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

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Transport Committee

Rail 2020

Tuesday 19 June 2012

Sir Roy McNulty and Graham Smith MBE

Tim O’Toole CBE and Sir David Higgins

Mick Whelan, Bob Crow, Manuel Cortes and Julia Long

Evidence heard in Public Questions 1 - 135

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Oral Evidence

Taken before the Transport Committee

on Tuesday 19 June 2012

Members present:

Mrs Louise Ellman (Chair)

Steve Baker

Jim Dobbin

Julie Hilling

Mr John Leech

Paul Maynard

Iain Stewart

Graham Stringer

________________

Examination of Witnesses

Witnesses: Sir Roy McNulty, Chairman, and Graham Smith MBE, Team Leader, Rail Value for Money Study, gave evidence.

Q1 Chair: Good morning and welcome to the Transport Select Committee. Would you please give your name and position to help with our records?

Sir Roy McNulty: I am Sir Roy McNulty. I was Chairman of the Rail Value for Money Study, which was published in May of last year.

Graham Smith: My name is Graham Smith. I was a Team Leader on the study working for Sir Roy.

Q2 Chair: Sir Roy, in your study you say that efficiency savings should be achieved. You talk about 20% to 30% savings by 2018-19. Are you sure that can be done in a way that is about efficiency rather than reducing services or standards?

Sir Roy McNulty: I am confident that certainly 20% is achievable. I think 30% is a viable target for people to aim at. Perhaps it might help the Committee if I explained how we got to that conclusion. We looked at it in several stages. The first thing we did was to look at the actual costs of the railway and particularly at the unit costs-the costs per passenger kilometre. That showed us that over the past 15 years or so there had been barely any improvement, despite the fact that traffic volumes had increased very substantially and you would expect some reduction in unit costs.

We then did a study looking at what had happened in other industries that had been privatised and in other railways that had been franchised elsewhere. The conclusion we came to was that there was potential for 20% to 30% improvement.

We looked at what had happened in the freight sector here in the UK as opposed to the passenger railway sector. Again, it showed that freight had made significant productivity improvements, whereas the passenger railways had not.

We then looked at a number of international benchmarks-benchmarking that had been done by others, notably by ORR, but also other studies that had been done in the past. We commissioned consultants to do a number of comparisons with four other European countries. Again, that confirmed that there is a substantial efficiency gap between the UK and those other countries. It suggested that the gap was bigger than 30% and maybe as high as 40%, although it is always difficult to get "apples for apples" comparisons.

Then we looked at it the other way. We looked at all the recommendations that had come from the different working groups and studies that we had commissioned. We looked bottom up at the recommendations that we were making and what we thought the savings potential from that would be. If you take the recommendations from our study, plus the savings that are already planned for Network Rail currently and projected into the next control period, plus some improvements that we believe are possible in train utilisation, you can justify a 30% target.

Having looked at it from those different angles and talked to an awful lot of people within the industry, we were reasonably comfortable that a 20% to 30% range is a sensible thing to put on the table.

Q3 Chair: You have some pretty stark figures in your report. You say that compared with the systems against which we are benchmarked-other European rail systems, essentially-the passenger is paying, on average, 30% more for the tickets and the taxpayer is paying around 30% more in subsidy. You also say that it appears that perhaps British Rail were more effective at controlling costs than the current structure. With all of those figures, do you think that you gave enough attention to looking to a different system as a whole rather than making changes in the system that we have, given the size of those differences?

Sir Roy McNulty: The passengers paying 30% more is consistent with other studies that other people, including Passenger Focus, have done in the past. On average, our passengers are paying more. As to why the cost is higher, we did not research British Rail’s period of time in detail, but they had fairly well perfected the art of "make do and mend". Some of the arrears of investment that have had to be made good in recent years go back to that era of "make do and mend".

We did consider-and our report shows that we considered-alternative structures as a possibility. The reality is that the upheaval of changing the structure, pulling it all up by the roots and starting again, would very significantly delay the effort to achieve savings that we believe can be achieved if the effort is made now. In other words, the present value of the savings will be greatest by sticking with the present structure and making it work more effectively rather than throwing it all up in the air and starting again with something completely different.

Q4 Chair: Did you think that there would be any political will to change the structure as a whole? Was that the real reason you did not look in that direction?

Sir Roy McNulty: No, it was not a factor. I have no political axe to grind in this. I have no doctrinaire axe to grind. We looked at it purely from a practical point of view. What is the quickest way to achieve the savings that are possible and give some relief to both the passenger and the taxpayer, who, I believe are not getting a very good deal at the moment?

Q5 Chair: What is the cost of the fragmented nature of the rail service we have?

Sir Roy McNulty: I could not put a figure on it, but, without a doubt, the way it has worked or not worked together in the past has been one of the barriers to efficiency. One of the big themes of the report is the need for much better co-operation across and within the industry at different levels, both at the pan-industry level, which to an extent should be remedied by the Rail Delivery Group, but also at an operational level between Network Rail and the train operating companies, because operating in separate silos, as they have tended to do, has been one of the causes of inefficiency. I do not think we could put a number on what that cost is. I do not think anybody could put a number on that cost, but, without a doubt, better co-operation and better alignment of incentives and effort should yield savings.

Q6 Graham Stringer: You say that the costs you compared with were industry norms across Europe and North America. Why isn’t the comparator British Rail prior to privatisation, which cost the taxpayer about £800 million? We are now paying about £3.7 billion or £3.8 billion, if you change it for inflation. That is an increase in costs of between seven and 10 times. You are getting more passengers paying more fares. Something does not add up in all of this.

Sir Roy McNulty: I agree that something does not add up, as I said in response to the earlier question. If you had a railway that has grown its traffic in the period we looked at by 57%, you would have expected the unit costs to come down.

Q7 Graham Stringer: I heard that answer. You are talking about a huge difference. You would have expected the railways, with that extra revenue flow, to be subsidy free, would you not? Why aren’t they? When I asked the chairman of Network Rail, he did not seem to have good answers to that. Where have all those extra billions of cost gone? Where is that money going?

Sir Roy McNulty: It is going in a number of ways. If you group direct recommendations, it is in three parts. First of all, there is what I describe as the enabling environment. In the way it is set up we have not made the objectives clear enough. We have not aligned the incentives and the incentives have not worked. The structures have not worked together well enough. There has not been clear enough leadership within the industry. To that extent, the environment has not been conducive to the efficiency that I think should have been delivered.

In terms of the places where costs can be saved, obviously asset management is a major activity within the railway. There needs to be better asset management, better procurement and management of the supply chain, better management of projects and better management of human resources and the efficiency thereof. All of those management things are the places where the savings can and should be delivered.

The third element of it, and it is not to be ignored, is implementation. Alistair Darling in the debate on the Command Paper a couple of months ago said-and he is absolutely right-that it is much easier to announce efficiencies than make them happen. The railway has had umpteen recommendations before. The big trick this time is to make some of it happen.

Q8 Graham Stringer: I am still not sure where those extra billions are going. Let me make some suggestions. Is the top management structure overpaid compared to the British Rail time? Do you think it is appropriate that there is a bonus structure in what is only a partially private company? Well, it is really a public sector company, is it not? Is that where the extra money is going?

Sir Roy McNulty: It is by no means the only factor in all of this. It is not an area we studied, and I am guessing, but I would guess that senior management pay today is ahead of where it was in the days of British Rail. I would guess that work force pay today is ahead of where it was with British Rail, but I do not think that senior management pay is a major proportion of the £2.5 billion to £3.5 billion that we are looking at in terms of an efficiency gap.

Q9 Graham Stringer: Do you think the structure of Network Rail helps or would it be better to have a structure where there were outside influences? Network Rail is really the rail industry talking to itself, is it not? Everybody has an interest in a better railway, but nobody has an interest in pushing the costs down.

Sir Roy McNulty: I think the governance of Network Rail is unusual.

Q10 Graham Stringer: It is unique.

Sir Roy McNulty: This member structure is unique; yes, that is absolutely the word I was going to use. I know that Network Rail, during the period we were involved in this study, was looking at coming forward with proposals to improve governance. There are things to be looked at in that area.

Q11 Julie Hilling: I want to carry on with the fragmentation part. You stated that industry fragmentation at privatisation was a cause of high rail costs. Why will further fragmentation reduce costs?

Sir Roy McNulty: We need to be careful about what we mean by "fragmentation". Now that I re-read the report with the benefit of a year’s hindsight, we might have been even more precise, although I think we did express it reasonably clearly. The issue is not so much that there are too many parts to it-I come from a different industry, aviation, where there are many more players-but the really important issue is how the parts work together. In the railway, the way in which the different parts have worked together has not been very good. The thing was set up in ways with legal protections that have led to people viewing everything rather from a silo point of view-in other words, looking after their own piece-but there are very important interactions both at an industry and operational level that could work better. Quite a number of the recommendations that we have made have pointed in that direction.

Q12 Julie Hilling: Isn’t one of the difficulties that there are very few unique pieces of railway where there is only one sort of traffic flowing over that? The majority will have a number of train operating companies, freight companies and so on running over that piece of track. How does the co-operation work between one train operating company and Network Rail-or putting that into one body-in terms of all of those other partners in there who would then need a say in what is happening?

Sir Roy McNulty: I can provide a separate note on this because I do not have all the data in my head. There are a substantial number of routes where there is a significant correlation between the dominant operator in that area and Network Rail. There are some large routes-the West Coast Main Line and East Coast Main Line would be typical of that-where you have many different operators and it is more difficult to get the co-operation there. None the less, we can now see emerging some elements of co-operation even in those more complicated situations whereby the train operators and Network Rail are looking together at joint problems in a way that they did not do before. I am guessing, and this is why I need to give you a separate note, that about half of the railway would have quite a strong correlation between the dominant operator and Network Rail route.

Q13 Julie Hilling: I want to ask specifically about Merseytravel. The Merseytravel area was seen to be one of those unique pieces. My understanding is that the Merseytravel board have voted against being a pilot of vertical integration. Do you know why that was? What is their sense of saying this would not work, and can you inform us as to why others are saying it might?

Sir Roy McNulty: We did not look at the reasons for that decision, which I think happened after our study. My impression from a distance is that the reasons for taking that decision were not wholly operational reasons.

Q14 Mr Leech: Forgive me if I am putting words in your mouth, but I think you said that you did not look at the issue about executive pay, remuneration and bonuses. You were suggesting that that would only account for a small proportion of the additional costs within the railway.

Sir Roy McNulty: If I may say so, you are slightly putting words in my mouth.

Q15 Chair: Would you like to tell us what your view is?

Sir Roy McNulty: I think I said the second half of that. It is a relatively small proportion of the total cost bill. If you wish, I can provide you with a separate note of our estimates of that. We did look at it because we looked at it as part of the overall pattern of wage trends and wage increases within the industry as a whole. We looked at it at every level. It showed that the rate of pay increase at board level was not dissimilar to what it was through the work force as a whole. In my personal opinion, they were both getting significantly ahead of inflation.

Q16 Mr Leech: How similar was that pay in relation to other relatively similar railway networks in other parts of the world?

Sir Roy McNulty: I am not sure we have the answer, but I might ask Mr Smith who has some diagrams in front of him.

Graham Smith: We looked at how pay across the industry compared with the UK. We found, for example, that directors’ earnings, through a study of the statutory accounts, are now 14.5% higher than the average earnings index for all industries. We also looked at the pay of the industry as a whole and found that from a base of 96-97 being 100-all industry average earnings had risen to an index of 116. The rail industry as a whole had risen to 134. We did not make a comparison of directors’ pay with other railways. The reason for that is that securing the co-operation of other railways in benchmarking can sometimes be a challenge. We were successful in persuading the French, the Swedes and the Swiss to help, but there is a limit to what people are willing to give to consultants or a study like ours. They were not going to provide us with information on the pay of their directors.

Q17 Mr Leech: If Alistair Darling is right and it is a lot easier to announce efficiency savings than deliver them-I do not think anyone would disagree with that-and the problem is that the people who are running our railways just have not delivered those efficiencies, surely one of the issues is about the ability of those people at the top of the industry to deliver those efficiencies and whether or not they are the right people. There may be some comparison to be made with the right people in France or Germany.

Sir Roy McNulty: I have absolutely no doubt that the people who are running the GB railway are very well capable of delivering greater efficiencies. It is absolutely essential that we create that enabling environment for them that I have described. There are things that need to be clear and maybe clearer about Government policy and Government objectives. There are things that need to be changed in terms of the incentives, which clearly have not worked well. There are things that need to change in terms of leadership within the industry. In one of the exercises we did, what stood out was that from a survey of people, both within Network Rail and the train operators, they saw the biggest failing of the present set-up as a lack of leadership and a lack of clarity as to what the strategy is.

Q18 Chair: Would you say from that, Sir Roy, that the high level of pay for top executives has not produced the leadership that is required?

Sir Roy McNulty: There has been a situation-and our report makes it quite clear that our view was that far too many of the decisions have been taken by Government, and the industry has neither been allowed nor has been prepared to exercise the leadership that is needed. Government cannot take all the decisions. If Government take all the decisions, then they are taking an awful lot of the responsibility for the end outcome in terms of costs. The responsibility for costs should primarily be on the industry and the environment has to be presented to them that encourages, enables and incentivises them to deliver the results that are required.

Graham Smith: I would add a point there. The leaders in the industry have delivered significant growth, a safer railway and a more punctual railway within their areas of responsibility. What we focused on in the report was to get those leaders to work together to create a more efficient railway. That has essentially led to the recommendation around the creation of the Rail Delivery Group. There is no question mark over the quality of the leadership, which has achieved an awful lot. It is about getting those leaders to work together.

Q19 Mr Leech: If the industry had been left on its own to make decisions rather than the Government making decisions, what major differences would we have seen in the railways in the last 15 years, say?

Sir Roy McNulty: We would have seen more of a focus on costs. We would have seen the industry working better together. The problem we have had is that the industry has, to an extent, been constrained by the franchises, the contracts and the length of those franchises, with the result that they have not focused on costs in the way that was needed.

Q20 Mr Leech: That is quite a vague answer. I was thinking about some specifics. Would there be more passengers on the railways? Would there be fewer services? Would there be longer franchises? What actual concrete differences would there have been if there had been less intervention from Government and more decision making by the railway industry?

Sir Roy McNulty: You would have a service pattern that is better attuned to the demand that we have. We are running services by taking a previous timetable, adding some more to it and continuing to grow the service structure in that way. The result of that is that we probably have the best frequencies in Europe but also relatively low load factors and therefore relatively poor economics.

Chair: That must take us back to the question of leadership and good management.

Q21 Paul Maynard: I see a seductive narrative emerging here of how all we need to do is to go back to the glory days of BR and the "Fat Controller" default position. For the sake of clarity, in section 2.2 of your report there is a statement where you make the point that "the current industry operating deficit is no different to what it was in 1996-97." I assume that to be referring to the privatised railways. Is it an accurate interpretation that on a per passenger basis, scaled up to 2009-10 prices, the cost to Government of the railways is no different from what it was in 1996-97?

Chair: Is that right, Sir Roy?

Sir Roy McNulty: If you take the subsidy in 1996-97 and you adjust it for the change in the volume of passengers, which was up 57%, and you adjust it for price levels to bring it to today’s prices, you end up with the subsidy that we had in 2008-09. That is what happens if your unit costs have not changed and the relationship of fares to unit costs has not changed.

Q22 Paul Maynard: That is an important clarification for which I am grateful. Equally in your report, on page 30, you have a table that you alluded to in your previous answer about load factors and train utilisation. We have a significantly lower load factor than the five comparator companies that you compared us with. Can you explain for me why we have such a low load factor?

Sir Roy McNulty: That is a subject that the Rail Delivery Group is looking at and has been looking at over recent months. It is a collection of several factors. First of all, as I said a moment ago, I believe that we have the highest frequencies of railways in Europe, and other previous surveys have tended to show that. Together with high frequencies, we have relatively low load factors. In other words, we are running more trains more frequently but carrying fewer people than elsewhere. As well as that, we have a sizeable regional network that tends to have lower train utilisation. If you add all that together, you get the results that that benchmarking tends to suggest.

We have said that this is not a simple subject to understand and the ultimate causes of it need to be researched further. That is why the Rail Delivery Group has been looking at this more. There is a need for a fundamental look at a number of the service patterns that we are operating. That applies to here in London and the south-east, where there is obviously a major need to transport people in at the morning peak and out in the evening peak. There needs to be more thought as to what to do the rest of the day because in the rest of the day we are running quite a lot of trains with relatively low load factors.

I came in yesterday from Stansted airport. There are lovely new trains built by Bombardier, I am glad to say, and I should declare a past interest. I would guess the train has the potential to carry maybe 300 or 400 people. If there were 30 or 40 on it, that would be the height of it. It is the economics of doing these things. It is a great service and I appreciated it, but, if we are looking at costs, we need to look at the efficiency with which we are using the system.

Q23 Paul Maynard: You have just anticipated my next question. Have you made any assessment of the additional costs of providing the peak hour infrastructure necessary to meet demand that is then not used during the off-peak period? Is there any way that can be measured at all?

Sir Roy McNulty: I think it could be measured. It is a major study. Frankly, within the time we had available to deliver our report, we did not have time to get to the bottom of that. Our recommendation was that the way in which we build and use capacity and the way in which we utilise the trains needs a lot more study than it has been getting. At the moment it is not anyone’s job in particular to look at this. It is not Network Rail’s job; it is not the train operating companies’ job. It is probably not even DfT’s job. It is an important issue that sits in a bit of a vacuum at the moment.

Q24 Paul Maynard: Your comparator countries all tend to use double-decker trains on their commuter routes. It is a frequent appearance in rail journals and indeed newspaper letters columns that the answer to all our problems is to have double-decker trains, instantly and magically doubling the capacity. If that were the path we were to go down, clearly that would need massive infrastructure changes left, right and centre, but, as you point out, there is a vacuum in terms of decision making. If we were to go down that path, just for the sake of argument, who ought to be the individuals or the organisation to say, "Right, from now on all new infrastructure should be predicated upon double-decker trains; off you go"? Where should that decision-making power lie?

Sir Roy McNulty: I find it very difficult to imagine that we are going to rebuild the whole country to accommodate double-decker trains, but I saw a comment by David Higgins recently where he was explaining the need to think perhaps of fewer, longer trains as a means of using our capacity more effectively. I have a lot of sympathy with that view. There needs to be someone whose job it is to worry about the efficiency with which we are using this capacity. I think it is a thing that the Rail Delivery Group, when they have finished the study work that they are undertaking at the moment, need to discuss with DfT and agree where within the system the responsibility for this should lie. Anyone who runs a big and complicated production system like this needs to have somebody whose job it is to worry about the efficiency with which we are using it.

Q25 Paul Maynard: You are saying that it is not necessarily Government. It could be RDG.

Sir Roy McNulty: It could be RDG, DfT or ORR. Somebody needs to have this as a major preoccupation.

Q26 Iain Stewart: I would like to turn to your report’s recommendations about using railway land and property most efficiently. When railways were privatised, at the time the expectation was that it would be a period of managed decline. In the intervening almost two decades we have seen a massive increase in both freight and passenger use. At the time several areas of mothballed property and land were expected to be sold off but have now been brought back into use. Your report suggests selling off surplus land and property. How do you define what is going to be surplus land and in what sort of time scale?

Sir Roy McNulty: That is a good question to which I do not have the answer. I do not see this, incidentally, as a major piece of the puzzle relative to the total costs and total revenues of the industry. The revenue from land sales or leasing is not going to be the be-all and end-all. All we were saying was that the environment within which Network Rail operates needs to be a bit more conducive than it is to making the most of those land assets, but in doing so they have to be cognisant of the long-term needs of the railway, both passenger and freight, and to take a long-term view rather than, "We don’t need it today and therefore let’s sell it."

Graham Smith: I will give another illustration. Particularly in the freight sector there is still land in the ownership of the freight operating companies relating to their historical activity involving heavy industry. There is railway land around pits and mines, whereas the rail freight industry is now much more focused on intermodal container carrying. One could perhaps envisage that brownfield sites that are in the ownership of the freight operators could be sold for development, but in return there need to be strategic freight interchanges that would enable further growth in container movements, for example, from the deep sea ports inland into the UK.

Q27 Iain Stewart: I will give you one example to try and illustrate the point I am making. You identified some land close by London Victoria that could be sold off. That potentially reduces the carriage depot facilities there. If they are looking to increase commuter services in and out of Victoria, that means the depot has to be further away, which results in more costly and timely movements of empty stock and increases the cost. Who should be adjudicating that decision about the use of land? It might not be needed now but in 10 or 15 years down the road it might be. Who should be adjudicating that?

Sir Roy McNulty: Network Rail is in the middle of that situation. As you rightly say, the important thing is that it is not viewed just for the short term but with an assessment of the long-term needs. One of the points we have made elsewhere in the report is that, while having five-year settlements has been a good thing in many ways and has given the railway a reasonable degree of certainty, there are a number of other purposes for which a much longer planning horizon is needed because this is a very long-term game. That applies to property as it applies to a number of other elements of the railway infrastructure.

Q28 Iain Stewart: I will follow that up by asking whether you think we have a sufficiently long-term planning horizon. To supplement that question, is it sufficiently holistic with other transport modes? You gave the example of your train from Stansted and the frequency, which is underutilised at the minute. If the idea is to expand capacity at Stansted, that frequent rail link may potentially be required. Do we look far enough ahead and in a sufficiently holistic way?

Sir Roy McNulty: I do not think we look far enough ahead. We said that in the report. While the HLOS process is certainly an improvement and an advance on what was there before, this is an industry in which, if you are not planning 20 to 30 years ahead, you will miss a lot of the important issues. There is a need for a longer-term planning horizon. As to whether it is sufficiently holistic with other modes of transport, having lived through the period of Mr Prescott’s integrated transport plan and all of those things, it is a good aspiration and in many ways some of the things we do are not very clever, but it is an awfully difficult thing to do and is somewhat outside the remit of our Rail Value for Money Study.

Q29 Steve Baker: I want to return to the question of an absence of a major preoccupation with efficiency. This system is often described as privatised, but would you agree that, although we have private profit-making business involved with railways, the industry is characterised by state ownership, extensive subsidy and very heavy regulation, which often tramples market mechanisms like the price system?

Chair: Is that how you see it, Sir Roy?

Sir Roy McNulty: There is a substantial state element. Obviously it has heavy regulation. It has lots of subsidy and therefore it has lots of Government involvement. The point that was made to us repeatedly by people we talked to was that, in fact, the amount of Government involvement, Government decision making and, some would say, Government interference is greater today than it was in the days when BR was the nationalised company running it. We have ended up in a different place from where we intended to go.

Q30 Steve Baker: Yes; it is perhaps a third way between capitalism and socialism.

Sir Roy McNulty: Who knows? I am not a politician. I would not understand these things.

Q31 Steve Baker: In the course of your studies has anybody ever asked you to compare this current set of structures with the set of structures that emerged in the great days of profit and loss and private capital being deployed by entrepreneurs to build and operate railways?

Sir Roy McNulty: No.

Q32 Steve Baker: Has anybody ever suggested that we actually privatise the railways?

Sir Roy McNulty: Some people have suggested that, yes.

Q33 Jim Dobbin: Mr Smith, you have raised the issue of freight and land use. I have a big interest in this basically because of the nature of my constituency. The M62 goes right through the middle of it. It is right in the centre of the country between the M6 and the M1 and two ports-Liverpool and Hull. How serious is the attempt to provide more freight terminals? I am surrounded by distribution plants with huge numbers of HGVs going through the communities. How seriously are the Government taking it?

Graham Smith: The study in chapter 13 of the detailed report reviewed the freight sector in GB rail and found it to be thriving. It found it to have received significant investment and a small amount of support from Government for environmental benefit to have achieved productivity, and to some extent it was an example that others could look to in terms of getting changes in the industry elsewhere. It also recognised that freight could help the wider industry by using network capacity effectively, by maximising the amount of goods behind a locomotive and therefore using paths efficiently, and not seeking to go on lines where there was no prospect of freight use in the long term, which might be able to reduce maintenance costs.

The study also reviewed the Government’s proposals for a strategic freight network. Investment started for that under the previous Administration and has continued under this Administration. We found that there was more that could be done. The study noted that the Government’s strategic rail freight interchange policy would create the administrative environment to encourage that, but, ultimately, it would require investment principally by the private sector, in your constituency and others, to encourage transfer of freight from road to rail. There have been a number of proposals for strategic freight interchanges that have been subject to public inquiry and review. Some have been approved; others have not. The study felt that freight was a benefit to the economy; it was a benefit to the railway. We supported all efforts to increase the amount of freight on rail.

Q34 Jim Dobbin: Do you have a geographical plan of where these terminals would be and how many have you proposed?

Graham Smith: We did not get into that kind of detail in the study. We thought it was useful to review freight, but as a study we were aware that there were a number of maps and plans produced by the rail freight operators, the rail freight group and the Freight Transport Association, identifying where strategic freight interchanges could be built that would enable significant transfer of freight from road to rail. We had no reason to doubt there was anything awry with those and would support that.

Q35 Chair: A lot of concerns have been expressed in relation to freight. If we are going to have the alliances that you suggest and decentralisation, who is going to be looking at the interests of rail freight?

Sir Roy McNulty: Within the study team Mr Smith was looking after the interests of rail freight. In fact, some people said he had been put into the team as a hostage to make sure that the interests of the rail freight industry were properly looked after. Graham, would you care to comment on that?

Graham Smith: Yes. In the freight section we identified a number of requirements to perpetuate a national approach to timetabling, capacity allocation and the capability of the network to ensure that freight that does not fit neatly with anybody’s geographical boundary, going from north to south and east to west, could continue to expand so that we could have higher and wider containers and higher capacity wagons.

The devil is in the detail. It will be absolutely essential to the alliancing as it develops-and I believe the Committee is taking evidence from the alliance partners in the south-west shortly-that the freight operators in particular are consulted and involved with the alliance senior management. For example, in the south-west, which from a freight perspective is principally about container traffic to and from Southampton, the interests of the passenger operation and the infrastructure provider take account of the significant growth that is possible from Southampton and the surrounding ports.

The freight operators are represented on the Rail Delivery Group, and I know that Network Rail pays a lot of attention to the needs of the rail freight industry. At the moment rail freight access charges are being reviewed by the Office of Rail Regulation. I am sure you will be looking at that in due course. We as a study made our recommendations, and the response we had from the industry was that the needs of rail freight were fully recognised and would be taken into account in the alliancing process in the future.

Q36 Chair: In the tables of costs and subsidies to rail, the table showing subsidies to regional rail shows a very high level of subsidy compared with other routes, which has led to a lot of fears that this is really a prescription to close down or reduce regional railways. How have you done the costings for that? Have the costs of capital investment by Network Rail been allocated on a regional basis-or has that not been done?-which would really reduce the subsidy to London on the tables that you have?

Sir Roy McNulty: The exercise that we did was a purely factual exercise as best one can do in allocating costs. Obviously, the Network Rail costs-both the operating and capital costs-have to be allocated in as fair a way as possible.

Q37 Chair: Who decides what a fair way is?

Sir Roy McNulty: The consultants that we hired made the best estimates that they could. A lot of Network Rail costs are not a matter of great debate. Given the geographical spread and layout of the Network Rail routes, you can reasonably identify which costs lie where. There are some common costs and an allocation was made of those. No matter how you did the allocation of common costs, you would not end up with a much different result.

To come back to your original question, if I may, we set out that information as a piece of information. It is not intended and was not used by us to advocate any reduction of the network. Our terms of reference were crystal clear that this was not to be a Beeching-type exercise. It was to grow capacity as necessary. We have stuck to that and have not looked at reducing any part of the network. It is a fact of life that a major part of the subsidy goes into those regional routes and there may be issues as to how to operate them more efficiently, but that is quite different from saying that we put those figures up there as a pointer to say, "Close a lot of it down."

Q38 Chair: It has been suggested that your report could lead to the loss of about 20,000 jobs and the closure of perhaps 650 ticket offices. Do you see it like that?

Sir Roy McNulty: The 20,000 jobs figure, in my opinion, is a significant exaggeration of what we said. You will see in our calculations of the possible savings coming from our recommendations that the figure was £260 million. If you use a figure of £40,000 cost per person, then there are potentially 6,000 jobs saved. One must also bear in mind that this is an industry that is growing. It is growing at 5% per annum at the moment. It can absorb a significant amount of efficiency savings, but 20,000 is way beyond the calculations that we did based on the recommendations that we have made.

Q39 Chair: What about the concerns expressed about the alliances, and that that could produce a series of what have been dubbed mini Railtracks, where safety considerations might be seen as secondary?

Sir Roy McNulty: I do not think that is a likely outcome. The safety regime within which the train operators and Network Rail operate is very well defined and policed by ORR. It is quite clear that the idea of these alliances will not change safety responsibilities and accountabilities. I would have every confidence that this regime is strong enough to handle a change like this without safety risks.

Q40 Julie Hilling: I want to drill down a little bit more into the staffing costs. One concerns staff on board, and there are obviously station staff. One thing that really worried me was when I read about driver-only operation improving performance in the report. I have certainly had discussions about this before and been told that, certainly with trains the length of a Pendolino, driver-only operating would take longer for self-dispatch. What do you mean by improved performance? Where does the passenger view come into those decisions? As a woman, I do not like being alone on a train. Certainly if there were no staff on board, apart from the person shut in a cab, I would be exceedingly concerned. I am just wondering how you have come to those two conclusions. Would you say that that is the default as well-to have driver-only operation?

Sir Roy McNulty: I would ask Graham to comment on driver only operation.

Graham Smith: When we looked at the way in which trains are crewed and the number of staff there should be on a train, we took into account that a significant proportion of the London commuter network is already operated by one person. Most of the trains into Liverpool Street, all the trains on Thameslink and a significant number of the trains south of the river are just operated by the driver.

In terms of the efficiency of dispatch, if there is an interaction involving the driver, the guard and the member of the station staff, that adds time in terms of the interaction between the people involved. As soon as there are three human beings involved in a process rather than two or one, the potential for misunderstanding and for risk increases. We just noted that as a fact. We noted that performance around train dispatch, where there was just the driver responsible, was better than in places where there was more than one person.

I should emphasise that what we said in the study was that there should just be one person on the train responsible for its operation. We chose our words very carefully. We made the point that, if there was argument for commercial reasons for fare collection or for providing additional services, that would be a commercial decision by the train operating company. This was just about one person being responsible for the train, as happens, for example, in the entirety of the rail freight sector in Britain, which is the responsibility of the driver, as is the London underground.

Q41 Julie Hilling: I would say freight is slightly different. I want to pick up quickly on station staff. Would closing ticket offices and removing station staff be discriminatory against older and disabled people who do not have access to the internet and, certainly for disabled people, who need passenger assistance? One cannot imagine the driver getting off the train and going to assist the passenger. Would it not be discriminatory to get rid of those staff?

Graham Smith: We did not make the recommendation on station staff. We said that individual operators should look at their risk assessments and judge whether they had the right number of staff on the station. Our recommendation related solely to ticket offices where, in the main, the member of staff selling tickets will remain behind the plate glass window, with people queuing to be served. We recognised that there is a significant trend and an increase in the use of the internet for buying rail tickets, as there is in much of retail, or the use of automatic machines. But we were very clear in the study that there need to be mitigating measures and a recognition of the needs of the disabled and disadvantaged before any changes were to be made.

Q42 Paul Maynard: I am not a member of a rail union so I have no interest in this question. In your report you have clearly looked at the issue of manning of stations, utilisation of estates, assets and so on. We have also seen reports in the trade press over recent weeks of how, in Japan, efficiencies have been driven by a commercialisation of what occurs on station estates, more use of retail and that sort of thing. Do you believe that the Command Paper, the industry groups and indeed stakeholders such as the unions are being sufficiently open-minded to other ways of employing people in the railways that broaden a revenue stream for the railway, at the same time as protecting jobs, but not necessarily in the way that they have always been?

Sir Roy McNulty: There is significant scope for more commercialisation and making more of the station assets. I am not sure I would want it to go as far as the airport industry has gone, but the rail industry is under-exploiting its commercial assets as they stand and could do more. That would create more employment.

Q43 Chair: Sir Roy, at the beginning of this session you said that you had looked at adjusting the current system rather than looking at something completely different because you thought the upheaval of a complete change would mean that savings would not materialise. Did you do any studies or any specific assessment in relation to that or was it just a judgment that you made?

Sir Roy McNulty: We did a little calculation that said that, if the savings that we have projected by adapting the current structure-which is what we have recommended-are thus and so, what would happen if you delayed starting that savings process by maybe three to five years, and how much more savings would you need to end up with the same present value? I do not have those figures with me but I could provide them to the Committee if it is of interest. The answer was that you would need a very substantially greater amount of savings to be achieved eventually if you have significant delay at the beginning. It is a normal, present-value kind of calculation.

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

Examination of Witnesses

Witnesses: Tim O’Toole CBE, Chairman, and Sir David Higgins, Vice-Chairman, Rail Delivery Group, gave evidence.

Q44 Chair: Good morning and welcome to the Transport Select Committee. Mr O’Toole, you are here in your new capacity. You have been here before in a previous life. Would you both give us your name and position for our records?

Sir David Higgins: I am David Higgins, Chief Executive of Network Rail.

Tim O’Toole: I am Tim O’Toole appearing as Chairman of the Rail Delivery Group.

Chair: I would like to declare that I am a member of Unite. I think perhaps there are other members who would like to declare.

Jim Dobbin: Unite.

Graham Stringer: Unite.

Julie Hilling: Unite and TSSA.

Q45 Chair: Do you accept that UK rail is 30% less efficient than it could be and 40% less efficient than some other European rail industries?

Sir David Higgins: If you start with the benchmark from 2009 and you take an end date of 2019-that is two control periods and a 10-year period-we agreed with the McNulty Report that there is a 30% saving to be made in the rail industry over that period. That is the figure you hear. There is a real saving in annual costs of around £3.5 billion at the upper range of those savings, but we agree with the 30% figure. I disagree with the 40% figure in terms of Europe and so does Network Rail. The reason, as I think I have mentioned before at this Committee, is that there are no obvious comparators in Europe. The level of disclosure in Europe is very different. The way that rail renewal is accounted for in particular is very different from the way we do it. Therefore we think it is incorrect to compare that.

Q46 Chair: If you are saying that the comparisons with European rail systems are misleading, is there a comparison that could be made or is it just a matter of saying-

Sir David Higgins: There are comparisons but you really have to break it down. The railways in Europe are very different. Essentially, we have three railways here in the UK. We have a regional railway, which operates typically like Northern Rail or in Scotland or Wales. We have the long-distance railway and we have the London and commuter railways. Those are three very different railways. They run at three very different levels of public subsidy and cost to fare payers and taxpayers. What do we compare them with? It is very difficult to compare our long-distance with European high-speed. It is very difficult to compare East Coast, West Coast or Western with TGV in France or ICE in Germany. You could probably compare the London commuter with France, with the RER service.

You have to get under the covers. High-level statements are just that. You have to drill down and look at the actual comparison between the type of railway and the level of public subsidy. What is clear is that there are very substantial taxpayer subsidies in European railways which we are not aware of, or they are not fully disclosed.

Q47 Chair: Are the efficiency gains put forward in the Rail Value for Money Study realistic, though? Can they be achieved?

Sir David Higgins: Yes.

Tim O’Toole: Many are; some are not. We at the Rail Delivery Group are not apologists for those conclusions. We have just attempted to take the report apart and see what we could get behind and endorse as a possibility. An example of one where we do not think the savings are achievable and we think the numbers put against them are without foundation is the area of train utilisation that was referred to.

First of all, the comparisons are largely warped by the fact that it includes our regional railways and does not include the regional railways of the countries it is comparing to. Secondly, it is largely driven by specification. You would not have to be James J. Hill to improve train utilisation in this country. We would just cut out a lot of trains, but that is not an option. There is a very specific requirement on a service to be run and therefore you will get the result you have. We do not think that a reduction in service that would be required simply to manipulate that number is anything that would be politically acceptable in this country.

Q48 Chair: Do you think that British Rail was more efficient than the current system?

Tim O’Toole: I do not think there is any evidence of that. If you drew a regression line on passengers on British Rail, it would look like this. If you drew a regression line on growth in privatisation, it would look like that. The supposition in some of the inquiry that there is something broken here is questionable. I can say this because I am not being defensive; I have come to this just recently. We are sitting on a massive success story. There has been this huge prolonged increase in patronage and a huge modal shift in this country. Growth on the railways is far beyond any growth in jobs in this country, at a time when safety and productivity has improved. Yes, there are enormous savings, but there is more we need to do because of the challenges we are facing. I think there has been something of a minor miracle over the last 10 years in the railways. As I say, I can say this because I can’t take credit for it.

Q49 Iain Stewart: I would like to have your views on comments Sir Roy made in the last session on the efficiency of using train paths between the crowded peak and the less crowded off-peak. One of the suggestions is that the ticketing structure be adjusted so that you do not have the cliff edge between peak and off-peak to encourage people not to travel on the 07:51 into Euston. What assessment have you made of the size of the commuter market that would be responsive to that offer, if I can put it that way, against those who have to catch the 07:51 because that is the train they need to get to work and, if they had a super-peak fare, it would just be a price hike?

Sir David Higgins: As set out in the Rail Command Paper, the Government have sent out a full consultation on fares. It would be pre-empting that consultation to say what the right answer is. They will be looking at shoulder and peak, and the trade-offs that come from that. We expect that report in the next months.

Q50 Iain Stewart: If I could ask you to anticipate, what would you expect the answer to be to that?

Sir David Higgins: It is not really my position to anticipate the answer. Tim is probably closer to it, but again I would rely on the Command Paper and the level of consultation that is going on to work out just how much can be gained by trying to shift some patronage to the shoulder. We now know that the shoulder extends a fair way as it is. It is pretty crowded. There is not an obvious cliff.

Q51 Iain Stewart: Do you have a view from an operator perspective?

Tim O’Toole: Yes. There is not a lot of upside for me to get in front of the Government’s fares review. There are real limits to what will be accomplished by demand management with fares for the reasons you point out. That does not change the fact that there are still overhangs of regulation in the fare structure that do incentivise behaviours. If you just had market-based pricing, you would have a chance of filling the trains more efficiently. But your point is a good one. Some people have to travel at a certain time of the day. You cannot just think that the whole world can magically change their work hours.

Q52 Iain Stewart: I was just trying to get at what the likely size of that is.

Tim O’Toole: As I said, I would defer to the Government’s review.

Q53 Graham Stringer: Going back to what you said about the future success of the railways, there is no question about that in terms of passenger numbers on a much reduced network. We are now getting record numbers of passengers. That is extraordinary, but it is not really a good deal for the taxpayer, is it, when the costs have gone up so much over that period? With fares going up and more passengers, you would expect there to be less public subsidy. Do you have a good explanation for that?

Tim O’Toole: The major reason for the public subsidy and operator costs is infrastructure costs. It is the enhancements. This is again the missing part of the story from the soundbite from the McNulty Study in saying that unit costs have not gone anywhere. The unit costs were coming down and then you had Hatfield. There was a collective nervous breakdown and so everybody had to spend a lot of money on the infrastructure to bring it back, which is what has happened, and now, under David, unit costs are coming down again. But these two points in time are being compared as if to say there has not been any change, as if the industry has gone like this. That obscures the history of what has happened. There was a massive expenditure on infrastructure in this country and that has driven all of these numbers and all of these comparisons.

Sir David Higgins: Typically, you would replace around 2% of the rail on the network every year. For years and years the industry replaced 1%, which meant they were storing up a major problem. In the recovery we replaced over 3% on an annual basis. On the taxpayer subsidy, historically, it has been around 50:50, so the taxpayer pays 50% of the subsidy of running a railway and fare payers pay 50%. The previous Government moved to 75:25 and so is this one. The taxpayer pays 25% and the fare payers pay 75%. That is an explicit policy decision by both Governments to move the burden of paying for cost directly to the fare payers.

If you look around the country regionally, with long distance, it is already at 75:25. In London and the south-east it is already at 81%, so the taxpayer is only paying 19%. If you look at regional, the fare payers pay 39%. The taxpayer there is subsidising it to the tune of 61%. There is a very real reason why the Government have set the policies in regional railways to heavily subsidise it, because it is doing more than just moving people to work every day. This is a Government policy decision to shift the burden from taxpayers to fare payers. Equally, it has to be balanced with the way that the Government set social policy as well. It is a Government decision.

Q54 Graham Stringer: There is a lot in those answers. I accept the last point. That is just a straightforward policy decision. The extent of public subsidy has gone up at the same time as fares have gone up while that balance is going. On Network Rail’s balance sheet they are carrying about £27 billion at the moment. It is £3.5 billion subsidy, which is considerably more than previously. That cannot all be accounted for by capital investment. Just in the detail, Sir David, I looked at the figures not long ago. In terms of rail replacement, you are absolutely right that in the run-up to privatisation it dropped to about 30% of what it was before. It was slightly different year to year. In 1991 or 1992 it was at quite a high level. If you look over a long period of time, the stats are slightly different than you say they are, but essentially we are putting a fortune into the railways when more fares are going up. There is something fundamentally wrong. I just simply do not see the figures that say that is capital investment.

Sir David Higgins: There is a long history of decades and decades of underinvestment, both in rail and bridges and structures. It will take generations to catch up on that. There are stations as well. There was a period around the 1970s of 15 years, after a brief period of investment, when no investment at all was made in any electrification. We have decades to catch up in railways.

There is an important figure to remember. If you look forward now, because we are in an industry that is going to have to cope with substantial growth, we would expect on our current numbers by 2019, so at the end of the next control period CP5, that the public subsidy to the whole railway-train operating companies and ourselves-drops from around £5 billion to £2 billion. If we can get to a situation where the Government choosing to buy rail services, some of which are social and some of which are micro-based, get to a total public subsidy of £2 billion a year in 2019, wow, I think that is a pretty good story in terms of what the Government and the public get from the railway and services.

Q55 Graham Stringer: I want to ask something on the other side of the income and costs in the railway: the franchises. I have sat in this Committee and listened to Ministers from different Governments saying that it will be more efficient having shorter franchises, more efficient having longer franchises, and we will get more investment from that. Whether they are seven-year or 15-year franchises, at the end, there is a disincentive for those train operating companies to invest because they do not know if they are going to be there for the next year or so. Do you think there is a fundamental flaw that is adding to the costs with a franchising system?

Sir David Higgins: Tim, given he is bidding for four, would be happy to answer this.

Tim O’Toole: The phenomenon of an end of a franchise not encouraging development of the business is undeniably true. It is one of the things you get away from, or at least reduce the frequency of encountering, as you get to longer franchises, which is an advantage. Not only do you not encounter that cliff so often but your ambition for development is so much greater over a longer period. That is one of the prices that you pay, obviously, as a result of the franchising system. I would not deny that.

Q56 Graham Stringer: What I am asking is impossible to evaluate. Do the costs in terms of the cliff edge effect counterbalance the benefits of the competition when the franchise is let? Where is the balance in that?

Tim O’Toole: The shortfall comes more from lack of development. Pushing growth on those lines, arguably, one would say, is less an incentive for certain operators who are about to bid again as opposed to some massive increase in cost. I do not think that is the issue so much. When we look at that, we are arguing against what the alternative is, and it is just a guess. The thing you do know for sure is that there has been this massive increase in ridership, which is the public, notwithstanding the headlines, recognising massive value for money. On our own railways our great growth has not been in people buying the high-level fares that are in the headlines. It is all in the discount fares. We have growth of the nature of 60% in many of these categories. The public are able to find value for money on the railways and that is what allows all this growth to take place.

Sir David Higgins: You can try and counter the cliff edge on stations. For example, the West Coast tender is out now with 17 stations, and with the Anglia franchise retendered we are looking at long-term 99-year leases, but then recognising value for the franchisee that bids and invests in it so that at the end of the franchise period it gets a monetary recognition of that tied into the asset base. There are ways of getting round that obvious cliff edge, but longer franchises must be the right answer because it allows greater investment. Franchisees can make decisions in terms of operating costs that have a payback over that period.

Q57 Chair: Is there any evidence that will happen or is it just assumption?

Sir David Higgins: I suppose the longest franchise we see is Chiltern at the moment. That was a 25-year franchise. That encouraged investment in that railway line. Around 17% of the whole network is up for rebid in the next four years; so it is a very important period.

Q58 Paul Maynard: I want to take you back to some of your earlier answers regarding this, by now, famous table 6.1 in Sir Roy McNulty’s report about the different costs and the different types of railway. Sir Roy said it was a presentation of facts. You are indicating that in your view it shows we have potentially three different railways. What do you think is the policy conclusion that we, as legislators, ought to draw from that information? The facts have been presented, but what interpretation do you think we should put on them?

Sir David Higgins: I will answer first and then I am sure Tim will. We all now understand that there are different railways. We initially looked at Network Rail and the networkers, and there are huge network benefits. We have to run the railway as a network because it is so inextricably linked, but we know that the issues faced even by Essex, Sussex and Kent are different, because they were designed as different railways and historically they have different markets and operate differently. The whole point within our organisation of devolution and alliances with our customers is to address those customer needs locally and put decision making right at the customer interface. That is where we will find savings. It will be a question of how quickly we make decisions and how localised they are to those particular market and infrastructure issues.

Q59 Paul Maynard: Would you suggest, therefore, that possibly this Command Paper might be the last one ever to try to set a national rail policy, given Transport for London’s plans, what is occurring in the northern PTEs and the arguments over the extent to which the Mayor takes control over more suburban services in London? Do you think the era of national rail policy is coming to an end?

Tim O’Toole: The accommodation of more local agenda and regional identification is accounted for in the Command Paper. You will always have to have a guiding mind, and a network derives its strength from the fact that it is a network; so there is always going to be co-ordination. The point was made previously that, where you have multi operators and operations that extend over regional networks, that is all going to have to be co-ordinated.

It is not so much about what your rail policy is as what your transport policy is. It is the total view. We have a society here. How are we going to move people around and create growth in our economy? The decisions you make on rail have to derive from the decisions you make about transport generally. I think you will always have to have some version of a national rail policy. In this case what is being pointed to is that it will involve the accommodation of more local planning than perhaps you have seen in the past.

Q60 Paul Maynard: I realise neither of you were terribly keen to pre-empt the fares and ticketing review, but can I have another go because hope springs eternal? Clearly there is a case that the peak is oversubscribed and the off-peak is undersubscribed. In an ideal world you would incentivise people with cheaper tickets to take off-peak services. However, would you agree with me that this current review is flawed because it states that the output must be revenue neutral? Therefore, any attempt to incentivise off-peak travel has to be compensated for by penalising peak travel, despite the fact that the Command Paper explicitly states that that should not be the outcome. How do you incentivise off-peak travel on a revenue-neutral basis? Is that possible?

Tim O’Toole: I am certainly not going to say a study is flawed of which I have not even seen the results. I am not going there-

Paul Maynard: The remit.

Tim O’Toole: -but I am inferring, since it is not my statement, that what the remit is saying is that this review is not a disguised attempt to raise revenues further and it should not be interpreted that way. This is a review that looks at whether there are structural changes that would result in a more efficient allocation of the people who do purchase the tickets. We do not want to extract more from the public, who are already paying so much. Whether or not prices have to go up later is a different question. That is all they are trying to communicate by that remit.

Sir David Higgins: Ultimately I think the issue is about capacity. We can argue about fares and shoulders, but, if you look at what the public want, it is more train capacity. As I think I have said here before, we are years behind in terms of the capacity of Crossrail and Thameslink, but, thank heavens, within 10 years they will both be on board with resignalling. Our challenge on these key commuter routes like the Brighton mainline is that there are no more landing paths. It is worse than Heathrow. We do not have a 99% capacity utilisation; we have 110%, and we grapple with that. As Sir Roy said, it is about longer trains and more efficient usage. You are moving huge volumes of people into central London in the morning and evening peak. It is probably only Paris that has to cope with this volume in Europe. Even their RER, with the double-decker trains, really struggle now to get people on and off those trains in the peak and keep punctuality. Capacity-building, timetabling and efficient utilisation of train paths is what it is all about.

Q61 Paul Maynard: I would agree with you entirely, but surely the problem is that the capacity is still required at the peak time. Both the McNulty Report and indeed the Command Paper indicate that adding peak time capacity is perhaps the least efficient form of investment because it goes unused or less used during off-peak periods. How do we resolve that dilemma or is it something we just have to swallow?

Sir David Higgins: It is a big challenge. As you know, in parts of Europe they just park all the trains up after the peak and then you have very limited services. As Sir Roy said, we have a level of frequency of services here that is better than much of Europe. With both Crossrail and Thameslink, there is a 30% increase in capacity by 2020, which is great. How we use it best is for smarter people than me, in the end. That is timetabling and franchising, but at least we will have it.

Q62 Chair: What sort of powers do you have as the Rail Delivery Group to achieve any of these things? Aren’t the interests of shareholders in the individual companies going to be paramount? There is an assumption behind the setting up of your group that there is a cross-industry interest that will automatically be to the benefit of the public in terms of being both passengers and taxpayers, but is that a naive assumption? Aren’t we talking about a competitive industry responsible to its shareholders?

Tim O’Toole: First, what are the powers of the Rail Delivery Group? As a group qua group it does not have any powers. It has no official standing. It is the leadership coming together to see if we co-operatively can address some of the challenge that was put to us by the Rail Delivery Group, and ultimately succeeding, perhaps, in earning the recognition as the leadership voice of the industry. In some respects we have enormous powers because we control these companies and David controls Network Rail. With all of us in the room, theoretically we have all the levers, with the exception of those controlled by Government. To accomplish many of these things we are going to have to make choices. It is a choice between two good things. It is not a good and a bad thing. An example of adding more capacity at the peak versus whether we are going to park the trains or deliver a frequent service in non-peak is a good example of it.

Our ambition on the Rail Delivery Group is that we can find common ground. Our experience over the first year is just that. We came to this as individuals, all with the scepticism that one would expect- that is, we are all self-interested companies, creatures of contract and it is not in our interest to act altruistically. Why would any of these companies come together and do this? We confronted all these things. This is what we argued about in private.

One of the things we found as we picked apart the McNulty Report is that we were not trapped in some game. There were enormous sums to be gained through co-operation that did not take money from either of us-but it was because, structurally, no one was set up to focus on it. The biggest area is not people; it is asset management. For example, there has been no incentive for the operating companies and Network Rail to work together to deliver projects in the most efficient way and to scale the projects down to what the commercial proposition is. Instead, we sit back and are happy to watch them spend all the money in the world building the most glorious things that you would never do if it were your family’s money. By working together, we can find ways to scale projects closer to the capacity that we are trying to create. It is those kinds of solutions that we are focused on right now. It is the cross-industry co-operation that is otherwise missing in a structure that involves multiple companies rather than just British Rail. That is what we are trying to solve.

Q63 Chair: Up to now are you optimistic? Do you think it is going to work and that companies are going to act in this overall national interest rather than their own interests?

Tim O’Toole: I have been stunned that everyone has stayed in the room for a year. The sub-groups have continued to work. We have actually been able to unpick quite a bit and we are putting it to Government. We believe that we have to make a more permanent structure. We think it is important that it stays very lean as a leadership group and does not grow into a bureaucracy. The one thing I am sure of is that the need for a group such as this, and the search for it, has gone on for 50 or 60 years even before privatisation. As every successive Government deals with the frustration of what will always be a subsidised industry, at the end of the day, it has looked for some body to give it the kind of expert disinterested commentary it needs to understand the choices that taxpayers face, whether it is the British Transport Commission, the British Rail Board or SRA. There have been these constant attempts to find this body that can advise Government. This time it is an attempt to do it on a voluntary basis that is not costing the taxpayers money. We think that that effort, combined with David’s forming of Network Rail into more devolved, locally based structures, means there is a real possibility that we can make even more progress this time.

Q64 Graham Stringer: When you say there is money being spent but no one wants to spend their own money on it, you are talking about gold-plating, are you?

Tim O’Toole: Right.

Q65 Graham Stringer: Can you give us some examples of that?

Sir David Higgins: We can give you a real example that our two organisations have worked on or are currently working on up in Scotland, which is a missing link of rail line alongside the Paisley Canal. If we did that traditionally to a traditional specification without heavy consultation with ScotRail, it would cost x amount of money. We are going to halve the amount of money that we spend on that electrification just because we have changed the specification. We have put neutral sections under the bridges because we have come up with a performance specification that we and the operator believe we can all live with, with some compromise, and then we will look at how we are going to deliver it and schedule four or eight payments, which in some ways encourage conflict. We set all those aside and we deliver it in a very efficient way. That is the first success, which will be done by the end of this year.

Q66 Graham Stringer: On that point, that is a really good example of the future. Are there any examples from the past where you have seen gold-plating and where you can take those costs out?

Sir David Higgins: There is a simple one in high level numbers. Of the £3.5 billion that Sir Roy talks about, we can see £2.5 billion coming from the individual organisations working on the railways. There is Network Rail plugging away on control periods 4 and 5 and the train operating companies through the franchising and rebidding. There is another billion there, but we cannot do it without working together. Equally, we cannot do it without the Government getting involved.

Let us just talk about stations. Today, to manage a station, there is a document that has some 1,000 pages in it. That is the contract. That is how his organisation, as a train operator, manages stations across the country. It has been there for years. If you give them much more flexibility and replace it with a performance-based contract, they will save money. That is a classic example of how you can save money.

There are lots of issues. How do disabled people get access? What shall we do with station staff? Can we use other things? We have to look at all those political and policy issues, but there is a lot of money to be saved in an example like that.

Q67 Jim Dobbin: The issue of localism has been raised. What part would your two organisations play in that process?

Sir David Higgins: From our point of view we welcome it. To start with, we welcome it with TfL, with the Mayor. The Mayor desires to have greater involvement in the setting of timetables and franchise determination, particularly on the south-east and Anglia routes. That is fine with us. We are happy to work with TfL and the Department for Transport on that, right through to Manchester, the Northern Hub and all the work we are doing with the transport organisations up there to make sure that we have a very focused localised service. It is getting more and more focused on those regional customers.

Q68 Jim Dobbin: But the Local Government Association have stated that there is no one model that they would like to see. For example, different local authorities or different local organisations might want to set up something entirely different. Don’t you think that would just lead to utter confusion?

Sir David Higgins: No, I don’t think so. Let us take Scotland and Wales as the perfect example. Scotland, with their own freedom on budget and capital, make a decision that suits them and report to the Government within Scotland. There are signals that that will increase. Both our organisations, as it turns out, have to be very responsive to the Government in Scotland as to what they need. Clearly, if they want to take more control of the asset base, that is entirely a decision between the two Governments. That is very appropriate in Scotland but it is entirely different in Manchester and London.

Tim O’Toole: We are perfectly comfortable with it. Our only caution is the one I think you are hinting at. You have to have clarity as to the decision maker. That is the big thing. You cannot have two bosses.

Q69 Jim Dobbin: It is not just that; it is the plethora of organisations or local controls that might well be set up that creates a sea of confusion.

Sir David Higgins: It could result in an explosion of overheads if you are not careful. Also, unlike many other railways systems, this is a network. It is inextricably linked. There is a key group of stations, which, if they are not managed very well, impact on the performance across the entire network very dramatically.

Q70 Julie Hilling: I want to ask questions in two areas. I was quite surprised when I saw the make-up of the group. My colleague has just reminded me that there are three sets of stakeholders that are missing from there. One is passengers, the second is staff, and the third are the ITAs collectively. Why was the decision made to focus on only three of the stakeholders rather than perhaps six stakeholders?

Sir David Higgins: We started the whole discussion around a table where we could fit everyone in a small group. What had happened before was that the train operating owner groups and Network Rail never really had a dialogue at all. Well before the Command Paper came out, and even before McNulty was finally determined, we started getting together a year and a half ago. What McNulty said is that it is a fragmented industry and there is a complete lack of leadership. The only way this will happen is if we start to fill in that vacuum and provide a leadership role. There have been many histories-and Tim knows them better than me-of large groups that went on and became larger and larger after the various crises. I hear the war stories of 20 or 30 people in the room. The obvious groups to involve are the suppliers, train leasing companies, trade unions, employer representatives, right through. Very quickly you can have 30 people around a table, and many meetings in the rail industry do.

The strength of this group so far and why it has kept together is that it is a tight group that we deal with directly in terms of the freight and train operating companies. Now we need to work out how to have a much greater engagement with the supply community in particular, the labour unions, as well as of course dealing with the many other organisations that would need to be involved. We have to make sure that we can clearly communicate what our objectives are and how we will let them be involved.

Q71 Julie Hilling: That leads me on to my next question because the real question for me is whether the users’ voice is in there. You talk about this huge reduction in subsidy. What will the consequence of that be for people? The previous Secretary of State said that we already had a rich man’s railway. Will these changes mean that it is a rich person’s railway even more so, and it is only the rich who can travel on it? What are the consequences of that reduction in subsidy?

Tim O’Toole: The organisations that are focused on passengers are ones that we are consulting with and are going to include as we go forward. You touch on the heart of the matter, and in many ways the most obvious missing piece from the McNulty Report-as if it is to be our North Star-is that it does not say a whole lot about the passengers and how to make things better for them. At the end of the day, if you don’t translate everything back to that, we are wasting our time. Who knows whether it is £1 billion, £800 million, £1.2 billion or whatever number we ultimately come up with. Our success will be judged by whether the public think they ended up with something better at the end of the day. We have to take all of this work and bring it back to that. You are absolutely right, and I have said this to Sir Roy face to face. That is the piece that is missing from the way we look at this.

Q72 Julie Hilling: When you are then considering things like reduction in staff on stations, driver-only operated trains and so on, is the voice of people like me being heard who say, "I don’t want to be on a train where I have only got the driver on it"?

Tim O’Toole: In many ways we cannot help but hear it. People are making their views very clearly heard on that subject. Taking off staff is a perfect example of where we, as operators, care dearly about the answer. It is not like we are at war with our own employees. They are the people who create the value for us. I want to do the right thing. The issue is not whether or not there should be people selling tickets from behind glass. We have studied this extensively on the underground. People do not like to stand in queues. People do not like to go to ticket offices. What people do like is information. Some people find they can get it at a ticket office and they can get confounded by a ticket machine. Therefore, they are willing to do something that otherwise they would prefer not to do. The issue really is how we can solve that person’s information deficit-how we can get them what they really want.

As we solve that, what will happen is what is happening to most of our customers: they are going to get their tickets another way. You are seeing it in every walk of life. Revenue collection is changing and it will change on the railway, but it should not change until we solve those information questions that people need. I do not believe that anybody wants to stand in a queue at a ticket office, but I do believe that people want to understand how to get the best ticket, how to know where to go and so on. We have to answer those questions when bringing in any new technology on the railway.

Q73 Chair: What kinds of links or conversations do you have with passenger representative groups?

Tim O’Toole: What we have done so far is that at the six-month mark of our work we had a forum, invited them and talked about what we were working on because we were so focused on asset management and the like. We took as our agenda the big numbers in McNulty. We said, "All right, let’s take those apart first." We looked at train utilisation, programme management, asset management and supply chain management. Our work did not implicate any of the things that would have suggested major changes, but, as we go into these subjects in more detail going forward, we will engage with them in more detail.

In the programme and asset management area that I run, we have brought in a supply chain. They work on our sub-groups. I would expect the exact same thing to happen with the passenger focus groups as those ideas are developed.

Q74 Chair: So you will be doing that, will you?

Tim O’Toole: Absolutely.

Q75 Chair: But you are not doing it now.

Tim O’Toole: We don’t want to set up any answer that just gets shot down later.

Q76 Julie Hilling: I appreciate what you are saying about fares, but there is also the safety element. Often it is about feeling safe; it is not just about being safe. What consideration are you giving to that element of it?

Tim O’Toole: That is a subject we are constantly grappling with and have in the front of our minds in running the current system.

Q77 Iain Stewart: I would like to pick up on one of Mr O’Toole’s responses to my colleague Mr Maynard’s questions earlier. That concerns looking at national rail policy in the context of transport policy more generally. Earlier this morning I had a meeting with people from Gatwick airport. Their case is that they are inhibited in their ability to attract new carriers to utilise their spare capacity because in their view the rail links from Gatwick into the centre of London are poor and have diminished in recent years. Are you satisfied that the mechanisms are effectively there for the interests of non-rail companies who have a direct interest in the provision of rail services to get their viewpoint heard? If not, what needs to change?

Tim O’Toole: Their way of getting their voice heard is the same as ours. The Government have an interest in Gatwick working, and they tell the Government what they need in order for it to work. A lot of these proposals on High Speed 2, for example, are all about how you tie in decisions about rail to what you build and the like. It is about co-ordinating those concerns at the level of Government as opposed to their coming to us to do it. Transport policy generally is for the Government.

Q78 Iain Stewart: Do you think it is working effectively at the minute?

Tim O’Toole: I am sure that you could find examples of it working and of it not. It is just not something that I oversee. I do not think it would be fair to me to grade, but ultimately all of these decisions have to be tied back to some transport policy or principle; otherwise we have no orientation of what we are trying to accomplish.

Q79 Chair: Are you concerned that the combination of alliances and more decentralisation will result in a more complex structure?

Tim O’Toole: Any time you take a single thing and make it multiple things you have that risk, don’t you? It is going to be very critical that Network Rail continues to develop an asset register and that there is a guiding mind to standards and the like. It is very important that the alliances go forward so that the train operating companies and Network Rail can produce real savings and we just don’t have a proliferation of new smaller overheads. We are all well aware that those are the risks. The upside is so great that we can overcome those risks.

Sir David Higgins: The concept of what we would call a system operator, which we see Network Rail as, is essential to maintain the integrity of the network and get the efficiencies of economies of scale, whether it is procurement or standards. I would support what Tim said on the other area.

Q80 Chair: How do you engage with the trade unions?

Sir David Higgins: Regularly. From Network Rail’s point of view, we have an extensive level of engagement and consultation with them.

Q81 Chair: They are clearly very concerned about the implications of these proposals in terms of jobs and safety. How are you addressing that?

Tim O’Toole: First of all, the Rail Delivery Group is not a bargaining unit. We do not make decisions that we would then announce and enforce. The dealings with the trade unions are on a company-by-company basis. Any changes will be by the normal machinery, first of all. As regards the way we think about possible strategies and directions going forward, we will engage with the trade unions and tentatively have already done so, as we do with the ROSCOs and their issues or the supply chain. We will meet with them and will bring them into the sub-groups. We will talk through the issues and get their thoughts as well, but actual changes will only happen through the normal machinery.

Q82 Chair: Are they involved in those sub-groups now?

Tim O’Toole: They have been part of a couple of conversations. I have been party to one of them personally, but it has not gone into any detail yet.

Q83 Chair: How are the interests of freight going to be considered?

Sir David Higgins: They are represented.

Tim O’Toole: They are on the RDG. We have two freight companies on the Rail Delivery Group. They are, for example, represented in my sub-group as well.

Q84 Chair: You do not have concerns that new decentralisation and different structures might minimise looking at the interests of freight as a national service.

Sir David Higgins: It has the potential to within Network Rail, but we have set up a national freight group within our own organisation under a guy called Tim Robinson whose background is freight. He has a national group within our organisation. If we did not do that, we would run the risk of fragmenting the service to freight operators.

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

Examination of Witnesses

Witnesses: Mick Whelan, General Secretary, ASLEF, Bob Crow, General Secretary, RMT, Manuel Cortes, General Secretary, TSSA, and Julia Long, National Officer for Docks, Rail, Ferries and Waterways, Unite, gave evidence.

Q85 Chair: Good morning and welcome to the Transport Select Committee. Would you each give your name and organisation for our records?

Mick Whelan: I am Mick Whelan, General Secretary of ASLEF.

Manuel Cortes: I am Manuel Cortes, General Secretary of TSSA.

Bob Crow: I am Bob Crow from the RMT.

Julia Long: I am Julia Long from Unite.

Q86 Chair: In your submission to us, you show very strong concerns about what you see as the costs of privatisation. How do you think those costs could be addressed other than by changing the whole system, which I know is the tenor of the general submissions you have made? Are there any other ways in which those costs of privatisation could be addressed?

Bob Crow: Nationalise them.

Manuel Cortes: The biggest cost that has come from privatisation has been the fragmentation of the railway and the fact that we now have a whole raft of different operators and different companies all trying to run what used to be a unified structure. If you look at the McNulty Review, he actually says that that has been a major contributor to the escalation of costs, and yet when he comes to his conclusions he says that we need even more fragmentation. It just does not add up.

Bob Crow: If you take what is happening at the moment, the railways in Europe are 30% cheaper than the ones over here on the basis that the railways in Europe are near enough all nationalised. They do have private companies running them, but they all report to one chief executive. There is no captain of the ship at all of the railways in Britain. In pre-British Railways days, if a light bulb needed to be changed on a station in leafy Surrey, the chairman or chairwoman of the board could ring up the station master and say, "Change the light bulb." Now he has to speak to the company concerned, who subcontract it and who agency staff it. They all have their contracts and they all get their lawyers rather than having one line of command. The reality is-even Sir Roy McNulty recognised this in his report-that there are too many interfaces. We are going to see an announcement on Thursday in the Scottish Railways where they are looking at breaking up Scottish Railways into five separate companies. That is madness. We should be looking at delivering the railway for the travelling public so that they know exactly how to get from A to B as quickly as possible, as safely as possible and as cheaply as possible.

Q87 Chair: In your submission you make the case for renationalisation. You talk about how that could be done. In relation to franchises, you say that when a franchise comes to its end it should be held nationally instead of let out again. But the realities are that at the moment, over the next two years, nine franchises are due to be re-let on a longer term basis than they are now. If your policy was to be accepted, it would take a long time to do that, would it not?

Bob Crow: Not really-not if you want to extend the franchise.

Q88 Chair: What else could be done now?

Mick Whelan: Surely there has to be a recognition that the franchise system as it exists is flawed. The reality is that as a result of the way in which it is distributed you are always going to have franchises that will attract massive subsidy. The reality is that, if there are any gains to be made from that subsidy, it is not coming back into the Exchequer or to the Treasury; it is going out to the shareholders of the franchises. Of the massive investment that goes into the industry, no money comes pouring back in.

The flawed model that originally created the franchise system was based upon competition. They told us that competition would drive costs down, both for the infrastructure and fares. We have seen massive increases in fares, and nobody disagrees with the fact that the fare structures are wrong. What we are planning to do now on the back of McNulty, as I understand it, is possibly to give 15-year franchises and take even more competition out of the equation. Nothing has been done to offset the model that is there now.

For the sake of argument, say that First Great Western did win their franchise and got 15 years. These are the people who handed the keys back three years early so that they did not have to pay back £700 million to the Exchequer. That has to be found somewhere else, surely. The reality is that we should look at doing something different. That is without looking at the other add-ons, where the ROSCOs have announced their profits in 2008 of £700 million. Again, those are assets that we previously owned and assets that the Government invested in and developed. That money is pouring out of the industry and elsewhere.

If we really want to look at cost, all McNulty did was a very bare-bones study about eliminating some exposure by reducing the work force. That will not make for a safer railway. If you are possibly talking about taking 21,000 jobs out of the industry, you are going to make it a less safe place to be, not a better railway.

Bob Crow: You have parts of the railway now that are nationalised. The East Coast Main Line, which runs trains from King’s Cross to Inverness, is nationalised. It is run by the state. It is running particularly well. It is moving a lot of passengers up and down, and at the end of the day it gives the opportunity to the Government to do one of two things when the annual accounts come in. The money that the company makes can be reinvested into the railway or the Government can keep it for themselves and give it to other social services.

Q89 Chair: Do you see any benefits at all in having longer-term franchises under the current system?

Bob Crow: No.

Manuel Cortes: No.

Q90 Chair: Does anybody see anything positive at all?

Mick Whelan: If all the investment was going to come centrally, no. These people who are investing in the industry are doing it purely to generate profit where they can for their shareholders, which is their role. They do it very well in relation to the people they represent. What they have is a model where they cannot lose. We have all talked about a capital economy before, about revenue protection, and I will not even get into the realm where they are paying people to run railways and say that was profit when it is industrial strife. It seems to me that the whole of McNulty is a recipe for future strife. It seems that what you are actually inviting people to do is to say what efficiencies they will make and, if the Government believe they have gone far enough, then they will award them the franchises. That is a very dangerous place to be.

Bob Crow: Where has the investment from the train operating companies gone? The only investment I see from the train operating companies is that they love a car park. They love the asphalt. They love putting a gate up and a barrier and charging people exorbitant fees for parking their cars. That is the only investment I have seen by the train operating companies in the railway network.

Manuel Cortes: There is no genuine risk taken by any of the private operators. Everything is underwritten by and large by Government money. There is no risk taken.

Q91 Chair: The things you are saying are probably in relation to the problems that there are. There is a large measure of agreement on those. The issue is whether anything can be done to address those under the current structure, basically. That is what we are struggling with.

Manuel Cortes: Our fundamental view is that you cannot do it under that kind of structure. What we need is a root and branch review of the way we run the railways; otherwise we are in danger of doing two things: cutting back on services that people need and having fare payers pay more and more, even though they already have the highest fares in Europe.

Bob Crow: Why can’t Network Rail run a train operating company?

Q92 Mr Leech: We privatised the railways, rightly or wrongly-

Bob Crow: Wrongly.

Q93 Mr Leech: I accept entirely that from your perspective it was the wrong decision. I happen to agree with you, but we are where we are several years down the line. Is there not a danger that you are putting all your eggs in one basket, which is scrapping the system and renationalising? We know that that is your starting position, but isn’t there a danger that, if you do not come up with ways in which we could improve the current system, then the decisions will be made without the unions having any involvement in how it takes place?

Mick Whelan: We are not naive enough to believe it is going to happen overnight, but you do need to move towards a model that gives value for money. We hear those words touted and vaunted around-that we need to do away with subsidy. Most of the subsidy is going out of the industry into the shareholders’ pockets. The reality is that, even within the Command Paper itself, it talks about involving more interest groups, whether it is locally, in communities, councils or whatever. To do that, you have to look at the Railways Act 1993 and allow public bodies or other transport groups to invest in or own railways. That is the problem unless you move towards that. If all we are going to do is sit here and talk about how we can do it within what we have now, we are going to come here and make the same arguments regularly.

Q94 Mr Leech: I think you are missing the point of the question I asked. The question I asked was, having got that very fundamental position that you all hold, is there not a danger that you then are not able to be involved in the process of change?

Bob Crow: We have not been involved in the process from the start anyway. We have not been involved in the process. The Rail Delivery Group has had a number of meetings and we are not allowed to sit there and put a point of view on behalf of the work force, even though we represent 100,000 workers between all four unions sitting here today. There was one meeting last November. We were basically all in a room together sitting round the camp fire deciding what was wrong and what was right.

You talk about efficiencies, Mr Leech. Network Rail have 160 solicitors who sit there all day long saying it was the train operating company that was at fault for this train being late and that train being late. The train operating company have another 150 solicitors saying it was Network Rail’s fault. So you have 300 solicitors sitting there all day saying, "You were wrong for being three minutes’ late; you were wrong for being five minutes’ late; you were wrong for being half a minute late." If you scrapped that, you could save 300 lawyers’ wages straight away and get on with what the real issue is, which is delivering a service for the travelling public.

Manuel Cortes: Just to come back on your point, ever since the railway was privatised every Government that has come in has tinkered around the edges. The reality is that they have not achieved a more efficient railway. I do not know what makes you think that further tinkering is going to achieve that. There is a fundamental flaw with the structure of the railway and it needs to be cured. To do that you need to start from the beginning. The cost escalation came about as a result of the fragmentation. It came about because of privatisation. That is where we need to go back and revisit.

Q95 Mr Leech: Mr Cortes, do you actually believe that what is being put forward as a proposal now is still "tinkering"? It strikes me that it is some fairly major changes that you, as unions, ought to have a significant input into to make sure that you are getting your points across.

Manuel Cortes: Where is the major change? The railways are still going to be run for profit. They are still going to be fragmented. In some of the recommendations from McNulty, fragmentation is going to get even worse, even though he says in his analysis that that is what has led to costs running out of control. I just do not see where the fundamental change is.

Mick Whelan: Some of the structural changes that have been proposed around alliancing will probably give us more cause for concern than where we are now. The reality with that, to all intents and purposes, is back-door mini Railtracks and reintroducing the profit motive to Network Rail.

Q96 Chair: Could you tell us which areas give you more concern about the proposals?

Mick Whelan: The areas of transparency and health and safety would initially give us cause for concern. When Tim Shoveller is the managing director of South West Trains and he runs a Network Rail area and they still trade with each other, that is going to cause a problem. When he starts to devolve certain roles from Network Rail into the top and vice versa, that will cause issues and problems across the board. At the same time we can see that without a proper structure, it is going to cause problems for other operators operating in those areas. We can see that just introducing alliancing per se-which, to come back to your structural point, is a major structural change-is going to cause many issues across the board.

Bob Crow: I want us to get back to why we are here. The reality is that, when Railtrack was set up as a company on the stock market, it failed to maintain the railways of Britain properly because it would rather spend its money on not providing a service than providing a service. This is not me saying this but the inquiry into Hatfield. They made it quite clear that it was like a steamroller going over a digestive biscuit. That piece of railway broke into 190 pieces. It was done away with because, quite clearly, it had put profit before safety. As ASLEF quite rightly say, we have now set up mini Railtracks. We have a managing director who is now supposed to be responsible for the infrastructure and also for the train operating company. He has Stagecoach in one ear saying to him, "I want you to make a profit", and Network Rail in the other ear saying, "You need to maintain the railways properly because we don’t want another disaster." He must be turning into a schizophrenic as every day goes by because he does not know which way to turn. That is the reality of it.

The fact of the matter is that these train operating companies have had over £24 billion worth of taxpayers’ subsidy since they have had the railway. It is like walking into a fish and chip shop, asking for fish and chips, eating it, and then when you ask for the bill they tell you, "No, we’ll pay you to eat it." That is how crackers this system is.

Q97 Iain Stewart: I would like to pick up on a couple of your earlier comments. First, there is your opposition to longer rail franchises. I want to put to you the example of Chiltern Railways, which I understand has the longest franchise. From my perspective Chiltern has achieved a revolution on that line. It modernised it with new trains and new routes. It has opened up a healthy competition to Virgin in the London-Birmingham market. Am I wrong in the view that it has been a success with a long franchise?

Mick Whelan: I think Chiltern is probably one of the exceptions but it is a captive audience, isn’t it? If you look at the future proposals and changes, if you look at the current Thameslink franchise and merge that with Southern and Gatwick Express, you will have 30% of all rail capacity contained within one franchise. Whoever wins that will have the keys to Fort Knox. There is nothing written into that about how they develop the franchise, or them putting in their own money or investment to get a return. It will still be centrally funded with all the profits coming out.

Also, if you look at McNulty and what it allows with the increase in fares over a period of time, it is just a licence to print money while at the same time reducing the amount of staff to run the operation. Fundamentally, this is to do with the ethos of privatisation. We did not call them passengers back then; it was customers, and everything was about customer focus. Because of society we were going to get better information. They were going to put in CCTV. We would have CIS screens and better booking office hours. Now the solution is to turn 180° and close the booking offices, take people off the platforms, encourage driver-only operation and limit the exposure of the companies to maximise their profits by reducing the work force. Chiltern, to take your example, are a company that do believe in serving the customer and have built on that ethos. That is the ethos that has been proposed within the market.

Q98 Iain Stewart: I am specifically asking about your opposition to longer franchises. I appreciate that you have other concerns. Why couldn’t a longer franchise operating on the Chiltern model deliver the same improvements to others?

Mick Whelan: Because you are changing the model. The original franchises-and correct me if I am wrong-were let on the basis that you told the operators what trains they had to run-how many trains they had to provide. They had to say what they would do over and above that to encourage central Government to give them franchises. The way I read the Command Paper now is that we will be allowing them to run their own timetables and say what trains they want to run. They will be delivered in a different way. That is not the Chiltern model.

Q99 Iain Stewart: But Chiltern would have the ability under the new arrangement to develop their model in innovative ways.

Mick Whelan: Chiltern are probably now at the zenith of where they can be because of the limitations in and around the Birmingham area and the share of responsibility for the other operators. They are virtually at full capacity. The real problem is down the years. Most of what we have done within the industry has been based on capacity studies, looking at population growth and footfall in the future. The reality is that that is going to slow down purely because of where new property is going to be.

Q100 Iain Stewart: I want to ask one other question in a slightly different area. At the moment the percentage of rail industry income that comes from the fare box is just over half. It is 55% or 56%. In your view, what should the percentage of income that comes from the fare box be? I would like each of you to give an answer.

Mick Whelan: My colleagues are probably more attuned to this than I am. I think it should be a higher percentage. The reality is that, if you want to encourage growth in capacity, you have to get away from the nonsense where you turn up on the day and pay £200 for a Birmingham return.

Q101 Iain Stewart: I was not clear about your answer there. You want the percentage of fare box income to go up.

Mick Whelan: Yes; I would like to see less profits for the franchises and more of the money generated from the fare box to come back into central Government.

Q102 Iain Stewart: Balancing fare box income against net Government subsidy, you would like to see a higher percentage than currently from the fare box.

Mick Whelan: Yes, because at the moment you have organisations out there-and I have dealt with many of them down the years-that will never wash their face economically and they will always be relying on subsidy. The only way that they create profit for their shareholders therefore is by taking money from the subsidy and by running it for less, basically. Unless you take away that model whereby the money in certain areas-if you are not an intercity TOC, in certain regional areas you will always be heavily reliant on subsidy, for ever and a day.

If you take Wales, for example, you could never have the cost opportunity that allows the fares to meet the returns you require. You are always going to have to subsidise. There is not a one size fits all.

Q103 Iain Stewart: Is that a shared view?

Bob Crow: We would support ASLEF, but at the same time we don’t support any of these fare boxes. We would like to see the railways being run by the state. That is what we would like to see.

Q104 Iain Stewart: Forgive me, Mr Crow, whether the railways are nationalised or privately run, there is a balance between what the passenger pays towards the cost of running the railways against what the Government provide in net subsidy. What I am trying to get is your view. The percentage now from the fare box is roughly 55%. Is that too high, too low or about right?

Bob Crow: If it was nationalised, I would like to see more in it because we would be dealing with the environmental factor then and getting people out of their cars and on to trains.

Q105 Iain Stewart: So you want a lower percentage and high net subsidies.

Bob Crow: Yes.

Manuel Cortes: Fares are already far too high. It was the former Secretary of State for Transport but one who described it as becoming a "rich man’s toy". They are already extremely high, but part of the problem is the amount of money that leaks out of the industry in profits. Part of the problem is how much it costs to run because of fragmentation. There has to be good public investment into the railways. There are social and environmental aims that we need by having a railway.

Q106 Graham Stringer: Mr Whelan, do I take it from what you said earlier that you would ban First Great Western from bidding for the next franchise?

Mick Whelan: I am not saying I would ban them.

Q107 Graham Stringer: Why not?

Mick Whelan: I am giving the example that we have a system at the moment that allows people to walk away from their obligations early, so that they do not have to pay back hundreds of millions of pounds to the Treasury, and then are still allowed within the process to bid for the franchise they have just walked away from. That seems odd to me.

Q108 Graham Stringer: It seems odd to me as well. What I am really asking is, don’t you think there should be a penalty for that abdication of responsibility and that penalty should be to be banned from bidding?

Mick Whelan: Of course, and I think the RMT put it quite appositely earlier. At the moment there are no penalties. If you lose you win, and if you want to walk away you still win.

Bob Crow: Take National Express, Mr Stringer. They won the East Coast Main Line franchise, and just as the recession came in they gave it up. If it had been a boom rather than a declining industry, they would have been laughing all the way to the bank. They gave it up. What was their penalty? They were allowed to bid for the c2c route down to Southend. They still allowed them to do that. National Express should clearly be banned from being allowed to put in for any franchise on the railways of Britain.

Q109 Graham Stringer: You mentioned before that there were 300 solicitors talking to each other.

Bob Crow: That is just over fares.

Q110 Graham Stringer: You can expand the answer if you wish because it is an interesting figure. Where is the hard evidence for that? Where can the Committee look to find the evidence for that?

Bob Crow: Ask the chairman of Network Rail, Sir David Higgins. That is what he told us.

Q111 Graham Stringer: You have been told that by the chairman of Network Rail.

Bob Crow: Yes.

Q112 Graham Stringer: We had Sir Roy McNulty here before and we also had the Rail Delivery Group here. I want to ask you the question I asked them. We now have £27 billion of debt on Network Rail’s balance sheet. The taxpayer is paying nearly £4 billion a year into the rail system. It is a lot of money. I was in a debate in 1999 with Teddy Taylor when he said that it did not matter that the railways had been sold off cheaply because in the future they would require no subsidy. Where has that £27 billion plus £4 billion a year gone? Where is it going?

Bob Crow: All that has gone in dividends to the shareholders. That is why I said before, Mr Stringer, that, if the railways were nationalised, then each year the Government could decide over a period of time whether they were putting too much in or not enough. If the railways were generating a profit-and don’t forget there are more people using the railways now than have done for the last 70 years-then they could do one of two things. They could reinvest it back into the railway network or they could put it back into the state in general.

Manuel Cortes: Part of the cost is for fragmentation. That is what privatisation has delivered. Clearly if you had one national train operating company running for the interests of passengers and not profit, there could be cross-subsidies to those lines that are needed for social purposes.

Q113 Graham Stringer: We were told that it had gone into investment.

Bob Crow: What has gone into investment?

Q114 Graham Stringer: That money was going into investment.

Mick Whelan: It was necessary investment. What we had at the time of privatisation-and one thing we do not nay-say-is the railway being brought up to a certain standard, and it had to be done. There has been procurement for one side. Post-privatisation with Hatfield, the whole industry nearly collapsed. If it was not for the stakeholders that we represent, no trains would have run and we would have no industry now. It was not the TOCs that made it good. It was not Network Rail that made it good. It was the workers in the industry who kept on going through terrible times. That meant that a massive amount of investment had to be put into the industry post that time. Part of the problem with how both Railtrack and Network Rail get their investment, because they are not shown on Government balance sheets, is that they have to borrow at higher rates. Part of the debt is the heavier borrowing costs that they have.

We then went into a series of major investments such as the West Coast modernisation. That was overrun by billions and then was not finished. It was meant to give us moving block. It was meant to give us a similar sort of system that they have on the French railways, and it still has not been completed. What we have is billions of pounds that have gone into the Pendolinos. There was originally going to be a train every 15 minutes out of Euston to all destinations. There would be no timetables; it would be step on, step off. That was going to go hand in hand with the modernisation of the West Coast Main Line. It failed. We have had series after series of borrowing and investment at high cost for things that unfortunately have not been delivered.

Q115 Chair: You see the costs to do with investment costing a great deal more than they needed to, to deliver what they did.

Mick Whelan: Yes.

Bob Crow: They are getting four times more subsidy now than British Rail got. Certainly British Rail was not the ideal position, looking through rose-tinted glasses. There was low pay, long hours and one thing and another. The model that the RMT would like to see is a new board where all the railways deliver one thing, which is a service for the travelling public. There would be representatives from the work force and the travelling public serving on the board with the railway company, which delivers the profits. There is Network Rail, the train operating companies, the infrastructure companies and the subsidy. What the people want is to turn up at a railway station, find it friendly, safe, non-expensive and that they can get from A to B without going through a dictionary of different railway companies.

Q116 Graham Stringer: I want to ask about another cost. I asked Sir Roy McNulty about the cost of salaries and whether top management and the board was costing a lot more money now than it did under British Rail. His answer, and I paraphrase, was that, yes, costs have gone up by more than the rate of inflation, but that was just in line with what the work force was being paid. I would be interested in your comments on that answer.

Bob Crow: The fares have gone up by more than the rate of inflation because they are allowed to put their fares up by over 3% above the rate of inflation. If the workers ask for a pay rise of 3% above inflation, they are called greedy and other names as well. If they put it up, it is seen as good investment.

Chair: Mr Whelan, I think you want to come in here.

Mick Whelan: I was rather interested in Sir Roy McNulty and his report. He spoke about wages drift but he gave no acknowledgment of the fact that we have totally revamped all the terms and conditions of all grade groups across the industry in the last 10 years. Everything we have had has been paid for by productivity. If you look in the McNulty Report or the subsequent Command Paper, there is no recognition of that. They say that higher wage costs must come down. We are happy to reduce the wage costs. We will go back to a flat eight-hour day. That will generate real jobs for millions of unemployed out there. The reality for us is that we believe we pay for what we have. What we did not want to do is pay 26 managing directors six-figure salaries, their finance directors, their operations directors and all the other people who run all these operations that could be simply controlled by one body. As Manuel has repeatedly said, fragmentation brings its own costs, whereby you need 26 human resources directors and their teams, rather than one centralised body under one organisation.

Manuel Cortes: Also, the salaries that are being paid to those boards are well in excess of what people used to get, with any inflation link, in any British Railway board.

Mick Whelan: We will not even get into the share options that these groups award to their managing directors and operations directors, because they do not give them to the staff.

Bob Crow: Also, Chair, it is not like for like. You talk about costs being dearer in Britain. We are talking about a railway network over here that has 4,000 bridges and various structures. It is a Victorian network with a drainage system underneath it. That is compared to the cost of a railway-for example, Barcelona to Madrid-where it is a straight piece of brand new railway. It is not like for like.

Q117 Julie Hilling: I want to continue with my theme of the day, which is asking questions around staffing. The report talks about driver-only operation as a safe method of operation that improves performance. It says the default position should be driver-operated, with a second member of train crew only being provided when there is a commercial, technical or other imperative. I am aware that you object to that. Could you explain your objections to driver-operated trains?

Mick Whelan: We do object to it. I could be parochial and say, "My guys and girls are going to be okay because we will have a driver on every train." That is not what we believe. We see societal issues out there. We see people afraid to travel late at night. We see women not wanting to use them. All the studies tell us that we have problems out there. The reality is that taking people off platforms, off the back of trains and out of the industry does not make the railway a safer place. It does not make it more user-friendly or more cost-effective. We believe it is the wrong thing to do.

Julia Long: The passengers on the trains, especially women and older people, want to be able to go on to the station and for somebody to be there. They want to go on to the train and for somebody to be there for them to feel safe. The proposals are saying that we should just have a train driver on a train and that the ticket offices should not be staffed. To me, that is a danger to all people in this country who use the train. It is not going to encourage them to continue using the train.

Bob Crow: As Unite quite rightly says, in all of the reports of all the incidents that have taken place on the railway-Southall, Hatfield and Potters Bar-it is the guard and the catering staff that are trained in evacuating people, to take them to a safe point, rather than people jumping through windows with trains coming down the other line. The reality is that we do not want a job for a guard just for the sake of him being a guard who is put into a box and who just presses a button. We are quite happy for a person to do the commercial role as well, but there must be someone on that train, in our view, who has the ability to look after the staff. That is what their name says: to guard the people on that train and to make sure they are safe.

If you do not have people on stations, they will become muggers’ paradises. There is no point in putting a "Help" point in if someone gets attacked. It will probably get the person sentenced, but we do not want the attack to take place in the first place.

Q118 Julie Hilling: I want to follow up on that with the proposed ticket office closures and the effect of those on passengers.

Manuel Cortes: All the evidence suggests that when you take staff out of stations they do become a magnet, as Bob has just said, for petty crime, antisocial behaviour and vandalism. It deters people from travelling at night in particular. Also, there is no one left behind to lend a hand to those with mobility problems. One of my members works in Birmingham New Street and has given me a good example of what would happen if somebody with mobility problems turns up at New Street and wants to go to a suburban station where there is no longer any staff member. They would be put in a taxi at Birmingham New Street to be taken to the suburban station. That will be replicated across the rail industry. Is that the kind of inclusive railway that we want? Is that one that allows everybody to use it? It is one where people are turned back, when they turn up, and put in a taxi because they have a mobility issue.

Equally important-and this is a question for you-why isn’t there going to be a vote in this House about the proposal to shut 675 stations? Why not? I think the issue is so unpopular that they know they would not be able to get it through the House of Commons. So now they are going through the back door and using franchise agreements to try and close down 675 booking offices.

Q119 Jim Dobbin: On the issue of rail freight, do you think there is enough stress being put on this by Government to increase rail freight traffic?

Mick Whelan: The consultation paper that is out now will work on the basis of a "polluter pays" process whereby they want to charge freight trains far more for the possible damage they do when they are carrying heavy loads across the tracks. That will deter people and force traffic back on to the roads, making it a less green option. We are a very small island with a finite capacity. If we want to move bulk goods and passengers, rail should be the cheapest, most efficient and greenest option. Unfortunately, we are in a situation where that is not the case.

Julia Long: The unions have all argued that we should have an integrated transport system and we should be encouraging freight on to rail. We should be encouraging regional hubs so that they can go into them. It does not lose jobs. We have talked about that. We represent the lorry drivers within Unite. Basically, we are saying that we need more freight on rail. It is a nonsense not to.

Bob Crow: We have never asked for a monopoly for freight going on rail. We have said that, as far as we are concerned, long haul could be moved by rail, and then you would have the smaller journeys in rail distribution and freight distribution warehouse hubs taking the localities. We had one in Warrington. There was a massive investment into it and the whole lot shut down. That is what you see with industrial vandalism, in my view.

Q120 Jim Dobbin: I have one question on the back of that. When they create these terminals, are the trade unions involved in any of the discussions?

Bob Crow: I have not been involved.

Mick Whelan: If there is any public consultation, we tend to put our two-penny-worth in to any consultation that takes place, whether it is regional or national, but we don’t have direct involvement.

Q121 Chair: Have you been involved in any discussions in the Rail Delivery Group?

Bob Crow: No.

Q122 Chair: Do you want to be?

Bob Crow: We have asked if we can sit at the table.

Q123 Chair: You have asked.

Bob Crow: Yes. We have put our point of view. How can you bring all the railways closer together if the 100,000 workers that work on the railways do not have a voice at the table? We have asked. We have written to the companies. We can show you the correspondence. They say, "At this moment in time we do not think it will be appropriate." They called one meeting last November of everyone, all and sundry. As I said before, it was like sitting round a camp fire and throwing up your ideas about the railway network. The Rail Delivery Group continues to meet. They have set up a number of sub-committees operated by David Higgins and Tim O’Toole. We have not once been invited to go and put our point of view at the table. We are not asking to be a decision maker, but we would like to think we could get the ear of the Rail Delivery Group to express our point of view and what the representatives of the workers feel.

Mick Whelan: My view of the Rail Delivery Group is rather cynical. I think it is a throwback to the Victorian railway owners meeting in a dark room, setting terms and conditions and wages for the future. That is why they do not want any involvement of the employee groups that we represent.

Q124 Chair: Would you want to be involved? I ask you because we did raise this issue with the Rail Delivery Group and they said that you would be involved at a future stage. I just want to clarify whether you want to be.

Bob Crow: We would be involved?

Mick Whelan: Well, once they have decided what they are going to do, then they will tell us what they are going to do. Is that what you call involvement and consultation? Our view of it is that they are meeting in their darkened rooms making their plans for the future and would like to present it as some sort of fait accompli to us, probably Government-backed. We are very cynical about the RDG.

Q125 Mr Leech: In your written evidence you calculate that up to 20,000 jobs could be lost. In one of the previous sessions Sir Roy McNulty suggested that the figure was more likely to be around the 6,000 mark. How did you make the calculation of 20,000?

Bob Crow: That was on the basis of the analysis that was put in that report. It is the amount of booking offices that would close, the amount of catering staff and guards that would be got rid of, and also the cutting back of the agency and subcontracting work that operates in the infrastructure.

Q126 Mr Leech: Would it be possible to send us that evidence?

Bob Crow: Yes.

Q127 Mr Leech: On a separate point, if there are unmanned trains- sorry, driver-only trains-

Bob Crow: That is the next step that the Mayor of London wants to bring in.

Q128 Mr Leech: If there are driver-only trains and closure of ticket offices, have you made any calculations on the potential increase in fare dodging and the loss of revenue protection?

Bob Crow: Only that it will go up. It is obvious. If you have less staff there, it will go up.

Q129 Mr Leech: The question is whether or not you have done any work on it or have made any calculation.

Bob Crow: Not any work. It is on the basis that you put a ticket machine in and a ticket barrier. There is a difference between a ticket machine and ticket barrier. Some people say we can all get our tickets off the internet now, but if you are partially sighted you cannot get your tickets off the internet. They want a machine. The machine will give the most expensive fare. If you put a ticket barrier in, you have to have a member of staff because, if someone gets caught in the machine, there is no one there to help. The reality is that, where companies have put in extra revenue control and extra staff, then fare dodging goes down. It is common sense.

Q130 Chair: It is a general assessment based on experience.

Mick Whelan: The ticket office serves more than the purpose of just securing and protecting revenue. The railways are a strange environment. Everybody in this room has probably travelled to some place on them. With the geography of the railway and the multitude of companies that we have, it is key that people have the right information to travel safely. Without people to pass that information on, the railway is not a good place to be. That is just a fact of life.

Manuel Cortes: There are also so many fares now. It is quite complex for somebody to choose the right fare from a machine. If you go to King’s Cross and try to buy a fare from London to Newcastle, there are probably 10 or 12 different fares. When you go to the machine the first one that comes up is the most expensive. It is not the one that would best suit you but it is the most expensive. You have to go to the third screen to find the one that might suit you.

On your specific question about revenue protection, Transport for London may have some good data on this. When they took over the running of what was the North London Line, Silverlink and the Barking to Gospel Oak Line and they put staff in the stations, they started to combat some of the fare dodging that had been going on for years because there was no one around. People had got used to using the railway without having to pay. Their revenue increased very substantially very quickly.

Julia Long: I would also add that a lot of the stations are not in big cities but are isolated. In the local areas where people live in the regions, the stations are very isolated and if you are going along to those stations there is nobody there to help you on anything. It is an utter disgrace, really, even to be saying that we are going to do this. We have to think about disabled people who need assistance. Where is that going to come from if the stations are not manned? There are all those sorts of things that McNulty has not considered in his report.

Even on the wages situation, there is no evidence in what he is saying to say that the wages are too high. His Command Paper is just drawing conclusions and saying, "Let’s accept people on our terms and conditions because that will cut the wage bill." The whole thing is a nonsense.

Q131 Chair: You have made your general position very clear, but I have one final question I want to ask you. If the suggested alliances go ahead, are there any measures you would advocate to try to ensure safety and maintenance? Are those your concerns?

Bob Crow: But they are going ahead, Chair.

Q132 Chair: If they are going ahead, is there anything you would press for?

Bob Crow: They are going ahead. It has already started. It has already started on South West Trains.

Q133 Chair: Is there anything specific you would press for to try and address the safety and maintenance issues?

Bob Crow: We would have to be extremely vigilant. As I said before, there is-

Q134 Chair: But is there any particular thing you would want to be put into that?

Bob Crow: Safety. You have the managing director of a private train operating company who now oversees the infrastructure. That is the sole reason why Railtrack was got rid of. Railtrack thought that a private company was going to come and maintain the piece of rail, and the private company did not want to do it because they thought Railtrack was going to give it to someone else. It never got done, and a train came off at 120 mph and killed the travelling public. That is why Railtrack went bankrupt. That is why Network Rail was set up, and that is why we were told that safety was put first. Now what we are going to see is a number of these alliances-which, as ASLEF quite rightly pointed out earlier on, are mini Railtracks-going back to where we were some 10 or 12 years ago.

Q135 Chair: Mr Whelan, is there anything you would want to add to that?

Mick Whelan: There is one overarching point I should make. With the proposed changes to the ORR and its structure, the ORR will be both poacher and gamekeeper, whereby they will regulate the railways, the franchises and the alliances but will also in future be in charge of issuing those franchises/alliances. Again, we have another tier where there is a lack of transparency and where they are not going to admit they are wrong in giving the franchise to somebody else, or that they have not controlled it and put the right risk measurements in place. We see all this as interlinked. We have a really fundamental problem as to where all of this is going. Strangely enough, I do believe that you will see many battles coming up, possibly, between my trade union, at least, and the alliances when they tell us what they are going to do.

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

Prepared 22nd June 2012