§ 7.30 p.m.
§ Lord Mountevans rose to ask Her Majesty's Government what progress is being made towards the privatisation of British Rail.
§ The noble Lord said: My Lords, at the outset I must make it clear that I am fully seized of the fact that no firm decision has been taken regarding the privatisation of British Rail. But in looking at British Rail today, its achievements, its problems and its position in the market-place, 1 should like to suggest that it is right that we consider all the options for ensuring that it does not choke on what I believe to be its present success. We should look at all the possibilities to ensure that British Rail has the resources to go from what is a strong position now to a stronger position in the future.
§ Hence I welcome the announcement by the Secretary of State earlier this year that he was considering all the options for positioning British Rail for the 1990s. Privatisation has been much touted in this context. Perhaps I may give two definitions of that word. On the one hand, it can mean selling off by flotation. On the other hand, it can mean increasing the role played by private resources in funding, for example, British Rail's operations, or indeed those of the British Overseas Trade Board or the Civil Aviation Authority.
§ At present British Rail's achievements speak for themselves. Passenger traffic is running at levels not seen since before Beeching. Freight, riding on the back of strong economy, is also doing well. Revenue is increasing and the need for subsidy is falling. The investment programme, wholly funded by internal resources, is running at record levels.
§ All this should be seen against the background that British Rail has only 7 per cent. of the domestic passenger market, measured in terms of passenger miles; and some 9 per cent. of the freight market. That is hardly a monopoly—no more so than the idea that the Mars Bar has a monopoly in confectionery or that Persil has a monopoly of the detergent market. I admit that in some market segments British Rail has market dominance. I know, for example, that it has 75 per cent. of all coal tonne miles; some 40 per cent. of metal and mineral raw material miles. It may have, though it is difficult to quantify, some 70 per cent. of middle distance commuter traffic into London from the South-East; and perhaps 30 per cent. of the domestic business travel market. But British Rail's market-places are intensely competitive. It has market dominance but I cannot accept that it has a monopoly. It is doing very well, but just doing well poses its own problems for British Rail.
§ As some noble Lords will know, I judge British Rail's best kept station competition, which delightful chore during September took me all over the country; from Penzance to Wick, from Ashford in Kent to Telford, from Chester to Beverley, as well as to some 50 other places hither and yon. I used trains at the top of the range—InterCity Pullmans—and I used 1950s diesel sets which should have been withdrawn but for 1430 the fact that British Rail needs them still to keep track with the demands being made upon it.
§ The trains were clean and with one exception, which was totally attributable to the Central Electricity Generating Board's inability to provide electricity, were generally on time or early. Catering was provided wherever advertised and even in one unadvertised instance. I would go so far as to say that British Rail did itself proud during this expedition. It certainly seemed to be hitting the quality of service targets which have been agreed between British Rail and the Secretary of State. One might say in parenthesis that some of the quality of service targets, particularly if one judges the inquiry services of British Airways and the National Bus Company in the private sector, are tighter in the public sector—in other words, in the hands of British Rail—than they presently are elsewhere.
§ The 5,000 or so miles experience was a good advertisement for British Rail but it also highlighted the resource problem which its success is bringing upon it. When one has to stand on the lunchtime train from Nottingham to Derby, or l he teatime train from Birmingham to Cardigan Bay, or even on the mid-morning InterCity train from Inverness to London, one realises that overcrowding is not a problem unique to the South-East or to commuter periods of the day. Commuter peaks amount to only some 20 hours in each 168-hour week; that is, two hours in the morning and two hours in the evening for five days a week. But when overcrowding is also occurring at off-peak times the resource problems faced by British Rail are brought horne to one with a bang.
§ The Government have recognised five options for resolving this resource problem while at the same time making British Rail more subject to commercial discipline and getting the customer a better deal. The first of these has been called the track authority option. The track and signalling—indeed, the physical infrastructure required to run the system as a whole—would be owned by an entity which would provide slots for independent companies wishing to run trains. The word "slots" is appropriate in this case because the concept works well at airports. It satisfies the resource and competition requirements. But does it satisfy the better deal for the customer requirement? I am not so sure, and there are three major reasons why one should have one's doubts.
§ First, there is the need for investment in peak hour capacity. I feel that a track authority would find it difficult to justify massive investment to meet the demands posed by only a short period in each week—one-seventh of the week, perhaps. There is also pricing. Because so much of the demand is in urban areas one can almost argue that British Rail's resource in those area is finite. One cannot broaden the railway and add another two tracks. Therefore the pricing mechanism will work not necessarily for the benefit of the consumer.
§ If the resource remains finite, and if one continues to have only four tracks between, lets us say, Surbiton and Clapham Junction, the long-haul traffic will price the suburban traffic off the route in rnuch the same way as Boeing 747s are squeezing commuter aircraft 1431 out of major airports. If that happens the short-haul traffic does not go to the wall; it goes to the roads. I make that point because one cannot look at British Rail's problems and opportunities in isolation.
§ Thirdly, there is the safety aspect of the track authority. There are some horrendous American examples of disaster arising out of different operators running services over track owned by a third party. I do not dismiss the track authority option out of hand, but last week's tragedy at Clapham shows what could happen on a railway that is not fully integrated. It highlights the major weakness of the track authority option.
§ There is also the regional or local option—not, I hope, as some have suggested, an emotional harking back to the glorious, or allegedly glorious, days of the private railway. Local management and loyalty are seen as potential strengths, though ticketing and information provisions are seen against that as weaknesses by those of us who have followed what has happened in the passenger transport authorities. Furthermore, foreign experience suggests that this is the age of the big unit and that private railways are growing larger by acquisition rather than smaller by dismemberment.
§ The third option is the sector option: privatise British Rail broadly on the lines of the sectors which it currently operates—InterCity, Network South-East, provincial parcels and freight. It too has its strengths, but it has demerits, not least the problem of who owns the track. The freight sector really knows no boundaries, while InterCity and the other sectors are all major users of track managed by their colleagues.
§ There is a monopoly problem in privatising InterCity. If it has 40 per cent. of the North-West to South-East passenger traffic or 30 per cent. of domestic travel, all one is doing is enshrining that monopoly. That problem does not seem to go away if you go for the sector option. I also wonder if there is a subsidy option, particularly arising out of the provincial services. If provincial service trains are going to cross from the boundary of one owning sector to another or, in the case of the earlier option, from one railway to another, it would seem to me that they will almost certainly continue to require subsidy in many cases.
§ In the old days the subsidy per route was public information. One could see exactly how much subsidy was being given on the route from Carlisle to Edinburgh or on the line from Brecon to Merthyr. However, I believe that there is now a European ruling that subsidy can only be published en bloc. That, in my view, would pose a problem in respect of the particular option we are discussing.
§ Last of the favoured four options which the Secretary of State announced is to float off BR en bloc—the so-called BR plc option. If flotation is the form of privatisation chosen, then that would be the route I would wish to follow, preserving the unitary nature of the railway and its many strengths in terms of ticketing and service and, most of all, of safety.
§ Resources might become more readily or easily available provided that BR could improve on its 1432 ability to identify and to control costs and revenues. But would it add anything to the competitive dimension of the discussion which I have introduced tonight? I am not at all sure about that.
§ The fifth option is to take bits and pieces from the first four. But there is a sixth option; it is one that appeals to me enormously. I mentioned it briefly in my opening remarks. It avoids the flotation issue but seeks by all means to maximise the private resource that is going into British Rail's operations. It leaves, as the BR plc option does, a united railway. And it leaves the railway to do the thing it does best, which is to run trains.
§ However, it gives the private sector the opportunity to invest in the running of those trains. In the words of the Department of Transport's press release announcing authorisation of the joint BR/BAA plc Paddington to Heathrow link, it gives maximum private sector involvement but, at the same time, the maximum financial benefit to British Rail. With BAA plc meeting approximately 80 per cent. of the costs of the Heathrow rail link, BR gets its inner-suburban electrification out of Paddington on the cheap.
§ Meanwhile, in operating the trains and the signalling BR deploys its own abilities to best advantage. Commuters from the Heathrow area get a new, albeit expensive, choice of journey to London; while commuters from Southall have the possibility of an electric service which they do not presently enjoy. There are so many benefits in so many directions—benefits which might also stem from the eventual private sector construction of the route which will be needed between London and the Channel Tunnel.
§ This treatment may at first seem brand new. But, of course, it is not. Similar activities have been going on in the freight sector for many years. If you ignore coal traffic, 70 per cent. of all goods wagons running on British Rail are privately owned. Foster Yeoman owns its own locomotives, though they are run by BR and maintained under its supervision. Freight customers, working with BR and often with government support, are developing their own terminals; while companies such as Procor and Tiphook continue to explore the opportunities for the private wagon fleet and its expansion.
§ Many of those opportunities involve leasing. One wonders why British Rail is not allowed to lease. A great deal of the rolling stock which one sees on North American railways is the property of Manufacturers Hanover Trust Railway Leasing Ltd., or some similar body. I wonder whether this is a possible source of private funding which is presently unavailable to British Rail. If that is so, I wonder whether the Minister can tell us why? It seems to me to be a rational source of private funding.
§ There is one other major source of private funding available to British Rail—its property assets. At the moment these are doing a great deal to fund BR's massive investment programme. But I wonder whether the arrangements allowed to British Rail, and its need to capitalise rental income very early on, make the best use of this resource. Why is it not allowed to do longer-term deals or, indeed, become 1433 the freeholder of property which it is developing with the property sector? At present it has no option, but I feel that it should at least have the ability to look for deals which give it the scope for longer-term investment, as opposed to short-term income.
§ I do not believe that BR's future lies irrevocably in the public sector. But as we journey towards whatever degree of privatisation is eventually settled upon, I would hope that there would be no blight on investment decisions similar, for example, to the way that the development of Fawley B Power Station has suddenly been brought to an acute and dead stop, pending privatisation. I do not think that investments on the scale which British Rail needs, and with the lead times it has, can afford to be put under this blight.
§ If I have been relatively brief in considering the options discussed by the Secretary of State it is because I suspect that the noble Lord, Lord Brabazon of Tara, has much more detail than I have. After all, I mentioned resource, and he has the resources which I do not enjoy.
§ I welcome the Government's proposals and initiative in terms of the Secretary of State's announcement. I hope, however, that I shall be allowed to add my own additional option which stops short of all-out flotation. I especially commend it to your Lordships because it seems to me to bring private money into British Rail much more quickly than any other option currently under discussion.
§ 7.46 p.m.
§ Lord Teviot
My Lords, we are all most grateful to the noble Lord, Lord Mountevans, for introducing this most interesting subject. Although the Government might have mentioned it, I think that he has rather caught everyone's attention by actually speaking on the matter in a public forum. Moreover, I must say that he has done so extremely well. However, his speech came to such an abrupt end—I thought he was going to continue for another 10 minutes—that there was a slight pause before I rose to my feet.
We must all recognise that railway privatisation is not new. The railways grew up as private companies, and before 1922 there were over 100 separate railways ranging in size from the "giants"—the ones we all know like the Great Western—to very small local lines. They were drawn together into four large groups in 1922 as a result of legislation. As we know, in 1948 they were nationalised, although it would have been slightly earlier if it had not been for your Lordships. Therefore, in today's Question, it seems that the wheel will have turned full circle. I think that if the Government decide to privatise British Rail, we would be well advised to consider the lessons of the past.
The noble Lord has kindly suggested, or rather hinted, that if I wish to speak at all then my speech should be based on the subject of privatisation of the bus industry, and the lessons which we can learn from that for the railways. I think that the most important lesson is that buses were not privatised in isolation; that privatisation was part of the overall policy of competition and deregulation.
1434 The Government, in the Transport Act 1985, sought to ensure that passengers were protected from exploitation by deregulation, freedom of entry to the market and open competition; and that adequate arrangements were made for the appropriate public authority to secure, in a competitive market, subsidised non-commercial services. In discussing rail privatisation, we need to ask the Government to state clearly how they will tackle those issues. The bus industry has given us some useful lessons which we would be well advised to heed.
Privatisation has been beneficial where it has released local management who know the market, and the business, from the constraint of centralised control. It has also been a means of involving employees more closely in the success of their business and thereby aligning the interests of management and the workforce. if the railways are to be privatised, we must be satisfied that the Government's proposals achieve those benefits without any of the disadvantages such as asset stripping and inadequate financing which have already affected parts of the bus industry. However. I shall go no further down that road.
I am encouraged by the. Government's attitude towards employee share ownership; and plans for privatising the bus companies owned by the passenger transport authorities and the district councils. On the face of it, that seems to be a good way to achieve the objectives of combining management and employee incentives with serving the passenger efficiently and effectively. I hope that if privatisation takes place, the employees will have the experienced management that they have so far enjoyed. I hope that people who understand the transport industry, and have been trained to work in it will be retained, and that whizz kids who believe that they can put everything right in five minutes will not be brought in.
I trust that when considering methods of privatising the railways, the Government will recognise that its business has a national and local dimension and will ensure that adequate arrangements are made to achieve benefits without cost to the passenger or any other part of the public purse. I have nothing more to say other than to wish the plans well.
§ 7.51 p.m.
§ Lord Ezra
My Lords, I am grateful to the noble Lord, Lord Mountevans, for raising the subject for debate, not only because it enables us to express an opinion on the possible privatisation of the railways, but because we can comment on the present situation in the railways. We must look at the railways' future prospects in the light of what is now happening and what may be required. There is not the slightest doubt that historically, at present and in the future, the railways were and are a great industry. They have enormous skills and capabilities at their disposal. I was closely associated with the railways for many years when I was in the coal industry.
One of biggest achievements in the post-war history of the railways is the way in which vast quantities of coal have been moved from the big pits 1435 in Yorkshire and the Midlands to the massive power stations. It was a merry-go-round system. It was virtually automatic in operation. That movement of freight is probably more intensive than anywhere else in the world. The system works successfully and adequately. It shows the great skill that the railways have when given the opportunity to deploy them.
The problem with the railways since the war is that under successive governments there was no clear idea of which way they should be run; whether they should be run commercially or as a social service. It was not until the Railways Act of 1974 that an attempt was made to try to resolve that question. It was left to the Secretary of State to decide what the railways board should provide beyond a commercially viable service. The commercial services were left to them. That gave rise to the system which is in operation today—that is, that the non-commercial services were to be met by what was known as the public service obligation grant. That grant has remained. In the past financial year it amounted to some £794 million, having come down from a previous higher level. The objective within the next two to three years is to bring it down to £555 million. The railways are making every effort to keep to those objectives.
The railways' other major financial control is the external financing limit. That is a control which has been applied to all nationalised industries. I know all about how it works from my experience in the coal industry. The trouble with the PSO grant and the EFL is that they are short-term devices. They apply year by year. They come to an abrupt end at the end of a year, and then one negotiates the next year's restraints. As those are the primary financial controls in the industry, they militate against what is inevitably a long-term capital-intensive industry. That is worrying.
I have read with care, as have I am sure other noble Lords who are intervening in the debate, the report of the transport committee of the other place on the financing of the rail services which was published in the middle of 1987 and which clearly identified the fact that those financial priorities have frequently led to British Rail being unable to achieve its capital investment objectives. If one runs out of cash for any reason, one cannot go ahead. I found that time and time again in the coal industry. The problem is not unique to the railways. However, that raises questions about the future and the form of financial constraint, which it is the prime objective of the railways to achieve and adhere to, as one can see from looking at its last annual report. The first thing to which the report refers is the external financing limit; how it has been able to keep to it; and the PSO grant, and how it is keeping to that. They are good achievements. The question is however whether these constraints are consistent with what will be required from the railways in the future.
Let us look at the future. The future for the railways could be different from the recent past. On the whole, since the war, the railways have tended to languish as a form of transport, except for special sectors such as the coal sector which has been mentioned. In passenger and freight terms, as the 1436 noble Lord, Lord Mountevans, pointed out, the railways contribute a relatively small amount to the overall figure of passengers and freight moved in this country. However, in the past three years, there has been a substantial increase in passenger and freight traffic. That has been brought about not only as a result of the growth in the economy and the natural growth in transport requirements, but because of the increase in congestion on the roads. Many people transfer to rail to get away from that congestion. The trouble is that when they have moved from the congestion on the roads they then find themselves, as the noble Lord, Lord Mountevans, pointed out, in overcrowded trains. They go from one form of congestion to another.
In the debate it is proper to ask the question: where do the railways go from here? Are the present financial structure and corporate plan relevant to what now appears to be a much increased need for railway services? The time has come to undertake a strategic review of the whole of the railways' future. I do not believe that the present system will achieve what is needed. What is needed is not to be continually refurbishing what is basically a Victorian network, admirable as it is; we need effectively to build a new railways system to meet the needs of the 21st century. That has been done elsewhere. It has been done in France and other Continental countries. The report from the other place to which I referred pointed out that we spend a much smaller proportion of our GDP on the railways than they do. That is the issue, above all others, that we need to face.
I am sure that when he replies the Minister will tell us of the substantial sums allocated for railway investment. I am sure that he has all the figures at his fingertips.
It is perfectly true that this is being done, but it is not, I suggest, the issue. The issue is whether, as a result of this investment, we shall get the sort of railway system we need for the end of this century and beyond. That is the issue. In a sense I submit that the cost we are talking about is secondary because the cost of not getting a much improved railway system will be vast. 1 submit that the time has come to think big about the railways.
It is in that context that we need to turn to the subject of the debate; namely, possible privatisation. I was very pleased when I read the speech, already quoted by the noble Lord, Lord Mountevans, of the Secretary of State for Transport on 28th October on this subject. He was very cautious: right at the beginning of his speech, he said:Of course we must look at privatisation as an option. But it will only be an option that is chosen if we are convinced that we can provide a better service to travellers in some privatised BR than has been done up to now".That is a very important statement with which I fully concur. I am delighted that the Government take the view that they do not proceed with privatisation unless they are convinced that it will bring benefit to the traveller.
Further on, as the noble Lord, Lord Mountevans, pointed out, the Secretary of State looked at the various possible options. It is fair to say that while he pointed to advantages in certain cases, he suggested 1437 that in almost all cases there were also disadvantages. He ended by saying that if anybody had other proposals to bring forward then he would be delighted to consider them.
I am very interested, as I am sure we all are, in the proposal which the noble Lord, Lord Mountevans, put forward today. But at the end of the day it is a matter of priorities. The priority for the railways at the present time in my opinion is to elaborate a new strategy within the existing framework. I do not believe that what the railways now need is a change of ownership. What they need is a change of strategy.
§ 8.2 p.m.
§ Lord Taylor of Gryfe
My Lords, this is an interesting debate. I cannot however congratulate the noble Lord, Lord Mountevans, on his timing. On the eve of the Christmas Recess a very thin House is discussing matters of great importance. I should have thought that the subjects raised by the noble Lord. Lord Mountevans, and the wider debate which has been opened by the noble Lord, Lord Ezra, require much more detailed examination and much more thorough discussion than is possible at eight o'clock on the eve of the Christmas Recess. I hope that arising from these proceedings the noble Lord, Lord Ezra, will be encouraged to introduce a debate at a later stage on the wider strategy for railways in relation to the total transport system of this country. There are social and environmental matters involved in such a strategy as well as purely economic matters.
The public are deeply concerned about the subject of the privatisation of British Rail. The first question we must ask is, why privatise? The Minister's right honourable friend, speaking to the Centre for Policy Studies, as quoted by the noble Lord, Lord Ezra, spelt it out:We must be convinced that we can provide a better service to travellers in some privatised BR than has been done up to now".If the Minister's right honourable friend regards that as the test, then I am quite happy. I look at the annual report of British Rail for last year. I shall not quote extensively from it, but the report talks of last year as a "record breaking year" for British Rail:The group result at a surplus of £290 million after interest and extraordinary items was the highest ever achieved by British Rail. The surplus on ordinary activities was £47.3 million after interest, compared with £2.4 million in 1986–87".That is a considerable improvement.The railway's operating profit of £190 million before interest was the best result recorded in 25 years' history of the British Rail Board and the passenger volume of 20.6 billion passenger miles was the highest for 27 years and all three passenger sectors had record profits".Rail freight is very important, as the noble Lord, Lord Ezra, pointed out. We all learnt that during the miners' strike when coal had to be transported along our roads and through our villages. We realised then how important it was for the environment that British Rail carry the coal freight. The report says:The rail freight had its best results for a decade with an operating surplus before interest of £43 million".If the Minister will be guided by the test laid down by his right honourable friend, there is no reason in my view for introducing privatisation into the entire railway system. At the same time it is important that 1438 we examine some of the ideas that have been put forward by the noble Lord, Lord Mountevans.
There is something wrong with this Government's attitude to privatisation in general. They seem to believe that privatisation is some kind of magic formula that guarantees an improvement in performance. I commend to the Minister a very interesting booklet recently published by the London Business School—a very objective study called Does privatisation work? It indicates that privatised firms, judged on several measures including their total factor productivity, have not done notably better than enterprises which were owned by the state. They give a number of examples. So there is no magic formula about ownership being the contributing factor to improved performance.
The options discussed very objectively by the Minister's right honourable friend in his important speech to the Centre for Policy Studies have been analysed by the noble Lord, Lord Mountevans. All I say about the regionalisation option is that there is a great feeling of nostalgia among people who travelled on the Great Western Railway line. Some people in the railway system and some employees still regard their loyalty as being to the LMS and LN ER. But that is past. In Scotland, British Rail is known nowadays as "Scotrail" in order to encourage local and regional loyalty. There is no reason for upsetting the overall structure in order to accommodate these local loyalties.
As regards BR owning and renting out the track to operators, it is worth looking at one or two possibilities. I should have hoped that it might he possible on the Victoria-Gatwick link and the access route to the Channel Tunnel. There could perhaps be an experiment in the area of a private, or privately financed, line, with British Rail owning the track. A good deal of work has been done but we have not gone very far in conducting an experiment.
Frequently it is argued, in support of the privatisation idea, that it would enable the railways, or the other industries that are to be privatised, to get access to the market for finance. At present interest rates, I am not so sure that access to the market is as attractive as it might have been. For example, British Rail borrows four to five year money at 11.25 per cent. The Public Works Loan Board rate expects a 5 per cent. return from British Rail on investment. So, to go to the market today at present interest rates does not suggest any improvement in the financing of the railways.
British Rail has not required financing this year. It has generated sufficient funds from its own internal resources, and from the disposal of property assets. to avoid any borrowing. Therefore, the argument that privatisation would give it some kind of access to sources of new funds is irrelevant at the moment.
I wish to say a few words about privatisation within the railways. There has been considerable privatisation within the railway system already. My worry about the Government is that they are not very efficient in the handling of privatisation of national resources. A few years ago the railway hotels were, quite rightly, privatised. I agreed with that because I do not believe that railways should be running hotels. 1439 Hotels are very different things from railways, and it creates difficulties as regards options for investment. Those in charge of the railways do not know whether it is better to put down new track somewhere, or to put new carpets in Gleneagles Hotel, for example. So, rightly enough, sales of the railway hotels took place.
But so concerned were the Government to put those hotels on the market as some kind of political demonstration of their commitment to privatisation that some 28 of the best hotels of this country were thrown on the market at the same time. No one would dispose of their assets in that way. If the Government are looking at areas of privatisation, I hope that at least if they are going to privatise they will do it sensibly. The net effect of the railway hotels privatisation was that one company bought Gleneagles, the North British Hotel in Edinburgh and the Caledonian Hotel in Edinburgh. It then sold two of them off a few years later. It got Gleneagles for nothing—it is still owned by Guinness—and obtained £10 million in cash in the kitty by disposing of the two other hotels.
I regard the process of privatisation as being a much more sophisticated business than simply calling for immediate privatisation and throwing assets indiscriminately on the market. I noticed today that station catering has been privatised, and there has been a management buy-out for £25 million. I think that is a good thing.
British Transport Advertising has been privatised. There has also been a vast privatisation process in property sales. My trouble with the Government in this connection is that they insisted that the property board should dispose of its sites when, if the property board had been permitted to hold on to those sites and develop them in conjunction with private enterprise, a much bigger contribution would be made to British Rail financing.
I noticed that property sales last year raised gross sales of £181 million, and there was a gross income from letting of £82 million. If British Rail had been permitted to hold on to its sites and develop them, it would have been one of the major property companies in this country. But, instead of that, it was pressurised by the dogma which states that one must get rid of ownership and privatise. As a consequence, other people are enjoying some of the benefits. However, there have been some recent disposals of property and more recent developments in combination with private investment. Indeed, the Broadgate development at Liverpool Street station has resulted in British Rail getting a new station. British Rail is also receiving a share of the large profits that are being earned in that development.
I was a member of the British Rail Property Board, and for too long it was simply a matter of selling the sites as quickly as possible. As a result, Rosehaugh and others enjoyed the major benefits of those developments. I am in favour of privatisation of the peripheral activities of British Rail. I am also in favour of experimenting as regards access to private capital for, say, the Victoria to Gatwick line, and also for the access to the Channel Tunnel. But I am not in favour of the general principle of privatisation of British Rail.
1440 It is running well, it has considerable achievements and it has considerable social obligations as well as an obligation to run the railways efficiently. I hope that on some future occasion we may return to the place of British Rail in the transport system, as suggested by the noble Lord, Lord Ezra, so that we can have a full debate rather than a rather scrappy exercise at this late hour.
§ 8.16 p.m.
§ Lord Underhill
My Lords, I somewhat share the view expressed by the noble Lord, Lord Taylor of Gryfe, about the timing of this debate. Nevertheless, I am grateful to the noble Lord, Lord Mountevans, for putting this Question down because it enables us to put down some markers ourselves and, I hope, obtain some definite answers from the Minister.
When I read the debate on rail privatisation which took place in another place on 28th July, I was a little heartened when I saw that the Minister for Public Transport said:I stress that we have no plans to privatise British Rail at present, and we are constantly reviewing our long-term options."—[Official Report, Commons, 28/7/88; col. 682.]I am also pleased that some reference has been made to the Secretary of State's cautionary statements. But am I not correct that at the Conservative conference in October it was made clear that the Conservative Party intends to privatise British Rail after the next general election? If that is correct, I must echo the question asked by the noble Lord, Lord Taylor of Gryfe, when he asked why there was an intention to privatise British Rail.
Will it be, as in the cases of some other privatisations, or even other Bills, that, having made decisions, the Government then have to think up arguments to justify why privatisation should take place? Would it not be just following dogma and a doctrinaire attitude to make a definite decision to privatise?
I have another question which I have asked a number of times in the past few years. Does the Conservative Party still believe in a mixed economy, in which my own party still believes, or has it thrown over the idea of a mixed economy? I hope that the argument will not be used that British Rail must be returned to the private sector where it properly belongs. That was the argument used in practically every case of privatisation that has occurred.
Reference has been made to the pre-1923 position when there were 150 railway companies. It has been made perfectly clear—I think we all know this—that in the 10 years prior to the last war three of the four private companies never paid a dividend of more than 1 per cent. on ordinary shares. Even the Great Western Railway rarely paid more than 3 per cent. So I hope there will not be any argument that the railways should be taken out of the public sector and put into the private sector as a matter of principle.
As we know, public ownership of the railways came about in 1947. We are pleased, as the noble Lord, Lord Mountevans, has said, that today the number of passengers carried by the railways is increasing. British Rail's percentage of the freight 1441 carriage market is also increasing. We all accept that the percentage of passengers carried by rail is still much lower than by other means of transport.
We must also remember the good safety record of British Rail, despite the recent tragedy at Clapham Junction. It has a first-class safety record when one compares fatalities and serious injuries on the railway with the 5,000-plus killed on our roads and the 64,000 suffering serious injuries as a result of road accidents.
Various options have been put forward, and I shall refer to those briefly later. I do not believe that any of the options can be justified on the grounds of competition. They may be justified on other grounds, but certainly not on the grounds of competition. I am convinced that any attempt to justify them on the grounds of competition would merely be a fabrication, as it is in the case of the privatisation of the electricity industry.
I think that we should all agree that some other countries, particularly in Europe, have a greater pride in their railway systems and the railways have a greater place in their national life than they have in this country. I was pleased that the noble Lord, Lord Ezra, reminded us of the support given by other governments to their rail systems compared with the situation of BR, as was mentioned in the 1987 report of the House of Commons transport committee. He also referred to the very high proportion of its costs which BR raises from revenue compared with other European railways. I should also like to refer to the House of Commons transport committee report published only a few months ago. That dealt with transport expenditure for 1988–89 and 1990–91. In paragraph 38 it states:If the Department wishes to see a modern railway for the twenty-first century it may have to encourage BR to undertake the necessary investment and at the same time provide an appropriate financial framework for BR to operate in. We recommend the Department to take immediate steps to ensure that additional investment funds are made available to meet the necessary investment requirements of BR".In the Observer of 18th December Nigel Hawkes, in a piece headed "No way to run a railway", which was hardly uncritical of BR, made it clear that:It is not BR but the Government that sets the financial targets that are met by running fewer trains with more people aboard".I share the views of the noble Lord, Lord Ezra, about PSO and EFL as they apply to British Rail.
I should draw the attention of the House to what my noble friend Lord Jay said during Question Time this afternoon, although it was not perhaps pertinent to the Question on the Order Paper. I have checked the newspaper comment. The Guardian of 17th December states that the British Rail board is studying proposals to cut nearly £1 million from its annual signals maintenance bill. I have not seen any contradiction of that statement by the BR board. I hope that the Minister can make a statement on that point. If the financial position is such that at this critical time BR has to cut £1 million from its signal maintenance system there is something tragically wrong.
There have been improvements in British Rail over the past few years which we all welcome. However, we all recognise that there are still some grounds for 1442 complaint. Because the unions had grave doubts that the Government would restore in full the amount of grant, the House will recall that they launched the "Better Rail Campaign". They believed that it is essential that conditions should be improved in order to attract more passengers and thus more revenue. They suggested improvements in six areas: punctuality and reliability; overcrowding; cleaning standards; booking and inquiry services; station staffing; and service frequency.
The unions sent the report to independent consultants, and I believe that some noble Lords have seen that report. Some of us went to a briefing session at which the results of the independent consultation were explained. The costs are set cut in detail in explanatory literature. It is suggested that those great improvements, if achieved, would cost £137 million a year, plus a one-off spend of around £500 million.
I should like to ask the Minister what has happened to the proposal which the union put forward for great improvements in British Rail and to attract more passengers. What has been the result of any consultations which the Government may have had with the unions?
In a statement on the last report of British Rail the chairman of the board, Sir Robert Reid, stated:Major organisational change is the remedy for a business which is in bad shape. Ours is not. The debate on our future ownership is only just beginning and there are some years of hard work ahead of us before major changes in the present statutory framework, if decided, could be implemented … This year's record financial results—to which the noble Lord, Lord Taylor of Gryfe, referred—and our forecasts for the next five years may encourage speculation about future ownership of the railway".One got the impression that Sir Robert would argue that it would he blatant injustice to break up a company which has now been turned round financially.
However, if one looks at this Government's record, it is when public ownership has turned round the financial results—such as in the case of BA and BAA—that the Government decides tc privatise. The Minister may use other quotations. BAA was congratulated by the Government when in public ownership on its great success. British Airways turned round its financial position which enabled it to be floated on the market.
I understand that the British Railways board would have three criteria for any possible change: it should benefit the customer; the railway should be free to compete with other national transport operators; and it should have the support of the management and the staff.
In the Guardian of 31st October I noticed that Mr. David Kirby, vice-chairman of BRB, stressed that BR wanted to retain the national network. He said:We may be the only people running full-scale railways in this country, but we are competing with all sorts of other forms of transport".That must not be forgotten.
I shall not go in detail into the four options outlined so ably by the noble Lord, Lord Mountevans; namely, to split BR into regional 1443 divisions, the sale of separate sections, the sale of separate routes or a national track authority. I do not believe that any of those provides competition or can meet the three criteria suggested by the board.
Under any of those options what would happen to a national rail system? All would surely make an efficient rail network practically impossible. What would happen to through-ticketing? What would happen to scheduling? What would happen to a pricing structure? What would happen to discounted fares and rail cards?
Shortly before this debate, I received an urgent letter from the noble Baroness, Lady Masham, who regrets that she cannot be here today. She asked me if possible to include in my remarks some reference to the fact that any future plans for British Rail must have firm arrangements, as at present, for disabled passengers. In her own words, "Many people make use of the service and are very grateful for it".
I conclude, as did the noble Lord, Lord Ezra, by asserting that the Government have to determine what they see as the railway's future role. We now have congested main roads; every single day there is congestion on some motorway—and in particular the M.25—with tailbacks for many miles; and there are congested conurbations. Problems of the environment and energy conservation have to be tackled. Consideration must be given to the assistance to industry and commerce that can be provided by an efficient railway service. Neither must we overlook what has been stated so often in our debates on the Channel Tunnel Bill—that the carriage of both freight and passengers from the North, the Midlands and Scotland through to the Continent requires a continuation of the national network. We must have a safe, modern and efficient rail network. That is essential to carry people from one part of the country to another and enable people to get to and from work. It must be a network that serves the community.
Of course regard must be had to performance figures. I think that it would generally be agreed that the performance of British Rail staff has been excellent over the past few years. However we must not think only in terms of financial return. There must be a clear standard of service provided for this country and a clear understanding of the purpose of the railways in all their different aspects. I do not believe that it can be provided by privatisation. Different measures of assistance to British Rail may provide it, but I hope that the answer to the Question of the noble Lord, Lord Mountevans, will be that no progress will be made on the development of privatisation of British Rail.
§ 8.32 p.m.
§ Lord Brabazon of Tara
My Lords, we are grateful to the noble Lord, Lord Mountevans, for raising this subject this evening.
I must start my remarks by referring to the dreadful tragedy at Clapham Junction, which happened only nine days ago. Obviously it is right that safety should have been mentioned in our debate today. Before I say any more I should like to stress 1444 that the Government attach the highest priority to safety. That will be paramount when considering the possible privatisation of British Rail. My right honourable friend made that very clear in his speech on 28th October to the Centre for Policy Studies. We must now learn the lessons from the accident at Clapham Junction and ensure that the highest possible standards of safety are achieved and maintained whatever may be the future structure of the railways.
A few words about investment may also be appropriate at this point. There is no question of government financial targets constraining sensible investment. Since 1983 over £2 billion has been invested in the railways. Investment is at the highest level since the 1960s, with over £3.5 billion planned over the next five years. The noble Lord, Lord Underhill, mentioned the cost of signalling works. The British Railways Board assured my right honourable friend last month that financial targets were not preventing adequate safety provision and the board would ensure that they never would. That is quite right.
I now return to privatisation prospects and the progress made on considering whether this is the right answer for British Rail. I want to emphasise at the start that the Government have not decided to privatise British Rail. There will be no chance to do so in this Parliament.
The noble Lord, Lord Ezra, said that there was a need for a strategic review, and what we have decided to do is to look at the long-term options for BR so that we can plan a successful future for it in the 1990s. Of course we must look at privatisation as an option. This Government see a number of potential advantages in the privatisation of commercial businesses. It puts them on the same footing as their competitors; it frees companies from the bureaucratic constraints of the public sector; and it ensures that management and staff will be motivated by the incentives and disciplines of the market-place. Most important of all, it ensures that a business must put the customer first if it is to develop and flourish. There is also the added possibility of employee share ownership, to which my noble friend Lord Teviot referred.
Although it is only in the last few months that privatisation of British Rail has been considered a serious possibility by many, it is in many ways a natural development of BR's more customer-orientated approach of recent years. By paying more attention to the needs of the customer and the need for greater efficiency, BR has substantially reduced its dependence on government subsidy.
But this more commercial approach has not meant that investment in the railways has been reduced. As I said earlier, the board's capital expenditure is at record levels. Major new projects are going ahead, such as the electrification of the east coast main line and the new train services for the Channel Tunnel. At the same time, big programmes of renewal of existing services are in progress. As the noble Lord, Lord Mountevans, mentioned, the railway is also winning more traffic. The figure of passenger traffic last year was the highest for 27 years and this has led to problems of overcrowding on some services.
1445 These changes have been helped forward by the clear framework of policy that we have set for BR. We have given it clear published objectives on both financial targets and quality standards. We have backed its progress by approving major investments. Our policies have brought British Rail to the point where it is right to think about the long-term options. To analyse the best way forward for BR we must consider possible ways of privatising BR so that we can see the advantages and disadvantages of each course.
In looking at BR we also have to ask ourselves whether there are any special considerations. We believe that there are indeed three special points to which we have to put our minds from the start. First, as I have already said, there is safety, which requires rigorous oversight by an independent inspectorate. For nearly 150 years, the railway inspectorate has had the oversight of railway safety, and railways are an extremely safe form of travel. I repeat that the highest possible standards of safety must be paramount.
The second special point is that some of BR's operations receive substantial subsidies, including the large provincial network which is maintained for broad social reasons. I must make it clear that subsidy does not depend on ownership. We would anyway have to look closely at the reasons for subsidy, as we have already been doing, and see whether the mechanisms for deciding and paying subsidy can he improved. Those are issues irrespective of ownership, though a change of ownership may present questions of mechanics. But there is no reason why privatisation should affect subsidy to services where it is clearly needed. Bus deregulation and privatisation have proved perfectly compatible with subsidies. Some rail services will inevitably need to be subsidised for the foreseeable future.
The third special point is that in some markets the railway is dominant. In most cases it faces strong competition, but in carrying commuter traffic into central London from outside the London area the railway has a dominant share. So in that case there are important questions of protection from monopoly power. Where that exists, fares and service quality will need to be regulated to ensure that the traveller receives value for money.
In his speech to the Centre for Policy Studies, my right honourable friend set out the possible options for privatisation. In no particular order they are: a division of the railways into a number of independent regional companies; a vertically separated railway industry with track owned by a track authority or company and independent operating companies which would run the trains, generally known as the track authority option; a single company to run Britain's railway network, which has been called in the press BR plc; and, lastly, a division into several independent companies based on British Rail's business sectors, which I shall call the sector option.
Finally, there is no need to stick to a single option for the whole railway. It would be perfectly possible to combine aspects of more than one of the other options. For example, a division into independent 1446 companies based partly on regions and partly on sectors might be possible. Another possibility is an arrangement where parts of the railway were run by independent vertically integrated companies and other parts had a track authority and operating companies.
The noble Lord, Lord Mountevans, has suggested a further possibility; namely, a public sector British Rail with a maximum of private sector involvement along the lines of the proposed joint BAA/BR service to Heathrow. There are of course already examples of private sector involvement with BR, as the noble Lord has already said. Foster Yeoman, who own their own locomotives, are one example of the freight side. The Venice-Simplon Orient Express is another on the passenger side. There is no doubt that opportunities for increased private sector involvement would need to be looked at very carefully if it were decided that full privatisation should not proceed.
Let me take first regional railways. Our approach to regional companies has to be forward looking. Would they meet the needs of the late 20th and the 21st centuries? Regional companies could have a number of advantages. They would allow some, largely indirect, competition to be introduced. Morale might be improved by building on local loyalty. It might be possible to achieve more flexibility and in some cases the management task could be made simpler.
What about the problems? Through-ticketing, as the noble Lord, Lord Underhill, has mentioned, is often quoted, though independent companies would have a strong commercial incentive to make adequate arrangements for through travel. Through trains would be a larger problem, particularly freight trains, which often take little account of regional boundaries. It is possible that economies of scale would be lost though it is open to debate whether railways need to be as large as BR to achieve them.
More significant could be the mix of businesses within each region. Several of the current BR regions have almost as great a range of types of business as BR as a whole, with all the problems of divided management attention that this implies.
Moreover, the loss-making provincial services would be spread fairly evenly around all the regions with the exception of Southern and Anglia. Several of the railways based on the current regions would inevitably be dependent on subsidy to a significant extent.
Let me turn now to the track authority option. The main advantage usually quoted is the opportunity for the introduction of competition in the actual running of trains, with a number of independent companies using the same track. But competition between railway companies will be limited by the practicalities of railway operation and the main competition for many rail services would be from car, coach or air. The track authority itself would of course be in an entrenched monopoly position in relation to the operators, and moreover would be more rather than less remote from the eventual customers. It is clear that the monopoly position of the track authority could present very difficult regulatory problems. 1447 Investment decisions would also present problems as investment in track and trains can often interact, most obviously if electrification is considered.
A unitary BR has obvious advantages of continuity and minimising the cost of change. It would not require new arrangements for through-ticketing or intercompany transactions. There could be no question of losing any possible economies of scale.
On the other side, the opportunity to introduce even limited competition would be missed. Even indirect "competition by emulation" could provide useful information to those responsible for regulation and subsidy. The very size and spread of BR's activities may introduce what might be called "diseconomies of complexity". The balance of pros and cons needs a great deal of thought.
Railways based on BR's business sectors would avoid some of the problems of complex objectives and dilution of commercial incentives, since the loss-making services would be concentrated in the provincial sector. However, the option runs up against the serious problem of who would own the track. Much of BR's track is used by more than one sector with intercity and freight in particular sharing much of their networks. Someone would need to own the track. If this were the sectors themselves on a geographical basis one would have something akin to a regional option. If this were an umbrella body this is probably a form of the BR plc option; and if it were a third party it is a sort of track authority option.
Finally, one might consider hybrid options, for example, combining some of the features of the sector and regional approaches by basing a division partly on geography and partly on business sector. It is possible that some such option would allow some of the better features of the others to be incorporated, while avoiding some of the drawbacks.
1448 More work is still needed on many questions about each option. Does it meet the subsidy problem? Does it take account of the virtual monopoly which BR enjoys in some areas?
The noble Lord, Lord Mountevans, has referred to both property and leasing as areas where more flexibility is needed, and the noble Lord, Lord Taylor of Gryfe, referred to the property side of it. This would of course be easier for private sector railways. How far it is possible to go in the public sector, I am not sure. I should have to write to the noble Lord if he would find that useful.
All these questions must be resolved in a way that frees a privatised railway industry from unnecessary bureaucracy while retaining the controls, such as those over safety, which are essential. The structure needs to allow the industry to provide a better service to the customer by identifying new market opportunities within a changing transport market, by operating more efficiently, and by investing in modern and attractive services.
The noble Lord, Lord Taylor of Gryfe, asked whether a better service to customers would be the test of privatisation. I entirely accept that that will be the ultimate test against which any proposals for privatisation must be judged.
The Department of Transport is working on all these questions, but it will be some time before the Government are able to reach any firm conclusions. I welcome the comments from noble Lords, which we shall certainly take away and study carefully. If at the end of the day we do decide to privatise, it will be because we are convinced it is the best way forward for the customer, the railway industry and the country as a whole.
House adjourned at fourteen minutes before nine o'clock.