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Over £1bn in savings can be made in rail by 2019, says McNulty report

Transport secretary Philip Hammond last week said that the McNulty rail industry review has identified £1.05bn of savings that could be made by 2019.

Speaking at the launch of the Rail Value for Money Study, Sir Roy McNulty said “achieving a 30% efficiency improvement by 2019 should be the target for the GB rail industry given the study’s findings on the industry’s costs compared to European railways and other industries.

“A reduction of this magnitude is achievable, and is essential if passengers and taxpayers are to get the fair deal they deserve from the rail industry”.

The Office of Rail Regulation had identified that Network Rail is up to 40% more expensive than top performing European counterparts.

The report found that up to £1.05bn of savings could be secured by 2019, said Hammond.

“These savings, when added to the savings Network Rail are already committed to achieving to 2014 and the savings Sir Roy expects the Regulator to seek from Network Rail over the period to 2019, should largely close this efficiency gap,” he said.

The study’s final report puts forward a range of recommendations focused on cost reduction, efficiencies and how change can be implemented.

Among the most imminent recommendations for change – to be carried out by August – are plans to set up a new independent programme implementation team, as well as the establishment of the Rail Delivery Group (RDG) and devolution of some of Network Rail’s powers.

Rail industry leaders simultaneously announced the set up of their RDG last week. This will be chaired by FirstGroup chief executive Tim O’Toole and will be made up of chief executives of the passenger and freight train operating owning groups and Network Rail.

Meanwhile Network Rail has already begun to implement its regionalisation plan that will devolve power for rail to some areas.

“The rail industry has the opportunity for substantial further growth, building on the successes of the past fifteen years, but the licence to grow has to be earned by greater efficiency,” said McNulty. “It is now for the industry, working with government and the ORR to rise to the challenge.”

The study also said that “as an important part of the change process” its key recommendations must be specified in the upcoming franchise process for West Coast, East Coast and Greater Anglia.

The draft indication to tender for the inter-city West coast Franchise was also launched last week. The proposed specification represented a relaxation from time-rigid requirements, in keeping with the McNulty report.

This marked a significant shift which should allow companies to maximise profits, Hammond said.

The franchise is to be awarded in August in 2012 and commence operation on 9 September 2012.

Key recommendations

The key recommendations can be summarised under three main headings:

1. Creating an enabling environment

Recommendations under this heading are the principal catalysts for change, and need to be in place to enable delivery of the main savings from other areas.

Recommendations for leadership from the top:

• The Department for Transport (DfT) to develop a clearer definition of the roles of government and industry, with Government focused primarily on setting the overall vision for the industry, the direction of rail policy, the objectives for the industry, the level of funding available, and leading on franchising procurement.

• The industry to accept greater responsibility for strategic planning and the delivery of outcomes in line with Government’s policies and objectives, particularly on cost reduction.

• The industry to establish a Rail Delivery Group, consisting of the most senior people from Network Rail and the TOC-owning groups, freight and other stakeholders, to lead a substantial programme of change – focused particularly on cost reduction, changing the industry culture, encouraging more integrated whole-system approaches where necessary, and improving the speed and effectiveness of cross-industry bodies. Mechanisms for establishing a dialogue at industry level with the trade unions should also be explored.

• On some critical issues, it may also be necessary for the transport secretary to give a lead.

Recommendations for clearer objectives:

• Government to provide greater clarity about what Government policy is, how different strands of policy are harmonised, and make clearer the links between the different levels of policy, objectives, strategies and implementation.

• The High Level Output Specification (HLOS)/Statement of Funds Available (SoFA) process to include specific cost objectives and a greater degree of longer term planning.

• There should be a move away from “predict and provide” to “predict, manage and provide”, with a much greater focus on making better use of existing system capacity.

• The DfT to work with industry to develop a comprehensive analysis of how subsidy is used, i.e. where subsidy is used and what it is buying; the DfT should then assess how this use of subsidy contributes to Government’s policy objectives.

Recommendations for devolved decision-making:

• Less prescriptive franchises to allow TOCs more freedom to respond to the market.

• Decentralisation and devolution within Network Rail.

• A greater degree of local decision-making by PTEs, and/or local authorities, brought more closely together with budget responsibility and accountability.

Recommendations for changes to structures and interfaces:

• Devolution and decentralisation within Network Rail.

• Introduce diverse ownership of some infrastructure management concessions.

• Closer alignment of route-level infrastructure management with TOCs, at one or other of the following levels:

− minimum – cost and revenue sharing, and joint targets; or

− intermediate – joint ventures or alliances; or

− maximum – full vertical integration though a concession of infrastructure management and train operations combined.

The Study recommends having at least two joint ventures/alliances in place by 2013/14 and at least one vertically-integrated pilot in place by about the same time.

The DfT and the ORR should drive this process of closer alignment in all new franchise procurements and for new Control Periods for NR.

The study recognises that, within the current franchises and Control Period, choices between these options for alignment are commercial decisions for these concerned, and that “one size will not fit all”. It is also clear that there must be effective safeguards for freight and other operators.

Recommendations for more effective incentives:

• Reform of franchising, along the lines already announced by government with much stronger incentives for TOCs to reduce costs, and to co-operate more effectively with Network Rail.

• Closer alignment of Network Rail and TOC incentives through the structural changes indicated above.

• In relation to Network Rail:

− comparative regulation of route-level units;

− introducing a degree of independent ownership of infrastructure management concessions;

− consider directing all subsidy for NR through track access charges;

− develop improved corporate governance and a better focused management incentive programme;

− assess the potential, after industry structures stabilise, for unsupported debt and/or private investment.

• Improved incentives for efficient enhancements.

• Improving incentives and clarifying responsibilities for the efficient management of existing capacity.

• Greater transparency of the industry’s finances and cost performance.

Recommendations for regulation:

• Move towards the industry having a single regulator, the ORR, with a new focus on whole system outputs and with the necessary resources, skills and standing to support an expanded role.

• The DfT to undertake a full review of fares policy and structures, aiming to move towards a system that is seen to be less complex and more equitable, and which also aids the management of peak demand and the more efficient matching of demand with capacity. The study’s recommendations envisage some re-balancing of fares but no increase overall.

• The DfT to work with industry to accelerate Smartcards, other retail technologies and introducing other retail locations.

• The DfT, in liaison with the industry, to overhaul the Ticketing and Settlement Agreement which prescribes such matters as ticket office opening hours, providing other enabling pre-conditions are met.

2. Delivering greater efficiencies

The areas from which the principal savings are expected to come are as follows:

Recommendations on asset management, programme and project management, and supply chain management

• Industry wide adoption of modern, best-practice frameworks to encourage whole-system, whole-life approaches, focusing particularly on considering all available options fully before fixing on the solutions

• Making best use of the new objectives, incentives, structures and interfaces to achieve improved trade offs between infrastructure, rolling stock and operations

• Better selection of the optimum maintenance approaches, informed by better understanding of assets and better asset condition information to reduce maintenance and renewals effort

• Better visibility of forward plans and less volatile workloads to encourage long term investment by suppliers in whole life solutions and cost reduction approaches

• Earlier involvement of suppliers and contractors, and much wider use of partnering approaches, to incentivise all parties to reduce the cost of delivering rail services.

Recommendations on safety, standards and innovation:

• Clearer safety leadership at industry level to drive further improvement in the rail safety culture.

• Establishment of a Rail Systems Agency (RSA) to lead the industry in achieving technical excellence in standards management, technical integration, and driving innovation.

Recommendations on HR management:

• Review of many aspects of staffing and working practices.

• The need for pay restraint in relation to both staff and senior management.

• The need for improved training and people development.

• Review of overheads and administration.

Recommendations on information systems:

• Improved oversight and management of cross-industry information systems.

Recommendations on rolling stock:

• Increased standardisation and more effective procurement of rolling stock, plus establishing strategic partnerships with the ROSCOs.

Recommendations on lower-cost regional railways:

• Piloting more differentiated approaches for both infrastructure and operations which can maintain standards of safety, but which can reduce the costs of less intensively used networks.

3. Driving implementation


• A small independent team for change programme management to work closely with the Rail Delivery Group, and to report direct to the Secretary of State against an agreed implementation plan.


Readers' comments (2)

  • I was very disappointed not to find any reference to value mangement or value engineering in the McNulty Report (likewise in IUK's Infrastructure Plan and Cost Review, or the DfT's recent Transport Business Case or VfM Guidance), despite the OGC having launched its Management of Value Guide in November. This would have made it very clear that there is a part for everyone to play in this quest for value for money.

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  • Remarkably I did not see any mention of converting near empty first class carriages on WCML to business classs or economy. This could add around 40% more capacity. I wonder whether HS2 planners considered this easy win before pursuing the £30bn option?

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