Scottish Government

CHAPTER EIGHT: CONCLUSIONS

Introduction

8.1. In this final chapter we draw our conclusions in addressing the issues and questions which Transport Scotland asked us to answer. For reference these are repeated below in Table 8.1.

TABLE 8.1 TRANSPORT SCOTLAND'S QUESTIONS

8.2. In order to minimise repetition, we provide below a joint summary to a number of questions where there is considerable overlap in the issues they raise. Where appropriate we have also cross-referred our conclusions to the relevant paragraphs of the report.

8.3. Our conclusions relate to Scotland and the comparator railways of Ireland, Northern Ireland, Hamburg/Schleswig-Holstein, Denmark and Sweden, given the similarity to Scotland of their characteristics such as limited linkage to other railways, relatively small population and low population density. They may not reflect the situation of either larger networks, such as those of England, France, Spain, Italy and Germany as a whole, or smaller networks embedded within continental Europe, such as those of Switzerland, Belgium and the Netherlands.

Conclusions

8.4. Our principal conclusion is that Scotland and the comparators have taken a range of approaches to structuring, planning, funding, operating and regulating their railways. Convergence is appearing in some areas, where experience in the different networks is driving them to similar approaches, but in other areas a variety of different approaches appear to work successfully.

Objectives of controlling authorities

Rail's place in transport provision and policy

8.5. Railways are generally long-established businesses and their current range of activities are often more a reflection of history and inertia rather than of active government initiatives. Change in Scotland, Sweden and New Zealand has long been driven by government policy on the structural reform of the sector, and change in Denmark and Hamburg/Schleswig-Holstein has until recently been driven by the need to comply with European law. Ireland and Northern Ireland have derogations from many of the EU-mandated structural requirements and have focused their change initiatives on the need to maintain an integrated approach to public transport delivery (hence the inclusion of the railways in public transport "holding companies") and the need to reduce operating deficits.

8.6. Only in Ireland (5.10) and Northern Ireland (5.17) are there single controlling authorities which are responsible for both rail and bus transport in both urban and rural areas. All the other comparator networks are subject to at least two tiers of cross-border, national, regional, local or urban government influence and control. These bodies do not always set out formal policy objectives for the railways, but generally expect them to serve urban/suburban commuting and interurban travel and to help maintain levels of accessibility in rural areas.

8.7. National government bodies tend, like the Scottish Executive, to deal with setting general transport objectives including economic development, social inclusion, environment and health, safety and integration. Local governments tend to deal with more specific issues such as service specification, fares, and integration with other modes. However, the type and extent of powers delegated to local authorities varies.

8.8. Ireland and Northern Ireland's derogations from European requirements to separate the management of rail infrastructure and operations have allowed them to continue to operate their railways as integrated national businesses (3.21). New Zealand is not affected by the European requirements, and initially tried to privatise the railway on an integrated basis, but has now taken public control of the infrastructure and divided control of the operations between national bodies and the two cities which have urban/suburban rail networks (3.16). Hamburg and Schleswig-Holstein are subject to national German rail policy but have wide powers over local rail services (3.28). Denmark's national network is dominated by services controlled by the city authority in Copenhagen, but the remainder is gradually being franchised by the national government on a regional basis (3.35). Sweden has a system of national control of infrastructure and inter-regional services but counties are responsible for their internal services (3.41).

8.9. Rail timetables, fares and ticketing are generally integrated with other modes in larger cities except Dublin, where proposals for a controlling authority are only just emerging (5.15), and in New Zealand, where integration with deregulated and commercially-operated buses is difficult (5.105). Increasingly, there is a need for planning and investment to be integrated with other modes, as in Dublin (6.81) and Stockholm (6.86), and sometimes across regional or national boundaries, as over the Øresund linking Denmark and Sweden (6.92).

8.10. Scotland uses a standard planning procedure. Transport Scotland prepares a Scotland Planning Assessment ( SPA), to assess demand for rail travel, and Network Rail prepares a Route Utilisation Strategy ( RUS) to identify any conflicts between the various operator and transport authority aspirations, any shortfalls in capacity, and how best to use or expand the infrastructure. Other networks generally share planning powers and responsibility differently between infrastructure manager and regulatory, procurement and planning bodies, although in Ireland a single body is responsible for all railway operational and planning activity (Figure 6.1).

Evolution of the comparator networks

Infrastructure capacity and quality

Constraints on demand

8.11. Over the longer term, all the networks have shared a broadly similar history, reflecting low population densities and growing urbanisation in the areas they serve. They developed in the nineteenth century to serve freight and interurban travel, typically requiring only single track over large parts of their route.

8.12. There has generally been little need for additional capacity outside the major cities, as an increasing proportion of rural and long-distance travel has been carried out by car or, in Sweden and New Zealand, domestic air services. Capacity on single track rural lines is often adequate, or can be expanded relatively easily with longer trains or more frequent passing loops. Urban railway capacity is more likely to be constrained and, where it is, solutions tend to be costly and technically complex. Addition of new track is most likely to be required in city centres and require tunnelling, which raises the question of whether capacity should be added to the national rail network or instead to a largely-segregated commuter network, a separate metro system, a light rail network or even as buses.

8.13. On rural lines, speed varies widely: Sweden's network permits 200 kph (125 mph) on some major dual track lines but not elsewhere, yet New Zealand's Auckland to Wellington services average under 60 kph (40 mph). New Zealand's infrastructure deteriorated under private sector ownership and has now been taken back into public control (5.2), but Denmark is also having to address a maintenance backlog on its publicly-owned infrastructure (6.46).

8.14. Over the last five years, ScotRail has seen rapid growth in travel on long-distance and regional services and on the "point-to-point" flow between Edinburgh and Glasgow (Figure 4.2). There has been slower growth within the central belt and on cross-border services which have faced increasing competition from low cost air travel. Without disaggregate data on other networks, however, short term trends are more difficult to interpret and may be due to specific new services such as the Øresund link between Denmark and Sweden.

8.15. Looking forward, the prospects for rail freight and passenger rail demand are finely balanced between the conflicting influences of falling road operating costs and any rises in road congestion costs or user charges (4.50). Road congestion is unlikely to be a major issue in rural areas of the comparators but is likely either to increase or be managed with congestion charging in at least some of the larger cities. Additional public transport capacity may be needed in urban/suburban areas, but rail may not be the most cost-effective means of providing it.

The role of government in rail markets

8.16. Governments are now generally removed from deciding what rail freight services to provide and at what price. These decisions lie largely in the hands of the operators, whether in the private or public sector.

8.17. In contrast, decisions on what passenger transport services to provide, by what mode, in what vehicles and on what infrastructure still lie overwhelmingly with national, regional or local government which must still fulfil the roles of owner, funder, planner, procurer and regulator of rail services. Even where service specification can be left to the operators or to local procurement authorities, the ultimate responsibility for the railway lies with central government, particularly in relation to the funding of major projects, infrastructure charging policies and the regulation of fares.

8.18. Governments' roles have been delegated in different ways, all of which seem to have limitations. In Scotland, the outcome of the RUS process is not binding on the independent rail regulator. In New Zealand, complete privatisation failed and the government finds that it has had to develop institutions to resume control and management of the infrastructure (5.5). In Ireland and Denmark a single body not only specifies and procures rail services but also determines the funding available for them, which can lead to disagreement over what is achievable with the available funds (Figure 6.1). In Sweden, there remain concerns over whether the infrastructure manager, Banverket, is responsive to operators. In Hamburg and Schleswig-Holstein, the federal government's "hands-off" approach has left control of most infrastructure and rolling stock in the hands of the incumbent national operator, making it difficult for local authorities to seek alternatives (5.25).

Government spending and price controls

8.19. Underlying levels of government spending are difficult to identify and compare (5.52). In most of the networks, funding provided by a variety of mechanisms is spent by an infrastructure manager and a range of private sector operators. Aggregate accounts may not be available and the accounts of individual bodies may not reveal the funding of different services.

5.20. We attempted to estimate three measures of levels of funding (Figure 5.2). Average passenger subsidy levels vary from around 17p/passenger-km in Northern Ireland to only 2p/passenger-km in Sweden, which has many commercial services. The proportion of passenger train operating costs recovered from fares vary from around 40% for First ScotRail to around 70% in Sweden and Ireland. The proportion of total railway costs, including infrastructure, recovered from passenger and freight customers varies from around 30% in Northern Ireland to around 100% in New Zealand's privatised, but mainly freight, network.

Regulation of price, safety and standards

8.21. Freight tariffs are no longer regulated in any of the comparators.

8.22. Patterns of passenger fares regulation vary widely, particularly for long-distance travel (5.101). At one extreme, fares are still directly related to distance, with return fares twice the single fare and fixed ratios between First and Second Class and adult, child, youth and pensioner fares, and few further discounts. At the other, Sweden does not regulate fares on services crossing regional boundaries, and the sole regulated "Saver" fare on Anglo-Scottish services is normally undercut by other fares, and hence irrelevant, on most trains on which it is available. Flexibility to charge a wide range of fares on these services has probably helped increase demand and make travel more affordable, but paradoxically the limited availability of these fares has led to concerns about accessibility and exclusion. Experience in Germany is that sudden changes in accepted fares structures can be confusing and unpopular (5.113).

8.23. There is a greater consensus on fares for urban/suburban transport, with all the major city networks studied having, or aspiring to, a zonal system covering travel by all modes. In Denmark and Sweden fares are even being integrated across the Øresund region which straddles the national border (6.92). In time, smart card technology may also allow revenue to be allocated to different operators and demand to be managed to reflect capacity.

8.24. Regulation of safety and standards is carried out in a number of different ways (5.90). The principal issues drawn to our attention related to delays in obtaining safety cases and approvals for new rolling stock, and the need for capable, skilled and empowered regulators, rather than to any strengths or weaknesses of particular systems.

5.25. Regulation of infrastructure charges by a body independent of the infrastructure manager is only necessary in Scotland, where Network Rail is notionally a private sector body, and Germany, where DB Netz is closely affiliated to the main national operator (Figure 5.4). Infrastructure changes in the other European comparators are under direct policy control. In New Zealand, independent arbitration is available to resolve access charge disputes, but no formal regulation exists.

8.26. Regulation of infrastructure access by a body independent of all operators, as required by European law, is provided in Scotland and all the European comparators except Ireland and Northern Ireland, which have derogations from these requirements.

Separation of infrastructure and operations

8.27. Infrastructure and operations are now separately managed in all the networks except Ireland and Northern Ireland which enjoy derogations from the relevant European law (3.22). In Hamburg/Schleswig-Holstein the main infrastructure and incumbent operator remain in common ownership but proposals have just been announced to part-privatise the operator (5.33). New Zealand privatised its railway on an integrated basis and with minimal regulation, but has now taken the infrastructure back into public control, although this resulted from a need to safeguard the infrastructure and maintain service coverage rather than a policy of separating it from operations, which remain in the private sector (5.2).

8.28. Sweden and Denmark have long implemented and accepted separation on the main national networks. In both, we were told there is at least some tension between infrastructure manager and operators, but also between national and regional priorities or between rail and other modes. Neither saw separation of infrastructure and operations as a dominant, or even major issue, and both are committed to make the system work.

8.29. Railway activities have been merged with other activities, or subdivided in so many ways, that evidence of the specific effects of separation of railway infrastructure and operations on financial and operational efficiency is anecdotal and inconclusive. It is also difficult to identify the impact of separation from factors such as the shortage of funds to undertake maintenance and renewal of the network. With a long-lived asset such as railway infrastructure, maintenance and renewal expenditure can be cut back in the short term, but the asset gradually deteriorates until remedial work becomes urgent, as happened in New Zealand (3.17).

8.30. Integration of infrastructure and operations may not only give access to engineering and operational synergies but also, on small networks, allow a saving in management costs and overheads. Denmark (3.38) and Sweden (3.43) have obtained exemptions from European law for small existing networks and for Sweden's new Arlanda Express concession. Within the United Kingdom, Tyne and Wear Metro has an exemption and Northern Ireland has a derogation from European law, and arguably both achieve savings from being allowed to operate their small networks on an integrated basis.

8.31. On larger networks, separate management of infrastructure and operations creates no major problems where there are no major capacity constraints (6.37), although it is still important for the infrastructure manager to be responsive to the operators' needs. This need is greatest in managing the response to major disruption and in planning for major maintenance and renewal works, where the interests of operators and infrastructure managers may not be well-aligned.

8.32. Growth in urban areas has been a greater problem as it often requires the co-ordination of planning and investment not only in expensive urban rail infrastructure and trains but also in rail and other modes (6.78). When Dublin required a link to its airport it would have been desirable to develop and evaluate rail and metro alternatives within a common framework (6.85). Stockholm's road pricing experiment involved highway, bus, metro and rail authorities, although capacity constraints meant that rail had little scope to deal with mode shift (6.86).

Infrastructure ownership

8.33. Private ownership of existing infrastructure has been attempted in Scotland and New Zealand but has not proved sustainable (5.2). Practical issues have included the difficulty of specifying and monitoring the condition and capability of the infrastructure, planning publicly-specified services without access to this information, separating the costs, funding and outputs of underlying operations maintenance and renewal ( OMR) and enhancement projects, and carrying out these projects on a working railway.

8.34. Germany is proposing a part-privatisation of the incumbent national rail operator which would have "economic" control of the infrastructure, but details are unclear and interviewees were sceptical about how this arrangement could work (5.35). No complete privatisation of existing infrastructure is proposed in any of the networks.

8.35. Private finance of extensions and new links appears to be practicable. Sweden's Arlanda Express concession has built and owns and operates its own infrastructure between the national network and Stockholm Airport (7.15).

The structure of rail infrastructure charges

8.36. In Scotland and on the comparator networks, rail freight is at best a marginal business and can only be sustained if its access charges are no more than marginal costs (4.32).

8.37. Few passenger services can cover even their direct operating costs at the fare levels specified by public policy or sustainable in the market (4.35). Even where they can, marginal cost access charges are generally too low to influence behaviour and the incremental costs of new capacity are generally too high to be affordable (6.27). The overwhelming majority of services are specified in public service contracts ( PSCs) and will therefore be unresponsive to access charges (6.20), and the overwhelming majority of new capacity will need to be funded through public investment rather than through access charges (6.27).

8.38. Access charges can, however, play a role in incentivising efficient delivery of the infrastructure and its outputs, particularly where operators bear commercial risk in the market place or in their public service contract (6.28).

Passenger services: franchising, public and private monopolies

8.39. A near-monopoly private sector railway was created in New Zealand but has maintained few passenger services not contracted by local authorities (5.2). Germany's incumbent national rail operator is to be part-privatised, but it is unclear how it will be regulated, what competition it will face and what services it will continue to provide (5.33).

8.40. A "commercial" monopoly public sector railway has been established in Sweden but this approach may lead to problems (5.47). There is inherent uncertainty as to how efficient SJ is relative to potential private sector operators and what services it will continue to offer, particularly if it is exposed to on-track competition from them. In the aviation sector, we note that commercial public sector airlines have generally been unable to sustain their businesses and networks in the face of low-cost competition. Over time Sweden may converge with Denmark and Scotland in an approach in which all the former incumbent's services are franchised on a geographical basis.

8.41. Franchising of parts of an existing public sector railway allows the private sector to compete to innovate to reduce costs and improve quality while still maintaining whatever levels of service, fares and integration are specified by its public service contract with the relevant transport authority. Even when franchisees "fail" to deliver quality to their customers or profits to their shareholders, the rail services continue under new management who can then reassess the business and learn from past mistakes. The principal difficulty is ensuring that risk transfer is real, avoiding a situation in which franchisees retain profitable franchises but abandon unprofitable ones. Many, but not all, transport authorities, have concluded that competing private sector innovators generally lead to faster reductions in cost and improvements in quality than public sector management.

Competition in or for rail markets

8.42. On-track competitive entry into passenger rail services has been requested in Sweden by aspiring new entrants but has to date been turned down to protect incumbent SJ (4.35). Competition "in the market" on price exists as a matter of policy on some airport links, such as in Stockholm (4.37), or as an accident of franchising policy on Anglo-Scottish services which are provided through three separate franchises, two of which are currently in common ownership (4.45).

8.43. In most markets the comparator rail networks face intense competition from road transport. At longer distances, air serves some passenger markets and coastal and international shipping serves some freight markets. Further competition in the rail market adds little value and potentially reduces the contribution towards fixed costs which premium routes can generate, in turn reducing the capacity of an operator to sustain a viable network of services.

8.44. The benefits of competition in the passenger market are therefore predominantly obtained through franchising, which exists in Scotland, Schleswig-Holstein, Denmark, Sweden and New Zealand, all of which have succeeded in attracting competition "for the market". Many interviewees considered that this was cost-effective although evidence on the extent of cost savings was often anecdotal.

8.45. The benefits of competition in the freight market, in contrast, have been not through franchising the freight market but through opening it. In Scotland, Schleswig-Holstein, Denmark and Sweden, new operators can compete directly "in the market" but more typically compete to provide services tailored to the specific needs of individual customers.

Barriers to greater market entry

8.46. The principal barriers to market entry to provide on-track competition "in the market" are, in approximate order, commercial viability at current fares levels (4.22), capacity on existing networks (4.57), desire to limit support to existing PSO services (4.61), and the need for fares integration (4.68). All of these barriers depend on policy and could be removed, over time and at a financial and social cost, although none of the governments we spoke to expressed any interest in doing so.

8.47. Some barriers to franchise competition "for the market" still exist. These include access to rolling stock (4.70) and other services in monopoly supply (4.82) which can be addressed by policies of separating rolling stock from operations and by effective regulation of the railway and wider competition issues.

Contracting out of non-core services

8.48. Contracting out of track maintenance has proved problematic in Network Rail, at least partly because of lack of knowledge of the condition of its assets, the lack of definition of the maintenance tasks to be carried out, and the division of maintenance activities between maintenance and renewal. However, other infrastructure managers (7.4) and operators (7.17) have subcontracted a wide range of services where supply markets exist or are allowed to develop.

8.49. Decisions on whether to subcontract or to do work in house may be finely balanced. However, provided they are based on specific value-for-money criteria rather than centrally-dictated policy, and workable specification and management arrangements can be put in place, subcontracting can often be attractive and effective.