McNulty Review

John Siraut, Director - Economics, Colin Buchanan

John Siraut, Director - Economics, Colin Buchanan

On 7 December 2010 the Secretary of State (SoS) published the Rail Value for Money Study Interim Report. The Study has produced some initial thoughts on solutions and will submit its final report to DfT in April 2011, with the SoS announcing his reform plans for the industry in November 2011. The interim report suggests that savings of £50-100m could be possible in 2014/15, and annual savings of £600-1,000m by 2018/19 in addition to Network Rail (NR) efficiency savings in Control Period 5. This compares to the £5.2bn of support provided by the Government to the industry in 2008/09 out of total industry costs of £11.8bn. Some of the suggested initiatives described in the report are:

• Government setting high-level objectives (including costs) and industry taking more responsibility for delivery of these objectives – the existing HLOS process is broadly fit for purpose but lacks flexibility
  
• Industry should be more pro-active in developing long-term, whole-system strategies
  
• Cost reduction should become one of the key industry objectives alongside safety, reliability and capacity Network Rail and TOCs should be much closer aligned, probably through more autonomous regional units within NR – although NR would keep a central organisation to look at system-wide issues.
• There may be different arrangements for different parts of the network ranging from informal joint working to full vertical integration
• Stronger incentives to better align interests of NR and TOCs towards delivering lower costs
• Reform of franchising arrangements (being undertaken by DfT)
• Leadership for cost reduction to come from Government and industry
• Improved planning and decision making with stronger focus on costs, value for money and the whole system
• More cost-effective approaches to standards and improving rail safety
• Improving asset management, programme and project management, supply chain management, and management of human resources

This is an interim report that gives an indication of the type of changes to the industry we are likely to see and are focused around delivering cost reduction facilitated by Government, who will set cost reduction as a key objective, through train operators, who will operate a minimum service specification plus only those additional services that generate revenue, and through Network Rail, who will include cost reduction in their planning process and who will be expected to find additional efficiency savings.

The future industry structure will facilitate a closer working relationship between NR and TOCs at a local level, with incentives aligned to encourage cost reduction. The arrangements would be different depending on the location and type of service, and potentially could be achieved through some degree of vertical integration where operators would have some responsibility for signalling, maintenance and/or renewals. Longer passenger franchises (15 years or more) would reduce bidding costs and encourage investment by operators in schemes which deliver returns over a longer period.

The Study’s focus to date has been on cost reduction and it is now looking at other issues such as fares policy, franchise specifications, quality of service, balancing demand and capacity, the franchise map and policy on subsidies. It appears that major changes to the industry are coming, and the report recognises the need for all stakeholders to work together to deliver the initiatives, in order to achieve a more cost-effective railway. Getting agreement on the changes, and timescales for implementation, is a challenging task and why we must now wait until November 2011 for a clear plan of action.