At the same time, Network Rail continued to run effectively one of the world’s busiest and most complex railway networks, whatever the vagaries of weather or the slings and arrows of outrageous fortune. This is an achievement that should not be underestimated. Despite the potential for distraction, Network Rail has focused on its core operations and delivered a solid operating performance, both in terms of running a safe and reliable rail network and continuing to reduce costs and drive efficiencies. That said, we recognise that we can and must improve still further to meet the expectations of funders and users. David Higgins, Network Rail’s new Chief Executive and Patrick Butcher, the Group Finance Director provide details of the Company’s operating and financial performance in their reviews as well as a statement of our ambitions.
The focus for my statement is the significant changes that have occurred during the past 12 months, notably the change of Chief Executive Officer. I would like to pay tribute here to the outstanding job that the outgoing Iain Coucher did for Network Rail. It is easy to forget the grim situation that faced Britain’s railway at Network Rail’s inception. Railtrack was in administration. One in four trains was late. The West Coast modernisation project was much delayed and costs had spiralled. The performance and reputation of the railway was at an all time low. The contrast with the situation at Iain’s departure could not be clearer. Nine out of ten trains run on time. The West Coast upgrade that Network Rail inherited was delivered on time as promised. Maintenance, one of Network Rail’s core functions, is now delivered in-house. Passenger numbers and satisfaction levels are at an all time high. Britain’s railway has been transformed and Iain Coucher, as Deputy Chief Executive and latterly as Chief Executive, has played a pivotal role.
The Board was delighted to appoint a highly capable and qualified replacement in David Higgins. His track record is exceptional, encompassing chief executive roles in both the public and private sector. In addition, his experience as a Non-Executive Director of Network Rail gave him the head start that has allowed some significant early decisions, such as the devolution project which will empower decision-making at a local level and drive closer alignment between route level infrastructure management and the train and freight operators.
In last year’s report, I highlighted the need to start to win emotional battles and improve relationships. I am pleased to report some real progress, albeit hard won, in this area. Our priority has been our relationship with Governments. The Board of Network Rail has tempered its strict adherence to a private company philosophy and instead adopted a more balanced approach which properly recognises the important role of Governments in funding Britain’s railways and creating a constructive context for financing from other sources. This is not to say that Network Rail has become the rail equivalent of the Highways Agency, rather it is about listening positively to the Governments in England, Scotland and Wales and recognising their status as both investors in the railway and political representatives. Across Britain, national and local government has recognised the importance of sustained public investment in rail. The railway is a vital part of the nation’s social and economic infrastructure and is crucial to the country’s ability to compete for investment and markets. Last year’s Comprehensive Spending Review, which left Network Rail’s regulatory settlement largely untouched, was a clear demonstration of the Government’s commitment to Britain’s railway.
At the same time, the Government also recognised that the structure of Britain’s railways was potentially an impediment to efficiency and established the ‘Rail – value for money study’, a review chaired by Sir Roy McNulty. The final report made a series of recommendations on how the railway can be made more efficient with a reduction of the burden of support required from the public purse. The key recommendations are centred around top level leadership of the industry, clear cost reduction objectives and benchmarking, structural changes and effective incentivisation. The study identifies a significant efficiency gap between the rail industry in Britain and leading international comparators and will make a number of specific recommendations to improve efficiency.
We had long anticipated the major structural change recommendation that relates to Network Rail is likely to be that of decentralisation and a transfer of decision-making to those parties who operate the network and at levels that are closest to the market. David Higgins has already moved to take action on this front through the devolution project. In addition, our new approaches to partnering and contestability of our services will continue to drive a fast pace of change within both the Company and the industry as a whole.
The Board has given its full backing to Sir Roy and Network Rail has played an active and energetic role in the review. Crucial to enabling this role has been the fact that the Board has been open to all outcomes from the study and committed to the best possible outcome for the users, funders and industry. We have approached the review objectively, with the shared goals of driving further efficiency and cutting costs. We have been tireless in our attempts to dismantle some of the barriers to progress that have emerged over the years.
Recruiting and retaining top talent is a vital part of achieving our very ambitious goals. There is no doubt that the market for outstanding executives is now global and very active. In recent months, Network Rail has lost route senior staff to transport networks in Australia and the Middle East. Closer to home, senior Network Rail staff have joined both Crossrail and HS2. These circumstances, together with recognition of legitimate concerns from Government, the regulator and other stakeholders, resulted in our review and consequent revision of the Company’s remuneration and incentive schemes. Full details appear later in this report, but I would like to give thanks to both Steve Russell for his tireless work in shaping the scheme and to Members for their high levels of engagement when endorsing the schemes. By delivering an approach that rewards only long-term outperformance, I am confident that we have a robust model that will drive the right behaviours and incentivise success, while allowing us to be competitive in the global battle for talent.
Over the year, the planned reshaping of the Board has reached completion. David Bailey stood down in November 2010 while Yvonne Constance and Chris Green retired at the AGM in July last year. I would like to express my thanks for their contribution and formally welcome Malcolm Brinded and Bridget Rosewell who joined in the year. We will also welcome Keith Ludeman to the Board in July 2011.
Last year, I also noted progress in our primary governance and the assessment of the Company’s future challenges. This year we have focused on leadership culture, flows of communication and quality of dialogue, scrutiny and assurance. We have made real progress in all areas and I am confident that the changes we have made at Board level and through devolution and other initiatives will sustain this momentum.
Finally, I would like to put on record the Board’s appreciation of the efforts of all Network Rail’s people in running Britain’s rail network in what has been a year of significant change. The dedication and commitment of our people to keeping the railway running, notably in terrible winter weather is worthy of the highest praise. These qualities, together with the actions the Board has taken in the past year, give me confidence that Network Rail will deliver a strong performance in the year ahead.
Rick Haythornthwaite
Chairman
8 June 2011