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Rail Value for Money Study

Railway Study Association7 March 2012

Sir Roy McNultyChair, RVfM Study

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Contents

• The RVfM Study – Findings and Recommendations

• Things that surprised me

• Things the Report didn’t say

• Progress since the Report was issued

• Making Change happen

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Terms of Reference

1. To examine the overall cost structure of all elements of the railway sector and to identify options for improving value for money to passengers and the taxpayer while continuing to expand capacity as necessary and drive up passenger satisfaction.

2. In particular, to examine: what legal, operational and cultural barriers stand in the way of

efficiency improvements; the incentives across different parts of the rail industry to

generate greater efficiency; the role of new technology, processes and working practices

in fostering greater efficiency; ways of generating more revenue, e.g. car parking, gating at

stations, better utilisation of property; and to make recommendations.

3. The study will examine the whole industry costs and revenues and their composition. In doing so, it will look at comparable industries in the UK and abroad.

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GB Rail Performance

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In many ways GB Rail has performed well

• Increasing customer satisfaction

• High levels of operational performance/punctuality

• Continued improvement in safety

• Significant investment

• Important contributions to decarbonisation, and to the economy

• Sustained growth – passenger and freight

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Figure 2.1: Change in network length (route-km), passenger-km and journeys, 1948-2009

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And GB rail has major opportunities for the future

• Prospect of doubling current levels of traffic by 2030

• But NOT if railway economics remain as they are

• GB rail has to earn its “licence to grow”

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The efficiency gap

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Figure 2.3: Industry expenditure per passenger-km(2009/10 prices)

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Table 2.3: Impact on industry costs of “should cost” exercise (2008/09 prices)

Low

Savings

(£bn)

High

Savings

(£bn)

Total industry expenditure (2008/09 actuals) 12.0 12.0

Effect of closing the total efficiency gap -2.5 -3.5

Resultant reduced industry costs (using 2008/09 base)

9.5 8.5

On this basis, the efficiency gap is 20 – 30%

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International benchmarking

• Benchmarking GB rail against France, Netherlands, Switzerland and Sweden, based on 2009 data

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Figure 2.10: Comparison of whole system costs (partly normalised)£/k passenger-km

DCBAGBR

[GBP / k passenger-km]

Passenger train operation

Track access charges

Rolling Stock

Infrastructure

120112

1) Infrastructure has been fully normalised, train operation and rolling stock has been normalised for the countries where normalisation factors were known

Numbers do not include track access charges

202

123 124

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Figure 2.13: Total income streams

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Findings on Costs and Revenues

• Unit costs of the GB passenger railway have not improved since the mid 1990’s

• The study’s desk analysis suggested that GB rail should cost 20-30% less than it did in 2008/09

• Benchmarking against four European comparators indicates an efficiency gap of some 40%

• Some of the difference between 20-30% and the 40% is due to difference in train utilisation, some of which may be systemic

The result of GB Rail’s higher costs is that GB Passengers and Taxpayers are each paying at least 30% more than their counterparts elsewhere

GB Rail should aim for a 30% reduction in unit costs by 2018/19

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Barriers to efficiency

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Barriers to Efficiency

• Fragmentation – Structures and Interfaces

• The ways in which the main players have operated

• Roles of Government and industry

• Incentives/Franchising

• Fares structures

• Legal and contractual framework

• Supply chain management

• Limitations on whole-system approaches

• Relationships and culture

The basic principles of the UK approach do not need to be changed, but there is a need for improved Collaboration and Alignment

Some of the issues apply to UK Infrastructure generally

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Barriers to Efficiency - Conclusions

• Not a cause for despair- we need a thorough understanding of the causes of

excessive costs

- these barriers can be overcome, with strong leadership and concerted effort by all

- nothing to be gained from “blame games” or “inquests”

• Not a simple set of problems; no “silver bullet”

• The problems get solved if everyone contributes

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Principal Recommendations(1) Creating an Enabling

Environment

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Creating an Enabling Environment

• Leadership from the top

• Clearer Objectives

• More Devolved Decision-making

• Changes to Structures and Interfaces

• More Effective Incentives (particularly in Franchising)

• Changes to Regulation

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Principal Recommendations(2) Delivering greater efficiencies

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Delivering Greater Efficiencies

• Asset Management

• Programme and Project Management

• Supply Chain Management

• Safety, Standards and Innovation

• HR Management

• Information Systems

• Rolling Stock

• Lower cost Regional railways

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Principal Recommendations(3) Driving implementation

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(3) Driving implementation

• Learn the lessons from the past

• Rail Delivery Group to take a lead

• Small independent change team

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Some broader reflections from the Study

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Things that surprised me

• Good GB Rail Performance (other than costs)

• Scale and complexity of operations and projects

• Organisations and people committed to “the railway”

• Organisations and people ready for change

• Extent of Government involvement

• Lack of clear Focus on Costs

• Lack of clarity as to what the Subsidy is buying

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Things the Report didn’t say

• The UK got it wrong the basic principles of the UK approach are sound

- privatised/liberalised/competitive

- clear separation of roles (track/train, franchises etc)

- clear accountability

- strong independent regulation

- transparency of costs

but in addition, there is a need for better Alignment and Co-operation, particularly at Industry and Route levels, and between Customers and Suppliers

and we need an environment which encourages/enables a clear focus on Costs and Value for Money.

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Things the Report didn’t say (cont’d)

• Sweep away the whole complicated structure and start again, instead of trying to make what we’ve got work better in an industry as big and complex as GB Rail, no

structure is going to be simple and easy to operate even more importantly, no other conceivable structure

is likely to yield sufficient additional savings to compensate for the 5-7 years delay, which major reorganisation would involve, in addressing the areas where savings can clearly be made

passengers and taxpayers want their burdens eased NOW

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Progress since the Report was issued

• Rail Delivery Group- formation/composition- programme of work

• asset, programme and supply chain management• contractual relationships• train utilisation• technology and innovation• Rail systems Agency• Initial Industry Plan

- commitment from those involved- interaction with Government and ORR

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Progress since the Report was issued (cont’d)

• Network Rail- devolution to Routes- new ways of working with suppliers- external benchmarking and competition- behaviour safety programme- asset condition systems- all this on top of existing commitments

• Train operators- review of rolling stock procurement and management- new Franchises

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Progress since the Report was issued (cont’d)

• Network Rail and Train Operators- support for Rail Delivery Group- alliancing- Initial Industry Plan

• DfT- changes to franchising- Command Paper

• ORR- expanded role- capability review

• Areas where more progress is needed

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• The barriers and solutions are well understood;

• Easier in an environment of growth;

• Significant changes are already in progress;

• Many people in the industry ready for change;

• The industry can provide the vision, leadership and energy to make change happen; and

• We have a Secretary of State who is determined to see this happen.

Why major change on this scale is achievable

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Making Change Happen

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A Framework for Change•Recognising the need for change•Creating and communicating a new vision•Empowering people to act on the vision•Institutionalising change

Key Ingredients•Vision•Leadership•Energy•Relationships•Structures

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Rail Value for Money Study

Rail Study Association 7 March 2012

Sir Roy McNultyChair, RVfM Study