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Network Rail

Volume 590: debated on Tuesday 13 January 2015

Network Rail has a quite extraordinary governance structure. It was set up in that way, as I think almost all parties would agree, with the primary aim of keeping its debt off the Government’s books. However, since a ruling from Eurostat, implemented by the Office for National Statistics here, that debt is now on the Government’s balance sheets, with that decision having been taken finally in December 2013, with the reclassification of the entity taking effect on 1 September 2014.

Last week, when I asked the Secretary of State for Transport whether it was not therefore time to reform Network Rail’s labyrinthine governance structure to make it more accountable, he replied that he would take my question as a representation to cancel the building of a new railway station in my constituency. I fear that exchange probably told us more about the Secretary of State’s character than it did about the governance of Network Rail, hence today’s debate, which follows yesterday’s publication of Network Rail’s report on the post-Christmas disruption. I will focus on two issues—pay and governance—before finally making one or two remarks about Rochester and the applicability of these issues to my constituency.

Yesterday, a report was published by Dr Francis Paonessa, who is the managing director of infrastructure projects at Network Rail. He is paid an annual salary of £425,000 with a further bonus opportunity of 20% of salary. I intend no personal criticism to Dr Francis Paonessa, who is clearly a manager of stature. Before taking his current role with Network Rail, he was the UK managing director of Bombardier, which, under his leadership, secured the important Crossrail contract for building trains, having previously lost out on the Thameslink contract to Siemens. Clearly, running leading infrastructure projects requires a different set of skills, given their complexity, but he replaced Simon Kirby, who moved on to head up HS2 Ltd as chief executive—clearly a huge job, at least potentially. However, the excessive cost structure in the rail industry, led by Network Rail, underlines my party’s belief that HS2 is unaffordable. Half a dozen people at Network Rail, at least, earn similar sums to Dr Francis Paonessa. Mark Carne, the chief executive, earns substantially more. Why has their pay not been cut to reflect the transfer of Network Rail as an organisation from the private to the public sector?

We talk often, as a comparator, about how much the Prime Minister earns, but the numbers of people earning in excess of the Prime Minister’s salary are legion within Network Rail. It has moved from being a private sector to a public sector organisation, and surely we should be told what new standards are being applied in Network Rail following that move.

In March 2012, the Department for Transport wrote:

“As a private sector company, Network Rail sets performance pay levels for its senior staff”—

but it no longer is a private sector company, so who is setting those pay and performance-related pay numbers now? Who are those senior managers accountable to for their pay? Is it the Secretary of State? Is it the so-called members of Network Rail, about which more in a moment, or is it themselves? Mark Carne has announced that he intends to limit his bonus to just 5% of his salary—of course, that bonus will still be more than average earnings across the country and in my constituency.

In particular, we have seen the failures over the post-Christmas period and the disruption that caused to many people across the country seeking to use the network, the extent to which it has become standard to have long-running periods of shutdown over Christmas and new year, the length of some of these infrastructure projects and the closures involved and the lack of predictability about them. In my constituency, we greatly welcomed the new railway station in Rochester, but one point I have from my constituents is why people cannot be warned further in advance about closures, so that they can plan around them.

On the point about the disruption and giving notice in advance, Network Rail had years to prepare for the shutdown of London Bridge station over the recent Christmas period as part of the admirable Thameslink programme. However, they made a huge blunder in organising that, the effects of which have still not been concluded and people’s journeys are still being disrupted. It is not bonuses that the managers should be looking at, but fines.

The hon. Gentleman makes a good point, which comes back to how these people are held accountable and whether that is through the withholding of a bonus or some other form of discipline, such as a reduction in salary. I do not know whether we are talking about fines, perhaps on a regulatory basis, or whether he is suggesting that it should be on a criminal basis—that would be very strong for such a management role. What I think my constituents and his want is accountability, and we simply do not have that with the current structure.

From 1 September 2014, we have had a new agreement between the Department and Network Rail, but there is, I believe at least, a lack of clarity about what difference that agreement is making in how Network Rail is held to account. Why do we still have these 46 public members and a similar number of industry members, ostensibly playing a part akin to shareholders in this organisation? There was a vote back in, I believe, November 2009. Thirty-six of those members—I do not know whether turkeys voting for Christmas is a fair comparison here—voted to decrease their numbers, but 36 voted against that, and that has remained the situation ever since, despite the Government saying again in March 2012:

“We therefore welcome the governance proposals that Network Rail is announcing, including: reducing the number of members to a more sensible level, thereby improving the quality of decision-making.”

Has that happened?

In the same report, “Reforming our Railways: Putting the Customer First”, the Government said:

“Network Rail is a private-sector, not-for-dividend company, limited by guarantee…we believe the existing structure is capable of delivering the outcomes and the savings we need without disruptive and unnecessary organisational change... equity is a strong driver of efficiency and value for money.”

How in this unique, convoluted, labyrinthine governance structure does equity operate as a driver of efficiency? We have these industry members that the board reports to, to a degree. One might think it is useful perhaps to have that reporting line to the customer, but whenever those customers’ interests are involved, that member steps aside on the basis of there being a conflict of interest, so how can that governance structure work and is it really a sensible way for us to proceed?

In my constituency of Rochester and Strood, we have had the impact of the London Bridge changes. The disruption has affected some people. The sheer length of the closure of London Bridge station for Charing Cross-bound trains that we are currently dealing with is an enormous issue. We have to hold Network Rail to account for the costs that it applies, which are largely passed on in fares to the customer, but also for the length of time that these projects take. I would be interested to hear the Minister’s view. Could she tell us what she has done to ensure that that closure period is as short as possible and the costs are as low as possible? I just have an innate suspicion of an organisation that is not accountable, or at least not in a way that I can understand or in the way in which other organisations are.

The Minister will no doubt refer to the report, published yesterday by Dr Francis Paonessa, explaining away, defending and, to an extent, putting Network Rail’s side of the story in terms of the disruption that we saw immediately after Christmas, but that report is not addressed to anyone. I do not know: is it for the board of Network Rail, for its members, for the Secretary of State or for Parliament? It does not say. There is a foreword by Mark Carne and a whole series of explanations and, to some extent, excuses, but who ultimately holds Network Rail to account for that? Why is it being paid so much money? Why is that disruption allowed, and do we really believe that this labyrinthine governance structure and the costs that we see in this industry are the best we can do? I believe that this country can do it better, and it is time we got on with that and dealt with some of the governance issues at Network Rail and ensured that it works better.

Mr Carswell, it is not in order for an additional Member to speak in a half-hour debate unless they have secured the agreement of both the sponsoring Member and the Minister. Has that advance agreement been secured?

My hon. Friend the Member for Clacton (Douglas Carswell) spoke to me yesterday, and I spoke to the Minister. I understand that agreement is forthcoming from her as well as myself.

I am most grateful, Mr Crausby. I think that we have a serious problem with Network Rail. Certainly, on the Clacton line, which affects my constituency, weekend works have overrun several times, which has been very disruptive to commuters trying to get to work on Monday mornings. We routinely have problems and failures on the line and we have seen a lot of weekend closures. That is not very helpful to a seaside town that depends on a lot of weekend seaside tourists coming to visit it. We have seen the problems affecting London stations over Christmas.

My main concern is not so much the rail operators, although I think that in the case of Abellio, they have been insufficiently robust in dealing with their supplier, Network Rail. My main concern is with Network Rail. It is to all intents and purposes a public body, which has recourse to public funds and socialised costs, yet it does not seem to be accountable to the public. It seems to have the structure of a public quango, but the bonuses of a bank. What is fundamentally missing is accountability.

Before Christmas, I wrote a letter to the Secretary of State for Transport, asking whether there were any plans to revisit the Network Rail’s governance structure, because it is not working the way it should and, when errors happen, they are not corrected the way they should be. I got a response that I think was probably drafted, if I can put this kindly, by a private secretary who did not understand the question. I then raised the issue on the Floor of the House last week, and I got a response from the Secretary of State that was perhaps dismissive, perhaps contemptuous, but he is not running a Whips Office any more; these are grown-up questions that demand proper, considered, grown-up answers.

There needs to be a rethink of this organisation’s governance structure. I would be interested to hear whether the Minister has given serious thought to how we might change the governance structure of Network Rail. My suggestion is that it should have greater accountability to Parliament. We could perhaps give a role to the Select Committee on Transport, which could confirm the appointment of senior management to this body. Perhaps this body might appear annually before the Select Committee to appeal for its budget. I do not claim to have all the answers. What I know is that the status quo is not working. There is a lack of accountability, and we need real reform. I would love to hear from the Minister how we can do that. How can we ensure that there is real accountability?

The Government said in March 2012 that Network Rail would invite other companies to compete against its core business. That contestability is perhaps one way to bring market disciplines to the operator. In the same document, the Government said that we could have vertical integration between operators. Perhaps in an area such as Kent, where Southeastern is the main operator, they could work more closely together or even become an alliance or a single body. I just wonder why that is not taken forward. Has my hon. Friend any insights?

My hon. Friend’s suggestion is a good one. There are all sorts of models of accountability. There is the proposal for parliamentary accountability. There is the proposal for restructuring in the way that he suggests, which would provide greater accountability. My fear is that we may have spent longer this afternoon discussing new models of corporate governance in this Chamber than the Minister may have done in the Department over the years. I would like to hear from the Minister what specific thoughts she has about changes to Network Rail’s accountability and governance structure.

Network Rail is a corporatist organisation. It lacks accountability. People who try to do the right thing but who have to travel by rail, who have to buy season tickets and travel on the railway to get to work find that the fares go up but the level of service remains poor. Ordinary people feel an incredible sense of frustration that, for all that they do and all that they are forced to do, the people at the top of Network Rail do not seem to be held accountable for mistakes that their organisation makes. We often hear Ministers talking in this place about accountability to Parliament through the Minister. I suggest that that model of accountability is not working and we need a fundamentally different way to ensure that Network Rail is properly publicly accountable. I would love to hear what that is.

It is a pleasure to serve under your chairmanship, Mr Crausby. I am delighted to have the opportunity to respond to this debate. I congratulate the hon. Member for Rochester and Strood (Mark Reckless) on securing it. This is a really important issue, and he and his colleague, the hon. Member for Clacton (Douglas Carswell), were right to raise it on the Floor of the House last week. I am sure that the constituents of the hon. Member for Rochester and Strood will be delighted with his new-found interest in the railways. It did strike me, in doing some digging, that before last week he had made only two mentions of his local trains in this Parliament. One was to express his profound support for HS2 and what it would do for his constituency, and one was to talk, quite rightly, about the inexcusable fact that constituents on his local franchise were paying RPI plus 3%—a policy that this Government have ended.

The Government’s ending of RPI plus 3%, for which my constituents were used as guinea pigs, and going to RPI plus 1% and now RPI is a positive thing that I very strongly welcome. Did the Minister consult her right hon. Friend the Member for Chipping Barnet (Mrs Villiers) on the many discussions that I had with her about the railways when she was the Minister responsible?

No, I relied on the public record, which I think it is important to do. In fact, the hon. Member for Clacton has spoken more in the last week on the railways than he has done in the entirety of this Parliament, because I can find no record in the public discourse—

Sitting suspended for a Division in the House.

On resuming—

I am sure the constituents of the hon. Member for Clacton are delighted that he has finally spoken up on railways, because my little trawl suggests that he has not mentioned railways in this Parliament.

When I was a Conservative Member of Parliament, I was bound by the Whip, and of course the Minister and her boss in the Department for Transport were then running the Whips Office. It was therefore much more difficult for me to speak freely in the interest of my constituents, and I am grateful that I am now at liberty to do so.

The hon. Gentleman suggests that he could not have asked questions about fares, services and station refurbishments, but he managed 42 mentions of the EU. It is rather depressing that his last comment on the railways dates from seven and a half years ago. Presumably, he could have spoken in that Parliament—no matter. I am delighted to welcome his nascent and new-found interest in the railways, which raises several questions. What is his party’s policy? The UK Independence party’s 2010 manifesto, of course, called for three high-speed lines, not two, with no mention of cost control. We will leave that point and move on.

I propose to make three sets of remarks this afternoon. I will first canter through Network Rail’s current governance structure and correct the hon. Member for Rochester and Strood, or at least answer some of his questions. Secondly, I will ask whether there is any evidence of governance failure. Lastly, I will review recent events, on which there are valid questions that we all need to ask.

In December 2013, as the hon. Gentleman knows, the Office for National Statistics made an independent decision to reclassify the Network Rail balance sheet from the private sector to the public sector, which changed nothing in terms of operational performance; it was an attempt to put public debt on the public balance sheet, which I strongly support. The reclassification does not change the industry structure or the day-to-day operations of the rail network, and it has no effect on fares, performance, punctuality, safety or timetables.

It would be helpful if I could make a little progress.

The reclassification rightly raises the question what the governance should look like, which is why the framework agreement was published in September 2014. The agreement specifically sets out what the relationship between Network Rail and the DFT looks like, and it tries to achieve two things. First, it tries to achieve a level of operational independence. All political parties, including the hon. Gentleman’s party I am sure, would say that Ministers should not be running trains and that there should be an element of independence and control. [Interruption.] The hon. Member for Clacton is chuntering away from a sedentary position, and I am trying to answer some of the questions. He is not particularly interested in railways, but perhaps he might be after today.

For many people, including the UK Independence party, it is not appropriate to have Ministers and, indeed, officials running the railway network; it is appropriate that Network Rail operates as an arm’s length body. However, it is important to deliver accountability and correct governance and structure. Under the new framework agreement, the Secretary of State for Transport, as a special board member, has levers by which to steer Network Rail, including the right to agree business plans and to approve Network Rail’s remuneration envelope.

Did the Secretary of State not previously have those powers as a special board member? Are those powers not due to him under Network Rail’s articles of association, rather than under the framework agreement?

The issue is whether they have been exercised, and since this new structure was introduced, they have indeed been exercised. The Department, representing the Secretary of State, has started to do appropriate things such as attending annual general meetings and being involved in board meetings.

I will make a little more progress, because the hon. Gentleman has asked a lot of questions.

In extreme cases, the Secretary of State has the power to remove the chair or, indeed, to become the sole member of Network Rail. So what is the role? The Secretary of State determines the rail investment strategy and the statements of funding available, and he works with the Office of Rail Regulation to monitor the timely delivery of major projects. Ministers effectively set the high-level strategic and spending approach to the railways and, ultimately, are accountable for the model of delivery and the operation of rail works for the country and for passengers.

Interesting suggestions have been proposed for improving governance. Crucially—this perhaps has not been conveyed clearly, so let me make it very clear—the Department is completely focused on maintaining and reviewing the appropriate role for governance. If governance needs to change to deliver improvements, it will change but based on the work done up until September 2014, and on the analysis of Network Rail’s board and the role of its public members, the current diagnosis is that it does not need to change to deliver the railway improvements that we all want to see.

The hon. Gentleman asked about the number of public members. As I am sure he knows, the number has been cut from 90 to 45. There was an independent external review of whether those members were carrying out their functions effectively, and it was found that they were performing their duties. On whether there is evidence that Network Rail’s governance is currently failing, it is right to raise those important issues, but I think the diagnosis is that Network Rail’s governance arrangements are working appropriately. We must carefully consider the role of the public members. It could have been said in the past that public members did not have the specific relevant experience to carry out that governance role, but they have now been appointed from relevant sectors and have experience and understanding of corporate governance.

The hon. Gentleman referred to some of the compensation arrangements for senior managers. I am sure, like me, he welcomes the fact that the bonuses paid in this year of Network Rail’s operation will be one tenth of those paid in the last year of the previous Administration. Given that the company’s role in carrying out its business has not changed—as a reminder, it is a company of 35,000 individuals with an income statement of some £7 billion a year, and it has £38 billion of investment proposals to deliver over the next five years— the question for the hon. Gentleman is: how much compensation is appropriate to deliver such highly important investment for the country?

What has changed, now that Network Rail has become a public sector body and its debt is on the Government’s balance sheet, is that it does not face the market risk of going bust, being insolvent or falling back on itself when its bond obligations cannot be satisfied.

Like me, the hon. Gentleman has a background in finance. He should therefore know that investors will always have considered that debt to have been effectively underwritten by the public sector, so the reclassification is simply a formalisation of what I suspect savvy investors have known for many a year.

There is no evidence that Network Rail’s governance structure is inappropriate or failing. However, I suspect that the hon. Gentleman’s new-found interest in its governance may be a result of the disruption after Christmas at several mainline stations and, more recently, at London Bridge station, which many people living in his constituency use on a daily basis. I am incredibly grateful to him for giving me the opportunity once again to state very clearly what passengers should expect.

The Secretary of State made it clear at the time that the disruption at King’s Cross and Paddington immediately after Christmas was totally unacceptable. In my view, the situation was inexcusable. Passengers deserve a reliable rail service, clear information and rapid help if things go wrong. I am sorry that, in this case, they did not get those things.

Across the industry, we have to be able to trust Network Rail’s ability to complete vital engineering works on time, and it is essential that the lessons that started to be spelled out in the report, which the hon. Gentleman slightly traduced, are learned. Work continues on finding the most appropriate time of year to do engineering works. I say again—this was said last week—that Network Rail carried out its busiest engineering programme ever over this holiday period. There were 2,000 work sites.

The Minister says that the failures were inexcusable, but she is now excusing the failure. She says that she is sorry for what happened, so what is she actually going to change about Network Rail’s governance to ensure that it does not happen again?

I appreciate the hon. Gentleman’s enthusiasm for railways, which marks a rapid change from his former portfolio of interests.

I am keen to answer the questions, if the hon. Gentleman will allow me to proceed.

As I was saying, an unprecedented amount of engineering work went on over the holiday period, because the main driver of problems on the railways is twofold. First, passenger growth is unprecedented. About 1.6 billion passenger journeys are now made every year, twice as many as before privatisation. Secondly, successive Governments have underinvested in the railways for many a long year.

The hon. Gentleman asked about London Bridge station, as did the hon. Member for Lewisham West and Penge (Jim Dowd). That station is 176 years old, and frankly, it has been ignored, although it is one of the busiest pinch points into London. That work is finally being done, so that residents across the south and south-east can transit in and out of London much more effectively.

I congratulate the Minister on organising a meeting next week with the principal train operating companies running into London Bridge—Southern and Southeastern. Can she confirm that we will also have an opportunity to consider the position regarding London Bridge itself and the colossal debacle that my constituents and many others have had to experience for 10 days now, with little sign of the problems abating?

I agree with the hon. Gentleman; I think that he uses a good adjective. I have visited the station, and my officials have been there. The Secretary of State himself went there during rush hour. We are extremely concerned that the engineering works, which are fantastically overdue, are delivered in a way that does not inconvenience passengers. That gets to the crux of the matter.

This is not a governance problem; it is a failure to work across industry, with passenger benefit front and central. Enormous operational improvements will clearly be delivered by this Government’s unprecedented £38 billion investment in the railways, which is long overdue and will benefit all Members in this room, but it must be delivered by thinking first and foremost about how passengers will use the network and about the benefits for them.

As we saw in the McNulty report published several years ago, the challenge for British railways is to do what we suggested then and join up the objectives of Network Rail and the train operating companies to carry on this unprecedented amount of investment, as we know can be done across the network. I am happy to reassure Members that the Government are committed across the board not only to ensuring operational independence, but, clearly, to delivering better services for passengers in the running of the railways. I am also happy to reassure Members that we remain committed to our huge programme of planned improvements, including the entire rebuild of Rochester station by the end of this year and £120 million of signalling works in east Kent, which I am sure the hon. Member for Rochester and Strood is rising to congratulate the Government on providing.

I am indeed. I rise to congratulate the Government and Network Rail on the new station in Rochester, which will be fantastic. The Minister talks about working together with the operators. The new station is half a mile or so closer to London, and significant investment has been put into signalling changes. It would be useful to know how many minutes that is likely to knock off train times from Rochester into London. Can Network Rail and Southeastern work together more closely on planning that for the new timetable?