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National Rail Conference

Speech by:
The Rt Hon Philip Hammond MP
Date delivered:
08 July 2010
Location:
BT Convention Centre, Monarchs Quay, Liverpool

Introductory remarks

Ladies and gentlemen,

Thank you for inviting me here today - it’s a pleasure to take part in one of the keynote events in the rail calendar.

While I was preparing this speech I did a little digging.

And I discovered that I am actually the nineteenth Transport Secretary over the last thirty years.

Each one of my predecessors brought his, or her, own style, character traits and approach to the job.

And each, like me, will have had to come to terms with the immense complexity of the railway industry – it is by far the most challenging area of the transport brief, with a language, history and culture of all of its own. And, as I am rapidly discovering, plenty of characters of its own as well.

Some of my predecessors were pretty openly rail sceptics.

Others, some of them not long gone, were frankly rail romantics.

I am not in either of those camps. But I place myself firmly in the category of people who believe in our railways and the spectacular renaissance they have undergone.

I remember when I was a teenager growing up in the sixties and seventies, I can distinctly remember two pieces of conventional wisdom – you know the sort that starts with “everyone knows that…”

The first was that the cinema was in terminal decline due to the advent of colour TV. And the second was that the motor car and the motorways had sounded the death knell of our railways.

As so often happens, neither conventional wisdom was true. Indeed, cinema and the railways are both thriving and in notably better health than they were forty years ago.

We recognise that our railways can contribute fundamentally to two of our key objectives, economic growth and carbon reduction.

But they must also contribute to our first and overriding objective – fiscal retrenchment.

So, when I look at the railways, it’s not through rose-tinted spectacles, but I hope with a fresh pair of eyes – aware of the opportunities but alert to the challenges. Not as a railway romantic, but as a railway realist.

That means I want to engage with you and work with you – with an open mind and an open door.

But it also means I will not shy away from telling you the hard truths when they need to be told.

And the first hard truth is that Britain’s railway industry must now learn to operate in a radically altered public spending environment.

The fiscal and economic challenge

The scale of the fiscal and economic challenge this government faced on coming to office was unprecedented.

Britain has just struggled out of the longest and deepest recession in its peacetime history.

We are saddled with the largest budget deficit of any economy in Europe - with the single exception of Ireland.

Borrowing one pound in every four we are spending, adding £3 billion each week to our national debt.

And according to pre-Budget forecasts carried out by our new and independent Office of Budget Responsibility, the permanent hole in the nation’s finances and the structural deficit was even larger than had been previously thought.

Based on the spending plans that this Government inherited by the end of this Parliament British taxpayers would have been paying out £70bn a year just in interest on our national debt.

That is more than we spend on educating our children, policing our streets or defending our country - putting businesses, jobs, interest rates and the recovery at risk.

So dealing with the largest budget deficit in our peacetime history, and putting our public finances back on a sustainable path, is the single most pressing issue facing this Government and this country.

Immediately on coming into office we identified, and removed, £6 billion worth of public spending from this year, including £100 million from Network Rail’s 2010-11 budget.

Last month’s Emergency Budget set out the decisive measures that will set this country on the road to fiscal discipline and economic recovery with a four year plan to eliminate our structural deficit and get debt falling as a percentage of GDP.

The next major milestone on our journey to fiscal recovery will be the announcement of the Spending Review for the next four years.

We already know the overall envelope of spending we face – 25% cuts in the resource budgets for non ring-fenced departments on average and the implementation of the previous government’s planned 40% reduction in capital spending from a 2010-11 baseline.

Well judged capital spending

I am not going to pretend that this will be easy, or that it will not hurt. Of course it will.

But, for transport, and for the rail industry, there is some good news – and I think it’s in two parts.

First – this new Government has rejected further capital spending cuts as the easy option in tackling the deficit.

As the Chancellor said in his Emergency Budget speech – 

Well-judged capital spending by government can help provide the new infrastructure our economy needs to compete in the modern world”.

It is my firm belief that, if we get transport infrastructure projects right, they are one of the best investments the taxpayer can make – delivering economic benefits many times their cost.

The second piece of good news is that the measures that we have set out will get the UK’s public finances back into balance by 2015.

And, in terms of investment in railway infrastructure, that timescale is virtually the blink of an eye.

In the meantime, tough decisions will have to be taken.

The capital that we do have available must be focussed relentlessly on those projects that deliver the growth and the jobs that Britain now so desperately needs.

The Chancellor has made clear that the Government understands the case for well judged capital spending; that it will take tough decisions to reduce Government revenue expenditure, rather than going for the easy option of slashing investment.

But a responsible government can only invest in an efficient and cost effective railway. The challenge we collectively face is to show that we are on track to deliver that cost effective railway.

That’s our shared reality. And, while we’re on the subject of reality, let me say a word about rail fares.

There’s been all sorts of speculation doing the rounds and I would like to put the record straight.

My position is simple – we have to reduce the cost of our railways to the public purse, and I firmly believe we must look to efficiency savings first. Anything less would be an abdication of our duty to the taxpayer and the passenger.

But it would also be a dereliction of our duty to future generations of rail users to take a dogmatic approach to the contribution current users make to the maintenance and modernisation of the railways.

To my mind, the current fares formula is a reasonable and sensible approach. But it cannot be set in stone when all the other variables are vulnerable to change and to challenges.

We will face some very stark choices and it would be irresponsible at this point to rule out even considering an increased contribution from the fare payer as part of the solution to protecting investment in the railways.

It is a stark fact that to secure a sustainable commitment to our railways, we need to secure the sustainability of our railways.

And to secure that sustainability, we must re-invent the way we work together in order to deliver more with less

McNulty Review

As you will be aware, Sir Roy McNulty is carrying out for us a Review of Value for Money on the railways.

I’ve already received, and welcomed, a scoping study report from Sir Roy.

And that report confirms that the cost of the UK’s railways is relatively high - both in historic terms and by comparison with other European railways.

I recognise that this report represents a very early stage in the work of Sir Roy and his team.

They will now develop his work, identifying the factors that drive up the cost of the UK’s railways – and we really do need to understand those factors, whether they are structural or cultural, systemic or specific.

The next stage of the Review will involve a close look at options for ensuring public investment in the railways is delivered as efficiently and effectively as possible – and I have asked Sir Roy to accelerate key elements of his work so that his preliminary findings can inform the discussions that are made as part of the autumn Spending Review.

I am convinced that this landmark review can point the way towards the future sustainability of our railways.

I intend to use Sir Roy’s report as the focus for my team’s thinking about the future of the railway.

And, while we will wait to see what his report says, we do not start from an entirely blank sheet of paper. We do have some views in advance of its publication – although we will be open minded if Sir Roy makes the case for a different approach.

While I have this opportunity, I would urge industry stakeholders to engage with Sir Roy and his team to offer their fullest co-operation.

Industry structure

One of the benefits of being a new boy is that you approach a business with unblinkered vision and a fresh perspective.

The first thing that has struck me about this industry, and it is very early days, is that the elaborate and expensive structures in place to create a simulated market do not necessarily produce the behaviour that the theory suggests.

It is clear to me that the structure of the railway industry should be designed to achieve the ambitions we have for our railways.

That means train companies which are responsive to passengers and an infrastructure operator that’s responsive to train companies and able to deliver the best results for passengers, companies and the taxpayer.

So we will examine the current structures and incentives to see where improvements can be made.

An accountable structure is also a transparent structure.

The previous government’s scope for manoeuvre was significantly restrained by the over-riding imperative it imposed on itself to keep Network Rail’s debt off the balance sheet.

I will face no such artificial constraints. It is a matter of complete indifference to me – and indeed to the Treasury – how the national statisticians classify Network Rail’s debt. Our decisions will be taken on the basis of what is right for the railway, not on the basis of accounting treatment.

We will work with the ORR to explore how best to make all the players in the rail market more responsive to their immediate customers, passengers and train operators as well as to the needs of taxpayers.

And being responsive also means being responsive to the economic realities of the day - from the services offered to customers, to the pay and conditions offered to employees, to the bonuses paid to directors.

In the private sector, many employees have had to forgo wage increases over the recession. Now, in the public sector, we are asking workers to accept a two year pay freeze as part of our collective efforts to tackle the debt crisis.

To be frank, I think a lot of people will be asking why this same pay discipline can’t also be applied to the railways – an industry that, in effect, straddles the private and the public sectors because of its dependence on billions of pounds worth of taxpayers’ money.

And, if we are going to ask people to endure personal sacrifices to get ourselves out of the hole we are in, then those at the top have a duty to act fairly and set the right example, especially on pay and bonuses.

Franchising

Let me turn for a moment to rail franchising. And again, as a Government, we approach this area of policy conscious of the need to re-invent the way we work.

My Department has just announced a pause in the competition for franchises and a consultation exercise on the future of rail franchising policy, led by my Minister of State, Theresa Villiers.

Our starting point is that franchises need to be longer. Franchisees need to invest more, take more risk and have more ability to respond to changes in circumstances as they occur. In other words they need to behave more like market operatrors.

Believe me, this is a consultation that really matters.

It matters because it will give industry partners a chance to help shape our approach to rail franchising and investment in improvements to trains and services.

But it also matters because I hope it signals a change in the way we want to do things. It is not all about my department specifying its requirements in a vacuum.

It’s about harnessing your energy and capacity for innovation to proactively propose changes that will deliver balanced benefits – for passengers and taxpayers.

High Speed Rail

Before I conclude I want to reiterate this Government’s commitment to high speed rail.

It lies at the heart of our transport policy. It drives difficult decisions which we have taken on additional runways at London’s airports.

This Government’s vision for high speed rail is of a network that is truly UK wide, with seamless links to Heathrow, and connections to Europe.

Such a network will have the potential to increase capacity, improve connections and encourage a modal shift from long road journeys and short haul flights –stimulating economic growth and contributing to our climate change targets.

What’s more, because we plan a process of phased construction, I am confident that high speed rail can be delivered in an affordable way and that we can build a domestic supply chain to support the project over the thirty plus years of its life.

High speed rail has the power to transform the economic and social geography of our country in the 21st century – just as the coming of the original railway did in the 19th century.

It will transform the prospects of our regional cities and the powerhouse of the London economy.

It will help to close regional pay and wealth differentials as we literally shrink our country into a single travel to work area.

At the same time as we press ahead at full speed with HS2, so we are proceeding with the sale of a 30 year concession on HS1.

We need to make our national assets work harder for the country and we need to harness private enterprise to improve public services and deliver better value for money for the taxpayer.

The money generated from the HS1 sale will give a much needed boost to the public finances as we tackle the debt crisis head on. The risks facing HS1 now that construction is complete and operational reliability has been proved are commercial risks – of a type best managed by commercial companies.

The sale will benefit both domestic and international passengers as the successful private bidder responds to the incentives he will face to attract new operators, serve new routes and grow the business.

Concluding remarks

I’ve spoken today about the bigger picture, the economic and fiscal backdrop against which the future of our railways must be planned. I have signalled, I hope, a distinct change of focus from the approach of my predecessor.

I have taken the risk of sharing with you some of my initial early perceptions of the industry and its structure.

I have been frank with you about the affordability of some of what has been promised in the past.

And I’ve set out my view as to what all of this means for the industry and the challenges we face in building a sustainable future for our railways.

I have argued that the best– in fact the only – way to respond to these challenges is to re-invent the way that we work.

There will be some big decisions to be taken in the autumn once our budgets are fixed – on IEP, HLOS rolling stock, electrification and the major London rail projects. Some tough choices will be required – I promise you I will not shrink from taking them.

But with the challenges, comes great opportunities. The history of the railway is characterised by innovation and invention, persistence and perseverance, achievement and advancement.

Those who work in, on and for this crucial 21st century industry are rightly proud of its long history. Today I’m here to tell you that you can be confident about its future.

Yes, this a time of challenge and change for our railways – no doubt about that.

And we will be relying on the skill, the innovation, the commitment and the dedication of the people and the organisations represented here today to step up to the plate and work with us to deliver a sustainable railway for the 21st century, meeting the needs of its passengers, as well as those of the taxpayer and the wider economy.

I have every confidence in your ability to deliver and I have every confidence in the future of this great industry.

(This speech represented existing departmental policy but the words may not have been the same as those used by the Minister.)