An holistic approach to rail

At the recent Beesley lecture on rail regulation, Sir Roy McNulty presented an overall upbeat outlook for the future of the railway.  He opened by saying that the railway needs to earn its licence to grow. The main challenge that it faces now is to establish how to grow in an efficient way.  While other sectors have been achieving efficiency savings of 1-2% per annum, the railway has lagged behind and is now at the same point as it was in 1996 in efficiency terms.  Under a 'should cost' model the current railway would be 20-30% cheaper.

Sir Roy McNulty summarised some of the main points which he made in his report.  He said that there are a range of barriers to efficiency. He noted that one of the main barriers is the inefficient working of the multiple interfaces.  Interestingly, he said that in aviation there are many more interfaces but that these operate much more efficiently than in rail. 

Sir Roy suggested that existing behaviour is logical in the current environment.  One of the reasons he cited for the difference in the efficiency of interfaces is that incentives appear to be misaligned in rail.  To achieve greater efficiencies, incentives need to be better aligned. There needs to be a clearer definition of roles and responsibilities, with Government stepping back from having a direct say over railway operations.  A single regulator should be allowed responsibilities across the sector.  Stronger industry leadership is required.

In his speech, Sir Roy noted that most of the industry parties that he had spoken to agreed the areas for reform.  He said that the prospect of growth creates an opportunity for the railway.  The industry is ready for change but it needs to bring the energy to make that change happen.  The main objective of the various parties should be to improve the frequency and quality of their dialogue.  This will help to develop a common purpose.

Tom Winsor, from White & Case, who was the Rail Regulator between 1999 -2004, gave a hard-hitting response. Tom criticised the Department of Transport for continuing to try to 'micro manage' the rail industry, rather than leaving the rail industry to deliver policy objectives.  Tom also criticised the current Office of Rail Regulation (ORR) for failing to implement reforms from his time as Rail Regulator, and for failing to adhere to standards of regulatory protection that the ORR had set for itself. Tom concluded his response by warning that both the Government and the ORR needed to support Sir Roy's proposals to avoid the fate of previous reforms.

There was a lively discussion following the speeches, with questions surrounding whether regulatory incentives are currently aligned.  Do trains operating companies have an incentive to consider the cost of track access, to utilise track assets better and to act on customers' views (e.g. in contrast to aviation, where customers' feedback is built into the regulatory framework)?  The audience was also interested in the definition of good "outcomes" in regulation (and whether the regulator rather than the Government should eventually define these), whether the Government is ready to reduce and decentralise its role in the industry, and the complexity of public subsidies to rail franchisees.