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Rail Freight (EUC Report)

My Lords, this has been a small but perfectly formed debate. I warmly congratulate everyone who has taken part in it. I particularly congratulate the noble Lord, Lord Freeman, on presenting the EU Committee report with such clarity and enthusiasm. He said that there was scarcely any difference between the conclusions of the committee and the Government’s position. I have been hunting and have found just one, to which I will refer later in my speech. I commend all the members of Sub-Committee B who carried out the inquiry and thank those who gave evidence. Some of it was of the highest quality. I am pleased to echo the noble Lord, Lord Bradshaw, and my noble friend Lord Berkeley in congratulating the committee. I also thank the noble Lord, Lord Freeman, for his acknowledgement of the speedy response of the Government. As he said, my noble friend Lord Adonis gave an almost instantaneous reply of warm welcome, which was followed by the Government’s official response less than two months from the date of publication. I do not know if that is a record, but it is not a bad response. I will start by putting the freight industry in Britain into context and pick up on the point made by my noble friend Lord Berkeley about rail freight volumes. He said that they had grown by 60 per cent since privatisation. The figure that I have is 59 per cent, but I will not quibble. The Government agree with him that one underlying reason for the growth is that we have one of the most liberalised market structures for rail freight in the EU. This growth is projected to continue both within Great Britain and on our international through services via the Channel Tunnel. Developments in the Channel Tunnel have been particularly encouraging. New operators have entered the market and launched new services, including the first for a number of years to haul temperature-controlled produce from Italy and Spain to the UK. The opportunities for long-distance rail freight services through the Channel Tunnel will be further enhanced once locomotive modifications have been completed that will allow conventional European-gauge freight services to run on the Channel Tunnel Rail Link HS1 route. That is one of the answers that the noble Baroness, Lady Hanham, was seeking. This will be good for the railway business and good for the environment. Again, I warmly welcome the Conservative Party’s commitment to support High Speed Two on a non-partisan basis. There is very little difference between the two parties on the desirability of building High Speed Two and we hope to have Conservative support when the feasibility study is presented before Christmas. One of the components being carried out is consideration of the impacts of released capacity on the existing network that would be created by a new high-speed railway. There is the potential for some current long-distance express services to transfer to the new line, freeing up existing capacity for new rail freight services on routes which are presently congested and also providing the opportunity for new regional and local services. The Commission’s aim of encouraging the establishment of an efficient, well integrated and sustainable rail freight market is therefore broadly similar to our government policy. Like the noble Baroness, we believe that there are clear gains from increasing rail freight. The legislation contained in the first railway package is crucial for Europe. It was intended to lay the foundation for the opening of the European rail market. We support the Commission’s view that, in reality, the package may have started this process but to date has not fully achieved its declared objective of market opening. In 2006, the Commission published a report which concluded that, although member states had formally transposed the rail access directives in national law, a number of important provisions had not been implemented effectively and correctly. A further Commission report from 2007 found that, although competition had increased, a genuine European rail transport market had not yet been created and that a number of entry barriers and other inefficiencies remained. On 26 June 2008, the Commission wrote to all but one of the 25 member states, the exception being the Netherlands, alleging varying degrees of failure to transpose the first railway package adequately into national law. I should emphasise that it wrote to member states with a rail system, because not every member state has a rail system. There are not many railways in Cyprus or Malta, for example. As the noble Baroness correctly observed, the UK received a letter of formal notice from the Commission for alleged non-conformity with the first railway package. I am pleased to tell the House that the alleged infringement was based on a misunderstanding and concerned the time taken by the regulator to approve track access agreements and to hear appeals. In our reply to the Commission of 8 August 2008, the Government stated their belief that our procedures were fully consistent with Directive 2001/14/EC. From subsequent informal meetings with the Commission, we understand that it is content with the UK’s response and that no further action on this point will be required. On 8 October 2009, the Commission sent reasoned opinions to 21 member states regarding their failure properly to implement the first railway package. The Commission believes that important issues still remain to be solved for opening up the railway markets to competition in a large number of member states—as noble Lords indicated in the debate, 21 of them. The noble Lord, Lord Freeman, particularly mentioned France, Belgium, Spain and Germany. Happily, this time, the UK was among the six member states which did not receive such a letter. In the reasoned opinions, the Commission highlighted shortcomings such as: the lack of independence of the infrastructure manager in relation to railway operators; insufficient implementation of the directive’s provisions on track access charging, such as the absence of a performance regime to improve the performance of the railway network; the lack of incentives for the infrastructure manager to reduce costs and charges, and of tariff systems based on the direct costs of rail services; and the failure to set up an independent regulatory body with the necessary powers to remedy competition problems in the railway sector. The Government therefore fully support the Commission in its efforts to make the international rail freight market more attractive and competitive. As your Lordships’ committee recommended, we also endorse the Commission’s dual-track strategy of achieving this objective by ensuring the proper and comprehensive transposition by member states of existing legislation and by reviewing the first railway package with the overall aim of clarifying and strengthening the legislative framework. With regard to the Commission’s imminent review of the first railway package, there is evidence that the separation of infrastructure management and train operations, as practised by a number of member states in everyday operational situations, has not achieved the desired intention of ensuring transparent, equitable and non-discriminatory access to rail infrastructure for non-incumbent, independent operators. Any recast of the first railway package needs to address that lack of separation to create what is probably the most important pre-condition to allow competition to take place under transparent and non-discriminatory conditions. The Government, therefore, agree with the committee’s recommendation, mentioned by the noble Lord, Lord Freeman, that the Commission should use the recast to ensure that infrastructure managers treat all rail freight and passenger operators fairly. We believe that this is best achieved by the full separation of rail infrastructure managers from railway undertakings. That will help to ensure fair treatment for freight customers and passengers. The Government also agree with the committee that more detailed provisions about the powers and remits of regulatory bodies are needed. We believe that national regulatory bodies should be given the necessary powers, independence, funding and resources to undertake their roles in a manner which is consistent with the spirit of the first railway package. This is how we have configured the regulatory system in the UK. However, in many European member states, as noble Lords have indicated in this debate, rail regulators seem to lack the competences, the resources and the necessary independence from Government to be effective local enforcers of European rail legislation. The recast of the first railway package needs to address this aspect of the regulatory approach across Europe. National regulators need to be empowered to act as effective national enforcement bodies of both the letter and the spirit of the first railway package. As the noble Lords are aware, the Commission's proposal for a regulation concerning a European rail network for competitive freight has been agreed at Council and will now go to the European Parliament for Second Reading and possible adoption. The proposal requires that regulatory bodies co-operate with each other and with infrastructure managers on cross-border issues. The Government welcome this development and see that as improving on the current requirements of the first railway package for both regulatory bodies and infrastructure managers. The EU committee also recommends that the recast should include a requirement that regulatory bodies should be independent of Government. The Commission has already sought to address the issue of independence by means of Article 2.5 of directive 2007/58/EC which amends directive 2001/14/EC. The directive requires that, ""the Regulatory Body shall furthermore be functionally independent from any competent authority involved in the award of a public service contract"." Directive 2007/58/EC is part of the third rail package and had a transposition deadline of 3 June 2009, so member states should have now implemented this requirement. However, it may be too early for the Commission to say what impact this provision has had on the independence of regulatory bodies throughout the EU, although it is a step in the right direction. In essence, however, we agree that regulatory bodies should be independent of Government, as is already the case in the UK. The committee recommends that the Commission should not propose establishing an EU-level regulator. The Government agree with that recommendation. That point was touched on by the noble Lord, Lord James of Blackheath, in his intervention. We believe that increased co-operation between national regulatory bodies, with the necessary powers, independence, funding and resources, should be able to oversee cross-border services in an effective way. It would be undesirable to have an EU-wide single regulator. The committee recommended that the Commission include in the recast mandatory definitions of which costs can and cannot be included in infrastructure charges. The Government believe that the principles of calculating track access charges differ widely from member state to member state. There is also evidence that in some member states the setting of infrastructure charges lacks transparency and consistency, which is likely to hinder the development of competition in the European rail freight and passenger market. We agree that the principles and methods for the calculation of infrastructure charges should be clarified and made more transparent and consistent. The committee also recommends that the recast include a requirement for member states to agree multi-annual contracts with their infrastructure managers. The Government are aware that in some member states funding remains exposed to the vagaries of annual government budgeting. I do not blame the noble Baroness for not responding to the challenge posed to her by the noble Lord, Lord Bradshaw; I should have been astonished if she had. That leads to unforeseen and sudden shortfalls of funds available for infrastructure management. The consequence is that infrastructure managers try to recoup funding shortfalls with increased track access charges in order to balance expenditure and income. In some cases, that makes the running of rail freight operations, which often suffer from low margins, and rail passenger services prohibitively expensive. The Government therefore believe that funding of infrastructure managers should be placed on a more reliable and predictable footing. The UK system of the five-year periodic review creates the necessary continuity and stability of funding. We think that that is an essential pre-condition for sound and efficient infrastructure management. Regarding rail-related services, the committee recommends that member states should be required to give regulatory bodies the power to act in this area. From a UK perspective, the Office of Rail Regulation has those powers already through measures introduced through the first railway package and transposed into UK legislation which has extended the opportunities for freight users to seek access to other operators’ terminals and those terminals previously exempt from regulation. In some other member states, there is anecdotal evidence that access to tracks, terminals, ports and services remains a problem for non-incumbent, independent operators. In particular, operators are having difficulty obtaining evidence that the charges which are quoted for access to tracks, facilities and supply of services reflect the cost of providing the service, calculated on the basis of actual use. We therefore support that recommendation. The committee recommends that the Commission explore the potential for the package to be complemented by the use of competition laws—a point referred to by my noble friend Lord Berkeley. The Government agree that the Commission should investigate the possibility of making use of competition laws if and where that is appropriate, but hope that proper enforcement and the recast of the first railway package will ultimately rectify the current lack of real competition of rail freight and rail passenger services within the UK. Finally, the committee recommended that the Commission consider recasting some of the railway package’s provisions into a regulation, which would be directly enforceable in all member states, rather than using a directive, which requires transposition into national laws. That is the only area where the Government take issue with the Commission and do not agree. We understand that the Commission is already considering that option. However, recasting some of the provisions of the first railway package by means of a regulation would be scrutinised more closely during negotiations and could therefore result in watered-down legislation. To summarise the situation in the UK, the Government believe that the key principles of the first railway package have been transposed properly and comprehensively. There is a clear functional and structural separation of infrastructure management from train operations. Capacity allocation and charging work in a transparent and non-discriminatory manner, permitting all operators equitable access to the network, and we have a functioning regulatory system with a well resourced, independent regulator, the Office of Rail Regulation, which has comprehensive powers of economic and safety regulation. If I may, I shall now try to answer points made by individual speakers in the debate. My noble friend Lord Berkeley asked about guidelines issued by the Commission. We would welcome the Commission providing clear guidance on a number of points when recasting the first railway package, such as which elements of cost can be included in track access charges and which cannot, and the general conditions of access to the infrastructure. The Government will engage, and indeed already are engaging, with the Commission on these and other ideas that need to be clarified. The noble Lord, Lord Bradshaw, asked a succession of questions that related not directly to the report but to rail freight. There were some questions on infrastructure maintenance costs and the operations of Network Rail. Decisions on the efficiency of Network Rail’s operations and how to improve them fall to the independent regulator, the Office of Rail Regulation, under the five-year funding settlement that has recently been implemented. The ORR continues to task Network Rail with delivering further challenging efficiency targets on the operation, maintenance and renewal of the national infrastructure. I certainly endorse the noble Lord’s comment that the quicker we can move to the seven-day railway, to which he referred, the better. We are maintaining pressure on the rail industry to improve engineering-work planning procedures to reflect better the needs of passengers and freight passengers. The ORR’s requirements on Network Rail for control period 4—2009 to 2014—to reduce the disruption to passenger services by a third by 2014 are a good start, but we want rail improvements to come into effect as soon as possible. The noble Lord, Lord Bradshaw, also asked about the Government’s progress in making foreign lorries pay for road use in the UK. Following the conclusion of the freight data feasibility study in 2008, the Government decided against a vignette scheme at this time due to what were seen as the limited benefits that could be achieved when compared with the costs. It was decided that greater benefits are achievable through other measures, such as enforcement. The Government are undertaking a foreign vehicle data survey to refresh data on foreign vehicle movements throughout the UK and to provide up-to-date evidence and this is expected to conclude this year.