Railways: 2004 White Paper

Standard Note: SN/BT/3142 Last updated: 31 March 2010

Author: Louise Butcher Section Business and Transport

This note summarises the White Paper The Future of Rail published on 15 July 2004. The document and associated information can be found on the 's archive.

The then Secretary of State for Transport, , announced a review of the railways in January 2004; this was followed by a report of the Transport Select Committee in April; and the Government’s conclusions and response to the Committee was published in a White Paper in July. The Secretary of State had ruled out renationalising the railways before the review took place and after consideration, he decided against radically changing the structure to a system of common ownership of the track and train. The White Paper identified weaknesses in the existing system for managing the railways and proposed changing the structure by:

• Abolishing the Strategic Rail Authority (SRA) and moving its strategic functions and financial obligations to the Department for Transport;

• Giving responsibility for operating the network and for its performance to ;

• Reducing the number of passenger franchises and aligning them more closely with Network Rail's regional structure;

• Increasing the role of the Scottish Executive, the Welsh Assembly and the Mayor, in determining passenger services and where appropriate, infrastructure; and

• Giving the Office of Rail Regulation (ORR) responsibility for safety, performance and cost.

A number of these changes – notably the closure of the SRA, the transfer of safety regulation, and proposals relating to devolved decision-making – were legislated for in the .

This information is provided to Members of Parliament in support of their parliamentary duties and is not intended to address the specific circumstances of any particular individual. It should not be relied upon as being up to date; the law or policies may have changed since it was last updated; and it should not be relied upon as legal or professional advice or as a substitute for it. A suitably qualified professional should be consulted if specific advice or information is required.

This information is provided subject to our general terms and conditions which are available online or may be provided on request in hard copy. Authors are available to discuss the content of this briefing with Members and their staff, but not with the general public. Contents

1 Rail Review, January 2004 2

2 Transport Committee report, April 2004 4

3 White Paper, July 2004 5

4 Impacts of the White Paper on the railway industry 7 4.1 Department for Transport 7 4.2 Strategic Rail Authority (SRA) 7 4.3 Network Rail 8 4.4 Office of Rail Regulation (ORR) 8 4.5 Train operating companies (TOCs) 9

5 Railways Act 2005 10

1 Rail Review, January 2004 Rapidly rising costs and continuing poor performance led the then Secretary of State for Transport, Alistair Darling, to announce a review of the rail industry on 19 January 2004. In a statement to the House, he explained how the industry stood:

The recent regulatory review published last December confirms that the cost of upkeep of Britain's railways is £1.5 billion a year more than was thought necessary just three years ago. The review implied that Network Rail inherited a business from with unit costs substantially higher than they ought to be. Network Rail is tackling these inefficiencies and is working to bring costs down. Taxpayers and fare-paying passengers alike need to know that their money is being well spent and that increased spending will improve performance. Cost control is absolutely essential (…)

There remains a further and very serious difficulty facing the industry—that is, its structure and organisation. The way in which it was privatised has led to fragmentation, excessive complication and dysfunctionality that have compounded the problems caused by decades of under-investment. Quite simply, there are too many organisations, some with overlapping responsibilities, and it has become increasingly clear that that gets in the way of effective decision making and frequently leads to unnecessary wrangling and disputes. That is no way to run the railways. 1

Mr Darling went on to restate the Government’s commitment to public-private partnership on the railways and he ruled out any return to nationalisation:

The Government are committed to a partnership between public and private sectors. It happens on railways throughout the world. However, the long-term inefficiencies and costs of privatisation have, as time has passed, become an even bigger barrier to the success of the railways, so in the spirit of partnership between private and public sectors, we need to put right the problems that the authors of privatisation left behind. We need to build on that investment and on the structural changes we have already put in place, not only to put the railways on a sound financial footing, but at the same

1 HC Deb 19 January 2004, cc1075-76

2 time to provide them with the right structure and organisation to take them through the next 20 or 30 years [...]

However, structural change is not just needed in order to make better spending decisions. It is also needed if rail is to operate effectively and to meet the needs of passengers and other customers. Privatisation had some disastrous and far-reaching consequences for the railways—Railtrack's performance, for example—but the private sector has brought considerable increased investment, and in many cases train companies have provided innovation that was conspicuously lacking in the past. We want to build on that.

That is why the Government believe that renationalisation would not solve the problems that the railways face. What is essential is to put in place a structure that works and can deliver not just cost control but safe, reliable railways that work efficiently.2

He then set out the objective of the rail review as follows:

Our objective is a streamlined structure and organisation with clear lines of responsibility and accountability. Network Rail is already operating in the public interest, and with the right franchising arrangements so should the train operators, but we have a clear responsibility to examine the roles and relationships of all the other organisations with a view to streamlining the present structure.

The review will therefore look at the regulation of safety, which at the moment is the responsibility of the Health and Safety Executive, the Health and Safety Commission and the Rail Safety and Standards Board. Safety is of paramount importance, and all those involved undoubtedly work hard to ensure safe railways, but there is now a plethora of industry standards, some of which are over-cautious or are being applied in an over-cautious way. Safety regulation needs to be focused on the real risks to passengers and employees and should not be an obstacle to providing reliable services. We need the right organisation to do that.

Our reforms must make the structure as simple and as straightforward as possible. The complex structure at privatisation has contributed to the daily frustrations of the public, many of which are shared by the dedicated and committed people across the country working to improve the railways and deliver better services.3

Responding to the statement, the Conservative Transport Spokesman, Theresa May, criticised the ‘chopping and changing’ of rail policy since 1997 and the centralisation and bureaucratisation that the industry was now subject to:

This statement heralds the fifth change in the structure of the railways in nearly seven years of this Labour Government. They came in promising immediate benefits for the travelling public, but after seven years passengers are seeing no improvement on the railways, and for many services are getting worse. One in five trains run late, targets for increasing passenger numbers have been cut, and work on new lines has been scrapped [...]

Having obstructed those at the sharp end of the industry with regulation, targets and ministerial intervention, now, when they are failing to deliver, their answer is to set up a review, change the system and put decisions in the hands of the politicians. The statement makes one thing clear—this is not about finding the right structure for the railways, but about increasing centralisation and political control. The Government are

2 ibid., cc1076-77 3 ibid., c1078

3 tearing up the very structure that they created less than four years ago ... Who created the Strategic Rail Authority? It was the brainchild of the Deputy Prime Minister. Who created Network Rail? It was the right hon. Member for Tyneside, North (Mr. Byers). This Secretary of State is having to clear up the mess left by his predecessors.

As ever with this Government, when there is a problem to be solved they do not look for efficiency and new ideas, but reach straight for centralisation, interference and bureaucracy. The statement takes 57 paragraphs to tell us that the Secretary of State is setting up a review.4

2 Transport Committee report, April 2004 Following the announcement in January 2004 the Transport Select Committee held an inquiry into the future of the railway. Its three main conclusions were that a public sector Railway Agency should be set up to combine the functions of the SRA and Network Rail; that economic regulation of the railways had largely failed; and that industry and the safety regulator needed to work better together:

A public sector Railway Agency is needed. This new executive body would combine the strategy and output delivery functions of the SRA with control of the infrastructure, and must be given all the powers required to manage the entire rail system and to deliver excellent services for the travelling public. Combining these functions will permit the body responsible for growth and targets also to manage the means of achieving improvements, and to receive funding at the cheapest level. However, this body must demonstrate a much greater creativity and vigour than its predecessors if these new arrangements are to have a chance of working. The travelling public do not care who runs railway services; their concern, quite properly, is with efficiency and value for money. While the private sector may therefore continue to provide some train and infrastructure services, where that clearly provides the best option, the Government needs to keep an open mind on the provision of these services directly by the public sector.

Economic regulation of the railway, as presently organised, has largely failed. However, if the private sector continues to be involved, there will be a role in future for a measure of independent economic regulation to ‘hold the ring’ between the infrastructure provider and the private sector companies. But the Government must take back into its own hands decisions about the sums which will be spent on the railway. This will correct the present absurd position in which the Government simply underwrites the Regulator’s funding decisions. Economic regulation should be removed from functions which are properly those of Government.

All parts of the industry and the safety regulator need to work co-operatively to provide a progressively safer, effective and efficient environment for those who work on, and travel by, rail. Our evidence suggested strongly that the HSE’s relationships with important parts of the industry have broken down. In these circumstances, there cannot be full public confidence in the present regulatory arrangements for rail safety. Consideration should be given, therefore, to removing the regulation of rail safety from the HSE, and for Her Majesty’s Railway Inspectorate either to be made a free standing Agency of the Department for Transport or merged with the new Railway Agency.

Demand for rail is strong, and it is impossible to imagine that the railway will not continue to be required. It is essential, therefore, that costs are controlled and performance improves. In January the Government announced a review of the structure of the railway. We welcome this review. A new beginning for the railway is

4 ibid., c1079

4 needed. The mistakes and ‘drift’ of the last ten years need to be corrected. We do not underestimate the size of this task. We have mapped out in this report what steps for organisational change will be required to assure the future of the railway. We hope that the Government will accept the real challenges of railway restructuring.5

3 White Paper, July 2004 The main problem with the system as it then was from the Government’s point of view was that it provided the money to run the railway but did not control the amount that was needed. Furthermore, the rail industry was perceived as weak at controlling costs and needed to provide better value for money. In Chapter 1, the White Paper discussed five structural weaknesses of the system: public sector complexity; the relationship between track and train; the regulatory regime; the structure of the private sector; and the lack of operational leadership:

• Public sector complexity: Both the Department for Transport and the Strategic Rail Authority (SRA) had responsibilities with regard to the overall strategy. Both the SRA and the ORR played a role in deciding Network Rail’s outputs and performance targets. European Community law also had an increasing influence on rail matters. In safety, the DfT, SRA, EC, ORR and HSE all had a role to play, plus the industry’s own Rail Safety and Standards Board, and the Rail Accident Investigation Branch, the and the prosecuting authorities in the event of an accident. This led to high staffing and administration costs and other, indirect, costs such as the lack of accountability and of a clear strategic direction. The White Paper proposed that Government should set outputs and targets and the private companies should focus on delivering them, enshrined in binding industry arrangements.6

• Relationship between track and train: The structure of the privatised railway at the time of privatisation was based on the concept of a commercial relationship between the infrastructure provider and the train companies. In theory, the train companies paid access charges set by the Regulator to run services on the infrastructure, and then each party would pay penalty payments to the other for the delays that they cause. The access charge should have meant that the train companies were Network Rail’s customers, with every incentive to drive Network Rail to provide better value from the money they pay. But this had not proved to be the case and the access charges paid by train companies bore little relation to the specific costs that imposed upon Network Rail. Moreover, the train companies’ franchise contracts with Government insulated them against any rise or fall in the access charge. The penalty payment system and the allocation of ticket revenues were highlighted as particular examples of ‘distorted markets’. The Government proposed that there should be a single body in charge of timetable setting, and franchise contracts must be clear about the pattern of services to be delivered.7

• Regulatory regime: Under the regulatory system, the ORR determined both Network Rail’s outputs for the operation of the rail network, and for its maintenance and renewal, and the price that should be paid for them, given its commitments to the passenger and freight companies. Ultimately, this meant that the Government footed the bill. While accepting that there was a ‘vital role’ for independent economic

5 Transport Committee, The future of the railway (seventh report of 2003-04), HC 145, 1 April 2004, p4 6 DfT, The future of rail, Cm 6233, July 2004, paras 1.4.1-1.4.3 7 ibid., paras 1.4.4-1.4.8

5 regulation to protect the rights of investors and ensure the Government paid a proper price for what it wished to buy, the Government proposed that it must have binding relationships with both the train companies and Network Rail, which set out the outputs they must provide and the price the Government would pay for them. This would give the Government proper control of its total expenditure on rail.8

• Structure of the private sector: The split of responsibilities between Network Rail and the train companies had the benefit of allowing both to develop management expertise and focus on their own areas, but it also increased costs because of the complex commercial and bureaucratic relationships, the lack of clarity over responsibilities, and the misaligned incentives between each part of the industry. Performance also suffered because the industry was unable to react quickly to incidents. Relationships within the industry were often adversarial, with problems being passed up the chain rather than tackled through collaborative working. In short, the system was over-complex, with too much ambiguity about the responsibilities of different organisations. The Government proposed clarifying and making explicit the roles and responsibilities of the different parts of the industry, particularly by establishing a direct relationship with Network Rail.9

• Lack of operational leadership: The lack of any single body with operational responsibility for the whole railway at a national level lay at the root of many problems. This was a contributory factor to both increasing costs and to poor performance, as this lack of clarity often led to poor decisions and perverse incentives. The Strategic Rail Authority (SRA) was set up to tackle many of these problems and had some successes, however the SRA was in a difficult position, unable to lead the industry from within. The Government proposed that it should have clear responsibility for setting the level of public funding and the strategy for the industry, alongside proper operational leadership and accountability within the private sector for delivering reliability and value for customers and taxpayers.10

The core of the White paper was the Government’s proposal that the Department for Transport would take charge of setting the overall strategy for the railways, including setting high level objectives, including the levels of performance; deciding how much money to spend; and awarding franchise contracts. Consequently, there would be no role for the SRA, which would be wound-up and the majority of its functions, including all its financial obligations, transferred to the Secretary of State. The ORR would remain the independent economic regulator and overall responsibility for the network would be transferred to Network Rail. The number of franchises would also be reduced. Increased powers would also be given to the Scottish Executive, the Welsh Assembly and the London Mayor as well as encouraging more local decision making in , particularly by the Passenger Transport Executives (PTEs).11

8 ibid., paras 1.4.9-1.4.10 9 ibid., paras 1.4.11-1.4.15 10 ibid., paras 1.4.16-1.4.20 11 ibid., executive summary, pp6-8

6 4 Impacts of the White Paper on the railway industry 4.1 Department for Transport Under the measures outlined in the White Paper the Secretary of State and the DfT would take over responsibility for overall strategy from the SRA and also for setting the industry’s strategic outputs. The Government would specify the outputs, Network Rail would deliver them and they would be priced by the ORR. In summary, the Government would be responsible for deciding:

• the overall size and shape of the network;

• the key timetable outputs;

• policy on regulated fares;

• minimum performance targets;

• enhancement priorities; and

• policy on information provision and accessibility. 12

Delivery would be the responsibility of Network Rail and the train operating companies (TOCs). The TOCs would be held accountable through the provisions in their franchise contracts, and Network Rail would be held accountable through enforcement by ORR in the event of poor performance or a failure to keep to budget.

The DfT would also decide the level of public funding for the railways, and consider in consultation with the ORR the levels of capacity and reliability that the railway should provide from that budget, whilst meeting its commitments on safety. The ORR would then determine the precise amount of income required by Network Rail in order to deliver, or help to deliver, these. If this level of income were to prove higher than the available funding for rail, then the Government would be able to reconsider the levels of performance and capacity that it set.13

4.2 Strategic Rail Authority (SRA) More information on the formation, operation and closure of the SRA can be found in HC Library standard note SN/BT/1344, available on the Parliament website.

The SRA was set up in 2000 to provide leadership for the rail industry but it lacked the power to bring together the various elements of the industry. It did have some successes. For example, it helped to get a grip on major projects which were running out of control, such as the West Coast Main Line route modernisation project; it developed and implemented a strategy to upgrade the electricity supply for rail services south of the Thames; it began the process of reforming the franchising regime; and it promoted better use of the network through its Route Utilisation Strategies (RUS). The SRA also developed a stronger regional focus, working to promote community rail partnerships and to promote joint working between the different parts of the industry and to drive up performance.14

The problems in the rail industry, however, turned out to be greater than realised in 2000 – there was the aftermath of the Hatfield accident; increasing infrastructure costs; Railtrack’s

12 ibid., para 4.3.6 13 ibid., paras 3.1.2-3.1.9 14 SRA press notice, “Britain’s railway ‘rehabilitated’”, 15 July 2004

7 entry into administration; and the subsequent transfer of its responsibilities to Network Rail. Consequently, the ORR played a more pivotal role during these years and the SRA found itself in an increasingly difficult position. A leadership model based on influence and persuasion was not strong enough.

Under the proposals in the White Paper the SRA’s strategic and financial responsibilities would pass to the Department for Transport, as would its responsibility for awarding the passenger franchises. The Secretary of State would take responsibility for setting the national-level strategic outputs for the railway industry, in terms of capacity and performance. Operational matters would remain the clear responsibility of the industry. The SRA’s role in monitoring the performance of the train companies and drawing up timetables would be taken over by Network Rail.

4.3 Network Rail More information on the formation, operation and closure of the SRA can be found in HC Library standard note SN/BT/2129, available on the Parliament website.

Under the proposals in the White Paper Network Rail would be given new powers over timetabling and industry co-ordination. It would be the body held accountable for the sector’s punctuality and cost control.

The proposed new structure would give the DfT a clear role in setting the strategy for the railway, but the private sector would be responsible for delivery, with Network Rail taking the lead role through its new and binding arrangement with the Department. The DfT considered that the network operator was the only organisation able to understand and deal with every aspect of the problems and incidents arising upon it. Network Rail would therefore be held accountable under the proposed new regulatory and contractual arrangements for the operational management of the network, and for co-ordinating the industry’s planning. It would retain its core responsibilities for operating, maintaining and renewing a safe national rail network. It will also assume responsibility for:

• drawing up route utilisation strategies (RUS) for agreement by Government that make best use of the network’s capacity;

• devising efficient and clear timetables based on those route strategies, and input from train companies;

• directing network operations, and getting services back on track following incidents and delays;

• driving up the operational performance of the network;

• devising and delivering infrastructure maintenance and renewals, as well as delivering enhancements to the network as appropriate; and

• accounting publicly for performance. 15

4.4 Office of Rail Regulation (ORR) More information on the role of the rail can be found in HC Library standard note SN/BT/2071, and on railway safety in SN/BT/605, both available on the Parliament website.

15 op cit., The future of rail, Cm 6233, para 4.3.11

8 Under the proposals in the White Paper the ORR would become the economic and safety regulator for the rail industry. It would continue to set the price for the work performed by Network Rail but the Government would be able to revise the outputs if the bill was too high. Thus, should the Treasury decide to reduce the subsidy – or not increase it – services or lines would have to be closed. At the time when the White Paper was published the Government had to pay what the ORR decided was necessary in order to maintain the network.

The transfer of safety responsibility to the ORR was welcomed by some commentators as spending decisions on safety have to be made within the context of what is affordable16 but condemned by Brendan Barber, the TUC General Secretary, who had “grave reservations” about the transfer of responsibility for safety from the HSE to the ORR.17 The HSC and HSE were disappointed at the decision.18

Overall, the ORR’s specific responsibilities would be:

• to assess the cost of the outputs specified by the Secretary of State and to determine the size of Network Rail’s income;

• to regulate access contracts and arbitrate between conflicting industry interests;

• to help ensure that the railway provides value-for-money for both the fare-payer and the taxpayer, taking into account safety, performance and cost;

• to enforce health and safety legislation in respect of the operational railway;

• to investigate and make recommendations on performance problems and cost overruns;

• to license railway operators;

• to exercise competition law functions concurrently with the Office of Fair Trading, where these relate to the railways; and

• to act as a single repository for rail industry data.19

4.5 Train operating companies (TOCs) More information on the rail franchising process and on individual franchises can be found in HC Library standard note SN/BT/1343, available on the Parliament website.

Under the proposals in the White Paper the TOCs would remain responsible for providing passenger services and would continue to sell tickets and retain fare revenues. Franchise contracts would be awarded by the DfT: there would be fewer of them and they would be more closely aligned with Network Rail’s regional structure to make joint working easier. Train companies would bid to operate a defined timetable, and their bids would be judged not only on price, but also on relevant past performance, their commitments to improve train and crew reliability and their operational viability. The contracts would include provisions on train

16 e.g., Christian Wolmer: “Compromise that fails to confront desperate need for radical reform”, The Independent, 16 July 2004 17 TUC press notice, “TUC has safety worries about rail changes”, 15 July 2004 18 HSE press notice, “The DfT Rail Review: HSE response”, 15 July 2004 19 op cit., The future of rail, para 3.4.2

9 and crew availability, which were by far the largest factors in delays attributed to train companies, and were clearly within the companies’ control. The contracts would include clearly defined penalties (including, as a last resort, termination) should they fail to deliver these commitments.

5 Railways Act 2005 The Railways Act 2005 gained Royal Assent on 7 April 2005. The Act gave effect to the proposals in the White Paper that required primary legislation. An overview of the provisions of the Act is given in the Explanatory Notes, as follows:

Part 1: Transfer of Functions and Railway Strategy

Part 1 provides for the Strategic Rail Authority (SRA) to be wound up, for the SRA's strategic and financial functions to pass to the Department for Transport and in some cases, to the devolved administrations, and for its consumer protection functions to pass to the Office of Rail Regulation (ORR). The Act also enables the SRA's assets, rights and liabilities to be transferred to third parties.

The Act also transfers safety functions under the Health and Safety at Work etc. Act 1974 in respect of the railways industry from the Health and Safety Commission/Executive (HSC/E) to the ORR.

The Act provides for changes to the access charges review process, with a duty on the Secretary of State to specify the outputs to be delivered by the rail industry.

The Act also gives the Scottish Ministers the power to prepare and publish a strategy for carrying out their functions in relation to railways in .

Part 2: Public Sector Funding Authorities for Railways

The Act provides a power for the Secretary of State to give financial assistance for any railway purpose.

The Act also makes provision for the provision of financial assistance from the Secretary of State, the Scottish Ministers and the National Assembly for (NAW) for freight services.

The Act enables the Scottish Ministers to take increased responsibility for passenger services and infrastructure relating to Scotland. The NAW will also take on increased responsibilities for passenger services in Wales, and be made a signatory to the Wales and Borders franchise agreement.

This Part also modifies the powers of Passenger Transport Executives (PTEs) so that they may, subject to the Secretary of State's approval, enter into franchise agreements and agreements relating to the quality of franchised rail services. The Secretary of State will have a duty to consult a PTE when preparing to let a franchise which involves services to, from or within the area covered by the PTE. It also provides for Transport for London to be given equivalent powers to PTEs.

Part 3: Rail Passengers' Council and Rail Passengers' Committees

The Act establishes the Rail Passengers' Council as a single national body reporting to the Secretary of State and dissolves the formal federal structure of regional Rail Passengers' Committees.

Part 4: Network Modifications etc.

10 Part 4 sets out procedures for operators and public sector funders to follow when they wish to discontinue all passenger services on a line or from a station or close all or part of a network or station. It replaces the current procedures in sections 37 to 49 of and Schedule 5 to the 1993 Act as amended by the Transport Act 2000.

Where a rail service in an English PTE area is to be discontinued or otherwise reduced, this Part provides for bus franchising for substitution of rail services. The Act will amend the procedure for entering into a bus quality contract scheme where the scheme is specifically for a bus service, or network, which meets transport needs equivalent to rail services being reduced or closed, and is consistent with the local transport plan. This part also enables the Secretary of State, the Scottish Ministers and the NAW to secure the provision of substitute bus services where a railway passenger service has been temporarily interrupted or discontinued.

Part 5: Further Miscellaneous Provisions

The Act enables railway operators to make bye-laws, subject to confirmation by the Secretary of State and, where appropriate, the Scottish Ministers, to enable them and the police to control the conduct and behaviour of people using the railways.

The Act also makes provision for the Scottish Ministers to be empowered to make penalty fare regulations for Scotland.

This Part also provides the Scottish Ministers with the power to prepare (and from time to time revise) a code of practice for protecting the interests of disabled rail users in Scotland.

This Part also provides for the Scottish Ministers to be able to exercise the functions of the Secretary of State in relation to a railway administration order involving a Scottish railway company.

The Act provides for a duty on the ORR to provide the Secretary of State, the Scottish Ministers and the NAW with advice and information.

This Part also provides a duty for PTEs to give advice to the Secretary of State when requested, in relation to railway matters.

11