We asked Sir Roy McNulty to share his thoughts on the key challenges in getting his rail Rail Value for Money study recommendations implemented.
In this video, Sir Roy talks about how to align incentives to ensure all stakeholders are focused on a common purpose, and shares his views on how the rail industry of 2026 will compare with the industry today.
Click here to view the video - http://www.pwc.co.uk/eng/issues/rail-value-for-money.html
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.
We asked Nick Bosanquet, Professor of Health Policy at Imperial College London, to share his view on the case for healthcare competition, how competition is evolving and the role that Monitor can play in supporting greater competition.
You can watch the video on the link below
http://www.pwc.co.uk/eng/issues/the-case-for-healthcare-competition.html
Ed Bramley-Harker
The Independent Commission on Banking proposals on ring-fencing are just one facet of global pressure to define orderly resolution plans. Against this shifting landscape, how can banks balance operational efficiency and self-sufficiency?
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We asked Tom Le Quesne, WWF to share his views on whether water scarcity policy should be national or global and what we could learn from other countries. We also asked him about the role of competition and regulation in managing our water resources, and what likely reforms can be expected.
You can watch the video on the link below:
http://www.pwc.co.uk/eng/issues/solving-water-scarcity.html
During last night's Beesley lecture on healthcare competition, Nick Bosanquet, Professor of Health Policy at Imperial College London, drew a stark comparison between general attitudes towards competition and the view that is held by many constituents within the health system. Attitudes on the benefits of competition in the economy have evolved over time - policy makers used to believe that protectionist policies will drive economic growth but now they understand that competition can be an engine of growth. Nick highlighted how competition drives productivity and innovation, grows consumption; he argued that evidence shows how entry and exit from markets is a contributor to productivity gain - efficient and innovative providers replace those that are falling behind.
Nick argued that attitudes to competition in healthcare have been moving in the other direction. Some believe that competition will lead to a race to the bottom on price and quality will fall, and because quality is hard to measure in health, it's difficult to safeguard against this. But the evidence shows the opposite. Nick highlighted a number of academic studies and examples to demonstrate that competition has delivered important improvements in the quality of healthcare. And this evidence applies across a range of services (including some specialist care). He talked about how different forms of competition (competition in and competition for markets) can be used to drive incentives across a range of health services.
Nick believes Monitor has a critical role to play going forward - to 'snatch victory from the jaws of defeat' as Nick put it. David Bennett, Chair of Monitor, in his response, emphasised Monitor's duty to protect and promote the health of patients, and drive competition where the evidence suggests it will deliver this. Monitor's new regulatory levers - licensing providers and setting prices (or at least the rules of the game) - are critical to this. The proposed failure regime is also key to supporting competition - it's the mechanism that protects services, but not providers, in the event that inefficient hospitals leave the market.
David highlighted how the debate on the role of competition in healthcare needs to be fact-driven and not ideologically based. This is a big challenge. But he was clear that Monitor must contribute to this and must have clear evidence to support the direction it takes. This won't eliminate the ideological differences around competition in health, but can at least start to move the debate towards the facts.
So the next few years are definitely going to be interesting. The demand side of the health market is changing rapidly with the introduction of Clinical Commissioning Groups. These groups will shape the markets they want to commission from, with Monitor setting the framework that allows effective competition to develop where appropriate. It's going to be a fascinating evolution.
It has been nearly 6 months since Sir Roy McNulty set out his ambitious plans for the future of the rail industry. During that time, there has been speculation over how the industry will respond to these recommendations and, in particular, the overall challenge of delivering 30% efficiency savings by 2019. Already visible steps include the establishment of the Rail Delivery Group and Network Rail's publication of its own Initial Industry Plan.
But what of regulation? McNulty was clear in his recommendations that a single industry regulator is required. This single body would take on a regulatory role in relation to aspects of the franchises and perhaps even fares. McNulty thinks that this would facilitate more output based regulation as well as create greater opportunities for cross-industry thinking. Government would be left to focus on its 'core' role - that of setting the overall policy direction for the sector and to make associated, often politically sensitive, trade-offs.
For the regulator, taking on additional responsibilities, such as regulating cross-industry outcomes including performance and journey time, that are currently included within franchise agreements, represents a significant change, even in a static environment.
But this change to the regulator's roles and responsibilities is being recommended against the back-drop of proposed fundamental changes to the structure of the industry (indeed it is these changes that are driving the need for the single regulator). These changes will, in themselves, require the regulator to adapt its role. For example, greater alignment of route infrastructure management with the TOCs will require the regulator to take an even more active role in ensuring that the interests of other operators, including freight, are protected.
And certain of McNulty's recommendations will affect the way in which regulation happens. Proposed concessioning, and potentially separate ownership, of route based infrastructure, will facilitate more comparative regulation. But such concessioning will also require an even deeper understanding of where efficiencies can be achieved, how these can be achieved and over what time period.
The regulator will be taking steps to ensure that it understands what its role looks like in the new world and what changes it needs to make to ensure that it is well positioned to carry out that new role.
A lively debate last night at the Beesley Lectures on water sector reform. Tom le Quesne, WWF, argued that property rights and pricing could play a role in the allocation of water as it became ever scarcer. He also warned of the dangers of importing water trading models from overseas into England and Wales as most international trading schemes are for agricultural water, not for water destined for domestic use.
Sir Ian Byatt, Director General of Water Services, put forward the argument that we should consider setting prices on the basis of what was affordable and then challenge companies to deliver water or reductions in water demand within that cap. So if prices were not to increase to fund major capital projects on the supply side, what could companies and society do to limit the demand side of the equation?
Key points arising from the floor included the concern that the definition of property rights could keep being changed which could lead to a loss of confidence in trading.There was a desire to understand what would be the priorities in defining these property rights.
Legal services in the UK are under pressure from all sides and the industry is going through some large-scale changes. The Beesley lecture on 'The future of legal services' focused on the effects of the Legal Services Act in enabling legal services to be provided by new business forms, but also picked up on other factors which are reshaping the market. For example, pressures on legal aid budget, reforms of the civil court system and the promotion of alternative forms of dispute resolution, and the influence of new technologies.
The speakers said that these changes would herald significant changes in the structure of the legal services sector as the rewards for innovation increase, services are commoditised and new sources of capital emerge. But he also said that these changes could offer great opportunities for firms who are able to take advantage of the new freedoms to establish trusted brands and satisfy customers.
The following debate confirmed the view that the shape of the legal 'high street' could soon become quite different. There was less agreement about whether and how other parts of the sector would be affected, but some were concerned about the risks presented by the changes for the international competitiveness of the UK legal sector.
At the recent Beesley lecture on 'stability and competition in the banking sector', Sir John Vickers provided a summary of the Independent Commission on Banking (ICB) report. He also provided insight into some of the thinking behind the report.
He said the key rationale of the ring-fence is to insulate a UK retail bank from the rest of a banking group and provide for easier resolvability. He acknowledged that retail banking remains inherently risky and the ring-fence does little to prevent future crises, which is why higher capital requirements are also recommended. The high ratio of banking assets to GDP in the UK provides added support to the recommendations.
In terms of the amount of capital banks should hold, he was highly persuaded by the economic arguments which suggest that increasing equity levels in banks should not have much impact on overall banking costs. He also thought that bankers need to reduce their future return expectations (mid-teen returns can't be justified in a post-crisis world).
There have been a number of challenges to the report. Sir John thought some of the competitiveness arguments have been overplayed - e.g. a few percentage points of extra capital is unlikely to be significant in the context of other competitive drivers such as brand and distribution channels. The ICB were also careful to place most of their recommendations on UK ring-fenced bank, rather than activities outside the ring-fence. He also suggested a more stable financial system will be beneficial to London and the wider UK economy.
Sir John was clear that this is a package of recommendations. This means that both legislators and regulators need to be careful about tinkering with the elements.
There are features of the UK banking market, which the ICB considered undesirable. Low switching rates was one. The margin increases following the financial crisis was another. Steve Smith, from Lloyds Banking Group, who chaired the subsequent discussion accepted the competition recommendations (e.g. current account redirection service), but challenged some of the underlying analysis. His view is that current account prices and charges have come down significantly in the past 10 years, services levels have risen and low account switching is not an indication of weak competition. Given the economic incentive to switch is at best £20 per year, Steve's recommendation is that we shouldn't use actual switching rates as a measure of success for the recommendations (rather we should use indicators such as customer awareness of switching).
