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Rail Freight (EUC Report)

My Lords, it gives me great pleasure to speak in this debate. First, I thank the noble Lord, Lord Freeman, for his very kind words about my activities in rail freight over the past few years. I also want to thank him and his committee for a really major contribution to the debate about rail freight—on the need to restructure, transparency, independent regulation and everything that leads to growth. I declare an interest as chairman of the Rail Freight Group in the UK; I am also this year’s president of the European Rail Freight Association, where I had the honour to be asked to give evidence to the committee. From my discussions and trips around Europe, I believe that this report has had a great and significant effect. It has been very much welcomed by the industry, not just by the railway undertakings, and particularly the private ones, but by the customers. Of course, it is usually the customers who decide how freight is going to get moved. It is worth recalling that with the structure that we have in the UK to which the noble Lord, Lord Freeman, referred, rail freight has grown by about 60 per cent in this country since privatisation, whereas in France, which the noble Lord also mentioned, it has gone down by 40 per cent, because there is no competition. The recession is affecting us all, and I shall come on to that later, but the key to this report, as noble Lords will not need reminding, is that it was based on evidence. I thought that the witnesses’ evidence, both written and oral, was extremely strong. I was therefore quite surprised to hear that an incumbent operator in a major continental country had approached their Government, asking, "Would you please tell the British Government that the House of Lords committee report was totally out of order? It said all the wrong things—could you get it cancelled?". I do not think they quite understood the difference between Government and Parliament, or a few other things. Anyway, while I do not know what our Ministers here said, the report is still very much with us. I hope that it stays with us; I know that it will. I also welcome the response from the Secretary of State, in that it was generally supportive of the recommendations, as of course I am. I should like to bring out one thing from the infraction proceedings to which the noble Lord, Lord Freeman, referred. There is a useful list of which countries have failed in which regard, and that list is very long. Thirteen member states failed on regulatory independence and scope. I will not go through all the others because it is a five-page document, which is indicative of the extent of failure. Sadly, from my discussions around the states, the list of the issues on which the Commission intends to take member states, eventually, to court—which is excellent—is only the tip of a very large iceberg. The problem is that it is not one iceberg but 21, all of different shapes and sizes. Leaving the sea and icebergs aside for a moment, I think noble Lords can understand the difficulty for a train operator of trying to start up in a new member state, with all its particular problems, and then trying to get to the next one where the problems are all different. It is a real nightmare. The UK Government have got off pretty lightly on some of these things, I think. We are not one of the 21. However, I am not really convinced that here, good though the structure and everything else are, the infrastructure manager—that is, Network Rail—has anything like enough incentive to reduce costs. The regulator is doing what it believes to be its best, but there is a great deal to be done and Network Rail failed by 4 per cent to reduce its costs. It was supposed to reduce costs by 31 per cent over five years in the period that ended in April, and it was 4 per cent short, which is quite serious, although big bonuses were still given for achieving that. Also, we do not do anything like enough to encourage the managers of infrastructure to minimise disruption. Passengers do not like going on buses and freight cannot go on buses. Yes, sometimes you can have diversionary routes. Network Rail scored a real own goal during the Labour Party conference in Brighton. Somebody came up to me at one of the fringe meetings and said, "Do you know that Network Rail has closed both lines to Hastings over the weekend?". There are two completely separate lines to Hastings; surely one could have been kept open and the public told, but no—Network Rail closed both at a time when all our Ministers were in Brighton and heard about it. I cannot say more than that, but there is quite a long way to go. Since the report was written and the evidence taken, sadly, the economic situation has got worse in the recession. The market share of rail is holding against road—if not getting better in some cases—but, of course, the volumes are down. This means that there is stronger pressure on all operators. There are financial pressures as well as everything else. There has been an increase in complaints from the European association to the Commission about failures in member states. There are serious failures in even the first railway package issues. For example, in Poland the incumbent has not paid access charges for a year. How can the independent operators compete with somebody who has not paid access charges? The incumbent said that it did not have any money. When I was there I was asked what I would do. I said that I would stop the incumbent operating trains and let the independents do it. In Romania—which is, I know, another eastern European country—the incumbent is losing market share to the private sector, which is good for the private sector, but the infrastructure is in an appalling state because, for a reason that is not yet clear, Romania was given €3 billion to invest in the infrastructure when it joined the European Union and has not spent it. We heard recently that in France the Government have announced a very welcome €7 billion package to help rail freight. However, much of it appears to be going to SNCF. Some will be going to RFF, the infrastructure manager. If it goes to one operator, surely, in these days of open access, other operators should be given the chance to compete. One of the biggest problems is that of the incumbents buying up small private operators, as the noble Lord, Lord Freeman, referred to. As he said, there will be less choice, but I question how the incumbents find the money to buy up private operators when half of them have their hands out for state aid. It may be for passengers, it may be for infrastructure, but with a lack of transparency, again, it is a serious problem. That is why I very much welcome, in paragraph 84 of the report, the committee’s encouragement of the Commission to use more competition law. We have to consider how to define the market when there is a dominant position. Is it a market for rail freight within a member state? Is it on a corridor, such as that between Rotterdam and Italy? Is it for coal or containers? The one question that I would ask my noble friend to answer when he responds is whether the Government can press the Commission to produce guidelines or something similar on how it would assess the markets in these different sectors, so that when there is a proposed buy-up of a private company, it could be assessed against whether it was going to cause a dominant position in a particular market. When it comes to the private sectors the Commission tells me that a private operator must make a complaint. I say that, first, it is very difficult to do that and, secondly, it is very expensive and they do not have the money. It would be very good if there were some guidelines from the Commission on doing that. Similarly, on state aid, I went to the European Council of Ministers of Transport conference in Leipzig in May. There were three Transport Ministers on the platform, from Italy, France and Poland. I could not resist the opportunity to ask them a question. They had all complained that the railways are broke. I said, "Why don’t you sell off your rail freight companies to the private sector? First, they will be able to compete more fairly with the private operators and, secondly, you will get some money to help your infrastructure". I got looks of incomprehension from all three. Finally, the French Minister said, "Yes, but we have a problem getting into Hamburg". I could not go back but I was going to ask him who he meant by "we". Was it la France, was it SNCF, or what? Was it a problem with access to Hamburg port? Anyway, he did not answer. It just shows that there is an awful lot more to do. I have talked about independent regulation. Mr Khan’s letter seemed to suggest that things will be better when directive 2007/58 comes into force. There is absolutely no evidence of any change at all across Europe since the committee took evidence. Member states are taking no notice. Half of them do not even know what regulation is. I know our Office of Rail Regulation is trying to help those who ask for help. There is a long, long way to go, so we should not take much comfort from that. I believe that the report is absolutely right in pushing for the recast and for taking member states to court if they do not comply. The recast needs strong and independent regulation, and fair and open access to terminals, as the noble Lord, Lord Freeman, said. At the moment, independent operators in Poland sometimes get charged 50 times what the incumbent is not charging itself. Multi-annual contracts are absolutely right. The noble Lord, Lord Freeman, is right about better structure of charging. Twenty years after the fall of communism, the reason for rates being higher in eastern Europe is that in the communist days rail freight subsidised passengers. There was no competition with road. It really has to change. The Commission and the whole EU have to support the change. Again, there should be total separation of infrastructure managers from passengers and freight. There may be an argument for requiring separation of passenger freight operators in the absence of proper transparency between them. I have mentioned competition issues and state aids. Finally, the committee and the noble Lord, Lord Freeman, mentioned the question of a regulation or a directive. The noble Lord is right to raise it. I believe that the committee is right. On the basis of the failure of member states even to implement the laws of the last 18 years, since 1991, a regulation would be a very good idea. However, it will mean a big battle in Brussels that I hope—indeed, I know—the Government will support. At the end of the day, as the noble Lord, Lord Freeman, said, we are trying to create a single market for rail freight—that is the objective; that is what the law says—and we have to finish it somehow. I know that our Government are being very supportive. We have a keen Commission and a slightly reluctant commissioner, although we do not know who will be commissioner next year. We have to ask other member states: do you really want open access and competition for freight or does the single market that we have all dreamt of somehow not apply to the rail freight business? I am very grateful to the committee for its report. I congratulate all its members on an excellent publication.