Sir Roy McNulty (pictured), the report's author, says that the national railway industry should aim to reduce the cost per passenger-km by 30% by 2018-19. "Only by doing this can the industry get to a position where it is giving a fair deal to passengers and taxpayers - at present both groups are paying at least 30% more than their counterparts in other European countries."
McNulty rules out increasing fares, which he says are already too high, or line closures as a means to cut costs. Indeed, he asserts high fares are a result of high costs, and says fares should be simplified and rebalanced. To cut costs, he recommends a substantial programme which addresses every barrier to change identified in the report.
McNulty also says there is no simple solution or "silver bullet" to reduce costs because there are many causes including the highly fragmented nature of the rail network, the government's detailed involvement in the industry coupled with its failure to clarify its policy and objectives, ineffective and misaligned incentives, franchises that do not encourage cost reduction, and management that falls short of best practice.
The report recognises that passenger traffic has increased by 57% coupled with significant growth in freight since British Rail's (BR) privatisation in 1996-97, with the prospect of traffic doubling by 2030. "Few other industries have sound prospects for growth on this scale," he says. The increased traffic has boosted revenue by £2.7bn a year. But this is offset by a net increase in government subsidy of £1.7bn, and increases in train operating costs of £2bn and Network Rail's (NR) net revenue requirement of £2.7bn. "It is very hard to imagine any government approving a doubling of the railway's activities if this meant a doubling of this level of deficit," says McNulty. "The industry is not generating any cash from operations to contribute towards the capital expenditure required for expansion."
Passenger rail expenditure excluding interest has increased by 60% or £4bn since 1996-97 to £11bn in 2009-10 at current prices. Costs during the first four years following privatisation were stable, but the Hatfield derailment in 2000 caused by a shattered rail under Railtrack's stewardship caused infrastructure costs to soar. However, NR has achieved a 30% reduction in operating and maintenance costs subsequently saving around £1.1bn and bringing them back to pre-Hatfield levels. On the other hand, renewals expenditure is now £1.1bn higher than in 1996-97 and enhancement expenditure has also increased by £1bn, partly due to major projects. The report also notes the huge increase in NR's so-called regulatory asset base from around £7.5bn in 2001-02 to £34bn in 2009-10, and says that strong financial discipline will be needed to prevent this rising to levels that cannot be supported by the industry.
Train operating costs rose by £1.7bn of which £800m is due to an increase in train-km, and much of the rest results from higher staff costs partly through employing more people and partly due to excessive pay increases. There is a marked difference between passenger and freight staff productivity, with passenger showing a 9% reduction compared with an improvement of 35% for freight.
"While the budgetary constraints under which BR operated may have been too severe at times and probably contributed to a significant backlog of investment, those constraints were arguably more effective in controlling industry costs and finances than the post-privatisation control regime," says the report. "The principal key to improving the railway's financial position lies in the industry's own efforts to improve efficiency... and in particular to reduce unit costs and create an operating surplus."
Benchmarking has revealed major discrepancies in costs between Britain and other European railways. There is a 34% efficiency gap between NR and the top-performing European infrastructure managers based on 2008 data. While the franchising of passenger operations in Britain has shown little reduction in costs, competitive tendering in the Netherlands showed an efficiency gain of 20-50%, compared with directly-awarded contracts which only improved efficiency by up to 10%. Tendering in Sweden has cut the subsidy by 20-30%, and in Germany it has led to savings of about 20% while the report argues services have improved. Even within Britain there is a 30% difference between the most and least efficient operators.
The cost of running railways in France, the Netherlands, Sweden and Switzerland is remarkably consistent despite their different size and structure, ranging from £112 to £124 per thousand passenger-km, compared with £202 in Britain. Britain also does badly on train utilisation, achieving only 107 passenger-km/train-km compared with 137 to 140 in the Netherlands and Sweden, and 196 for French National Railways (SNCF). SNCF's TGV network is the best performer in the group at 294.
McNulty wants the Department for Transport (DfT) to clearly define the roles for government and industry and to concentrate on setting and directing rail policy and funding, allowing the industry to take greater responsibility for strategic planning and results. He wants the DfT to stop acting as a regulator and to leave this function solely to the Office of Rail Regulation (ORR).
There must be more long-term planning, better use of existing capacity, and a better understanding of where subsidy is used and what it buys. McNulty calls for less-prescriptive franchises, decentralisation of NR (a process NR has already initiated) and more local decision making. He suggests that one route should be let by 2014-15 as a concession to an independent asset management company. McNulty also calls for closer alignment of infrastructure management with train operators, and recommends by 2013-14:
• two joint ventures or alliances between NR and operators
• one vertically-integrated pilot scheme, and
• a pilot for a lower-cost regional railway.
The report recommends that NR continues to reduce the cost of running the network. It says there should be more standardisation, and more effective procurement of rolling stock. The report also suggests that pay should be restrained for staff and managers, with better training, and universal adoption of driver-only operation.
The report recommends the formation of four new bodies:
• a cross-industry Rail Delivery Group to reduce costs, change the culture, and encourage cooperation
• an independent Change Team to manage the changes
• a Rail Systems Agency to drive innovation and technical excellence, and
• a National Safety Task Force.
Finally, McNulty calls for a phased implementation of the reforms, with priority given to the setting up of the new bodies to drive the process through. He believes the plan can be delivered in five to seven years provided there is a commitment from all parties. Failure to reduce costs and improve efficiency is likely to lead to line closures and lower investment.