UK Rail Review - overview of conclusions

On 19th January 2004, the Secretary of State for Transport announced a review of the rail industry, to consider structural and organisational changes, safety regulation, and issues relating to improving performance and controlling costs.

The Secretary of State published his conclusions, in a White Paper entitled 'The Future of Rail', on 15th July 2004 (available at www.dft.gov.uk/railways/whitepaper).

The main decisions arising out of the rail review are summarised below. These decisions

reflect a number of themes that can be drawn from the white paper.

• It is for Government to determine the amount of public funding available to the industry, to decide on the outputs it wants to buy and to allocate funds between rail and other modes of transport.
• The rail industry needs to control costs and live within the level of public funding available to it. Regional and local transport authorities need to bear the cost implications of their decisions when buying additional services.
• The current industry structure creates a false customer/client relationship. As primary buyer of services from the rail industry, Government needs direct commercial relationships with Network Rail and the train operating companies.
• Economic and safety regulation need to be streamlined and need to work within Government specifications of required outputs and funding levels.
• A single point of responsibility and control is needed for operational management and planning. Decisions to run additional services or invest in the network should be made only when the costs and other implications are understood.
• Joint working between Network Rail and train operating companies is needed and should focus on improving performance not assigning blame.

The changes highlighted in the White Paper will need to be implemented through primary legislation and changes to numerous contracts and codes throughout the rail industry. However, when implemented these will result in a fundamental restructuring of the regulatory and commercial structure for the rail industry, with the Government having the primary commercial relationship with the providers of infrastructure (through Network Rail) and passenger services (through the train operating companies) and regaining control over the overall level of funding made available to the sector.

Industry Structure

• Control over setting the national strategy for the railways, and financing of the railways, is to pass to the Secretary of State for Transport.
• The Office for Rail Regulation (ORR) will remain as the independent economic regulator and its role of is to be expanded, principally through transferring responsibility for safety regulation from the Health & Safety Executive to it.
• The Strategic Rail Authority (SRA) will be wound up, and its responsibilities and powers will transfer to the Secretary of State.
• The Secretary of State will have direct commercial relationships with Network Rail, and each of the train operating companies (TOCs) through new and/or revised agreements, with:
• • a new performance and capacity agreement between Network Rail and the Secretary of State
  • franchise agreements between the franchisee of each train operating company and the Secretary of State.
• Further powers and funding responsibilities are to be delegated to Passenger Transport Executives (PTEs), the Mayor for London, the Scottish Executive and the Welsh National Assembly.

Funding the network and defining outputs

• The required outputs from the rail network and the corresponding level of public funding will be determined through an iterative process between the Secretary of State and ORR.
• In the "pre-review" phase, the Secretary of State will indicate the level of funding available for rail (based upon the transport budget), and discuss options for allocating the funding with ORR. ORR will advise on the expected cost of the various options.
• The Secretary of State will publish guidance to ORR setting out the preferred option (a 'statement of required outputs') covering matters such as performance levels, carrying capacity on different parts of the network and network investment.
• ORR will review the option to determine the income which Network Rail is to receive over the years covered by the review.
• Should ORR's determination be that the level of funding required is higher than previously advised, the Secretary of State will be able to revise its statement of required outputs and the price adjustment would be calculated by ORR.
• Following the review, the statement of required outputs will become a 'statement of reasonable requirement' for the purposes of Network Rail's licence and ORR would enforce it through the licence enforcement mechanisms.

Office for Rail Regulation (ORR)

Following implementation of the changes, ORR will have the following responsibilities:

• assessing the costs of outputs specified by the Secretary of State, and determining the size of Network Rail's income – which will preserve ORR's role as independent economic regulator
• regulating access contracts (track, stations, depots), and arbitrating between conflicting industry interests
• helping to ensure the railway provides value-for-money for both the fare-payer and the tax-payer, taking into account safety, performance and cost
• enforcing health and safety legislation in relation to the railway
• investigating and making recommendations on performance problems and cost over-runs
• issuing and monitoring licences required for operators of railway assets (passenger, network, stations and light maintenance depot licences)
• exercising competition law functions relating to railways
• acting as a single repository for rail industry data.

The Secretary of State will also consider to what extent ORR should take on a role of arbiter in relation to franchise agreements.

Health and Safety

• The transfer of responsibility for health and safety regulations from the Heath & Safety Executive to ORR is intended to ensure that decisions relating to economic and safety regulation are taken together, and in particular that the economic consequences of safety decisions are more closely considered.
• The Secretary of State also intends to move towards a more "risk-based" approach to safety management for the rail industry – which is intended to concentrate investment on more serious risks.
• ORR will become the safety regulator for all other rail-based systems (including London Underground, other metro systems, heritage and light rail).

Network Rail

• Network Rail's roles and responsibilities are to be set out in a new agreement between the Secretary of State and Network Rail.
• Network Rail's core responsibility will be operational management of the network, including maintaining and renewing the infrastructure.
• Network Rail's responsibility for railway operations is to be enhanced to give it a leadership role and to make it the single point of responsibility for performance. Its responsibilities will now include:
• • drawing up route utilisation strategies, to be agreed with the Secretary of State, to make best use of the network's capacity
  • devising timetables based upon agreed route strategies and meeting minimum service specifications from Government, with input from train and freight operating companies
  • directing service recovery following incidents
  • co-ordinating industry planning
  • improving the performance of the network
  • delivering enhancements where appropriate
  • providing data to ORR and the Secretary of State.

Franchising

• The Department for Transport will take over responsibility for negotiating and awarding franchise agreements.
• Existing franchise agreements will continue in their current form. However, the Department for Transport will be seeking to update existing franchise agreements, to reflect the new structures, with the consent of all parties involved.
• There will be a review of the existing franchise areas, with the objective of linking the franchise map more closely to Network Rail's route regions. This will result in a reduction in the number of TOCs.
• As Network Rail is to take over primary responsibility for timetabling issues, the template franchise agreement will need to be adapted to reflect this. Future franchises are to be let on the basis of pre-defined timetables.
• Franchise contracts are to be reviewed to ensure that their key deliverables include train and crew availability, and that they contain more specific obligations to operate a defined timetable (rather than a range of services). Revenue risk sharing arrangements will continue.
• Franchise agreements may need to be adjusted from time to time to reflect the Government's specification of outputs that Network Rail is required to deliver. The ORR may take on a role of arbiter in relation to these adjustments.

Access and timetables

• The Network Code is to be amended, with a simplification of the performance regime and of the access charging regime, and to restrict the ability of TOCs to seek additional train slots. The Government's view is that extra services should only be allowed where the benefits of those services are not outweighed by the effect they would have on costs or performance (and will need to be agreed with ORR).
• At a local level, Network Rail and TOCs will have clear and reciprocal obligations to one another, possibly in the form of "local agreements" backed up by the Network Code.
• The penalty regime applying between TOCs and Network Rail is to be simplified, to reduce the bureaucracy involved.
• Operators will still be free to apply to run passenger services under open access rights. It is expected that capacity constraints will limit open access opportunities and open access operators will need to bear a fair share of costs through access charges.

Rolling stock/ ROSCOs

• The rail review does not contain specific recommendations in relation to rolling stock.
• However, the review does emphasise the importance of ensuring that rolling stock represents "good value to the taxpayer". There is a suggestion that returns for leasing existing rolling stock may be higher than they should be, on the basis that the risk of re-leasing rolling stock in a secondary lease period is lower than had been assumed.
• The review also raises concerns in relation to the allocation of maintenance responsibility between the various parties (TOCs, manufacturer and ROSCOs).
• The Government intends to develop a longer-term strategy for the rolling stock market, looking in particular at the issues highlighted above.

Freight Operating Companies (FOCs)

• Track access agreements between FOCs and Network Rail will be restructured, to include the "lose or use" provisions introduced by ORR (under which FOCs are required to relinquish access rights which are no longer required and move slots in the interests of efficiency).
• FOCs' long-term access rights are to be enhanced, with changes to be made to the basis for charging for access (so that this includes a contribution to the core costs of the network). Where lines carry only freight traffic, FOCs would pay their full costs.
• Where the cost implications of maintaining freight access are disproportionate, FOCs may be required to relinquish access rights to relevant parts of the network.
• ORR will continue to determine the price that FOCs pay for track access.

Infrastructure projects

• The agreement between the Secretary of State and Network Rail is intended to deal with the basis on which network investments (renewals and enhancements) are to be made.
• Government will determine the specification, overall approach, and basis for delivery of larger projects (such as the construction or upgrade of major lines).
• Network Rail will undertake medium-sized schemes (including capacity enhancement projects), on a basis agreed as part of the Government's outputs, and costed by ORR.
• Network Rail will have additional funding to develop smaller schemes (such as station improvements), with local stakeholders (local authorities, train companies, etc). Network Rail will not be required to obtain further approvals for such schemes.

Planned major projects

• Since the publication of the rail review, further announcements have been made in relation to major projects.
• The Department for Transport's 15-year strategy paper (available at www.dft.gov.uk/strategy/futureoftransport) has confirmed that Government will be seeking to put in place the powers (by way of a Hybrid Bill) for the construction of the Crossrail project – though the recently-published Montague Report (which members of this firm assisted in the production of) highlights the uncertainties surrounding the financing of this project, for which Government intends to seek a solution.
• The Department for Transport's 15 year strategy paper also considers light rail schemes, noting the mixed record for these schemes, and that these should be pursued where most appropriate, with bus schemes being likely to offer a more cost-effective solution on most corridors. Neither the Leeds not the South Hampshire light rail projects were approved.
• Transport for London has also recently announced its intention to extend the East London Line and expand the Docklands Light Railway.

Passenger Transport Executives (PTEs)

• The basis for the funding of PTEs is likely to be changed, to enable PTEs to reduce fares or increase services in their local areas as long as they meet the additional costs. PTEs may be required to structure their individual transport budgets so that decisions on costs and services are taken having regard to all (public) transport modes.
• PTEs will be able to procure additional train paths for the train operating companies servicing their area, following confirmation from Network Rail that the relevant train paths are available, and approval of the incremental costs for these services by ORR.
• Government intends to carry out a fuller review of PTE funding, which may result in the delegation to PTEs of further responsibility for financing local infrastructure and train service costs in their areas, at a later date.
• Merseytravel PTE (which is already responsible for the rail network in the Merseyside area) is to be considered separately. It may gain full decision-making responsibility in relation to track, stations and signalling on its local network.

Mayor for London

• The Mayor for London's responsibilities for rail services are to be reviewed. Government proposes to extend these, to enable fare structures and ticketing technology to be rationalised across the various public transport modes in London.
• The Mayor for London may be permitted to procure additional services or propose savings, on a similar basis to PTEs.
• Government will consider whether the Mayor for London should be able to specify service levels directly, and potentially share in the revenue risk of TOCs for services within the Greater London Authority boundary (or a slightly enlarged area, based upon the London commuter rail network).

Scotland and Wales

• There is to be a greater devolution of responsibility for rail to the Scottish Executive, including in relation to infrastructure and the franchising of Scotland-specific services. Network Rail will continue to own and manage the infrastructure in Scotland.
• The National Assembly in Wales will also be given greater powers and funding responsibilities in relation to rail services in Wales.

Community Rail

• The SRA's community rail proposals will continue to be developed, to seek to improve the financial stability of rural community lines, by increasing demand and reducing costs.
• The SRA had identified a number of routes as appropriate for development through community rail schemes. These are being revised following consultation.
• The basis on which community rail schemes might be implemented is still unclear. It may involve "Community Rail Partnerships" between Network Rail, train companies, local authorities and other stakeholders, "rail development companies" or "micro franchising". A micro-franchise might include a transfer of track operation from Network Rail to the franchisee.

Rail Passenger Council

• The structure of the existing Rail Passenger Council (comprising a central council, and 9 regional committees) is to be simplified, becoming a single national body, with some regional presence.