Transport Committee - Network Rail and the Office of Rail Regulation - Minutes of EvidenceHC 1882-i

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House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Transport Committee

Network Rail and the office of Rail Regulation

Tuesday 13 March 2012

Sir David Higgins

Anna Walker CB and Richard Price

Evidence heard in Public Questions 1 - 154

Oral Evidence

Taken before the Transport Committee

on Tuesday 13 March 2012

Members present:

Mrs Louise Ellman (Chair)

Steve Baker

Jim Dobbin

Mr Tom Harris

Julie Hilling

Paul Maynard

Iain Stewart

Graham Stringer

Julian Sturdy

________________

Examination of Witness

Witness: Sir David Higgins, Chief Executive, Network Rail, gave evidence.

Q1 Chair: Good morning, Sir David. Welcome to the Transport Committee. The last time you came in front of the Committee it was quite soon after your appointment. You have been at Network Rail for some time now. Do you think it is now running more effectively and efficiently than when you first took over?

Sir David Higgins: Yes, it has been a very interesting year. The organisation is up to the challenges ahead for the targets we have set for this year. We have done a lot of restructuring in the last year. One of the very first things that I got involved with was devolution, which was all about empowering our organisation where we interface with the customer-with the train and freight companies at the route level. That started with a few pilots and then we implemented that in November. It has been successful. It will take time for the full benefits of that to come through in terms of our decision making and efficiency.

The other thing we launched was alliances, which means working much more closely with our train operating company customers to achieve more flexibility and alignment, particularly as we look at the work on the track.

Q2 Chair: But you have to be judged on what you produce, do you not, and you are missing your targets for both passenger trains and freight. Why is that?

Sir David Higgins: Yes. We have a lot of targets. We have something like 30 different targets set for the control period. They range from safety, which is obviously our most important target, right through to train punctuality, asset, condition and financial targets. You are right: on some of the punctuality targets we have a letter from the regulator, which we will respond to at the end of this month. On Scotland, for example, that is relatively straightforward. We understand that there are timetabling issues there that require us, Transport Scotland and ScotRail to work together to modify the timetables. I do not believe we can get the punctuality we need to achieve with the current timetable. It will probably take us 12 months to modify that.

We are more focused on freight now. We have appointed a freight director and we have a freight performance group, which involves the freight operating companies. That is turning round now already, so I am more comfortable on that.

Long distance is more complex; it is a third area the regulator was concerned about. Our major routes for long distance are East Coast, West Coast and Western. For example, on West Coast our challenge is that we have 12 different train companies that compete daily-that is seven passenger and five freight companies. You have commuter, cross-country, long-distance freight, open access and sometimes even steam trains competing on the same set of tracks every single day for that access. There are trade-offs. An important debate to have on long distance is what trade-offs would have to be made to achieve the regulatory target on long distance. I do not want to pre-empt our response to the regulator on that, but it is certainly a very important debate to have.

Q3 Chair: You do not sound as if you are all that concerned about it. The regulator has been pretty tough with you and has spoken about you possibly breaching licence conditions. You sound pretty laid back about the whole thing. Is that right?

Sir David Higgins: No; I would not want to give that impression at all in terms of our overall targets. On punctuality, I just want it to be put in perspective. With regard to our overall punctuality public performance measure, which measures whether short or long-distance commuter trains are within either five or 10 minutes of their timetable, as of this year we are now running at about 91.6% as opposed to a target of 92%. That is a record high. It is the highest level it has been. It has plateaued. There is absolutely no doubt that, in the last two to three years, you can see that train performance, which has recovered a lot in the last 10 years, has hit a plateau.

We are very focused on that, but we have to have an honest debate about the trade-offs. There really is a trade-off because we have a huge growth in train capacity. This year it is up by 6%. If you look at where we thought growth would be in 2008, when we set the targets in the middle of a recession, there are a lot more trains on the track than there were. The more trains on the track, the more capacity. It impacts on performance because there are only a certain number of slots you can have, and it impacts on costs. You have to trade off those three elements. Yes, you could hit 92% long-distance performance, but would everyone be happy with the other trade-offs? We would have to regulate, potentially, other services and disadvantage other commuter services to achieve that. We want to have a broad debate about what the right objective is and what action we should take. We will be very open with the regulator and the industry about setting targets and agreeing the revised forecast on long distance. We need to have that debate. It is not an easy issue.

Q4 Chair: Are you saying it is a capacity issue and not an efficiency issue?

Sir David Higgins: It is both. It is capacity because there are a limited number of train paths. We have a huge challenge on capacity. It is good to have the capacity challenge that we have now because, if you look at our growth rate, our network growth is 40% in 10 years and 6% in the last 12 months. This is a huge challenge. It is good. I know that does not feel good for the people who travel on trains today, but we are in catch-up mode. This huge growth in railway demand from passengers means that we are really challenged on our network. Today, the Secretary of State commissions the tunnel boring for Crossrail and Thameslink. When I was here last year, I reminded everyone that Thameslink was 20 years late and Crossrail is the same. High Speed 2 is desperately needed, particularly for the southern section of West Coast, because West Coast is really being pounded as a rail route now with what is on that route. We have a real capacity challenge on our network.

We also need to drive efficiency at the same time. As you put more trains on the track, they wear out quicker; it costs more. We need more time on the track to maintain the track. All those issues fight each other. We are far from complacent. What I am trying to get across is that it is complex and there is a trade-off. There is always a trade-off. You can drive performance on long distance at the expense of the commuter. That is a decision we would need to discuss in the end with both the regulator and the Department.

Q5 Iain Stewart: I apologise in advance, Sir David, because I will have to leave before the end of your session to serve on a Public Bill Committee. One of the changes that have taken place since you took over is the arrangement with South West Trains to have a more vertically integrated system. Can you say a little more about what benefits you expect that to deliver and in what sort of time scale?

Sir David Higgins: Yes. One of the big enablers to get efficiency on the railways is what we call franchise reform. The franchise system has been set up, but one of the consequences is potential conflict. We have to buy access to the track to maintain our track, which sounds bizarre, but that is how it works. That is right because the train operating companies buy the right to run their trains, but that does not necessarily align us and it does not provide a lot of flexibility. We have a complicated process of delay attribution where we have people who claim against each other. The whole experiment of South West Trains is to say that maybe there is a different way of doing this.

We chose South West Trains for a number of reasons. It was fairly isolated. They ran 80% of the transport on that network, the rest being freight and cross-country. They have five years to run on the franchise. It is a well-run area. We have a partner that is entrepreneurial and is prepared to give up some of its contractual rights to find a better way. We hope, subject to the Department and the regulator being happy, that at some time in April we will start that alliance, which will then look at how we run this as a business. We make those trade-offs between maintenance time, operating costs and renewals costs to get a better running railway.

Q6 Iain Stewart: So you very much regard this as a pilot scheme, and if it is successful you would envisage expanding it to other franchises.

Sir David Higgins: You can apply it to the complex mixed routes. If you look at the West Coast or East Coast, there is no dominant operator in those areas as there is in South West. There are other areas, and we would hope with the new franchising that the principles we learn with South West Trains over the next five years are particularly applied to the key commuter routes. You can see Kent, Southern, Anglia, Wales, Scotland or Northern as easier routes, potentially, to apply this.

Q7 Julie Hilling: I want to pick up on safety. Network Rail has been criticised for "clear evidence of a poor safety culture, patchy implementation of procedures and slow progress on some key risks". I worked for TSSA-and am currently a member of TSSA-at the time of the Grayrigg accident. It seems to me that there is a history of not listening to staff and then blaming staff who have been blowing the whistle when accidents occur. Can you tell me how things are now in the company and whether Elsenham and Grayrigg could still happen?

Sir David Higgins: I hope that we have been honest on Grayrigg and Elsenham in terms of the mistakes that were made. Grayrigg, of course, in 2007 concerned mistakes in track quality. It started from some of the designs. It was a difficult set of points to maintain with maintenance routines and a change in timetable limiting access to the track. At the time Network Rail was quite clear that it had made mistakes. Significant improvements have been made since them. It is the same story with Elsenham. The risk assessment process on Elsenham was wrong, and I have been quite public on that, in terms of level crossings. The risk assessments in 2002 and then in 2005, before the accidents, were not correct, hence we pleaded guilty; and I believe the next stage of the court process occurs this Thursday.

We have made a real commitment in our organisation, first, to be honest about that and to accept that we can make mistakes, because it is only by saying that that we learn. But our risk assessment process on level crossings is getting better. They are not easy. There are 6,500 level crossings around the country. There are level crossings through market towns where trains run at 125 mph. There should not be any level crossings on the high speed railway in the UK at all, but we are where we are. There are no level crossings on High Speed 1. We cannot shut all the level crossings. Communities fight when we shut them. We have to get our story straight first. We have to get our house in order in terms of level crossings. We have to do the risk assessments better, and we are committed to that. When we have done that, we have to put more money into level crossings. We have done that too. The money put aside for level crossings on efficiency savings was too low, and we have corrected that. Then, and only then, should we talk to the public and explain to them that level crossings are dangerous. We should talk to schools, communities, teachers and local authorities and ask them to work with us to make level crossings, which are inherently risky, as safe as we can possibly make them.

Q8 Julie Hilling: Two issues arise out of both incidents. There was an active cover-up by Network Rail in terms of blame at that time. Can you be sure now that there would not be a cover-up in the process should another incident occur?

Chair: On a point of order, I am advised that sentencing for this is due on Thursday and, therefore, this specific issue is sub judice at the moment. That is my advice in relation to the specific issue involved.

Sir David Higgins: Perhaps when I respond I will not talk at all about the issue that is in court. I can talk generally.

Q9 Chair: We still want to question you generally about what is happening.

Sir David Higgins: I will try and respond to your question. I hope the organisation is changing, but a lot of it comes from trust. This is a pretty aggressive, confrontational industry. When you have an accident there is no mucking around. You have a series of bodies, whether it is the RAIB, the ORR or the British Transport Police. These are criminal issues and they are treated very seriously. That sometimes discourages people from coming forward. It creates a culture of fear either within the organisation or the process that goes on. Anyone in our organisation, including myself, can be tested at any time at work for drugs or alcohol and, if positive, can be fired. It is a tough business to be in. I hope that I encourage our organisation to speak up and that people trust the Executive more. It will also be about how we respond. In my case safety is certainly the prime purpose. I have no interest in any other performance measure if it puts safety at risk. I have made that very clear in everything I do in terms of the railways and in my previous jobs. In the end the work force-the people on the track-have to know that that is how you will behave. If we have to cancel a train, I do not mind. Cancel a train if it is going to put our work force at risk. In fact, one thing I am really focused on now is that there are more trains coming on the track all the time. The time to maintain the track is now so limited that the pressure it puts on our front-line work force is becoming wrong. Therefore, we are now looking at the whole way we access track, the speed at which we are doing that, the multi-skilling of our work force and the bureaucracy that is required to be filled in before we can access the track. We are going to put too much pressure on our front-line track workers to be able to maintain the track properly. But it is a trust that will take years to earn. We are not going to change a tough culture to one that is more open and trustworthy overnight.

Q10 Chair: Do you have a timetable to deal with level crossings? You have spoken about the sorts of issues you want to address.

Sir David Higgins: We do indeed. We are focusing on risk base. The most important thing we are doing now with the regulator-and we have agreement with them-is, first, that we are going to have an external body that will come in and audit our inputs. When you look at the 6,500 level crossings, what factors did you take into account? Then we put it into a complex computer algorithm, which then determines the level of risk. We want that algorithm audited, and then we will rank the 6,500 level crossings from red-dangerous-to less dangerous, to ones that require less work. Once we have agreed that with the ORR, we will focus our effort particularly on the highest risk level crossings. Towards the end of this year I would like to make that whole risk assessment process, particularly the input data, available to the public. I would like the public themselves to look at the level crossings to see whether or not our inputs are correct.

We have already started. We put an additional £100 million into level crossings towards the end of last year to be spent in the last two years of this control period. That means closing level crossings and clearing sight lines. It also involves using new technology. The cost of putting in boom gates and modifying level crossings is still too expensive at the moment.

Q11 Mr Harris: What effect did it have on you personally, and the organisation in general, when the regulator said you were in breach of your licence last year?

Sir David Higgins: It takes a huge amount of effort. There is a massive amount of committees, studies and work going on. Only last week we had a full afternoon with one of our sub-committees that did nothing else but review all the work over the last three months on what actions can be taken to correct those breaches or potential breaches.

Q12 Mr Harris: How confident are you that those breaches will not happen again?

Sir David Higgins: As I say, on Scotland we would all agree-and I think the regulator would accept that too-that the issue is essentially one of timetables. Trains do not meet each other at the right time at junctions. It sounds very simple, but timetabling is the key part of getting trains to run on time. We need to re-do the timetable. That will take time. It needs Transport Scotland to approve that. It needs ScotRail, which is the train operator, to agree to it. Then we need to work through to make sure that we do not create other problems. That will ultimately take 18 months, but I am confident that that will go the vast majority of the way to correcting the performance shortfall in freight in Scotland. On a 100-mile freight journey we are 20 seconds out. That is important. Freight comes on a ship-a container-from China for eight weeks and sits in a warehouse when it arrives here for another three weeks. So 20 seconds is important, but more important is us working with the freight companies because they are really concerned about flexibility. They compete with road. It is a very thin-margin business. What they want is the right to be able to put their freight trains on our tracks at very short notice because their customers require it. That is what road can offer.

From our point of view, that is very difficult. We have the freight paths that make a real mess of passenger train paths, particularly on the West Coast and East Coast. We have to reflect the trade-offs. I think freight is more about, yes, let us look at what we can do-and we are already turning it round-but it is more cancellations and flexibility that is the real issue for freight. We now have a board, effectively, of all the freight companies working with us, which the regulator sits on, to see what these trade-offs are and what they really want. Is it the 20 seconds every 100 miles that is really very important to them, or is it this flexibility that allows them to compete? Freight is growing. It has grown by 60% in the last 10 years.

As for long distance, it is much more complicated. The gold standard in long distance must be the most valuable long-distance route in Europe, which is London to Paris. There is new track and a train every 20 minutes. The gold standard there is 93% of trains within 15 minutes of their timetable. That has not been hit in the last two years for lots of reasons, but that is what you aim for.

Our long distance target is 10 minutes, not 15 minutes. It is a tighter timetable. We do not have a train every 20 minutes on new track. We have trains competing with 11 other train companies on old Victorian formations. We have set ourselves a hugely ambitious target on long distance, which was 87%. When we came out of the last control period in 2008-09, it came in at 87%. We have set ourselves a target of 92%. I said here on the record a year ago that I thought the targets were very ambitious. That is fine. We live with the targets because we have the money. We were paid the money to deal with those targets, but what I want is a debate on the trade-offs. If we go and regulate and give preference to long distance on those key corridors from Glasgow or Edinburgh, what are the consequences for those other 11 train operating companies that work on the same tracks?

Q13 Mr Harris: If I were involved in the rail freight industry and I just heard that answer, I would assume that that was an incredibly complacent response. You dismiss this 20-second value as if it does not really matter very much. You said that of course it matters, but you said it in such a context that it does not really matter to Network Rail. It sounds to me as though you are blaming the Office of Rail Regulation for your failures rather than Network Rail. Does Network Rail take any responsibility for these failures or is it all other people’s fault?

Sir David Higgins: No, we do. The first thing we did was to appoint a person from the rail freight industry. We recruited them into Network Rail to be in charge of freight nationally, focusing on freight performance. We lose time and performance on freight on East Coast and West Coast. We lose it not from the freight trains that travel every week, which know the paths and are very used to them. We have the punctuality challenges with the one-offs: the trains that come once a month or at irregular intervals. They are not used to using the track and they are not in the normal timetable.

Q14 Mr Harris: So it is their fault.

Sir David Higgins: No. That is what causes it. It is not their fault because that is the market.

Q15 Mr Harris: It is not their fault but they cause it.

Sir David Higgins: The solution is not to have that. The solution is to say that we do not want irregular, random freight trains coming on to the heavy corridors of West Coast and East Coast because these are unbelievably crowded, congested and valuable assets. That is fine; that will get punctuality back, but it will not suit the freight companies.

Q16 Mr Harris: But the ORR must be aware of that problem.

Sir David Higgins: They are.

Q17 Mr Harris: Yet they have still concluded that you are in breach of your licence.

Sir David Higgins: The ORR have said, "Will you set up a board, which has all the freight companies on it and yourselves? We would like to attend as well, but we are not here to solve your problems. You need to solve them yourselves. You need to turn round freight performance, and then you need to have this debate with the freight companies as to what the trade-offs are in terms of how strict you want timetabling to be and how critical the 20 seconds is to 100 miles, or whether cancellations are more important."

My understanding from a freight point of view, which is a tough, low-margin business, is that they are more concerned that, to get our timetables right, we just cancel a service. We can do that, but it means they have to pay off the train crew. First, we need to turn round performance but then have this debate on the trade-offs. What do our customers-the freight companies-really want out of our network?

Q18 Mr Harris: I am grateful for that answer, Sir David. I want to ask about a very different subject, which is the Midland Main Line electrification. On a scale of one to 10, how committed are you in Network Rail?

Sir David Higgins: Very. It is in our proposal.

Q19 Chair: What is "very" on a scale of one to 10?

Sir David Higgins: It is in our initial industry plan proposal to the Government.

Q20 Mr Harris: Is that a 10? On a scale of one to 10 you are 10 committed.

Sir David Higgins: We would not have put it in our IIP, as we call it, if we were not very passionate about it. We think it is essential. I have certainly talked to the Department and the Minister about it. The next 12 months, and the next six months in particular, is very critical. We will wait for the response from the Department in June/July, which will be their high output specification, and we really hope that we get that support.

Q21 Chair: Does the regulator press you harder on passenger services than on freight?

Sir David Higgins: It is hard to tell. Everyone is very focused on passenger services of course; that is a huge priority. Freight is growing enormously. I would not say that they favour one over the other. I do not think so.

Q22 Paul Maynard: I listened carefully to your answer regarding the future of the West Coast Main Line, the role of freight on that line and your reaction to the breach of licence. I seem to be hearing from you-and correct me if I am wrong-that you are no longer certain that the punctuality targets, and indeed the other targets that you are being asked to adhere to, are appropriate to the current circumstances of the railway. Would that be a correct assessment?

Sir David Higgins: The first target that I take as the most important is the target on safety. The public really want safe railways and they do not want us returning to Hatfield days. They do not want to go back 10 years. They do not want us to cut costs on our railways at the expense of the sustainability of the railways, and I would never approve that. The first target on safety is my priority and we will hit the regulator’s targets on safety, but I want to outperform them. To me, it is much more about organisational capability. That target is crucial.

On punctuality, which we have spent much time debating, there are multiple targets. I am confident of hitting quite a few of those. Regional railways were over-achieving. In London and the south-east, I expect us to achieve the target. I still do not accept that we will not achieve the freight target in Scotland. On long distance, I am saying that we could achieve it but I am not sure of the compromises. I accept the financials must be very important. There is a huge challenge in financial targets, which, from an operational point of view, was to save £1.2 billion a year in real costs, coming down from the start of the control period to the end. In terms of targets, are we hitting those? Yes. The proof that we are hitting those targets on cost efficiency is that the regulator has already approved us paying a rebate to both Transport Scotland and the DfT. Last year it was over £100 million. This year it will be roughly another £50 million. We are giving a rebate back to our funders, because in the first three years we have outperformed the efficiency targets set by the regulator. We are very focused on performance and the 30-plus targets we have to meet. It is a high performance organisation. They are very challenging targets to achieve.

The most important thing to remember is that you cannot drive cost efficiency at the expense of sustainability. We welcome the Command Paper and the new efficiency targets set, but we cannot hope to achieve the next level of efficiency targets in control period 5 without first investing in our organisation and our industry.

Q23 Paul Maynard: Specifically on the punctuality targets on long-distance travel, you earlier gave an indication that you regarded the capacity on West Coast and East Coast Main Line as challenging. You made reference, for example, to steam trains being on the network and the large number of operators. Clearly it is difficult. You spoke at length about trade-offs. I want to explore the trade-offs more closely in the light of the Government’s Command Paper.

The Government make what, to my mind, is a very surprising statement that they no longer regard open access as a desirable goal. Do you welcome that Government statement? Do you regard open access operators as a complicating factor to the delivery of your efficient railway now?

Sir David Higgins: I am not sure I would agree that open access is not desirable. Who knows, when High Speed 2 hopefully is finished, what method of access the Government and the regulator may choose to use the additional capacity that comes with that? I am not sure that I am experienced enough or know enough about the rail industry to give a definitive position either way, but I would reinforce what you said. We have a very complicated mixed use railway. West Coast is the busiest mixed use rail corridor in Europe. It is like the M25 of railways. It is the busiest in Europe. No one else sees anything like it. The bottom end of the West Coast nowadays just gets pounded. It gets pounded by freight, by Pendolino, cross-country, all the services there. It is really taking a tough time.

Q24 Paul Maynard: What you are essentially saying is that capacity on the West Coast Main Line is a severe problem for the operation of an efficient railway.

Sir David Higgins: Yes.

Q25 Paul Maynard: One of the Government’s key expectations, according to its Command Paper, is that the Rail Delivery Group has to take greater responsibility for improving both that situation and more generally. Paragraph 3.44 of the Command Paper-which I am sure you do not necessarily have a copy of in front of you-states that the Government are looking to return key roles and responsibilities to the rail industry, yet, to me, the phrasing of that paragraph suggested a degree of concern over the ability of the Rail Delivery Group to live up to Government expectations. Can you possibly give us some concrete specific examples of how the Rail Delivery Group during its current existence has made a positive difference to the operation of the railways?

Sir David Higgins: Yes. The Rail Delivery Group has been in place now for just under a year. It has representatives from the train passenger company ownership groups and freight, ATOC and us, under the Chair of Tim O’Toole. It is unique because this is the first time this group has got together. The McNulty study correctly said that the rail industry in the UK is very fragmented and there is a lack of leadership because of that fragmentation. The RDG looks to provide that leadership to the industry and to the Government. We had a big input and we will have an increasing input into the business plan. The Rail Delivery Group sees an absolutely central role in influencing the business planning process that results in control period 5 in roughly a year’s time from now. The whole franchise reform is very strong. There is a lot of representation. I went to see Ministers, and Tim wrote to Ministers saying, "For heaven’s sake, can we have a new franchise regime that allows alignment and flexibility? Can we move away from the old confrontational contractual relationship that set infrastructure supplier, Network Rail, and customer in conflict?"

Q26 Chair: Are you saying the Rail Delivery Group has started to work?

Sir David Higgins: I think it has, yes. It has held together well. We have looked to follow the money, so we have about six different sub-groups. We particularly look at where the real opportunities are for efficiency. They particularly relate to asset management and delivery of major projects and renewals on the track. The big difference between the cost of rail maintenance upgrade in major projects here compared with Europe is access. Because we have a very crowded, dense network with very little resilience left now, and because we are in catch-up after 20 years of under-investment, we have to work much closer together. We do not have the luxury of a number of the European tracks where they have high speed lines or resilience or they can shut railways down for a substantial time to do maintenance. We do not have bi-directional signalling or GPS-controlled trains. It is 10 years before the major capacity increases come.

Today, we have Crossrail tunnel boring from the Secretary of State; that is fabulous. As I think I reminded you all here a year ago, Thameslink, when it is finished, will be 20 years late, as will Crossrail. Our signalling system on Western is 40 years old. So there is 10 years for us to catch up from decades of under-investment. For the public, that does not feel like good news. I travel on crowded trains too, but relief will come when we get the benefits of electrification, train signalling and the new lines that will come.

Q27 Julian Sturdy: Sir David, to stay on the capacity line, do you think that how the East Coast franchise was dealt with, the problems we had with that and the uncertainty that that brought caused Network Rail problems?

Sir David Higgins: This was when it came in-house?

Julian Sturdy: I am talking about the problems when there were two franchises, having to give up the franchise and then move on, and it eventually came in-house.

Sir David Higgins: It was well before my time. I am not sure. We work well with East Coast, which is the Government-run train operating company. That is a good, professional relationship. I am not sure what it was like when it was under GNER or National Express.

Q28 Julian Sturdy: Continuing on that theme, do you believe that longer term franchises will, first, be better for Network Rail and, secondly, deliver new investment into the rail industry?

Sir David Higgins: It must be right to have longer term franchises just so that you are committed. There are simple things like stations. You have these bizarre differences in responsibilities in how the 2,000 plus stations of the train operating companies are maintained. We do some of the maintenance and they do some of the maintenance. We have worked closely with the Department on the new franchises, which propose giving the train operating companies accountability for maintaining those stations. There is a strange divide in scope at the moment that does not seem to make sense if you want to drive a more efficient railway. Having a train operating company that is committed for the long term, they can then make the reforms that are necessary rather than being short-term focused.

Q29 Julian Sturdy: Do you think it will drive investment because the Government have talked a lot about new investment coming in through longer franchises?

Sir David Higgins: Yes, provided the train operating company can get recognition for the value at the end of the franchise process because not everything can be written off over 15 years.

Q30 Julian Sturdy: I have one last point; Mr Maynard touched on it briefly. Do you think that open access has delivered more capacity over time? We know that open access has certainly delivered new routes to areas that did not have direct links, but do you think it has delivered its goal of increasing capacity?

Sir David Higgins: I would say at the moment it is probably at the margin. It has opened up routes that probably would not have been opened up before and provided competition. In terms of the main movement of people, they are still carried by the franchise operators, are they not? As a principle, the competition of open access must be right. The problem is that you are fighting over a very constricted set of railway tracks. Fighting for access is a great challenge.

Q31 Graham Stringer: You talk about the lack of investment. That may or may not be true, but there has not been a lack of cash, has there? You are getting something like 10 times the subsidy that British Rail got. You have more railway passengers than the railways ever saw under a nationalised system. Why, basically, are you so inefficient?

Sir David Higgins: We are not. Hopefully, you have these seven charts in front of you that I sent round. I really like this chart here. It is one of my all-time favourites. The red shows passenger growth. You talk about the times of British Rail and they were great days, but every year you carried less people than the year before; so you were managing decline the entire time. The railways were deteriorating and people were moving into cars. It only turned round in the mid-1990s. The red chart there is growth in passengers on the railways.

This chart here is the cost. That is actual cost in real terms for Network Rail. It shows that there was a huge period of catch-up. That is the previous page. This is Hatfield. That shows there is a huge drive. There is a holiday in the 1980s and 1990s. People did not spend money on railways. There was a holiday on renewals. We all know it now. We need to be honest about that. People just never spent any money fixing up the railway. Then, of course, we had a series of very tragic accidents. Money went through the roof. Yes, it was catch-up time. A huge amount of money was spent to get the railways to a standard where people were confident to travel on them. Now, 15 years later, we are back down to the costs pre-Hatfield. In terms of cost, this is the actual cost of Network Rail. In cost terms, we are forecasting that over two control periods-control periods 4 and 5-we will cut £2 billion of recurrent costs out of the railways. It will be a real saving this time, not just top-line slicing that results in a crisis in 10 years.

Q32 Graham Stringer: That is all very impressive, but you are still getting £3.8 billion from the taxpayers, whereas when British Rail finished they were getting about £800 million. That has been going on since the Hatfield crash. The actual railway lines were replaced about three or four times in the immediate aftermath of that. I would ask you why, with all these extra passengers, the taxpayer has to fork out so much more than they did 20 years ago?

Sir David Higgins: The typical rail breakage on Network Rail 20 years ago was 800 to 900 times a year. Nowadays it is around 150. Our rail standards and the renewal of rail are now top of the class at European standards. It is very difficult to compare a declining railway, with consistent long-term under-investment in assets, structures and rail, with where we are today. We need to look at the actual level of subsidy. The Government choose to subsidise the rail industry via Network Rail, not via the train operating companies. You could do it via the train operating companies. You could put grant in through that, but they choose to do it via Network Rail. It is their right to do that.

We have to drive efficiency. We will deliver £1.2 billion of operating savings this control period and at least £600 million to £700 million next period. We must do it. The key enablers are the simple things such as the knowledge of our asset conditions. What we are doing now is spending £300 million over the next seven years just to have confidence in the status of our rail network. We have Victorian bridges, structures and cabling systems. The records on all those are very old and very poor. If we now want to make the savings and spend less money every year on renewals, we had better know exactly in what condition all those assets are before we make further top-line cost efficiency savings but build up problems for the future.

Q33 Graham Stringer: I think you would have difficulty if you were writing a prospectus convincing many investors that you were putting your costs and subsidy up and at the same time you were increasing your customers. It strikes me as a very odd conclusion to reach that you are getting more efficient. It is an odd definition of efficiency. Do you think that the structure of Network Rail is helpful?

Sir David Higgins: Finally, on the issue of efficiency, if you look at the start of control period 4 and the end of control period 5, our forecast for the rail industry in total-that is train operating companies, Network Rail and the lot-is that the public subsidy will go down from £6 billion to under £2 billion in real terms. That is public subsidy-taxpayers’ money-going into the rail industry in total, which is a huge drop. When you look at it in terms of the service it provides, it is good value for money.

To answer your question on Network Rail’s structure, it is as efficient as they come. I cannot think of a more efficient capital structure than the one we have for Network Rail. We now have £25 billion worth of debt very efficiently financed.

Q34 Graham Stringer: I probably was not clear enough. I was thinking more about the governance structure.

Sir David Higgins: We are a for-profit company. The structure that we have is all about profit. It is then ring-fenced and reinvested back into the railways. From a railway point of view that has to be good.

Q35 Graham Stringer: But the members of your company do not have a different interest really, do they? They are part of the rail industry. It is not like having people who have invested money who want a return on their capital.

Sir David Higgins: You are right; we are not a Plc. We are not a Government Department and we are not a private company. You are right that we are in the middle. Welsh Water is the only other model that is similar.

Q36 Graham Stringer: I am really asking whether that is a structure that is going to press down on you in terms of improving your efficiency and reducing your costs.

Sir David Higgins: It has so far. If you look at that chart there, that is what has happened in the last control period and this control period. No one would argue with the cost- efficiency figures and the sustainable operating cost reduction since 2004.

Q37 Graham Stringer: You gave up your bonus four weeks ago. Do you think management incentives are appropriate in this kind of structure?

Sir David Higgins: The whole issue of variable pay and performance-based pay is very important. It is something that I feel strongly about. You want to attract to an organisation people who are ambitious, who take risks and who want to perform. The alternative, which is high fixed pay with long pensions, large termination benefits and payment for failure, must be wrong. I believe in performance-based and variable pay, and, effectively, bonuses are a part of that.

Q38 Graham Stringer: You just thought it was inappropriate at this time to accept your bonus.

Sir David Higgins: I think it had got to the stage where the real debate was lost. There had been a management incentive scheme approved by the members in April 2011. What was going up for approval was a relatively minor technical amendment, which reduced the amount of bonus available long term to the executive directors and made the scrutiny even more intense. It was lost in a lot of public discussion and concern about the debates about banking bonuses and other issues. It got to the stage where it was not possible to have a sensible debate about this. This was not about awarding a particular bonus. This approval or members’ discussion, which was then deferred, was about approving these relatively minor technical amendments. It was no use having that debate in public because it was lost.

Q39 Steve Baker: Sir David, you talked about trade-offs, the fight for access and, in particular long distance versus commuter passenger versus freight and so on. I was just looking at some of the cash flows in the industry. To what extent do you have sufficient freedom to contract and, in particular, to vary and enable competition over track access charges?

Sir David Higgins: They are set by the regulator.

Q40 Steve Baker: That sounds like you do not have sufficient freedom to use those mechanisms.

Sir David Higgins: The regulator has clear accountability in terms of ensuring equal access. They hold us to account. We have freedom, provided we comply with the obligations that the regulator sets us.

Q41 Steve Baker: If you had a greater degree of freedom from the regulator in this regard, could you achieve more in terms of resolving these tensions over the fight for access?

Sir David Higgins: No, I do not honestly think that is the issue. I do not think there is anything that the regulator does in terms of freedom of track access that causes that.

Q42 Steve Baker: To what extent has the Command Paper been helpful in this regard in terms of track access?

Sir David Higgins: The most important thing, first, about the Command Paper, which I really welcome, is that it brings to a close this debate and speculation about the future of rail. That is really helpful. I met the Secretary of State before the Command Paper came out. This is not an industry that needs restructuring. It does not need any further change, chopping up or uncertainty. All that does is distract the industry. I think that is really healthy. It talks a lot about the new form of franchises, which is fine. It talks about the role of the Rail Delivery Group. I think the Command Paper is very positive.

Most importantly, the Secretary of State recognises that you are not going to get efficiency savings unless you invest first. You need to invest in the industry, the organisation, right through from knowledge of assets to alignment of train companies and Network Rail.

Q43 Steve Baker: Could we just roll that into decentralisation, devolving, alliances and so on? I understand you devolved the day-to-day running of the railway to the 10 strategic routes in November. How is that devolution working? Have you identified benefits? Is that the end of the process?

Sir David Higgins: It is early days. The next big step is on 1 April. We move accountability for spending the money on renewals, which is a very big step, into the routes as well. That is very important. Parallel with that, there have also been alliance discussions with our various train operating company partners. We did not do this to save any money whatsoever or to get better performance in control period 4. We did all this to get ready for the next control period. The strategies to save money in this control period were set in the first two years. Knowing the ambitious targets we will be set in the next control period, what we will be doing is devolution, delegation of authority for renewals and co-ordination with train operating companies. That is all about the next level of efficiencies to come out in the next control period.

Q44 Steve Baker: Given the extent to which you are constrained by the regulator, to what extent is devolution meaningful?

Sir David Higgins: It is very meaningful. It is probably the biggest change that has happened to our organisation since bringing maintenance in-house in 2004-05 in terms of the changes that it will bring. What were effectively functional silos that reported through to head office are now cut off at a route level and address their customers, whether they are the communities or the train and freight operating companies.

Q45 Jim Dobbin: I have a couple of specific questions. With all the discussion about high speed rail recently, do you think that Network Rail should be the operator?

Sir David Higgins: Only if the Government choose. I would hope that Network Rail has some role, but we need to earn the role to play in High Speed 2. We have quite a lot of technical people seconded into the High Speed 2 team and they are helping. I am hugely supportive of High Speed 2. I sat on the challenge board until recently. The Government should find the most efficient way to deliver High Speed 2. It needs to form part of the network, of course, but we do not have any monopolistic right to be involved in it. The Government should want us if they see that we are the most efficient. Our projects division, which is one of the largest project management companies in the country, is becoming more independent from Network Rail, more up to the challenge and scrutiny so that it can be seen as a very credible partner for the people who want to build High Speed 2.

Q46 Jim Dobbin: So Network Rail would bid for this contract?

Sir David Higgins: Only if there is a role that makes sense for us. Every year we do a huge amount of projects. Our enhancement projects teams and the work beyond maintaining and renewal of the railway track runs at over £2 billion a year. They are massive projects such as Crossrail above ground, Thameslink and Reading station. There is a huge amount of activity done very well. The more we build credibility on projects like re-signalling or Western or Reading, the more likely it is that people who want to build High Speed 2 say, "We want to align ourselves with Network Rail and their projects division because they are very competent people."

Q47 Jim Dobbin: Specifically on the infrastructure programme that you have planned, where does Northern Hub fit into that?

Sir David Higgins: It is very important. We have started planning some of the work in this control period, which is absolutely essential. Every signal I get from Government is that it is an absolutely crucial part of control period 5. As I say, we are spending some money in control period 4 just to make sure that we are ready to move as soon as the money is freed up from control period 5. We have talked to the Department about pre-investing in design so that we do not have a period at the start of control period 5 where work is not done. So we are going to have a quick start. Yes, Northern Hub is a crucial part. I am sure you know all the figures and what it will do in terms of commuter and passenger usage. When you look at it, it frees up historic gaps, particularly around Manchester, and you will get a much more efficient railway system, as with the electrification programme.

Q48 Chair: But what priority does it have?

Sir David Higgins: I would be shocked if Northern Hub in its fullest extent is not central to control period 5; I would be really surprised.

Q49 Chair: There are current discussions taking place on it, are there not? Where are those up to?

Sir David Higgins: Design work on that has been done. What happens is that we make our initial industry plan, which is our bid for what should be in control period 5. The Department then responds with a high level output specification and a statement of funds available. That happens in the middle of this year. We then respond at the end of this year with a strategic business plan. That is the process of agreeing what is in control period 5. That is finally determined by the regulator initially in April next year. I would be very surprised if the Northern Hub in its entirety is not fully supported in control period 5.

Q50 Mr Harris: I want to follow up briefly on Mr Stringer’s questions relating to bonuses. Under the last Labour Government, Ministers were very strictly under orders never to be seen publicly giving Network Rail any instructions, orders or advice, or even to be seen speaking to them, lest the rules about public debt and the debt that was owed by Network Rail be reclassified as public debt instead of private debt.

This Government have taken a very different approach. In May 2010, just after becoming Secretary of State, Philip Hammond wrote to the Chairman warning him against bonuses for that year. The current Secretary of State, Justine Greening, has also said very publicly that annual bonuses would be unacceptable.

Is it fair to say that, without those interventions from Ministers, you would have been more likely to accept your own annual bonus this year?

Sir David Higgins: There was no annual bonus about to be paid to me. That was something that was lost in that entire debate. That would potentially have been determined in May of this year if we had hit punctuality and asset performance thresholds, which were quite strict.

I have talked to both the previous Secretary of State and the current Secretary of State. Both have made it very clear to me that it is not their role to approve or have opinions otherwise on bonuses. I met the Secretary of State, Justine Greening, on 2 and 3 November. She reflected general public concern about executive remuneration and public sector organisations that benefit from the taxpayers, but in the end she was quite clear that the decision on bonus payments was for the board and remuneration committee of Network Rail.

Any new revised bonus scheme-the management incentive plan, as it was termed-is the responsibility of the members to vote on. In that process, we needed to take advice from the regulator because we were required under our licence from the regulator to have in place a management incentive scheme. We have to find out from the regulator whether we comply with that licence condition, which we did. The members can then take advice from the regulator as to whether the bonus is value for money. The Secretary of State did in early November reflect public concerns, but I have not talked to her-and I know this is on the record-since 6 February about bonuses.

Q51 Mr Harris: It would be entirely appropriate for her to say to you, "Sir David, you really ought not to take your bonus." That would be a perfectly normal thing to say.

Q52 Sir David Higgins: She could say it; why not? She could reflect public comment, but she did not.

Q53 Mr Harris: Surely it is the job of the Secretary of State to have her own opinion, not just to reflect public comment.

Sir David Higgins: That is right, and she did. She did that in early November.

Q54 Mr Harris: You said you were not due any kind of annual bonus.

Sir David Higgins: That is right, because it had not been determined.

Q55 Mr Harris: So you did not give any money to charity then.

Sir David Higgins: I gave up the right. I hope I am confident that in the end we will trigger the performance objectives.

Q56 Mr Harris: This is semantics. You were going to get a bonus worth 60% of your annual salary and you just chose to give it to charity instead.

Sir David Higgins: No, no. That decision would have been made in May 2012 by the remuneration committee, not by me.

Q57 Mr Harris: If that decision is taken, that money will go to a railway safety charity. Is that correct?

Sir David Higgins: It is now not going to be made. What I have said-and I had discussed that decision with my colleagues before making it public-is that, given the public environment we are in, if in the event in May the board of Network Rail decided to pay out an annual bonus, I would elect to give that money away to a safety charity. I had already made that decision.

Q58 Chair: So nothing has actually happened.

Sir David Higgins: No, no. What will happen is that, in May, the remuneration committee will determine what money, which would have been available and would have been due to directors, will be given to safety. That decision will be made.

Q59 Mr Harris: Is that to safety charities?

Sir David Higgins: It is given to a safety fund, which is set up. It has been running for three years now. Money has been deducted for three years from the general bonuses that are paid to staff and put into a safety fund.

Q60 Mr Harris: So this is not a charitable organisation.

Sir David Higgins: No, it is not a charity. If that is the impression, that is wrong.

Q61 Mr Harris: That is certainly what was reported in the media.

Sir David Higgins: It is put into what we term a level crossing component of a safety fund. We put money aside that comes from bonuses that are forgone and have done so for three years. That is then used in training and safety and various other safety programmes. We particularly wanted the money that is set aside this year to be focused on level crossings because more money could be spent on level crossings.

Q62 Mr Harris: I appreciate that clarification. You said in answer to Mr Stringer that "payments for failure must be wrong".

Sir David Higgins: Yes, absolutely right.

Q63 Mr Harris: Presumably, having been found by the Rail Regulator to be breaching your licence, there was no question that, come May, you would accept an annual bonus.

Sir David Higgins: That is a decision for the remuneration committee to make at the time. Within our remuneration, there is a threshold of a public performance measure, punctuality, asset quality and then six other objectives. That is a very public figure. It was sent out to the members. It has been out in consultation now for a year. If you hit that target, there would not have been any bonus payment, but you would have been eligible for a payment. If you do not hit that target, you are not even eligible to be considered for a bonus.

Q64 Mr Harris: In two years, when the gainshare plan kicks in and directors start to be paid up to 500% of their annual salaries, do you anticipate smooth sailing at that point?

Sir David Higgins: There is no gainshare scheme.

Q65 Mr Harris: There is no gainshare scheme?

Sir David Higgins: There is no gainshare scheme.

Q66 Mr Harris: So it will not happen?

Sir David Higgins: There was a proposal to have one approved, but it was not approved because it was deferred.

Q67 Mr Harris: It was deferred?

Sir David Higgins: Yes; the meeting was deferred.

Q68 Mr Harris: But it is still on the agenda, is it not?

Sir David Higgins: No. The meeting was deferred, and it is not on the agenda at the moment. We have a licence condition to have a gainshare scheme in place. That is a requirement by the regulator and I believe in it. I do not believe in paying people large base salaries, long pensions, payment for failure and large termination payments to get rid of them. I do not think that is how you drive a performance organisation. I would want to have a performance-based system in place in this organisation. We do not today for directors but we should. We need to work out what it should be. We will reflect, talk to the regulator and come back with a scheme.

Q69 Chair: Has your head of legal services left you recently?

Sir David Higgins: Yes. She resigned four or five months ago.

Q70 Chair: Was there any large payout involved in that?

Sir David Higgins: No; she just resigned.

Q71 Chair: Can you give us any reason why?

Sir David Higgins: Her own personal reasons.

Q72 Chair: Has your head of PR gone recently?

Sir David Higgins: Yes. We did not have a real head of comms. We had a person who was an understudy doing that role. The head of PR and communications left over a year ago. Victoria Pender left 18 months ago, probably.

Q73 Chair: Was there any big payout involved in that?

Sir David Higgins: With Victoria Pender, I do not know; I was not around at the time.

Q74 Chair: I would like some clarification about the safety fund that the potentially forgone bonuses would go to. Does that fund depend upon money coming in from extra sources?

Sir David Higgins: No, it does not. It is just money that is set aside that can be put into safety. We deduct money from bonuses paid and put that money into safety. A lot of it is put into leadership programmes and behavioural safety programmes for the work force.

Q75 Chair: You spoke about having the alliances that have been suggested with the train operating companies. How would you make sure that those work in the interests of passengers?

Sir David Higgins: Our objectives are the same as those of the train operating companies. The proposed CEO of our alliance in South West Trains, Tim Shoveller, has the same obligations. As we are held to account by the regulator, they will be held to account by the Department for Transport.

Q76 Chair: Some concerns have been expressed that maybe that would benefit the train operating companies rather than the public.

Sir David Higgins: In terms of any excess profits?

Chair: Yes; that is correct.

Sir David Higgins: I think the agreement will cover that. If there are windfall profits, the agreement will look at protecting against that happening.

Q77 Chair: Is that arrangement likely to squeeze freight services?

Sir David Higgins: No, it will not. On that particular route, about 80% is passenger-South West Trains-and about 10% freight. It is a very important freight route coming up from Southampton. We have an obligation, and certainly the regulator holds us to that, to ensure that we have the correct access for the other passengers and cross-country as well as freight. I am confident we will comply with that.

Q78 Chair: I am referring to that in a more general way, not just a specific instance. If alliances become more general, would that mean that freight services would be squeezed even further?

Sir David Higgins: It depends on particular cases. It is very difficult to do an alliance like we have on South West Trains in areas like West Coast, East Coast or Western. It makes it very complicated because there is such fragmentation of users, and freight is so important in those corridors.

Q79 Steve Baker: I have a question on passenger information. Last year in our winter weather report, we called for a culture change in relation to passenger information and helping people understand the reasons for disruption. Has that culture change been achieved?

Sir David Higgins: A huge amount of work has gone on there. We have also had a lot of discussion with the regulator on that. There has been good progress and money has been invested. I think progress is going well.

Q80 Steve Baker: What has that money delivered? There was specifically a requirement for a real-time passenger information system so that people could understand why their journeys were so disrupted.

Sir David Higgins: Yes. About £5 million was put into connecting some of the old systems that did not talk to each other. That will come into place in April of this year.

Q81 Steve Baker: What should passengers expect next time there is heavy snow?

Sir David Higgins: Better co-ordination this winter. Even though it was not as tough as last winter, we had some pretty tough periods, with some very heavy gales and some periods of snow. This winter we are all better prepared and better co-ordinated. Ultimately, we need a better passenger information system. Ultimately, we need money to replace the old historic legacy IT systems that we have, but that is a longer game.

Q82 Steve Baker: How long is that game?

Sir David Higgins: How long and how much? It is probably a fair bit of money and it is a control period 5 issue to work through.

Q83 Chair: But there can be other kinds of disruption on the rail as well. Who is responsible for getting accurate information to passengers?

Sir David Higgins: The communication with passengers is the responsibility of the train operating companies of course, but a lot of the information is from feeds from our systems. It is a combination of both. We talk to passengers at the stations because we manage 17 stations. The prime communication is between the train operating companies and their customers because they are their passengers.

Q84 Chair: So you do not think you need to do anything better with this information?

Sir David Higgins: We do. We have to do everything possible to facilitate the train operating companies having the right information and we need to manage the main London terminal stations efficiently and competently with better co-ordination. There is no doubt about that. We should not try and go round the train operating companies and talk direct to the passengers. That would just confuse passengers.

Q85 Chair: But you are looking to improve communication between you and the train operating companies?

Sir David Higgins: Yes, we are. There is good progress. Different train operating companies have taken different approaches and used new media in terms of communicating with customers. The Olympics, of course, is a huge challenge for us. A massive amount of work has gone into that, working with the train operating companies and with the transport co-ordination centre. It will be a big challenge for our entire industry. Every day a million more people will use the main overground train network during the Olympics.

Q86 Paul Maynard: Clearly you have a very big challenge in meeting some of what Sir Roy McNulty has proposed in terms of reducing the cost base of the railways. You talk a lot about efficiency. One way of driving out cost is, of course, innovation. One of my concerns is that, in all your alliances, re-workings and finding new ways of working, the potential for the innovation referred to in the Rail Command Paper is being squeezed out. Can you talk briefly about what Network Rail is doing to promote innovation and give some concrete examples of how that is resulting in improved passenger satisfaction?

Sir David Higgins: We did go out to the public and ask for ideas. One concrete example that came from the public was the idea on Thameslink, which is a very complicated project of rebuilding the line through central London, to use a new composite sleeper that carried out multiple tasks. That came directly from the public; it has dramatically reduced the cost of sleepers and makes them much easier to install. That is an example I remember that came from that.

I do not see why innovation should stop in this process. Empowering the routes and working closely with the train operating companies should make it better to innovate.

Q87 Chair: Finally, Sir David, at the beginning of this session you spoke about all the challenges and demands on the line and why you were not meeting some of the punctuality targets. Do you think those targets should now be revised?

Sir David Higgins: No. The targets set for the control period are those for the control period.

Q88 Chair: Are you going to be able to meet them?

Sir David Higgins: We will certainly strive to meet them all but we have to be realistic. If the trade-offs we have to make in meeting those are too great, we need to have that very open and honest debate between ourselves, the regulator, the Department, and ultimately the public. We need to be clear with the public in the end about the challenges we face in the next 10 years as we deal with this big capacity crunch and do that responsibly. We are very committed to focusing on our targets. We get a large amount of money from the train operating companies and the public to deliver. We are a very focused and performance-based organisation.

The message I want to get over today is that we are now at a level of performance, whether it is safety, punctuality or cost, where we are facing the law of diminishing returns in some areas. There have to be trade-offs. The key issues of capacity, performance and cost fight against each other at this level now. We need to have that honest, mature debate. Then we will work and deliver the objectives we are set. We are very focused on delivering CP4, but I want to have that debate. In particular, I want to have it for control period 5 so that we go into control period 5 aware of the massive challenge we have of rebuilding a lot of the network-particularly Western and Thameslink, where there is a huge interruption to our network-but we understand the trade-offs and benefits that will come at the end of that investment programme.

Chair: Thank you for coming and answering our questions.

Examination of Witnesses

Witnesses: Anna Walker CB, Chair, and Richard Price, Chief Executive, Office of Rail Regulation, gave evidence.

Q89 Chair: Good morning and welcome to the Transport Committee. Could I have your names and positions, please, to help our records?

Anna Walker: Anna Walker, the Chair of the Office of Rail Regulation.

Richard Price: I am Richard Price, the Chief Executive of the Office of Rail Regulation.

Q90 Chair: What is your current assessment of Network Rail?

Anna Walker: As you have heard, there are increasingly complex issues about delivery on the network as a whole. We are very conscious of that. We are very conscious that the easy pickings have gone and there is a set of complexity now. It is not just Network Rail; it is the interaction between Network Rail and the train operating companies.

On the other hand, we are also clear that some arrangements were put in place for CP4. Those involved a sum of money for Network Rail. They involved some efficiency targets, and they also involved service targets, if I can call them that, or what needed to be delivered for the money that they were given. Network Rail accepted those, and we continue to believe that it is important on behalf of passengers and freight customers that those remain the targets. We remain very concerned, listening to what Network Rail says about the difficulty of meeting those targets, but they are the targets for CP4 and we need to push them hard as a basis for CP5 as well.

Richard Price: I would just add a little to what Anna has said. I come to this job as a newcomer to the industry. There are a number of striking things about the industry in terms of what it has achieved over the last 10 years. Its costs in what it has achieved through efficiency are already 40% below where they were 10 years ago. It is doing that on a network that is, as David said, performing at close to record levels. It is not quite at its targets, and we are exerting pressure on Network Rail to deliver those targets for which it has been funded. It is carrying more passengers than at any time since the 1920s, but it is nevertheless true that its costs remain too high. We are at a key moment now where a lot of investment is continuing to go into the sector because of the capacity constraints and because customers’ expectations are rising. We are at a moment where, in order to get further gains both in terms of performance and efficiency across the industry, we really need to see better collaboration between the train companies, Network Rail and the supply base to the industry. That is where we will be focusing over the next few years and as we go through the periodic review of Network Rail’s finances.

Q91 Chair: If Network Rail’s costs are too high, is that a criticism of them or of you for failing to regulate them more effectively?

Anna Walker: ORR had already established at the beginning of CP4 that, in their view, Network Rail’s costs were 40% away from best in class. The decision that was taken at the beginning of CP4 when I was not Chair, but I would very much support this, was about the question of how much of the gap could be closed in the CP4 period. The decision was 21% plus another couple of per cent. because Network Rail underperformed in CP3. There was a judgment there, but that was the judgment that was reached. The Office has been clear throughout what the gap is that needs to be closed.

Q92 Chair: Do you have enough regulatory tools at your disposal to act?

Anna Walker: I believe that we have the right regulatory tools in relation to Network Rail. We have a range that we can use. There is one point that I would like to highlight, which I have already referred to. Running the railways is a whole system. It is not just Network Rail; it is the train operating companies and, indeed, the suppliers and the rolling stock companies. At the moment we have a very bifurcated regulatory system. The ORR believes that there is a role for the regulator-not pushing the Department for Transport out altogether; I want to make that clear-to be more closely involved with monitoring the performance of the train operating companies, because we believe that in that way, there will be greater understanding of what is happening in the system as a whole and therefore a greater ability to bear down wherever the problem is. We can bear down on Network Rail, but it may be that, going forward, the train operating companies and the suppliers also need attention.

Q93 Chair: If that change is made, and that is what the Government are talking about now, what role would you leave in the Department for Transport? How would it work?

Anna Walker: Nobody is arguing that the Department for Transport should not be the franchise granter. They would continue to grant the franchise. Any Department that is granting a franchise and spending significant sums of public money on it is bound to want to be seen, for its own public accountability purposes, let alone the political issues, to be accountable for the proper delivery of what was under that franchise. What we are arguing for is to work alongside the Department for Transport on the monitoring of the train operating companies’ performance so that we can see it between us as a whole. Instead of bearing down on just one part or another part of the system, we can pull it together and look at it as a single whole.

Richard Price: This is true both for performance and for efficiency. We heard David Higgins talking earlier about the things that Network Rail can do alongside the TOCs to improve punctuality and the flow of information to customers. That is all very important. If you look at the analysis that was produced for the McNulty review, it is very clear that a large part of the efficiency gains that McNulty anticipated-and we worked with McNulty on this-come from Network Rail. That is what we will steam out through this control period of Network Rail and through our periodic review.

It is also very clear that a chunk of cost can potentially come out from the wider industry, including the train companies. What we have been doing so far is make sure that there is much greater transparency around the whole industry costs. We published for the first time in February a set of financial data for the industry as a whole, which I think substantially improves the transparency of the costs of the industry. That is really fundamental if, with the Department, we are going to get costs out across the industry.

Q94 Mr Harris: I am intrigued by this idea that the ORR would be more directly involved in monitoring the performance of the TOCs. ORR is already quite closely involved in the Rail Performance Group meetings that happen every month, where you meet with the Minister, the TOCs and Network Rail. You go through the performance of individual TOCs in detail. Is there something wrong with that process? Is there something that can be done to improve that particular process that you are not quite happy with, because ORR has plenty of opportunities to contribute there?

Anna Walker: You are absolutely right about the process and it is a very important one. It is an informal process. The TOCs, for reasons I understand, look entirely to the Department rather than to us. We are looking for a more formal role where it is clear that we have a legitimate position in terms of pulling together what we see on performance and laying that in front of the sector so that we get the sector right on behalf of passengers going forward.

I want to add one point. We understand, and we have put some real effort into seeking to listen to, those that we regulate or think we would like more of a regulatory role in relation to. We are very well aware that the train operating companies have a legitimate concern over double jeopardy. The point we are making to them and to the Department is that we, too, are opposed to double jeopardy, but we believe that is possible to think through with the Department a system, an approach and a structure that would not put the TOCs at risk of double jeopardy but would give us a clearer role to pull whole system performance through better in the future.

Q95 Paul Maynard: We are clearly hearing something of a power bid here from the ORR, which was not quite what I was expecting this morning. One of my concerns about that power bid is whether you are able to deliver on your high ambitions. If we look at issues related to train crowding, for example, there is a fascinating section in the Government’s Command Paper about your efforts to deliver more accurate metrics relating to train crowding and overcrowding, which would appear to be fundamental to the Government’s wider ambitions relating to ticketing reviews and so on.

If you cannot deliver measures on train overcrowding rapidly and promptly that would allow the Government to do its ticketing review, how can we have confidence that you can take on this wider role that you seem so ambitious for?

Anna Walker: I would really like to stress and make clear that this is definitely not a power bid. That is really, really, really important. I understand why you are saying that. It is not a power bid for two reasons. The first is that there is absolutely no challenge, as I hope I made clear, from us to the Department for Transport in its role in granting franchises for the train operating companies.

The second thing is that as an organisation we are really not interested in power for ORR except where it can be shown to be in the interests of the sector or the passenger for us to have a greater role. This would not be a role that in any way displaced the Department for Transport but gave us a more formal role in looking at what was happening across performance in a whole system way.

Richard Price: I was going to say something very similar. The important thing here is that independent regulation can bring some things to improving value for money and the customer experience across the system as a whole, which it is sometimes difficult to do from within Government alone. This is absolutely not in any way trying to remove power from the Department for Transport. This is simply trying to give them a better flow of information, better scrutiny and a better way of bringing the parties together to solve whole system problems relating to performance, train information and costs across the sector in a way that is really hard to do either for the Department or us as long as that regulation is kept entirely separate. This is about making sure that the Department can itself ensure that it is getting value for money through playing that role.

Q96 Paul Maynard: Are you trying to say that you cannot monitor train overcrowding without these new formal roles that you have been talking about? It does seem to be taking an awfully long time to develop agreed metrics for the TOCs.

Richard Price: There are two aspects here. Train overcrowding in terms of the customer experience would be managed through the franchise, which is held by the Department. However, we work very closely with the TOCs and the industry as a whole on safety aspects relating to overcrowding, where we set with the industry a series of protocols on the arrangements for meeting peak loads to make sure that those peak loads can be managed at stations and carried on trains safely. In a sense this is an illustration of how the responsibilities are currently divided and potentially could be brought together.

Q97 Chair: Do you think that works effectively? There are so many complaints about overcrowding. Does the system really work?

Anna Walker: What I was going to say on the overcrowding issues-and the Command Paper brings this out-is that one of the things that is really crucial on the question of crowding is the need for investment in ticketing machines so that we have real information in a way that we do not at the moment about the numbers on each service. We do not have that and we need more electronic ticketing services to get that. There is more of a debate sometimes on whether it is overcrowding, but if you are standing on one of those trains, which I have done, it feels like that; so I understand the point.

Q98 Chair: You mean you literally do not know how many people are on a given train?

Anna Walker: There are estimates but that is all they are. We need to move towards something that is more accurate than that. We need to do it for the questions of whether it is crowding or overcrowding, and where we need more capacity. We also need to do it to try to move towards a system, again in the Command Paper, which encourages some of us to travel at different times of the day where we can. You need to incentivise that of course through fares, not just the information about who is travelling when.

Richard Price: It is also worth making the rather obvious point that, in terms of tackling overcrowding through enhancements of capacity, again this is a whole system issue. There are a series of enhancement projects that Network Rail is delivering now. There are a series of enhancement projects such as the Northern Hub, which David talked about earlier, which will be delivered through CP5 and possibly beyond. Those things make sense, provided that in the franchises there are also terms that allow the train companies to respond, whether it is through expanding capacity on the trains or changing the service patterns to meet customer demand. The fact that we have good timing, in the sense of the periodic review of Network Rail alongside the process for re-letting some of the key franchises, means that this is an important point in terms of making those decisions for the longer term.

Q99 Mr Harris: I want to follow on from Mr Maynard’s question. I liked his phrase "power grab". I know it is not, but it is fun so we will stick with that. If you are looking for more responsibilities in terms of monitoring the train operating companies, and you are at pains to say that you do not want to take power away from Ministers, it seems to me that, if you have the best interests of the industry at heart and evidence was to accumulate that maybe ORR should do the franchising, can you see yourself going down that road?

Anna Walker: If the organisation was asked to take that on-we would not make a power grab for it-we would have to look at whether we had the skills to do that. We have the skills in the organisation to monitor performance because we do that with Network Rail. In monitoring Network Rail now, we have to look at what is happening with the train operating companies and, indeed, the suppliers, but it would be a step change for that in the future.

Q100 Mr Harris: Were you here when Sir David was giving his evidence?

Anna Walker: Absolutely.

Q101 Mr Harris: I wanted to ask you about the general structure of the long-term bonus scheme, what was called the gainshare, which I believe is now off the table but presumably will be replaced at some point with some kind of long-term incentive scheme. In their defence, Network Rail say that "the company at the moment is demonstrably vulnerable to poaching of our senior staff by competitors for their talent". In other words, if they do not give directors 500 times their annual salary at some point, then they are all going to go off and get even better paid jobs. Are you aware of this skills gap in Network Rail that is caused because the directors are paid so little?

Richard Price: It is really important that Network Rail are able to pay what they need in the market to recruit the right people to run the railway. That is right and absolutely central to their making sure they can deliver the very challenging set of targets and settlements that we give them and that over time they reduce the cost of the industry so that, first, there is less of a burden on taxpayers and customers and, secondly, that for the money the Government invests in the railway more can be achieved. It is really important that they can get the right people.

As they went through the process of redesigning their management incentive plan to replace a previous scheme, which in my view was far too generous because it did not fundamentally link payments to what had been achieved for customers and taxpayers, they produced a series of pieces of comparative data, which they made available to us, their members and their funders. That showed a range of remuneration packages across what they described as comparable businesses. We encouraged them to do that, but we also encouraged them to look at the rates at which other largely publicly funded bodies were able to recruit. There was London Underground, for example, and PTEs. We have encouraged Network Rail to think about what those comparators mean. It is not for us to set the levels of pay because, if we did that, we would be running the company. It is very important that they are able to demonstrate to their members, to funders and to the public-because this is a matter of real public interest-what they think they need to pay in order to recruit the right talent.

Q102 Mr Harris: What are these other private sector organisations of a similar scale to Network Rail? Network Rail is a national organisation. It is funded by the taxpayer. It operates throughout the whole of the UK. What are these private sector organisations of a similar scale to which it compares itself?

Richard Price: There are a range of different businesses.

Q103 Mr Harris: Could you name one or two of them?

Richard Price: Large construction companies, for example. They are Plcs, which are different in different ways. They are not always of the same scale as Network Rail. On the other hand, their directors bear risk directly, whereas Network Rail does not.

Q104 Mr Harris: That is why I was asking. I am sorry for interrupting, but the information I have from Network Rail, which is a briefing sent out to its members, said, "The talent we require is most likely to be found in private sector organisations of similar scale." Are you aware of any organisation of a similar scale to Network Rail?

Richard Price: It depends very much on the role. They have a range of roles across their director group. They will need to draw some from comparable businesses and they are in that market. For others, other comparators will be more relevant. For example, we have encouraged them to look at comparators like London Underground, which is not as large as Network Rail, but nevertheless is a very large business of significant scale.

Q105 Mr Harris: Would you call that a private company?

Richard Price: No, not at all.

Q106 Mr Harris: Network Rail does. That is what I am concerned about.

Richard Price: What I am saying is that that is not the only market in which they are recruiting for talent. This is a big market. Some of it is public sector and some of it is private sector.

Q107 Mr Harris: I am still trying to find private sector organisations of a similar scale. I cannot think of one.

Chair: Can you name any of them?

Anna Walker: I was trying to think back to the comparative information that we had. The National Grid was definitely one; BT was another. These are major infrastructure providers. There are the water companies, but of course they are regional and not national. In the comparators that we had, those were the companies where we could see there was some parallel, but, as Richard says, we urged Network Rail to look at other transport companies that were in receipt of public money as well.

Q108 Mr Harris: Did you find that there were similar types of incentive schemes in those publicly owned transport companies?

Anna Walker: Yes, though the transparency of the information is not always as great as one might like it to be in all those companies.

Q109 Mr Harris: As the Rail Regulator, do you agree with Network Rail’s view that the company is demonstrably vulnerable to poaching of its senior staff? Presumably that is of concern to you. They must have lost quite a lot of senior staff recently.

Richard Price: It is fair to say that they are operating in a market.

Chair: Is that observation something you would agree with?

Richard Price: They are clearly in the market. They clearly have talented people. They also want to draw in more talent, so they are in that market.

Mr Harris: Do you think they are vulnerable to poaching by other companies, though?

Richard Price: We encourage them to look at succession planning and all the rest of it.

Mr Harris: I am asking a very straightforward question. Are you aware that Network Rail is vulnerable to poaching of its senior staff because other companies are offering better packages?

Richard Price: That has to be a risk, yes.

Anna Walker: In two cases we are aware that there has been some serious interest in two members of their senior team. We have been aware of that.

Q110 Mr Harris: Do you think seriously, though, that that comprises a general concern about poaching of staff-that two members of Network Rail are interested in other jobs? In most organisations you have people who are thinking of moving on to other jobs at some point. This does not seem to me to constitute a vulnerability on the part of Network Rail.

Anna Walker: In the two cases that we are talking about, the issue was not that they may or may not have been interested but that others were coming to them. It seems important to me that we recognise, and Network Rail’s approach as a whole recognises, that there are two sets of issues. One is recruitment of staff in the first place. I suspect some form of market analysis there can be helpful.

The second is retention. We certainly understood why Network Rail, in the middle of CP4 with its demanding targets, could in principle be concerned about retention. On the other hand, I think Richard was going to talk about the objectives that we set Network Rail for its management incentive plan, which were extremely tough incentives. You might like to talk about those.

Q111 Chair: At the moment Mr Harris’s question is about whether you agree with Network Rail that their staff are vulnerable in relation to other companies.

Anna Walker: In some cases.

Richard Price: I do not want to talk about individuals. The key thing is that David Higgins, who is new to this business, is able to be confident that he has in place the right team at the top of that business to deliver a demanding bunch of targets in our settlement. They are going to get more demanding as we go into CP5, and he is going to have to have people who can collaborate across the industry in a way that perhaps Network Rail is not used to. He has a very big job of cultural change throughout that business. Is he vulnerable to losing people that he could not replace? In a sense, you can replace anyone. On the other hand, is it really important that he has the right team around him?

Q112 Chair: In your view, does he have the right team?

Richard Price: You would have to ask him that.

Q113 Chair: In your view has he got the right team? You are the regulators looking at what is happening.

Richard Price: David has a big job, and he has a strong team around him who can help him deliver that. It is really important that he feels confident in his team. That is why it is very important that he is able to compete in that market.

Q114 Mr Harris: Do you agree with Network Rail’s statement that the total pay package for directors is at least 25% below the mid-market level when assessed against comparable private sector companies? If that is true, then of course they are vulnerable. That also means that at some point you will have to approve a new package that will increase by a similar amount to bring them up to that level. Is that on the table?

Richard Price: It is not for us to approve or reject the levels of pay in the business.

Q115 Mr Harris: But you have to approve an incentive scheme, though.

Richard Price: That is right for Network Rail. As I said before, we had concerns about the previous package because we thought it was far too easy to get incentive payments through it. That is why we set quite demanding objectives for their new incentive arrangements, making sure that they are solidly focused on delivering some very demanding deliverables that were specified through their regulatory deal. We gave them a strong incentive to outperform on efficiency, which we all recognise as one of the biggest problems across the industry, and gave them an objective to make sure that everything they did in making payments of this sort was transparent and that they were accountable for the decisions they took. What we ended up with was a framework that made them more transparent than many other businesses, but, critically, it meant that they could not get payments for failure.

Q116 Mr Harris: Is that a yes?

Richard Price: I was trying to describe the-

Q117 Chair: We just want to know whether you are satisfied with the current position.

Richard Price: The current position is that Network Rail does not have a scheme in place, and under its licence condition it has to have one.

Q118 Chair: So you will have to agree whatever scheme is put forward; is that correct?

Richard Price: That is right. We will have to make sure that it complies with the licence condition, yes.

Q119 Chair: Will you have to agree whatever scheme comes forward?

Richard Price: We will have to agree the structure of the scheme, not the levels.

Q120 Chair: So it is not the levels, just the structure?

Richard Price: That is right.

Q121 Steve Baker: We have been reminded this morning that Network Rail is a profit-making company with scarce resources over which its customers compete for access, but also they lack freedom to contract and the ability to set prices for access to those scarce resources. Could you explain how it is that Network Rail is supposed to resolve this fight for access among its customers without that freedom to contract and set prices?

Richard Price: I heard what David had to say about that. The key thing is that Network Rail is able to deliver its existing targets on punctuality, performance and capacity as it has been financed to do in its regulatory deal. The structure of access charges reflects the decisions that were taken in the last periodic review, which made allowance for delivering the level of capacity and the level of punctuality that were set out in that deal.

David described the issues around the use of that capacity. I agree with him that ultimately there is a trade-off between capacity and cost and punctuality. In my view, we are some way away from the point at which those trade-offs begin to bite, particularly on long-distance routes where we have taken action. Network Rail are very clear that there are a number of things that they can do to improve performance before we get to those trade-offs.

Chair: Mr Baker is asking you a different point. He is asking you about the way in which the current system works and whether that can produce direct results.

Q122 Steve Baker: Thank you, Chair. We have listened to a conversation about the tension between commuter trains and long-distance trains, and between freight and passengers. There is a requirement for freight trains to have flexible access to track, but that might well come at the expense of not just passenger train operating companies but also no doubt all their passengers. But we have not had a conversation about how price is used to resolve these conflicts over scarce resources. It sounds like you are not recognising a role for price in that conflict, yet earlier Ms Walker mentioned the role of fares in incentivising people’s travel times. Where do you draw the line? Are fares and prices relevant to resolving access to scarce resources or not? If they are relevant, what are you going to do to enable Network Rail to use the price mechanism to resolve access questions?

Richard Price: There are two answers to this question. First, we have to make sure that users get access to the rail network on an equal basis with no undue discrimination. Secondly, there is some scope for varying access prices in relation to different kinds of service and also different kinds of rolling stock. We recently published a consultation document, looking forward to the next control period, which is looking at the extent to which more flexibility can be brought into that structure of access charges. There is a trade-off. On the one hand, you want to make sure that, as far as possible, the price mechanism is available to have the effect that you are describing. On the other hand, doing that adds a great deal of complexity to the charging mechanisms across the railway. There is a trade-off between having a set of incentives that is clear, simple and understandable enough for people to respond to it and, on the other hand, having such a degree of flexibility that it is so hard to understand that people cannot respond to it.

Q123 Steve Baker: Finally, I think you just said that you want to make sure that the users have access on an equal basis without undue discrimination.

Richard Price: That is right.

Q124 Steve Baker: Is this not an economic problem and not a political problem? What will you say to those customers who are passengers on a train and are inconvenienced, perhaps quite significantly, by a freight train going through with flexible access because it is on an equal basis without undue discrimination? What will you say to those passengers who are very substantially inconvenienced despite having paid for a ticket? Will you write to them and say, "I am sorry, but you will have to put up with that"?

<?oasys [pc10p0] ?>Richard Price: No. The obligation is on Network Rail as the operator of the system to make sure that those potential conflicts are well managed. You are right that there are issues around conflicts between freight and passenger movements. There was a situation that we came across quite recently where there was a busy Euston to Glasgow Express that was held up because three engineering trains were allowed to cross its path. That is not a question of access charges. That is a question of Network Rail significantly improving its real-time management of the system.

David is right that there is a degree to which trains that run infrequently are harder to manage, but the fact is that part of the regulatory deal is that they need to manage those movements better. Overall, it is very important that they improve their management of the system in order to make sure that there are fewer such conflicts and that both freight and passenger performance obligations are met.

Anna Walker: I do not know if this is helpful, and forgive me if it is absolutely clear to you. There are of course two levels of prices and charging that we are talking about. There is the track access charging, for which we are responsible, and then there are fares and prices to passengers, for which we are not. Of course, on the track access charging, at the moment a third comes from train operating companies. Of that third, only a tiny percentage comes from freight and two thirds comes from Government grant. Some of the issues that you are talking about arise partly from the complexity of this system as a whole.

If I may zone in on one point in particular, Richard has already talked about our concern that there is scope for Network Rail to manage the network better on freight that is using, for example, the East Coast or West Coast Main Line. We have also been looking-and will continue to look in CP5-at moving freight to less busy parts of the network. That is something we are actively looking at.

Within track access charges, which is the issue that ORR can influence, we are also beginning to look at capacity charging where there is a particular pressure on the network to try and get some more of these market signals into the structure.

Q125 Steve Baker: If I were to play back very briefly what I have heard, it seems that you are saying that this enormously complex resource management issue has to be managed without recourse to unhampered access to market mechanisms-that is prices and freedom to contract.

Anna Walker: No; I think we are saying it is restricted.

Richard Price: We are consulting now on more flexibility and a more complex charging structure. As I said before, there is a trade-off between having a simpler system, which sends in some senses weaker signals, and a more complex graduated system, which is just harder to understand and maintain.

Q126 Steve Baker: Can you foresee ever reaching a circumstance where, for example, a freight company can bid to buy a train path, including all the costs on other people of, say, for example, inconveniencing all the passengers who otherwise would have been on that train path and would wish to be compensated?

Chair: Is it possible to do that under the current system?

Richard Price: Under the current system it is not possible to do that. If you are asking in principle if it is possible to do that-

Q127 Steve Baker: Can you foresee Network Rail being able to auction train paths so that a freight company that wants flexible access can just say, "We will pay that much for that path", and it is then up to Network Rail?

Richard Price: In principle, it is possible to do that. As I say, the question is whether the complexity of that approach is better than a simpler approach, which sends some clearer signals.

Q128 Chair: But the question is: can it be done?

Richard Price: In principle it can be done.

Q129 Paul Maynard: You mentioned track access charges in the Command Paper and price signals. You stated that you are looking at increasing track access charges for freight trains aimed at the nuclear and electricity industries. In your consideration of that, have you taken into account the potential impact on energy prices overall as a consequence? Is that not an inflationary measure overall?

Richard Price: Yes, it is. Of course, we have to take account of the ability of generators-and ultimately of consumers-to bear those costs. Yes, that is a factor in our consideration.

Q130 Julian Sturdy: You have already touched on control period 5 and the importance that freight is going to play in that. What else do you see as the main priorities in this quite crucial period? You mentioned freight earlier in the questions from Mr Baker. I wanted to look at the other priorities you see there for freight.

Anna Walker: There are a number of them. Control period 5 is very important going forward. There is clearly the whole question of efficiency, and that is the increased efficiency of Network Rail and the train operating companies. As part of efficiency, we will, in control period 5, have a lot more information because of Network Rail’s devolution of routes. We will be able to use benchmarking comparators for efficiency in a way that we have not been able to do before.

The second issue, which hopefully begins to move all this towards more of a market structure, is what is set out in the Command Paper. There is the scope for alliances, as long as those alliances are not discriminatory. It is not just the alliances; it is a process that allows Network Rail and the train operating companies, if they can genuinely identify new efficiencies, to have a share in the benefits of those efficiencies. It is trying to encourage efficiency through ensuring that there is some incentive for those players to look for further efficiencies over the basics that we can find.

There is also a third issue, which again David Higgins has referred to, which is whether there is scope for a more pro-competitive approach on our railways where it makes sense for both the taxpayer and the passenger. There are some issues about when that is true for open access or not, but, as David has highlighted, there is other scope for competition such as putting work for new enhancements out for greater competition and doing what has been done in the other regulated utilities, which is to look at the whole of the supply chain of activity and seeing where competition could be introduced to the benefit of the taxpayer and the passenger.

Q131 Julian Sturdy: Obviously, the initial industry plan contains a very long list of infrastructure schemes, which is a good thing. We all support that and the Government have made some very good and recent announcements. Do you think that Network Rail has the capacity to be able to deliver that, because it is going to be quite crucial?

Richard Price: Network Rail is already delivering quite a large number of enhancement projects, which we look at very closely. A number of those will flow over into CP5. Of course, there are proposals in the IIP on top of those. The fact is that Network Rail has the capacity to run a whole series of enhancement projects. The key thing the industry has learned over the last five or 10 years is that Network Rail cannot do that by itself. It has to have really good, close working relationships with the whole supply chain. Mr Maynard asked earlier about innovation. It has to be open to innovation in not just the way it tenders but the dialogue that it has pre-tender. From the enhancement projects that we are seeing at the moment, it looks to me as if it is learning a number of the lessons on that and bringing together suppliers so that they can collaborate not just with Network Rail but also with each other. It is working closer than it has in the past with the train companies so that they can plan to manage any disruption to passengers as those enhancement projects are going in. I think Network Rail has capacity, but the way it partners up with the rest of the industry is going to be really critical, not just in delivering these projects but for making sure that it delivers them at minimum cost and-

Q132 Julian Sturdy: But you are seeing the evidence that it is moving towards that, are you?

Richard Price: Yes. I visited the Reading project a few weeks ago. I sat in a room with Network Rail and a whole group of its suppliers that is working collaboratively on that project. That project is about a quarter of the way through. So far it is on budget; if anything, it is a bit ahead of schedule. The things that the suppliers told me that made the difference were that they had had open discussions for a year at least before the tendering process and they had been able to influence the thinking, the design and the planning of that programme. There are variations, but there is good evidence that where this is working well those lessons are being learned.

Q133 Jim Dobbin: On passenger satisfaction, I was interested when you said that you have no role in regulating fares. Just for the record, who is responsible for that?

Anna Walker: It is the Department for Transport.

Q134 Jim Dobbin: I was concerned because the aim is to get traffic off the roads and on to rail. With the recent announcements about massive fare increases, it is going to cause a problem. Would you like to have the responsibility for regulating fares?

Anna Walker: The history of economic regulation in this country shows that this is something that an independent regulator can do and do with some benefit. An independent regulator who is looking at fares would always have to work within parameters and guidance laid down by Government where public money is going into the sector. There clearly are priorities that Government have to decide for that. We believe, in due course, that it would be possible for Government to lay down the overall approach and for the regulator to deliver within that overall approach. The Government of course have their own consultation going on-a fares and ticketing review-and we will input into that. This is not an issue that we think is as urgent or as immediate as-I won’t say it. If I have time, I will come back to that point. We believe the monitoring of performance, given the complexity of this industry, is an immediate concern.

Q135 Jim Dobbin: I think travelling passengers will have another point of view, possibly.

Anna Walker: I absolutely understand that.

Q136 Jim Dobbin: On information, which is very important, are you confident that with the new licence and code of conduct that is in place now you will be able to improve information to passengers?

Richard Price: I hope the licence condition and the code of conduct that the industry is signing up to beneath it will iron out the discrepancies in performance across train companies. Some perform really very well on providing information to passengers. There are a number of areas in which performance has just not been acceptable. We saw that with the snow last year. It is still the case that, when there are incidents, you get conflicting sources of information and it is hard for customers to make sense of it.

Q137 Chair: What is going to be done about it? We know what the problem is, but we want to know what is going to be done about it and what your role is in making it better?

Richard Price: The train companies are now putting in place plans to address any potential shortfalls in their information. My inspectors are visiting the train companies as they put in the work on those plans. We will monitor those plans very closely.

Q138 Chair: You will be monitoring the plans. Will you be doing anything about it?

<?oasys [pc10p0] ?>Richard Price: We will be monitoring the results. We will watch to see whether there continue to be discrepancies in performance. Of course, we have said that we will act where there are-

Q139 Chair: How long will you be doing the monitoring before you make an assessment of whether it is working properly?

Richard Price: The plans are being produced and implemented now by the train companies. We have said that we will review how progress has gone in a year’s time, but of course during that year, where there are problems, we will watch to see how the train companies perform. Things will go wrong from time to time on the railway. The really important thing is that all train companies are giving customers consistent and clear information that helps them to make decisions about their journeys.

Q140 Chair: But we want to know what you are going to be doing to make that happen.

Richard Price: We will be making sure that they have their plans in place and we will be seeing that they deliver on those plans.

Anna Walker: Richard is absolutely right that we have been talking about this crucial and difficult area of passenger information during disruption. There is another area, which is about transparency more generally. One of the things this sector isn’t is clear about what is happening. As ORR, one of the areas we are very concerned to move forward on, and we very much welcome that the Command Paper recognises this role for us too, is on the production of more information that is understandable to an average person about where public money is going into this railway, what is happening at individual route level in terms of the train operating company and Network Rail, and crucially-and this comes to one of the areas of concern to you-whether we can put more information into the public domain for passengers of a granular sort about what is really happening on performance on their part of the railway.

Q141 Chair: What is the Office of Rail Regulation going to do about achieving those things?

Anna Walker: We are looking actively with the Department at the moment about what information can usefully go out there for the public.

Q142 Chair: That is currently being done?

Anna Walker: Absolutely. We would hope to start CP5, if not before, with a flow of other information that really allows the informed consumer to look and say, "This is performing a lot less well than that."

Q143 Jim Dobbin: Another aspect of passenger satisfaction is safety of travel. Following your report last year, do you see improvements in the issue of safety?

Richard Price: We have been very clear that there will not be any compromise on safety standards. We have worked with the industry to encourage them-

Q144 Chair: Are you satisfied with the way Network Rail are now addressing the safety issues that you criticised in your last report?

Richard Price: Yes. Network Rail’s culture and its processes on safety are significantly better than they were years ago.

Q145 Chair: Are they good enough?

Richard Price: They are of a very high standard. If you look at their record, they are one of the safest across the whole of Europe.

Q146 Chair: No, no; that is a generalised statement. If we look at your safety report for 2010-11, it was very critical of Network Rail for its safety culture. It spoke about under-reporting of accidents. We already knew about the long-standing issue of level crossings. Are you satisfied that they are addressing both those areas adequately now?

Richard Price: Changing the culture of the organisation is a massive task.

Q147 Chair: Are they changing that culture sufficiently quickly?

Richard Price: They are doing the right things to shift the culture, yes. There is a long way to go, but I think they are making real progress. On level crossings, we have agreed that Network Rail will do a thorough risk assessment across all its 6,500 level crossings. We will scrutinise that and it will be audited. It will be made public. The key thing is that it is able to focus on addressing what everyone agrees are the highest risk level crossings across the system.

Q148 Chair: Do you think the timetable is adequate?

Richard Price: I think they are making fast progress on this.

Q149 Chair: Are they making enough progress?

Richard Price: There are still some areas across the country where their risk assessments need to be speeded up. We need to be clear that the inspections regime is sufficient. We serve enforcement notices where we think there are shortfalls. In terms of the progress on the risk assessment across the whole network, yes, I think they are proceeding well on that.

Q150 Chair: Ms Walker, you said that you supported the idea of alliances with the train operating companies as long as they were not discriminatory.

Anna Walker: Yes.

Q151 Chair: Could you tell us what your concerns are and how you will address that?

Anna Walker: Yes. Network Rail is obviously in a monopoly position as infrastructure provider. The train operating companies, particularly as they have longer franchises, have some degree of regional monopoly. They have competed for the franchise, but while they have it they have some degree of monopoly. As we have heard, the challenges in our system are actually of multi-use. Others using the system may be freight, but in many cases, it is other franchised train operating companies and very occasionally open access. We are saying that we welcome these alliances, which are innovative in terms of greater efficiency on behalf of passengers, but not at the expense of excluding others who have a legitimate reason for being on the network.

Q152 Chair: Where can Network Rail make efficiencies?

Richard Price: There are a range of things that they can do to improve efficiency. ORR did a lot of preparatory work for the McNulty review. Network Rail has already accepted that it can achieve the lower end of McNulty’s range-the 16% reduction in its operating renewals and maintenance costs. What we are looking at now is how they can go beyond that. They can do a range of things, which include improving the skills of their work force so that people are better able to make judgments and to manage projects; taking a risk-based approach to maintenance and effectively planning it over a longer period; making sure that they are clear what the work bank is across their maintenance and renewals programme; and getting better access to the track and using the period they have to get access to the track better.

There is a certain amount that Network Rail can do by itself. We think that, as the industry tries to get to the higher end of the McNulty range, it is going to be critical that we get the collaboration we have been talking about around alliancing but also better partnerships with the supply chain. Fundamentally, getting to the higher end of the efficiency range is going to require partnerships across the industry.

Q153 Chair: How are you going to set punctuality targets for the next control period? Network Rail says it wants to have a conversation with you. How is that going to influence you?

Anna Walker: This, too, is complicated. The very first question is, are the Government in their high level output specification going to set a punctuality target or not, and, if so, at what level? They did it last time and I am sure they will look at it again. We then take whatever the high level output specifications are and we have to translate those into specific outputs that may be more disaggregated for Network Rail. They are particularly important because they bind in not only Network Rail but the train operating companies.

We recognise all the points David is making about the trade-offs and the pressure on the system because of the growth of capacity, but what we are very concerned to do before decisions are made about either the high level output specification or the particular targets that will drive CP5 is that we have absolutely bottomed out what is not working on the network and aim to put it right on behalf of passengers. It would be wrong for us all to give up too easily maximising the punctuality on this network. Whatever is decided in 2014 will then become the punctuality measure between 2014 and 2019. We need to make sure that it is as good as it can be for passengers.

Q154 Chair: The National Audit Office suggests that there should be arrangements whereby Network Rail can return savings to the Department within the control period. Is that a good idea?

Richard Price: There already are arrangements where they can make rebates where they demonstrate absolutely and unambiguously that they have made efficiency gains. We would have problems with effectively reopening the settlement and changing the specification of what Network Rail is being asked to deliver. From experience, we know that that kind of change in the specification, especially in a long-term investment and infrastructure business such as Network Rail, is exactly the kind of disruption that can lead to costs escalating and undermine effective delivery. There are already pretty good mechanisms for these rebates to happen. A more fundamental reopening would be going the wrong way in terms of undermining efficiency.

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

Prepared 5th May 2012