The conclusion will come as no surprise to most users (who pay some of the highest fares in the world) and observers of Britain's railways, but it will probably shock officials at the Department for Transport (DfT) and many leading politicians who have denied for years that the cost of running Britain's railways has increased dramatically since the controversial and complex privatisation of British Rail in 1996-97.
It is clear from the report that the blame for the overall failure to control costs principally lies with the DfT and the former private infrastructure manager Railtrack, both of which appear to make decisions on the basis of a dangerous mixture of arrogance and ignorance. But the report also says that the industry has failed to improve efficiency and there is a general lack of cooperation and common purpose.

McNulty confirms that virtually none of the objectives of privatisation have been achieved. Chief among these was reducing subsidy, but this has increased by £1.7bn (net) while overall passenger rail expenditure has soared by 60%. Another objective was reducing government involvement, whereas it is now far greater than before.

There was to be competition, and while some franchisees did compete with one another on some routes, this has now been largely eliminated along with many of the new services introduced following privatisation, leaving just a couple of open-access operators as competitors and the only real competition in the freight sector.

The pace of change and innovation was to be increased, but it is now far harder to make changes to the timetable or adapt services to rises or falls in demand, and with the demise of world-renowned British Rail Research, research and development is largely left to other nations.

Privatisation did bring in private investment, the most successful element being the rolling stock leasing companies, although these have been sidelined in recent years as the DfT has taken charge of rolling stock procurement. This has slowed the whole process down, and made procurement far more complicated and expensive, the worst example being the Intercity Express Programme, which has cost taxpayers £27m so far and the contract has yet to be signed.

Despite the micro-management of passenger franchises, it is somewhat surprising to hear McNulty say that franchisees have been poor at controlling costs particularly staff pay which has been allowed to surge ahead of other industries.

McNulty wants to see greater emphasis placed on cost control, which should be normal business practice. At present the focus is on meeting revenue forecasts set when the franchise is awarded.

McNulty is keen to test new ways of working that could help to reduce costs. These include letting a concession for one Network Rail route to an independent infrastructure manager to act as a benchmark. He also calls for the creation of two joint ventures between Network Rail and franchises and a vertical integration trial.

McNulty hopes that working more closely together will help to align incentives and objectives thereby leading to greater efficiency. The problem is that full vertical integration is no longer allowed under European Union rules and, apart from the self-contained Merseyrail network, vertically-integrating part of the network could make life very difficult for other passenger franchisees and freight operators running their trains in the area.

Breaking up Network Rail would create more fragmentation and therefore potentially higher costs, and make timetable planning and path allocation more difficult, particularly for long-distance freight and passenger operators, not to mention strategic planning. Network Rail has made real progress in cutting costs since the demise of Railtrack, so why jeopardise this by splitting it up?

On the other hand, McNulty says little about the way the franchises are organised either geographically or in terms of the type of services they provide. Would it be better to have fewer larger franchises, or franchises competing on major routes, or more specialised franchises, or simply allow open-access operators to provide services on one or two major routes?

One thing is clear, the benchmarking of Britain's railways with those in France, the Netherlands, Sweden and Switzerland has shown once and for all that Britain is paying far too much for its rail services. The question is will the politicians take note and make the changes needed to radically cut costs? Failure to do so will have serious consequences for the rail industry and the wider economy.