulation and disclosure is substantially higher than what we are used to. We want to learn how you cope with this."

Amyas Morse: I was listening with interest to what you were saying, and you were making all these points about the differences between Europe and the UK rail system, and I know you believe that. So that would argue that using a European comparative does not make sense for regulation, wouldn’t it, and if that was true, what would you use instead? Supposing you were the regulator rather than the person operating it, how would you put a really tight vice around performance here?

David Higgins: What I would be asking of Network Rail would be a lot more details. It is no use giving a high level figure: I want to know what your track renewal is on a mile-by-mile basis, I want to know how you do it and I want to be able to compare that, I want to understand the stages of your capital projects, which is exactly what Bill is doing, and he has written to us and we have been doing this over the last few years. We are getting better: there is much more information out there. We have a lot of data; we do not have the information in the final form yet, but we will get there rapidly. That is the only way we can then challenge these issues, because I am quite confident there are big areas we need to challenge with our own internally applied standards, our approval process, our procurement, and the other thing that I think is that the only way we will get better efficiency on the railways is to open this up to competition. I believe in competitive pressure and contestability in everything we do.

Q55 Chair : What, the infrastructure?

David Higgins: Yes, I believe in competitive pressure to drive efficiency. There is no use in what I do inside our organisation to encourage people to do things fast and quicker, but if I say, "Well, I am going to take this design"-we use a grip process,-"at this stage, and then I am going to put it out to competitive bid and see if someone else can do that cheaper", then that way I can drive down prices, or at least I know what the outside market can do.

Q56 Ian Swales: Can I just ask if either of you see any irony in the discussion we are having? The European operators seem to be able to do all of this cheaper, that the infrastructure companies there tend to be state-owned, but there is an immediate response from Mr Emery saying, "Of course that would not work here." Do you see any irony in that, and that we are now rushing off saying, "Of course, it has to be privatised"? Is that actually part of the problem, if things are more efficient and costeffective in Europe?

David Higgins: I do not think I said we had to privatise to achieve that.

Q57 Ian Swales: I am putting together the various comments. We had a discussion about efficiency and cost, and the National Audit Office Report talks about the difference with the continent. Mr Johnson then asked about governance, and Mr Emery said that most of these companies-most of the equivalent organisations in continental Europe-are state-run. We have been having that discussion. I was just saying: do you not see some irony in the fact that we are now saying automatically that this has to be privatised and that competition is the answer? Should we be advising the Government that there is actually another way here?

David Higgins: I think what we would say is that there is no doubt that fragmentation brings some level of inefficiency, because you have a series of silos that have to talk to each other, and perhaps are too fragmented, and we need to get closer alliances. Some of the current arrangements we have between how we operate and the various train and freight operating companies are too confrontational and could be changed to align incentives, and I think could bring, for example, access to the track. You could change the current system to get greater cooperation on that, which I think would benefit us all. But Europe is moving to our direction. It is moving to much greater disclosure. There are going to be pan-European infrastructure companies that will look like Network Rail but will be across Europe in time, and you are going to have to separate operations from infrastructure. That is coming whether state-owned companies like it or not, but that is where the future is going. In many ways the UK has led Europe in this process, but it has been challenging.

Q58 Mrs McGuire: Are you of the opinion that we are still trying to deal with some of the issues-I will use that term advisedly-around a rather speedy and somewhat botched privatisation when the railways were privatised in the mid-90s?

David Higgins: I do not think I can comment on that because I was not around here at the time.

Q59 Mrs McGuire: I am not asking you to comment: I am asking you to think about some of the answers that you have given now. Do you think some of them might relate back to the way in which the railways were privatised in the mid-90s? We have gone from 100 companies, which you have mentioned, to all sorts of different configurations for our infrastructure.

David Higgins: Yes, but what we have had, which is interesting-sooner or later you have to challenge an industry and bring in competition. So yes, there have been challenges and some hiccups in the process; the odd contractor has not survived in that process, and I think it was a very traumatic period for the industry in the late 1990s and early 2000s-it was a very, very difficult period. But it has come through it, and what the private sector and the train operating companies and the freight operating companies-freight is a fantastic example because, with the competition that is on the freight industry, there was huge elevation of getting more competition between incumbent freight operators in the market. If you look at the innovation that the various train operators have brought to marketing and tickets-I travel regularly on the Virgin route up there; you can hardly get a seat on it nowadays, it is so popular-

Q60 Mrs McGuire: Where do you mean? Up where?

David Higgins: I was in Manchester yesterday.

Mrs McGuire: Right, up North, sorry. I always like to have people’s perceptions of the country. Right, sorry, Manchester, up there.

David Higgins: Is that the right direction?

Mrs McGuire: It depends which end of the country you are looking at it from.

David Higgins: All I am saying is that there are many benefits that have come from bringing in the private sector and innovation. You look at the way Chiltern Railways have run their operation, their innovation in delivering capital projects: all that is good stuff. But the only way we are going to make the next level of efficiency gains is to have more and more benchmarking and competitive pressures within our organisation, and contestability.

Q61 Mrs McGuire: And do you think that the only way to do that is to open it up to greater competitiveness? Benchmarking does not necessarily need to be opened up to greater competitiveness.

David Higgins: You need both, but when I say opening up to competition, we, Network Rail, are a monopolistic supplier to ourselves, so that is interesting. Parts of our organisations are incredibly skilful, and some of the best engineering expertise I have, and some parts we do not have to do, because the industry-our supply chain, the designers and contractors in this country-are very sophisticated, and they can do work that we can do, and we need to challenge whether they can deliver that more costeffectively.

Q62 Mrs McGuire: And Europe is looking at our model in many respects and quite likes it?

David Higgins: Europe, yes; we met one delegation-there is another one coming next week-who were over here just looking at the level of disclosure, which they find amazing. The information out there, and they are trying to understand how a regulator works and how they deal with a regulator on that issue there. But we can learn a lot from them.

Q63 Mrs McGuire: I will finish on this: does that not give you some confidence that while the model can be improved, that actually, essentially, it is working?

David Higgins: I am not here today to ask for change. I have been given this job to run Network Rail more efficiently. There are more efficiencies to be achieved; we can achieve Control Period 4. It will be hard work, but we have got to do that. We need to set tough measures for Control Period 5, and that is about to start. But the way we are going to achieve it is through greater granularity, much greater transparency on what we do; payment for performance and not payment when we do not perform; that is clear as well. But we can achieve it in this structure. We should not make any excuse and say the structure is why we are not performing. That is just a cheap excuse from our point of view.

Mrs McGuire: I agree with you on that.

Q64 Austin Mitchell: It is nice to know that Europe is looking at us with some interest, after 20 years of thinking we are barmy. I just want to revert back to the point that Bill Emery made, because your machine of discipline seems to be only, on the one hand, to use a nuclear weapon, which is a fine, which you do not want to use, or to wring your hands and say, "You’ve been naughty". Would it not be better if you bumped them in the bonuses: if you had some control over remuneration and bonuses? Because this is a unique company, as Stephen Barclay brought out: it is a nationalised entity as well, and it is a monopoly. So don’t you think you need more power?

Bill Emery: I do not think we need more power. I think what we have done recently is, in the light of Network Rail’s nonexecutive directors looking at their management incentive plan, we have established three high level objectives that that plan must comply with, and those are licence objectives, and they are that the bonuses should and must support sustainable delivery on Network Rail’s obligations, so there is a requirement and there is a tightening-up, but that is the basis.

Q65 Austin Mitchell: Are you happy that they do a scale of bonuses up to 60% of annual salary?

Bill Emery: The new scheme of bonuses that Network Rail are talking about at the moment has to comply with those things, and if Network Rail deliver on those then there is real benefit to passengers, freight customers and taxpayers.

Q66 Austin Mitchell: And do you need a section for if they don’t deliver?

Bill Emery: And if they don’t deliver, then under the objectives we have set the actual bonuses would not be valid because they would breach the licence obligations that we have now imposed upon Network Rail that this plan has to comply with. In a sense, we have got to that position because, in some respects, the discretion that was available to Network Rail’s remuneration committee we did not think was exercised effectively. We think this is a means of tightening that up, which is what we have done.

Q67 Austin Mitchell: I think you are believing a little in the efficacy of prayer. Let me move on. Paragraph 2.6 on page 17 says that, "The Regulator’s assessment of 2.8% efficiency savings in 2009-10"; the achievement is "slightly below its expectation", which was 3.8%. But you cannot tell how much of that is due to the difficulty of distinguishing between deferral of renewal activity and genuine efficiency. If you cannot measure it, how can you control it? You can fiddle the figures, in other words.

Bill Emery: We do not fiddle the figures.

Q68 Austin Mitchell: No, but they can by deferring.

Bill Emery: There has been a considerable debate, which we have got to tease out, which is when Network Rail do not carry out the work that they had planned-and in the first year they were having to review their asset policies where there was not a clarity as to exactly what they needed to do-as to whether that deferral is a real deferral, which is of benefit, because they do not need to do it, or whether or not they are going catch it up over the five years.

Q69 Chair : Mr Emery, do you know how much of their socalled 23% efficiency gains was deferral and how much was renewal? Do you know? Does the regulator know?

Bill Emery: Which 23% are we talking about?

Q70 Chair : Over the time-sorry, I got the wrong figure, the figure that you actually achieved, which was-I cannot remember now-27%; of the 27%, how much of that was deferral?

David Higgins: I can answer that: in Control Period 3, my understanding is there was no efficiency in renewals achieved by deferral. In Control Period 4 there is some allowed for, but the best description on at the top of page 16, which says that "an efficiency saving is a reduction in cost relative to a predefined baseline level which does not compromise the sustainable achievement of the outputs required of the regulated company". That is the key. If we can avoid replacing rail, because we do not have to, if we can get life extension that save public money, and we absolutely should be doing it, but we cannot do it at the expense of the asset condition or public safety, and remember, there is no incentive-

Q71 Chair : Okay, I understand that. So if I go back to the thing Austin Mitchell drew our attention to on paragraph 2.6, I am assuming it is Control Period 3 that it is referring to here, and it is saying that, as far as the NAO is concerned, in looking at your claimed savings, or the ORR’s claimed savings in that period, there was difficulty in distinguishing deferral and renewal.

Bill Emery: There was difficulty.

Q72 Chair : But you are saying that there was not.

Bill Emery: This is talking about 2009-10.

Q73 Chair : Which is Control Period 4, is it?

David Higgins: No, sorry, this is Control Period 4, yes.

Bill Emery: This is the first year of the Control Period, where we were trying to make an assessment of the efficiency-

Q74 Chair : So can you tell me for 2009-10? I understand that you have to meet you safety obligations, etc. In 2009-10, how much of your efficiency was genuine and was not due to deferral?

David Higgins: When we are talking about genuine, this is all about having a decent asset condition. In the bad old days of the early 2000s, you just replaced railway because you had 400 speed restrictions on the track at any one time. That was demand-led. A more and more sophisticated approach to monitoring of the rail, monitoring its performance, allows us to spend less public money, so in Control Period 4 we would hope to be able to defer, in order to meet our figures, over the whole five years about £1 billion worth of renewal in order for us to hit this number. That is how we get some of our savings; it is not the majority of our savings in renewals, but we hope to be able to defer that, because we have a better knowledge of the asset condition, and we can convince the regulator that we are doing that in a way that is effective.

Q75 Chair : But it is not an efficiency saving.

David Higgins: No, it is not doing the work faster or cheaper, but it is smarter.

Q76 Chair : But it is not: it is deferring.

David Higgins: No, it is not deferring it. We already know in Europe that we replace our tracks more regularly than France does. So why do we do that? Is it just because are very conservative? Or is it because of the quality of our steel? I do not know. We need to, and we will do, more work.

Q77 Chair : But the assessment you are making is that the £1 billion you can defer you can do without-your assertion is that we are conservative and we spend too much on renewals.

David Higgins: No, to get to our Control Period 4 numbers, we assume we need to be able to get asset extensions-

Chair : I understand that, but the task you have been set is an efficiency task.

Q78 Austin Mitchell: Is the NAO therefore wrong in saying, as it says in paragraph 2.6, "There is, however, a more general difficulty in obtaining information to identify genuine efficiency", and in saying, in paragraph 4.10, "It can be difficult to distinguish between scope efficiency and deferrals." Is it wrong?

David Higgins: No, that is right, it is difficult, but the answer to that is you get more and more sophisticated asset models. You need to understand more and more about your track and the quality of everything that you are doing to get those answers.

Q79 Nick Smith: On track, it is interesting in your comparison with France, where you said they treat, or they replace their track less often than us. Early on, you said that we monitored our track better, and we had good safety records. What are the comparative figures on safety for our track here compared to the French track?

David Higgins: One of the best measures is broken rails that occur. That is a rail safety issue. If a rail breaks, a train can be derailed: that is unfortunately tragically the reason for some of the disastrous train crashes over a decade ago, so our standard on broken rails has now come from, if you look at 10 years ago, around 900 happened in a year; we are now down to around 100 to 170 I think this year we are going for. So they have come down dramatically. Then, in terms of safety standards, we are the second safest railway in Europe of all those railways, both at track worker level, but also from a passenger point of view. In the 10-year period there have been substantial improvements of British train safety compared to where we were.

Q80 Nick Smith: What is the tradeoff between track safety and reducing maintenance costs here? Are they two separate things?

David Higgins: No, they are linked, but there is a judgement there. We could do fewer inspections on a track to match Europe, but the risk then is that you may miss broken rails, because track inspections are how you find out on the ground broken rails for drivers of trains, and if that happened too much we would get an increase in broken rails, and then we run the risk-

Q81 Nick Smith: So have you got it right now?

David Higgins: It is always a balance, and the way we can do this is you have to work out where the high risk areas are to replace rail: so high speed networks, West Coast, East Coast Mainline. These are high risk, high speed lines.

Q82 Nick Smith: So are the French doing that better than us at present?

David Higgins: The French have 2,000 kilometres of brand new high speed line-90% of high-speed journeys in France, long distance, go on the high speed network.

Q83 Nick Smith: What is their safety record, compared to us?

David Higgins: They are further up the scale in terms of the European stats-i.e. they are not as safe as ours-along with Germany, and Sweden is the one that is ahead of ours.

Bill Emery: From our point of view, safety is paramount in the railways, and in our terms it is a value, and it is not to be traded off in those terms. It is a challenge for Network Rail and it is a challenge for all the rail operators to find a better way of doing things that do not lead you to increased safety risk, and the driver is to manage that risk, and find the ways in which they can do things better, do it differently, save money, but not actually sacrifice any of the really sensible safety gains that have been made in our railways.

Q84 Nick Smith: And how do you we compare internationally on that issue?

Bill Emery: On those issues, we are a very safe railway in this country and that is a lot to be proud of, and there is lot in the industry to be proud of what the industry-

Q85 Nick Smith: So it is worth paying for good maintenance and regular replacement of track?

Bill Emery: The industry has got to do the right amount of maintenance, but it is a matter of how you do it and whether or not you are doing it on the right assets at the right time, and the question really has to be what information you base that on.

Q86 Ian Swales: I would like to come on to another area of efficiency that is mentioned in the Report. When I walk into my local mainline station, Darlington, I see a screen where the railway prides itself on hitting a target of reliability of 86%, and what that means is that 86% of the time I am going to get on that train, and it will only be 10 minutes late or less, which is a further 7% on top of my journey, and if I get it at York it is about 10% of the journey. To me, those do not feel like particularly ambitious targets, compared with other business activities or services. I am just wondering, if you look at the graph on figure 6, indeed, the reliability has been increasing dramatically and it looks like the whole network is over 90% now-which means, for some reason, the East Coast mainline seems to be lower down the scale-but what I want to know is what you feel about how ambitious these targets are, what the future holds and also, importantly, Network Rail’s role in this reliability figure, because obviously if an engine breaks down then that is not to do with Network Rail, but if you are doing maintenance unexpectedly or something, then that is. I wonder to what extent you analyse these figures. Let’s remember that this aspect of efficiency is what most impacts on passengers, unlike the costing we have been talking about before.

Bill Emery: Clearly, I think the industry has come on a long way from the dark days at the beginning of this millennium, and, as you say, on average they have achieved their best ever results at the end of this year. But-and there is a big but-whether that is the right measure long term is an issue that need to be teased out as part and parcel of the Government’s high level output for the railways, and that is part and parcel of the periodic review that we are going to be triggering in the next week or so and the discussions around that.

Passenger Focus have done recent work on this as to how much people value punctuality and basically their satisfaction on these things. That depends on what market you are going to; whether it is a commuter market or a business market, whatever it is, they have different values on these types of things, and that means that there may well be a need for a slightly more sophisticated approach now that you have got out of what was a pretty poor position and you are into a little bit more sophistication. In terms of delivering punctuality, then this is, essentially, a really collaborative effort between the train operators and Network Rail to work together at root level, and in a sense the mechanism we have, our joint performance improvement plans. We are looking at what is needed to meet our requirements we put on Network Rail, which are based on the Government requirements; how does Network Rail make sure it improves its delay minutes, and how does the train operator deal with that? Where there are issues-and you are right to mention that there are issues on the East Coast-that is when there is more intense scrutiny from the regulator, and that is one of the issues that we have more high up on our regulator escalator, to push Network Rail and the train operators to find solutions to sort this out, because it is not acceptable.

Q87 Chair : Mr Higgins, do you want to answer the question?

David Higgins: Sure: you are absolutely right on East Coast. The challenge on East Coast is the trains are 35 years old, the signalling system is 40 years old-so all past the use-by date. We are not going to do any major upgrades on East Coast for at least five to seven years; there are interim patches-something at Hitchen and a few other areas-with large sections that are two-track, so that when something goes wrong it goes horribly wrong. It is very difficult to divert. We allow, over a year-period, for delays that may happen. We forecast cable theft, and we used up six months of allowance in cable theft in one month last month: it all happened. Let’s hope for the next five months we get nothing, but that is highly unlikely so that causes huge disruption. So theft of all the signalling system shuts the system down straight away. It is a really challenging line, because it is really at its limit and we are putting another 19 paths on it in the next few weeks, which is going to put even more pressure on a difficult line, and it is a line that has got a lot of users, including heavy freight.

We are going to commit to a major freight loop that will divert freight off the line. It will take us the next three years to upgrade an existing line through Peterborough. This is a line we put a huge amount of focus in, and only before I came to this meeting I was looking at all the incidents that occurred in the last week; I watched the incidents and all of the delays. But I think we can better coordinate control; because, when everything was split up it did have separate controls of track and operators, I think on East Coast we can do more to make that coordinated, and I think we can do better at the mainline stations, because when an incident happens the public are very frustrated and they do not know what the hell is going on, and I think there is a lot of work we can do on that in particular at King’s Cross.

Q88 Ian Swales: Just as a rider to that-admittedly this is a very small data sample-but having travelled by train in both Western and Eastern Europe, you can set your watch by the time the train sets off and by the time it arrives. We seem to have a culture where we accept that if it is 10 minutes late that is okay. Well, is it? It does not feel okay as a passenger. To me, I always feel-and obviously coming here I am a very regular rail user-there is an attitude issue, that people do not feel there is an urgency, that it is a real failure to be five minutes late, and it is. If you promise to do something and you fail to do it, you have failed, and you do not get the impression that people even consider that as any sort of an issue. I will respect that we regard 10 minutes as okay, but even if it is 15 minutes, you do not sense from any of the people involved, in the stations or on the trains, or anybody, that there is a problem, that is just okay.

David Higgins: There is a huge focus on that, and the historic way, and the way still today, to deal with that is called right time. The way you fix that up is when you have a problem on the network you cancel that train, you will cut it short and you will take the passengers off the train, and you explain to them that the train they expected to occur is no longer going to come, and you restart the timetable, and then the timetable gets back on track. That is the right thing to do. It is very difficult, though, if you are a train operator and you want to keep your customers on the trains, and you have a different incentive, so we have a different incentive than the train operators: we are targeted on delay minutes, they are targeted on public performance measure, primarily. So that is a real discipline. The pendulum has probably gone too far on leaving the trains going and delaying in stations, with the volume that is getting on a train nowadays means that trains leave stations late, and therefore it delays it. We probably need to be more disciplined in terms of getting the timetables back to schedule.

Q89 Chair : I just want to go on to the North East a bit, because we heard the evidence yesterday, and it is one of the advantages of doing it. I have to say, looking a year or two back, it is the deterioration in the last year, so I think some of your explanations are interesting; they do not really convince me about why there was such a deterioration in performance over the last year. The other thing is, on the North East, we had the evidence there: 60% of the delay there-according to the NAO-is attributable to your work. Only 40% was the operator. So taking a train out would have not have made a difference. So you are sitting here and saying that, but it does not sound 100% plausible.

David Higgins: You are right: the 60/40 is correct, and track asset failure is a big part of it. Every now and again, like the external events at Grantham recently, and the odd tragedy in terms of suicide on that line does that, but a lot of it is just failure on the infrastructure.

Q90 Chair : Which has got worse in the last year.

David Higgins: It has got better in the last three months, because I track every single metric on that line, so it is turning round.

Q91 Ian Swales: I am just interested, as a former manager of things myself, we are at 92%: where is that line going to be? What can passengers expect of our system?

David Higgins: In my opinion, you are going to get to the law of diminishing returns on this network, because you have three things you want to do: you want us, rightfully, to drive down maintenance costs; you want to have more trains on time, and you want more trains on the same track. All that doesn’t work: something has to blow. There has to be a fine line of that on there. So you think of a simple line, like the Brighton line; it is just a straight line there. You shove more and more trains on that track, it will wear out the track quicker, you will have less and less time to maintain it, and therefore the cost will go up.

Q92 Chair : There are other options; you can have longer trains and get on with extending the platforms, which was an issue that we looked at about three months ago.

David Higgins: And we’re doing that. You are correct, you are absolutely right.

Q93 Ian Swales: So you think what, about 95%, is about the figure that, if we look in five years’ time, is our aspiration?

David Higgins: I think that is very optimistic, 95%. I think the biggest thing we can do is focus on capacity, and in next control period, when we finish Crossrail and Thameslink, particularly in the London commuter market, that will deliver a 30% increase in capacity, which will be the biggest increase in capacity this country has had for probably 100 years.

Q94 Austin Mitchell: If the East Coast line is that bad, why is it not going to be upgraded for five years?

David Higgins: West Coast costs £9 billion to upgrade it.

Q95 Austin Mitchell: The civilised part of the Committee all travels East Coast.

David Higgins: That is right. We are doing some interventions on East Coast. The problem for East Coast is it was built much later than West Coast, of course, and therefore it had longer capacity, it was electrified 30, 40 years ago, unfortunately in a way that was not that sustainable, but that is what it is. Therefore it was never as bad as West Coast, and therefore it has been put off. It does need a massive upgrade, but its major upgrade is probably Control Period 6 or 7 to do that in.

Bill Emery: I would just go back and say these issues on what is the right level of punctuality, what are the right metrics, where to put the investment and enhancement of the railways are things that are going to be teased out over the next 12 to 18 months as first of all the industry put its-

Chair : Can we have really tight answers so I can get on?

Bill Emery: It is going to be into the industry and then down to the Government in its high level specification for the railways, both here and the Government in Scotland, in 2012-and there is going to be a widespread consultation-and what we are wanting from the industry and David and all his colleagues is to have good information on the options and trade-offs so there can be an informed debate around these things and choices can be made, because it is trade-offs.

Q96 Austin Mitchell: David Higgins said that electrification was more efficient, but most of the failures I have experienced on East Coast have been because the trains come off the wires and it has held up the whole system. It is either that or Geordies pinching the signal wire, which is fairly common as well.

David Higgins: You are absolutely right, and you know why: because when it was electrified the things that hold up the wires were set too far apart.

Q97 Austin Mitchell: You’re joking; is that right?

David Higgins: Yes, that’s right. And so what happens is the wire swings in the breeze, and it comes off the top of the trains. It is as blunt as that, unfortunately.

Austin Mitchell: And we are putting all our sympathy into London, and here are we suffering.

Q98 Nick Smith: Two quick points from me. First of all, this theme of international comparisons. Mr Higgins, I am grateful that you are going to improve your project management and you are going to use your data better; that is music to the ears of this Committee, and good that Europeans are coming over here to hear about your best practice. Earlier on, however, you said that there were still recurring industry problems, in particular with fragmentation of operators and confrontation. How are you going to reduce the costs of those quite tricky issues?

David Higgins: They are tricky, and I think the great opportunity is the refranchising. That is just starting now, West Coast is the first one to come out in the next few weeks, and then over a period of five to seven years nearly every major line gets refranchised for a train operating company. For passengers, there is logic in what they call Schedule 4 and Schedule 8, which are the access penalties you need to pay for unplanned events or planned events, but they do not align us. There are 600 people on both sides of Network Rail and all the train operating companies that work out how much we can claim from each other. So it is an industry. It was interesting how it was put in at the start, but surely that needs to change. We need to be able to say there are times when we can access the railway that will save us money, that will not hurt train operating companies that much to lose that time, but they will only give it up if they get some benefit from the savings we are going to get. We need to explore those and experiment, and the challenge is that there is not one size that fits all. Each of the regions has their own specific issues, so we need to take a flexible approach, we need to be creative with the various train operating companies, we need to encourage them, when they bid for the franchises, to come back with options where they can save them money and ourselves money, and we will be very responsive to that.

Bill Emery: That is something that we fully endorse. It has been a frustration for us as the regulator.

Q99 Nick Smith: Obviously it is a recurring theme. I was quite interested in this business about cable theft. It is a big issue on the Cardiff to Ebbw Vale line in the South Wales valleys, and you talked about using up your six-month budget in one month’s budget. What are you doing about this? I know it is a problem in South Wales.

David Higgins: We are working very closely with British Transport Police. Two days ago, we had a very big PR campaign to alert people to them. We have used infrared, for example, on some of our stations. On one of our stations, we prosecuted 40 different people until they worked out there were infrared cameras there. But the way to stop it ultimately is to stop the secondary market; someone is buying all this cable. That is the problem. There needs to be a marking, or there needs to be a tougher clampdown on people, the secondhand market, that is obviously buying railway cabling.

Q100 Nick Smith: How much is that theft costing you this year?

David Higgins: I have not got the figure to hand, but I can tell you it is very substantial. The problem is, particularly with something like East Coast, when you lose that line it is just hopeless to try to recover the performance measure for the day, because when it goes down on such a long line it has a dramatic effect on public performance measures. It just knocks on.

Q101 Nick Smith: Can we have a note on how much it is costing?

David Higgins: I will send you that.

Q102 Stephen Barclay: Could you just update the Committee on Anthony White’s investigation, please?

David Higgins: Absolutely; it is still ongoing. I am not directly involved myself at all, my Chair is. I believe my Chair spoke to the QC running it, and is hoping to have something done by AGM, which is July of this year. So we are hoping to have that report through.

Q103 Stephen Barclay: Because I wrote to Network Rail on 5 January, and a press report said it would be a speedy reply; we are not going to get anything until July?

David Higgins: I think it is June at the earliest, but certainly we would really like it before our AGM with our members.

Q104 Stephen Barclay: And I was told the terms of reference would commit you to communicating the findings publically. Will you be making Mr White’s report public in full?

David Higgins: Yes. Personally it is out of my hands. I am speaking for the Chairman, but I know that certainly he has been given access to whatever information he needs.

Q105 Stephen Barclay: Okay, thank you. Flowing from that, one of the things I was very concerned to read about, and it is an issue that we have had before on the Committee, is compromise agreements and the number that Network Rail seem to have entered. Could you just confirm how many compromise agreements have been entered by Network Rail, and whether the regulator has full sight of those?

David Higgins: I do not know how many compromise agreements offhand. I can certainly write to you and cover that.

Chair : Can we just ask for the information in a week?

Q106 Stephen Barclay: Mr Emery, do you see all compromise agreements?

Bill Emery: We see no compromise agreements.

Q107 Stephen Barclay: You don’t, as regulator?

Bill Emery: As regulator we do not. These are matters for Network Rail and how to manage its staff.

Q108 Stephen Barclay: So in terms of the pressure that you were referring to that you exert on the company earlier, does it not concern you if public funds are being used to pay compromise agreements with gagging clauses attached and they are not notified to the regulator?

Bill Emery: I think that the way we come at it is that public funds are there to deliver the railways that the Government want, and that is a whole series of outputs in the sustainable railway, and that is what-

Q109 Chair : You do not think this is an issue of public importance?

Bill Emery: We think it is an issue that in fact Network Rail and members need to tease out, but I do not think it is a matter for the regulator.

Chair : But you do not think the public should be able to follow that-

Q110 Stephen Barclay: I asked you whether it concerned you; I was actually asking for your personal view, which you did not give, but if one looks at the health service, we had quite a battle with Sir David Nicholson because all foundation trust compromise agreements have to be reported to the Treasury, and there was a reluctance to disclose those. They have since been disclosed. Are compromise agreements by Network Rail disclosed to anyone outside the company? In other words, to the Treasury, to the Department for Transport or to the regulator?

David Higgins: Not that I am aware of. However, I think we are forgetting, in this entire discussion today, the board of Network Rail. We have a big change in the board, with a new chair and a whole new section of eight nonexec directors who come from very reputable backgrounds and they run a very tight ship. We run extensive reviews of everything that is going on in our organisation.

Q111 Stephen Barclay: Mr Higgins, I would not suggest that members of hospital boards are not reputable, but I am sure you would agree that most of the funds for Network Rail are coming from the taxpayer or from the public in terms of fares, and so it is not unreasonable to expect either the Treasury or the Department for Transport or the regulator to have sight of compromise agreements. Moving forward, would you be willing to the Committee an undertaking that all compromise agreements will be disclosed to one of those three parties?

David Higgins: Can I come back on that?

Q112 Stephen Barclay: Sure. Okay, could I ask a related question then, because another area of transparency might be around freedom of information, which again, the structure of Network Rail means you are not subject to. Mr Emery, as the regulator, would you have any objection to Network Rail being subject to freedom-of-information legislation?

Bill Emery: No, but from our perspective we have all the information that we need from Network Rail because we have an ability to get it.

Q113 Stephen Barclay: Sure, but even something as material as paying a compromise agreement of up to half a million pounds, and press reports suggesting that Network Rail had paid something like 150 compromise agreements, so obviously that was not material information for you, so what I am saying is that members of the public may be interested in using freedom of information. You would not have any objections to that?

Bill Emery: I have no objection to that.

David Higgins: Neither do I, as I have been on record at the Transport Select Committee. I have been used to FOI in the last two jobs I have had.

Q114 Stephen Barclay: Good, that is good to hear. Bonuses are linked into those issues. Could you just confirm to the Committee what the bonus pot is this year, and what percentage of salary is the maximum amount that can be paid in bonuses?

David Higgins: This year there are no bonuses to the directors of the company. That has been an agreement reached with bonuses, set those aside; so nothing.

Q115 Stephen Barclay: So no members of staff will get a bonus at Network Rail.

David Higgins: No, the entire organisation is on bonus, right to the-

Q116 Stephen Barclay: My question was what the bonus pot was, please.

David Higgins: The overall bonus pot for the company is something like £70 million for the entire-

Stephen Barclay: £70 million, okay.

David Higgins: But that covers 35,000 people.

Q117 Stephen Barclay: Sure; it was a simple question, I was just wondering what the bonus pot was. My constituents are paying more in fares, so obviously they are interested to know what the bonuses are, so what the bonus pot is, and what is the maximum percentage of salary that can be paid as a bonus?

David Higgins: It was 100%, but we have reduced it to 60%. What has happened in the last six months is that we have reduced the annual incentive from 100% down to 60%; we have proposed tougher hurdles, and we have proposed deferring the annual long-term incentive to the end of the Control Period. What that has done is it has made the bonus pot much less attractive and much harder to achieve for the management team in Network Rail.

Q118 Chair : Can I come in on some structural issues? If you look at page 27, you have para 4.3 looking at your costs information. You have Network Rail-presumably you are trying to improve the quality of your data, as you have told the Comptroller and Auditor General-you have the regulator, you have the Department-I would be interested to know what, because the Department gives you grant direct, so presumably they monitor and ask for information arising out of that. We then have these sudden four independent reporters-I cannot quite understand why we need them too, and I would like to know who they are-and then we have the NAO that does the audit and the value-for-money work. It just seems to me, there are a heck of a lot of agencies and individuals seeking information, and I would like to know from both of you-

Amyas Morse: We do not audit Network Rail.

Chair : Of course, you don’t audit-absolutely right. You audit the regulator; absolutely right, apologies for that. But it seems a heck of a lot, so I would like to know what the Department does in particular; I would like to know whether you justify all this; I would like to know who on earth the four independent reporters are and how you justify that.

Bill Emery: I will explain the proposal. We have established a whole series of information requirements on Network Rail to hold it to account, and we get those regular flows of information month by month, and report quarterly in our monitor. The Department gets similar information.

Q119 Chair : The same information, do they?

Bill Emery: It is not duplicated, although they get more financial information on the performance of the company.

Q120 Chair : What do they get that you do not get?

Bill Emery: We are not certain that they would get the financial returns; you submit them both to us and to the-

Q121 Chair : So they get the same information?

David Higgins: What the regulator requires are regulated financial statements, which the Department does not need. They have our management accounts, so there are just two complete sets of accounts. One is for the regulator, and they can both have both. There is no shortage of information, it is just that the regulator-consistent with all other regulators-have a set form of how they want their schedules-

Q122 Chair : And does the Department monitor those accounts and ask you questions about it?

David Higgins: Absolutely, yes.

Q123 Chair : All the time. So you have both the regulator and the Department, then you have these independent reporters.

David Higgins: And we have our board, and our board meets as four subcommittees, and this week, for example, I have two of those meetings, so in any particular month I will have three subcommittees meeting plus a main board, usually, of Network Rail, so it is extensive-

Q124 Chair : I assume you need one outsider; come back to me on what are the four independent reporters, who are they?

Bill Emery: The independent reporters are, we have Arup, who are looking to give us an independent view on the robustness of the information Network Rail is providing to us and audit that information and carry out studies, and they are the ones that carried out-

Q125 Chair : Why can’t you do that inhouse?

Bill Emery: What we found useful is that-as a regulator-is to seek a second opinion on these-

Q126 Chair : Why?

Bill Emery: Because to our purposes that means that we are in a position that we can look at this independent opinion with Network Rail, because these are jointly appointed people with a duty of care to both of us.

Q127 Stephen Barclay: You just said they are independent; can I just check none of the four consultancy firms providing independent reports do other work for Network Rail?

David Higgins: Parts of them probably would.

Q128 Chair : Arup will.

David Higgins: Arup would, yes. We hire nearly every consultant-

Q129 Stephen Barclay: So we have consultants of firms providing independent reporters who also do other work for Network Rail and who are jointly appointed by Network Rail. How are they 100% independent?

Bill Emery: Let me take me take you back a bit, because the history of independent reporting-in a sense it came from the model of consultant-

Q130 Stephen Barclay: The previous model may have been wrong. My question is that today, now, this is the arrangement under Mr Emery that is in place today; how are those independent reporters 100% independent?

Bill Emery: They are independent, as professional integrity is the driver to independence. Their roles, including Arup on information, is constrained as they cannot operate in those type of spheres in Network Rail. AMCL, who are experts in asset management, review that, and test Network Rail’s approach on asset management-

Q131 Chair : And do they work for you in other ways?

David Higgins: Not that I am aware of.

Q132 Chair : Okay, so one does, one does not.

Bill Emery: We have Halcrow and Nichols on enhancement projects for us, and assist us when we are looking at-

Q133 Chair : And do they work for you?

David Higgins: Nichols did one report for us I remember, yes-

Q134 Chair : And Halcrow-I’ve never heard of any-are these engineering companies?

David Higgins: Halcrow is an engineering-these are multidisciplined organisations.

Q135 Chair : And do they work for both of you?

David Higgins: Arup I know would do some structural design for us. In the end, with £3 billion of capital projects at any one time, Arup would be somewhere working on one of those projects. But these companies have divisions, individual divisions.

Q136 Chair : I just want to raise two issues: firstly, why we need independent reporters-we have you; I do not understand why you do not have the inhouse capabilities, and therefore there is a question mark about why we need the regulator if the regulator has to have other consultants’ advice. Secondly, it feels a bit cosy, if we take Arup as the example. So you have this cosy little group of people in this industry; have you got anyone from Arup on your board?

David Higgins: No.

Q137 Chair : Well, that is a delight.

David Higgins: That is a shortcoming, and I will have to sort that out.

Q138 Chair: Your board is full of people in the industry too. It all feels very inhouse, and then when you step back from it and you see the relative costs of us against Europe you think all these cosy relationships are not the best infrastructure for allowing you to drive down costs.

David Higgins: It does not feel cosy from my point of view, I can assure you. Of those four organisations, what they do have is they have specialist knowledge, and what I want to know-and I do not believe organisations of the calibre of an Arup or a Halcrow are going to throw a report, because in the end their reputation would be trashed. Those organisations-and Arup did an excellent report on asset management; it came up with a lot of reports-so in 15 reports from each of those reporters over two years for £2 million in total, I think that is money well spent from those organisations. From our point of view, they have certainly given us reports that have caused us-

Q139 Ian Swales: Can I just ask Mr Emery, how many people are in your organisation as regulator?

Bill Emery: Our organisation is 290 people, of which about 60% are on the safety side and the others are on the economic side, both looking at access and holding Network Rail to account.

Q140 Ian Swales: Correct me if I am wrong, but are we talking about reporters here that work for you, or do they work for Network Rail? Are they actually part of your regulatory function?

Bill Emery: They are an imposition of the regulator. They exist because of the regulation model. They came from the approach before reporters of, when a regulator was seeking expert third party advice, they appointed a consultant. The company then appointed a consultant, and we had two sets of consultants writing reports. The model that was developed said, "We want a third party view on this, because we are going to have to take a judgement as a regulator about what we are going to do, and we will get a third party and we will give them a clear role to stand outside the two of us and use their professional integrity", and that is the way it has worked, and it has worked remarkably well.

Q141 Chair : It feels barmy, and it does not feel like good value for money that you need-and the Department, we have not come to the Department. I bet the Department has over 100 people working on this stuff.

David Higgins: It being a normal company, the nonexec directors of Network Rail would have an audit programme, which would involve external consultants that would come in and audit parts of the organisation. We do not do that.

Q142 Chair : You must have auditors.

David Higgins: We do. We have our internal audit team, but we have Pricewaterhouse that audit the-

Q143 Chair : So there is another lot; I have forgotten about them.

David Higgins: They are financial auditors.

Q144 Ian Swales: I suppose in your 200-odd people, you mentioned the safety experts. Presumably you have staffed your organisation with people who know a bit about railways.

Bill Emery: We have a considerable amount of experience in railways.

Q145 Ian Swales: I do not know what they do all day, but are they not capable of doing this?

Bill Emery: There is always a choice when there is an issue and, if you looked at our regulator escalator, we have 27 things that we are discussing, whether or not we use inhouse resources to carry out that, or whether we ask the reporters to do that. In a sense that is a choice you make: you are trying to tailor whether or not to buy in resources or to staff up. Just as David is saying the critical decision he has on competition is whether to do it in-house is exactly the same decision as a regulator. There is an advantage of having a reporting model: it is that you get an independent view on the quality of the data that both of us can look at and then we can judge what the regulator response should be, and we can have a debate.

Q146 Ian Swales: Just on the theme of the Chair; it was interesting what Mr Higgins said about, "We find these reports useful and if we were a private company we would be calling these kind of people in", which does not feel like the regulator sending in the dogs, somehow, does it? It seems more like-well, I do not know what it seems like. I think as the Chair said, there seems to be a lack of clarity about who really is being held to account and who is commissioning the work.

David Higgins: They are jointly commissioned and report through to our audit committee, independent external directors.

Q147 Chair : But jointly commissioning is of itself a concern, frankly, if I can say so. If you want a regulator that is a tough regulator, that is holding you to account, the joint commissioning again seems a very cosy relationship.

David Higgins: But the report then goes to the ORR. The other way round, we duplicate it, we set our entire own set of other internal experts, the regulator arrives with their Arups and Halcrows; we then fight that, we get our lawyers and everyone else and prove that they are technically incorrect, we argue for a year and a half and we never do anything. All I want is a report that says where improvement can be made and where we can take actions. I am not about fighting reports, and all the reports that have come through that I have seen today are fairly tough and come up with ideas.

I think the challenge we all grapple with here is the scale of this regulation. This is the same as all the water and sewerage companies in the entire UK. It is four times Heathrow: that is what it is. It is just fractionally under those water companies. Our regulator has to base at £40 billion; for all the water companies across the UK, in Northern Ireland and Wales, it is £50 billion pounds. Heathrow is £9 billion, so this is four Heathrows, or nearly all the UK water companies as a business, and-scarier than that-it is totally mission critical.

Q148 Chair : The costs of the regulator-one of the things the Audit Office says-is quite small, and its expenditure on value for money, and losses-I cannot remember, how many million? What is it Mr Emery? Just give me a quick figure.

Bill Emery: £28 million is our budget.

Q149 Chair : Maybe the NAO can work it out, but there is a figure you have somewhere: £13 million, £14 million?

Bill Emery: £14 million; that is on-

Q150 Chair : £14 million, okay; so do you think that is too little, is that what you are telling us? David, is that too little?

David Higgins: What, for the regulator? I could not comment on that

Chair : Let me ask you another question.

David Higgins: I know what you would say if I did.

Q151 Chair : On Thameslink and Crossrail, as I understand it from page 22, para 3.7, you signed some sort of direct deal, so the regulator never got involved. What difference did that make?

David Higgins: That is directly with the Department for Transport; there we are essentially a contractor to deliver those projects with the Department for Transport.

Q152 Chair : So who looked after either efficiency or consumer interest, which is what the regulator is supposed to do?

David Higgins: The Department for Transport set the brief. In the case of Crossrail this is a company, which is a joint company by Transport for London, of course, and DfT. They set the brief as to how many trains per hour-

Q153 Chair : So why can’t we do that for everything? If you have a perfectly okay relationship on these two rather important rail infrastructure projects, Thameslink and Crossrail, where the regulator has no role-

David Higgins: Well, the regulator is aware of what we are doing, but the budgets-in fact, does the regulator not have oversight-

Chair : I think the regulator-page 22, let me have a look at it, because I obviously picked it up when I was reading it.

Bill Emery: Certainly in terms of these major projects the Government has taken the major client role and has an arrangement. We did not go into testing the efficiency of those particular ones because it was being dealt with by DfT, and it is a choice.

Q154 Stephen Barclay: The Report suggests that there needs to be change, because, looking at page 9 paragraph (e), it says, "The regulator should have the opportunity to engage with their development"-this is in terms of direct agreements-and it is very unclear in terms of whether you will have that, because it says, "May continue to feature in the rail investment programme." I suspect that what the Chair, and we as a Committee are looking for, is some certainty on this: will you have an involvement in these sorts of agreements moving forward?

Bill Emery: We believe that we should have a greater involvement, we believe it would have been a better solution if we had been, and that is our line that we have taken with the DfT. At the end of the day it is a matter for DfT and Transport Scotland on these matters. They have seen quite a lot of value, particularly on some of the issues around Thameslink and the issues around Glasgow-Edinburgh improvement for the involvement of the regulator after the fact. We would have been better involved right at the front, and this being done in a more conventional regulatory model, rather than it being a special project.

Q155 Stephen Barclay: So you made these representations to the Department. Have the Department given a view or indication of when they will give a view?

Bill Emery: They will be part and parcel of responding to some of these questions, and I think that they are minded to look at it again.

Amyas Morse: Would you say, Mr Emery, if you had been involved in the Crossrail project that it might have gone less massively over budget than it did?

Bill Emery: I think Crossrail is difficult; it is an early stage in Crossrail, isn’t it?

Amyas Morse: So is the stage of surface trains that you can be involved in?

Bill Emery: The issue for the regulator is where we get involved; it is certainly dealing with the mainline railway. Thameslink is on the mainline railway. That is really because all the interfaces are there. Crossrail and central tunnels, that is completely separate, and that can be dealt with outside. When it gets to all the work that Network Rail has to do at both ends, then that is best done, in our terms, with regulator oversight through the mechanisms that we have. Clearly there are lessons to be learned from these and the involvement of the regulator, and the Government is looking quite carefully at it.

David Higgins: Just on that point there, is the ultimate check, on the both those projects, not that the above ground rail has to go into the regulated asset base, and nothing can go into the regulated asset base unless the regulator signs off on it.

Q156 Chair : I have two very quick questions, and they have to be quick because everybody has a 17:30 meeting. One really to the regulator: across Government there has been a real attempt to drive for better regulation. I remember the Better Regulation Task Force, there is a Better Regulation Commission, there is a Better Regulation Executive; indeed, for a little bit of a time there was a Department for Business, Enterprise and Regulation. What has got better?

Bill Emery: There is substantially more transparency in the information, and the core principles of better regulation have become established in the way in which regulators work. I think there are issues around getting the right balance between who is setting the overall policy and who is doing the oversight of the companies.

Q157 Chair : So transparency is better?

Bill Emery: Transparency is better. In rail I think, because Parliament has imposed the high level output specification and public-statement-of-funds-available model, where the Government is making very clear what it wants from the railway, which does not exist so much in other sectors.

Q158 Chair : Okay, I will just make the observation, I have to move us on. It is a shame that in getting transparency we have not got good unit costs, because that, for me, would have been important. The very final thing is to you that there has been quite a lot in the press about safety with Elsenham-I am sure you know about the articles in The Times around the two young girls that were killed on the Elsenham level-and there is a suggestion in the press that two reports on the safety of that level crossing were deliberately kept back, or were deliberately hidden from Government investigators, deliberately withheld from Government investigators. Is that true?

David Higgins: Firstly, this is subject to an ORR review; it has been reopened, so it is probably not wise to talk on that until that finding comes out. What that press article today in The Times spoke about was a Railtrack memo that emerged in 2006, but was written in 2001. When I saw it in the files I sent it to the regulator and in fact to the family members, and it was two or three months ago.

Q159 Chair : So any relevant information that would help in the investigation-

David Higgins: It was a memo in 2001 from the Railtrack organisation, and I think it is described in The Times correctly. The story on level crossings is, while we do have, compared to Europe, a good record on level crossings-we run the safest train level crossings in Europe-our standards here need to improve, and significant improvements can be made, and we will launch, on 9 June, an initiative to strengthen them. Elsenham was all about risk assessment; it was how the risk at a crossing is assessed, who did it, what their competencies were, what happened to the information afterwards and what decisions were made.

Q160 Chair : Okay, I understand all that. What I understand is that there are two documents, but the memo of 2001 was sent in 2006?

David Higgins: Sorry?

Chair : When did all the relevant people get it?

David Higgins: Two months ago, I suppose.

Q161 Chair : Only two months ago.

David Higgins: But if it was deliberately withheld and it was material, that is something that the ORR would determine.

Q162 Chair : And when are you reporting on that?

Bill Emery: We are in the middle of our investigation, and we hope to report in a few weeks’ time, when we have gone through it all and reopened it as to whether or not this changes the decision taken originally on the culpability of Network Rail for this particular event-

Q163 Chair : And do you wish to add any comments on whether it was deliberately-

Bill Emery: I do not want to comment at this stage.

Chair : Okay. Alright, thank you very much indeed. Thank you.