BEIS Select Committee subinquiry into the Industrial Strategy

J September 2020

BEIS COMMITTEE: POST-PANDEMIC ECONOMIC GROWTH: INDUSTRIAL STRATEGY SUB-INQUIRY RESPONSE FROM THE RAILWAY INDUSTRY ASSOCIATION (RIA) 1.

INTRODUCTION

1.1

This submission constitutes the response from the Railway Industry Association (RIA) to the above sub-inquiry launched on 23 July 2020.

2.

BACKGROUND TO RIA

2.1

RIA is the trade association for UK-based suppliers to the UK and world-wide railways. It has some 300 companies in membership covering all aspects of rolling stock and infrastructure supply and covering a diverse range of products and services. As well as the vast majority of the larger, multinational companies, 60% of RIA’s membership base is comprised of SMEs.

2.2

The Oxford Economics 2018 report shows the UK rail sector contributes annually over £36 billion Gross Value Added (GVA) to the UK economy, employs 600,000 people and generates £11 billion in tax revenues. For every £1 spent on rail, £2.20 of income is generated in the wider economy, meaning rail is not just an important sector in its own right, but it is also crucial for UK plc, its economy and connectivity. Despite the Coronavirus pandemic, the long-term future of rail is positive – rail has been a growing industry since the 1990s and the number of rail journeys are expected to double in the next 25 years, along with significant growth in rail freight traffic. The full report Oxford Economics report can be accessed here.

2.3

RIA provides its members with extensive services, including: • Representation of the supply industry’s interests to Government, Network Rail (NR), Transport for London (TfL), High Speed 2 (HS2), the Office of Rail & Road (ORR) and other key stakeholders • Providing opportunities for dialogue and networking between members, including a number of Special Interest Groups • Supply chain improvement initiatives • Provision of technical, commercial and political information every week • Export promotional activity, through briefings, visits overseas, hosting inwards visits • Organising UK presence at exhibitions overseas.

Executive Summary • A 30-year plan for rail and funding certainty for devolved transport bodies will support certainty and visibility of upcoming work.

• Reducing ‘boom and bust’ in rail infrastructure work banks and rolling stock will give rail supply businesses the confidence to invest in skills and training, innovation and equipment.

It will help manage costs and improve productivity.

• This will support the levelling up agenda creating opportunities across the UK. • Rail is the transport mode with the lowest greenhouse gas (GHG) emissions in the UK, achieving full decarbonisation in rail can support significant emission reductions in other transport modes through modal shift.

• The Government should support electrification, hydrogen, batteries and digital rail now in order to meet air quality and zero carbon goals by 2050.

• RIA is working with the Rail Supply Group, and the Coronavirus Task Force “Act Now” initiatives to support the acceleration of the Rail Sector Deal to support the economic recovery and growth.

1 / 14

•

3.

Rail can make a significant contribution to exports both with the EU and international trading partners.

RIA SUBMISSION Industrial Strategy (IS) Priorities How does the Government understand, diagnose and monitor the underlying constraints on UK economic growth and is this informing the IS? How has Covid-19 impacted this evidence-base and should the IS change to reflect this?

Understand, diagnose and monitor underlying constraints on growth The aim of the Industrial Strategy (IS) is to boost productivity by backing businesses to create good jobs and increase the earning power of people throughout the UK with investment in skills, industries and infrastructure.

One of the indicators used by the Government to monitor economic performance is productivity – that is how much output is produced for a given input (such as an hour of work). Hence higher productivity growth leads to a higher long-term growth rate of the economy.

Historically, UK labour productivity has grown by around 2% per year but since the 2008/ 2009 recession it has stagnated (see chart below1).

Source: House of Commons

In Q1 2020, productivity fell by 0.6% compared with Q1 2019 and fell by 1.3% compared with Q4 2019. The effects of the coronavirus outbreak present significant challenges in the measurement of productivity. This likely means underlying productivity trends will be difficult to discern for some time. However, productivity growth can show: • Whether the impact of the restrictions caused by the coronavirus (COVID-19) are concentrated

in certain industries or affecting the whole economy and hence help to target interventions related to the IS. • Whether certain regions are relatively more affected.

• In the longer-term, whether the UK has performed more strongly than its international competitors, and whether there have been longer-term implications because of changes in innovation, investment or structural elements of the economy.

1

https://commonslibrary.parliament.uk/researchbriefings/sn02791/#:~:text=In%20Q1%202020%2C%20productivity%20fell,%2C%20productivity%20fell%20by%201.3%25.&text =Historically%2C%20UK%20labour%20productivity%20has,stagnated%20(see%20chart%20above).

2 / 14

As measuring productivity growth is a long-established and long-term indicator of economic performance, it would seem sensible to continue to use this to inform the IS. Typically, when the UK economy has suffered external shocks, such as the 2008 financial crisis, and recession, productivity growth has fallen.

ONS figures published on 12 August show that GDP fell in the second quarter of 2020 by 20.4%. In the first quarter there was a decline of 2.2%, meaning that the UK economy is now formally in a recession. This is the first recession since 2009; the current recession is thought to be the deepest UK recession on record and reflects the ongoing public health restrictions and forms of voluntary social distancing that have been put in place.

Another measure of economic performance is Gross Value Added (GVA) – this is a measure of the value of goods and services produced by an industry or sector of the economy. This can be used to identify/ chart (changes to) performance over time. GVA could indicate at a high level the effects of the IS on an individual sector.

There are, however, underpinning conditions that can help to improve productivity. For the rail supply chain, this means consistency in rail investment with visibility of a stable and smooth workload pipeline coming to market will give the rail supply chain the confidence to invest in plant, machinery, skills and training and innovation, all of which will deliver better services for passengers and freight users. It will enable capacity building and the capability to deliver multiannual work programmes. A smooth pipeline will also enable the rail supply industry to reduce costs and improve efficiency industry and to sustain and develop skilled teams and thus improve productivity to deliver more with the Government investment it receives.

However, the current system creates periods of ‘boom and bust’ in infrastructure investment, which manifests itself in a see-saw profile in the way work comes to market, often requiring suppliers to increase their capacity at the start of a five year funding period, only to reduce it when they see a sharp drop-off in workload near the end. This creates uncertainty for the supply chain and is a sub optimal way to run the railway both for the supply chain, for passengers, freight and taxpayers.

Economic growth The IS centres its approach on the foundations of productivity: Ideas; People; Infrastructure; Business environment; and Places. Rail can play a key role in this approach and help the Government’s ‘build, build, build’ infrastructure agenda and its economic ‘New Deal’. Rail schemes will be particularly effective in generating an economic bounce back because of the three Gs: • Growth: They generate significant investment – for every £1 spent on the rail network, £2.20 is generated in the wider economy.

• Geography: They support investment in all regions and nations of the UK, including areas of social deprivation where investment and regeneration is urgently needed – supporting the Government’s ‘levelling up’ agenda.

• Green: They promote a green mode of transport, ensuring the economic recovery is also a ‘green’ one.

Therefore, rail is crucial in supporting the success of the wider UK economy as it has clearly demonstrated recently, in difficult lockdown conditions enabling key workers to get to workplaces. It has also shown it can continue to safely maintain and build track and train, essential to the UK’s connectivity, clean growth and levelling-up agenda. The IS reflects this.

Its four grand challenges, which are defined as the response to global changes in technology and industry, include a focus on infrastructure, mobility and clean growth – all areas which are relevant for rail. The IS could, however, place a greater focus on sectors that will deliver the IS and target support accordingly.

3 / 14

Set out below is the RIA position on decarbonisation; clean growth; green growth; and the need for long-term investment in infrastructure.

Decarbonisation RIA has been actively lobbying and participating in various rail decarbonisation programmes, including: • In March 2019, RIA published the Electrification Cost Challenge Report demonstrating that electrification can and is being delivered cost effectively at up to 50% the cost of some past projects; • RIA was part of the Rail Industry Decarbonisation Taskforce and contributed to the report, published in July 2019; • RIA has contributed to and supported NR’s Traction Decarbonisation Network Strategy, to be published in Summer 2020; and • RIA is a founding partner of the UK Rail Research and Innovation Network (UKRRIN), a collaboration between academia and industry, aiming to provide a step-change in innovation in the sector and accelerate new technologies and products from research into market applications globally.

RIA is clear that decarbonisation will require a significant amount of rail electrification and zero carbon self-powered trains (e.g. battery and hydrogen fuel cell) for those parts of the network where electrification is not appropriate.

RIA believes that electrification remains the optimum form of traction for an intensely used railway. Around 40% of the UK rail network is electrified - much less than comparable European countries which are typically 60% or more electrified. Electrification has a number of benefits, including costing less in the long term, reducing journey times, having less wear on the track, and being more environmentally friendly.

RIA is calling for an immediate start to a rolling programme of rail electrification to enable the industry to deliver schemes at significantly lower cost, retain learning and skills, and incentivise investment to prepare for the level of activity that will be required from c2024 onwards to achieve net-zero carbon by 2050. Such a rolling programme of electrification would progressively lower the long-term operating costs of the railway towards European norms, while reducing further emissions from rail. RIA are also calling for fleet orders of zero-carbon trains to stimulate a UK capability in battery and hydrogen technology for both new and remanufactured trains and so that the industry can make the operational adaptations that only fleet level operation will allow.

Clean growth – the role of rail in modal shift Even though rail is the transport mode with the lowest greenhouse gas (GHG) emissions in the UK (in 2018, GHG emissions from rail – passenger and freight – made up just 1.4% of the UK's domestic transport emissions), achieving full decarbonisation in rail can support significant emission reductions in other transport modes through modal shift. Alternatively, if support for rail is neglected carbon targets are unlikely to be achieved.

The Office of Rail and Road (ORR) reported 152 billion net tonnes of freight were moved by road in 2018, compared to 17 billion net tonnes by rail, which means that only 8.9% of all goods were moved by rail in 2018. However, according to the DfT’s Rail Freight Strategy 2016, rail can deliver 76% emission reductions for freight compared with road (the average 25 tonne freight train has an equivalent payload to 70 HGVs). So there is a real opportunity to decarbonise the entire goods route delivery, not just the last mile, by shifting more freight onto rail. The rail industry is innovating with “into the city” concepts, bringing light goods to city centres without the use of vans and trucks.

4 / 14

Furthermore, high-speed rail offers a viable replacement for some short-haul flights and long car journeys. Short distance commuter trains are also irreplaceable for high capacity passenger transfer in urban areas. This makes rail the only transport mode capable of moving both people and heavy goods using a zero-carbon solution. Rail, as the least carbon intensive mode of transport should therefore be at the heart of the Government’s recovery plans, with the knowledge that one tonne of carbon saved in 2020 translates into 30 tonnes saved by 2050.

Green Growth RIA supports the Chancellor’s call for ‘shovel ready’ projects to help reboot a green economy post Coronavirus. We recommend the Government accelerate the 58 projects in its Rail Network Enhancements Pipeline (RNEP) and adopt the following approach to deliver on green growth and help achieve net zero emissions.

• Procure zero carbon: include embodied carbon considerations in procurement specifications to leverage zero carbon rail fleet and infrastructure manufacturing and building capabilities; • Plan for zero carbon: start a rolling programme of rail electrification now; and • Support zero carbon innovation: support early introduction of hydrogen and battery powered train fleets as part of wider UK place, innovation, technology, and export strategies.

Greater consideration of social value as part of public procurement would also provide a useful mechanism to emphasis social and environmental/ clean growth goals.

Long-term investment in rail infrastructure The UK rail industry successfully delivers a huge amount of work, day-in, day-out, to keep the country running and is working hard to manage an aging rail system. The UK rail network was one of the most intensively used in Europe before Coronavirus and past trends show that even though passenger traffic has reduced, numbers will return to past levels or higher in the coming years.

The rail network needs sustained long term investment in maintenance, renewals and enhancements, to ensure the asset performs efficiently and delivers value for money for passengers whilst coping with growth. Indeed, the future success of the rail sector will be heavily reliant on this investment, as will overall UK economic prosperity.

RIA believes that rail projects need to be sped up as part of the Government’s plans for the UK’s economic recovery and growth following the Coronavirus outbreak. This is because rail projects have a vital role to play in the recovery – they provide green investment across towns, cities, and communities in the UK and can generate economic growth, investment and jobs.

A guiding principle the Government should adopt in the recovery is ensuring as much work as possible can continue, including acceleration of rail (infrastructure and rolling stock) investment and major projects. Rail is already playing a key role in supporting the wider economy. Indeed, NR has been the single biggest contributor to UK capital investment (some 25%) during the Coronavirus pandemic. Where work can go ahead safely, it should continue to do so.

Crucially, rail suppliers must have certainty and visibility of upcoming work so they can plan for and manage schemes with confidence and invest ahead in a more efficient manner in order to deliver value for money both for taxpayers and passengers. The Oxford Economics 2018 report shows that out of around 600,000 jobs supported by rail, the UK railway supply industry creates 248,900 jobs. Pipeline visibility and smooth work banks are regularly cited as the top priorities of businesses. This means major rail clients (NR, HS2, TfL and Train Operating Companies) must share their commercial pipeline of current and future projects with the supply chain.

The Rail Supply Group (RSG) – who, earlier in 2020 were invited by Government to form a Coronavirus Taskforce – recently shared the findings of its independent research, carried out by Savanta ComRes, into the impact of the outbreak on businesses supplying the rail industry. In 5 / 14

total, 442 responses were completed via an online survey between 30 April and 18 May 2020 and 10 in-depth interviews were conducted.

The main finding of the survey showed that cashflow and visibility of the pipeline of work across the rail sector are seen as vital, with rail supply businesses wanting sight of what work will be happening, when it will be happening and highlighting where plans have been altered as a result of the crisis. The survey also revealed that there is support for the continuation of the mechanisms NR has put in place to make payments quickly under PPN02/20 (‘suppliers at risk’), with many wanting to see this is replicated across the industry.

The acceleration of schemes that are both ‘shovel ready’ (those that are ready to build) and ‘shovel worthy’ (those that are worth accelerating) will also help to ensure a sustained programme of schemes that support wider economic growth and the Government’s levelling-up and connectivity agendas. Decision-making on ‘shovel ready’ schemes needs to be sped up, with bureaucracy reduced, while design work on ‘shovel worthy’ schemes needs to continue in parallel. This will help avoid a hiatus in work for rail suppliers, which risks the loss of skills from the sector and disincentivises investment in people, process and plant.

Relevance of the Industrial Strategy How can the IS be made more relevant and accessible for the UK’s supply chain, LEPs, Growth Hubs and for individual companies, investors and entrepreneurs? Has it helped SMEs grow and innovate? Is it helping Ministers decide on broader market interventions and policies to recover the economy following Covid-19?

For the IS to be more relevant and accessible to the UK rail supply chain, and individual rail supply business, there needs to be visibility of a forward pipeline of work. Business follows the money.

Projects may come through LEPs, Growth Hubs, subnational transport bodies, major rail clients (NR, HS2, TfL) and/ or the Department for Transport. What is essential is the ability to plan for and manage work in an efficient manner. An efficient and properly resourced supply chain with visibility of a stable and smooth workload pipeline coming to market is vital, if the industry is to deliver what is required of it by the economy, by Government and by passengers and freight customers.

No or minimal major rail projects/ schemes (known as enhancements) risks the loss of multidisciplinary skillsets in the rail supply industry, such as systems integration and project and programme management. These specialist skills could move to other sectors with fuller order books or abroad. Such specialist skillsets are expensive to regain once momentum of rail major projects returns.

The Government should follow its own advice, as set out by the Cabinet Office’s Outsourcing Playbook, such that every Government department is open about its commercial procurement pipelines so that suppliers can plan for forthcoming projects. The UK rail network needs enhancements to increase rail capacity, improve journey times, and generate further economic growth. The Government also has goals to decarbonise the rail network, which can only be achieved through enhancement projects.

Devolution of funding RIA recognises the move towards devolution of funding can be an effective way of prioritising transport asks and ensuring efficient delivery which reflects local interests. Sub-national and regional strategic transport bodies, such as Transport for the North, Transport for Wales and Midlands Connect, can help to ensure that transport projects are more closely linked with economic priorities. To be effective, however, it would be helpful if these bodies, including Transport for London, had longer term funding certainty.

6 / 14

Coronavirus has hit local transport revenues and devolved budgets significantly. So, in order to support the levelling up agenda, including a sustainable rail sector, including SMEs, the Government needs to create funding certainty. For example, both NR regulatory settlements and franchise terms create periods of planning certainty: to unlock full growth and productivity potential Government needs to develop 30-year investment plans underpinned by clear, and democratically accountable funding settlements.

It should start by publishing the delayed National Infrastructure Strategy and the Integrated Plan for the North as soon as possible – and by committing to bring forward schemes which have the greatest potential to benefit local passengers and regional economies.

Industrial Strategy delivery Is the IS deliverable within the current institutional framework? Does the IS Council have sufficient insights and powers? Are Whitehall departments delivering on their respective IS obligations and how is the IS being optimised over time? How has the IS operated in the Devolved Administrations and how does it compare to our key competitors?

IS Council The role of the IS Council is to provide impartial and expert evaluation of the Government’s progress in delivering the aims of the Industrial Strategy. Its membership is comprised of leading men and women from business, academia, and civil society. It is independent of Government. Its remit includes: • recommending a series of success measures for the implementation of the IS. • commenting on delivery against these measures and their contribution to UK economic growth.

• publishing a regular report assessing progress on implementation of the IS against success measures and on ways to improve measurement and evaluation.

The Council published, in February 2020, an updated schedule of metrics that it will use to monitor the success of the IS. While these include more traditional indicators, such as GDP, productivity and earnings, the Council will also look at welfare outcomes more widely, including social and natural capital, wellbeing impacts, and the distribution of wealth. This marks a shift away from conventional measures of the economy, and headline measures such as productivity. The challenge with most economic indicators is being able to clearly link the positive improvement in an indicator, such as wellbeing, to a specific measure, when in reality, it is likely that the improvement is the result of a combination of measures.

The Council has also conducted several insight projects and published corresponding papers and reports, e.g. on skills and places.

The above suggests to RIA that the IS Council has sufficient insight and powers to perform its role.

Government engagement RIA is the delivery organisation both for the sustainable rail and exports pillars of the Rail Sector Deal and is closely involved in the Digital Railway pillar. There have been good levels of engagement with the Departments for Transport, Business, Energy and Industrial Strategy and International Trade on the Sector Deal. This could be further enhanced by greater sharing of resources between these departments and the rail supply industry, not least to accelerate delivery of the sector deal to support economy recovery post Coronavirus.

Industrial Strategy Foundations What data exists to evidence the impact the IS has had on the five foundations (ideas, people, infrastructure, business environment and places)? How has the IS impacted existing embedded

7 / 14

policy areas – such as R&D funding and skills and education delivery – across Government departments?

Evidence of impact The IS Council’s success metrics cover the five foundations in the IS, as well as the Grand Challenges and Sector Deals. The metrics are existing datasets that are either a time-series or a snapshot. In its first annual report, published in February 2020, the Council concluded that given the long-term nature of the policy commitments in the IS, it is too early to reach definitive judgements on their success. The Council said it ‘believed a refresh and reprioritisation of the Industrial Strategy would be desirable if it is to meet its longer-run objectives. Having an Industrial Strategy that is more tightly focussed on a core set of Grand Challenges, financed at scale, coordinated across government and committed to over the longer-term would not only improve the chances of the strategy meeting its longer-term objectives; it would also make it easier for people to understand, engage and support it’2.

People and infrastructure During coronavirus rail workers were rightly recognised as key workers. Rail offers a wide range of skilled career opportunities across the country and RIA believes that this should be more widely recognised and celebrated.

However, the current system of rail investment creates periods of ‘boom and bust’ in infrastructure investment, which manifests itself in a see-saw profile in the way work comes to market, often requiring suppliers to increase their capacity at the start of the funding period, only to reduce it when they see a sharp drop-off in workload near the end. This creates uncertainty for the supply chain, impacting on recruitment, investment in skills and training, and in research and development.

The rail supply chain needs consistency in rail investment, with visibility of a stable and smooth workload pipeline coming to market to give it the confidence to invest in plant, machinery, skills and training and innovation, all of which will deliver better services for passengers and freight users.

While Government policy and planning cycles for rail focuses on five-year time horizons, the commercial reality is that business confidence in forward orders is low. A study by the National Skills Academy Rail (NSAR) found the average forward confidence of a rail supplier was between 11 and 24 months.

The return on investment spending on skills and kit will be around three years plus. Hence the ‘boom and bust’ in work coming to the market makes it harder for rail supply businesses to justify investing in a three-year apprenticeship when there is no guarantee of work beyond year one.

This dampens short-medium term investment in skills. Yet greater levels of investment in skills would help the industry drive efficiency and innovation, mitigate wage inflation arising from skills shortages, thereby achieving a longer-term financial benefit.

The Government and the industry need to work together to ensure rail maintains and develops the number of engineers, technicians, and operational staff it needs to function successfully.

Additionally, RIA would like to see more engineering/integration resource in the areas of signalling and mechanical and electrical equipment, vital to the successful delivery of major investment programmes such as HS2, London Underground and the Digital Railway.

NSAR has identified the industry’s key skills areas are digital skills, cyber security’ systems engineering and leadership and management. The rail industry also needs to promote and attract more workers to help mitigate the impact of its ageing workforce.

2

https://industrialstrategycouncil.org/governments-industrial-strategy-has-made-progress-needs-refresh-and-reprioritisationmeet

8 / 14

Industrial Strategy Grand Challenge Missions Is the Government focusing on the right grand challenge missions (artificial Intelligence and data, ageing society, clean growth, future of mobility) and, if not, which are missing? Are missions addressing the right problems and are they the best approach? Where the Government has established additional capacity to deliver them (e.g. the Office of AI), has it succeeded, how is this evidenced, and can they be improved?

RIA agrees that the Grand Challenge missions are focused on the right areas, in particular those focused on infrastructure, data, mobility and clean growth.

Rail remains a key vehicle for Government investment; for every £1 spent on the rail network, £2.20 is generated in the wider economy. Rail projects including enhancements and renewals, are an essential part of the day-to-day work completed by the rail supply industry. Everything from upgrading stations, replacing track, introducing new signalling systems and installing digital technology to improving mainline travel and freight services. These works contribute to the delivery of a safe, efficient and reliable railway for passengers and freight services and form a low carbon transport mode.

The Government should therefore support rail investment projects by bringing forward renewals from the planned peak in 2022/23 to 2020/21 and committing to accelerate the 58 projects within the RNEP. One of the Government’s strategic priorities is to accelerate modal shift to public and active travel. Indeed, the Government wants public transport and active travel to be the natural first choice for daily activities. Encouraging modal shift from road to rail for everyday journeys commuting, leisure, and shopping - requires reliable and easily accessible rail services in cities and regions. This also allows for increase in active travel as people are more likely walk and cycle to a rail station. For that to happen investment in rail renewal and enhancement programmes need to be done in a timely and consistent manner.

The Government is also keen to see greater delivery of passenger benefits. Greater political ambition for digital rail, including digital signalling and smart ticketing would accelerate the pace of benefits delivery. Both these digital solutions are proven and transforming rail journeys across the globe. The issue is not technological. A stronger top-down approach with the appropriate legislation and regulatory power to ensure operators adopt existing digital solutions to improve passengers’ journeys, across different modes of transport.

Decarbonisation The UK is the first major economy to pass a net zero emissions law, which will require the UK to bring all greenhouse gas emissions to net zero by 2050. If the Government is serious about meeting this target, it should give environmental goals a higher priority in public investment and in its Green Book appraisal of proposed rail schemes, in particular on rail electrification. Policy uncertainty is one of the major risk factors that currently hamper private infrastructure investment.

An overlay/ timeline of complementary policy and investment decisions needed to achieve environmental goals is missing, e.g. the Government has set a target of 2040 for the removal of all diesel-only trains from the rail network with remaining part-diesel trains removed completely by 2050. Yet in recent years, there have been substantial orders for new and part diesel powered passenger trains, which have a 30-35-year asset life and hence takes their operational life beyond 2040. Similarly, there may be opportunities to repurpose/modernise diesel powered trains to run on other traction sources of energy such as battery, hydrogen, or dual fuel. This will require a 30 year plan supported by Government investment, particularly as this work needs to be accelerated to meet decarbonisation targets.

9 / 14

A joined-up approach to Government policy and investment is essential, e.g. a programme of more rail infrastructure electrification would mean more trains powered by electric traction are needed. Similarly, where Government policy favours a move to greater use of alternative traction sources for some journeys, the green energy infrastructure required to support battery and hydrogen powered trains will need to be part of a wider Government strategy for a zero carbon economy.

Connectivity The economic structure of the UK exhibits a wide dispersion in regional productivity levels between the South East, including London, and the rest of the country. Connectivity is widely recognised as a driver for economic growth. Adequate infrastructure provision would be instrumental in lowering regional disparities and balancing economic growth geographically, so that all parts of the UK can prosper in future. This supports the Government’s ‘levelling up’ agenda.

Better connected towns and cities have deeper labour markets, greater competition and greater economies of scale, leading to higher growth and living standards. This is why it is right that the Government should support the development of major infrastructure projects like Northern Powerhouse Rail and the Midlands Rail Hub – to join up towns and cities more effectively, and enable them to pool their labour markets and economic strengths.

HS2 is cited as an example of an infrastructure project that can deliver the wider ambitions of the Industrial Strategy. The project will establish a High Speed Rail network from London to Leeds and Manchester, with construction continuing until 2033. Thus, it provides a long-term opportunity to contribute to growth and productivity throughout the UK, and to support each foundation of the Industrial Strategy.

Whilst RIA supports investment in the North this should not come at the cost of neglecting London and the South. To boost connectivity, it is vital that the Government builds on its economic strengths and commits to the funding and financing of Crossrail 2, East West Rail and the Cambridge-Oxford-Milton Keynes Growth Corridor, and to connecting Northern Powerhouse Rail and Crossrail with HS2. This would align with the Government’s ‘build, build, build’ infrastructure agenda.

The national impact of Transport for London’s (TfL) investment programme means: • Out of every pound spent on its investment programmes, up to 55p is received by workforces located outside of London.

• 43,000 UK jobs are supported by TfL’s supply chain: 68% of which are outside of London. Over half of these jobs are related to the investment programme.

• By spend, 55% of companies delivering the London Underground investment programme are located outside of London and utilising regional workforces to provide design, engineering and professional services.

SME support for innovation and product development RIA believes that Government support could be offered in funding of innovation and product development for the lower tiers of the rail industry, in support of the SME and smaller non-SME companies who have struggled the most during the pandemic. Having such funding would help ‘ideas’ get over the ‘valley of death’ (the phase between research and commercialisation), which would help speed products to market.

Industrial Strategy support Is existing IS support (e.g. British Business Bank and Innovate UK), effective? Are IS priorities properly financed and how is value for money assessed? What type of businesses/organisations have benefited from R&D funding under the IS Challenge Funds? Where investment risks are taken, how 10 / 14

does Government assess and mitigate them? Does the IS merely bolster existing strengths or balance it against frontier innovation work?

Financial support There are various types of Government financial support, including: • Government loans and grants (including Coronavirus support packages) which must meet EU state aid rules including the “undertaking in difficulty” rule.

• The “undertaking in difficulty” rule is likely to be a barrier for many businesses looking to access many of the (coronavirus) business support measures that have been put in place, e.g. where it can be difficult to distinguish between companies which are investing in R&D and those which are losing money. The definition is understood to have been arrived at with large-scale bailouts in mind and may be unsuitable for many businesses the Government measures seek to assist, such as businesses that have invested heavily to grow, resulting in up-front losses, or private equityowned companies with leveraged financing structures.

• Match funding on commercial terms (e.g. the Futures Fund). This is not a state aid so “undertaking in difficulty rules do not apply – companies do need to find and equity partner or make a financial contribution themselves.

• Innovate UK research and development grants and loans – and wider support, e.g. access to advisors and assistance with identifying equity partners and investors.

• The Innovate UK offer has been extended as part of the Government coronavirus response package – with funding for new and existing partners and improved terms, e.g. on payments and delivery deadlines.

• The Enterprise Europe Network offers relevant advice and support – membership goes wider than the EU and is expected to continue after the EU transition period.

• Contractual approaches under which the “undertaking in difficulty” rule does not apply, such as previous DfT rail “First of a Kind” funding and current Network Rail Innovation Partnerships.

During the coronavirus period the Government has also improved information about such information and advice – using a mixture of newsletters and website information services. We think Government should build on this to simplify and improve the accessibility of information on the support available.

In respect of whether the IS priorities are properly financed, RIA’s view is that while the transport sector (the single largest source of UK domestic carbon emissions) attracts funding, and has a wide range of standards and incentives in place and this tends to be focused on modes other than rail. Yet modal shift to rail is more likely to achieve lower emissions in the near and longer-term, and zero carbon construction will be necessary to support zero carbon goals. Hence, there continues to be a need for the Government to do more to put rail at the heart of its zero carbon policy including by committing to longer term certainty of funding for a rolling programme of rail electrification with a steady annual programme of work out to 2050.

IS Challenge Funds These funds represent Government investment in a partnership with businesses to address the biggest industrial and societal challenges today, such as climate change and clean energy. These challenges have been informed by industry and are where the UK already has world-leading research and businesses that are ready to innovate, and where the global market is large or fast-growing and sustainable. The fund is a core pillar in the Government’s commitment to increase funding in research and development by £4.7 billion over four years to strengthen UK science and business.

According to UKRI, the Challenge Fund has supported 1,820 organisations since its inception in late 2016. Through the first two waves of funding £986 million of Government investment has been secured by 497 projects, in addition to almost £488 million of underpinning investment. Research organisations, SMEs, charities and the UK’s biggest businesses are all engaged with the fund from 11 / 14

Airbus to the Royal Opera House, Saga Robotics, the University of Oxford and Jaguar Land Rover3.

The challenges are a vehicle for innovation – investment in which involves a degree of failure on the road to success.

Industrial Strategy Sector Deals Is the Government focusing on the right sectors and, if not, which are missing? Have they delivered growth in goods or services output, solved underlying problems (e.g. productivity or decarbonisation) and/or created or improved jobs/pay? Does the Government need to rethink/re-prioritise sector deals because of Covid-19 and Brexit?

The Rail Sector Deal, launched in December 2018, sets out a new approach to the rail industry and the Government working in partnership to transform the rail sector by taking actions to increase the use of digital technology, boost productivity, double exports, improve the service received by those who use the railways and build the skills of the UK workforce to capitalise on these opportunities. The delivery of this RSD will equip the railway for its strategic role as a driver of economic growth and to provide a positive experience for passengers and freight users through this century and beyond. It will continue to provide a focus and impetus for the rail industry and Government, to work together and improve the rail infrastructure for the country, while supporting a faster recovery.

Earlier this year, The Rail Supply Group, the joint Government-Industry leadership body for the UK rail supply sector, formed a Coronavirus Taskforce to spearhead and aid the recovery of the industry from the effects of the Coronavirus crisis. The Taskforce is currently reviewing how delivery of the Rail Sector Deal (RSD) can be accelerated to support economic recovery and growth. In response to the findings of its recent survey on the impact of Coronavirus on the rail supply chain, the RSG has agreed three Act Now priorities: • Improve work pipeline visibility across the whole supply chain; • Increase access to rail performance data to allow better decision making and new services to be developed including improved customer information; and • Enhance railway access arrangements (known as possessions and blockades) to increase working hours and maximise productivity The Digital Railway Pillar of the Rail Sector Deal is an excellent example of Government and industry working together to address shared challenges, in this case how to affordably address the backlog of signalling renewals. In 2019 Network Rail developed a long-term plan and in 2020 industry responded with a strategy and plan to achieve European benchmark costs or better. The opportunity now is for government to ensure the necessary pilot projects are in place to support the industry to build up its capability and demonstrate its efficiency.

Public procurement and rolling stock While not a sector, RIA recommends that the Government review public procurement policy to ensure it remains relevant in a post-EU world, with a view to considering how it can incentivise local sourcing for rail procurement, including rolling stock procurement. This approach would support investment in mobility, skills, UK capability and rail supply chain growth.

We also support reforming UK rolling stock (and infrastructure) procurement to ensure more weight is given to socio-economic criteria, by adopting ‘life-cycle’ costing, or ‘Best Price-Quality Ratio’ in all future rail procurements, with appropriate due diligence on ‘Value for Taxpayer’. This would help prioritise the UK supply chain and ensure rolling stock manufacturing delivers its true economic potential for the UK. This approach would align with the work being progressed through the Rail Sector Deal, which is looking at how to drive value, including social value, in rail

3

https://www.ukri.org/innovation/industrial-strategy-challenge-fund/#pagecontentid-2

12 / 14

procurement. This has identified key success factors, including solution quality, outcome-based specifications, whole life costing, employment and skills and community and legacy benefits.

Delays to the Williams Review and franchising could further exacerbate ‘boom and bust’ in rolling stock manufacturing. We await clarity on the responsibilities of the expected new ‘guiding mind’ for rail, expected as part of the Williams Review, and recommend its remit includes development of a national rolling stock renewal plan, which is tied to the lifetime of fleets, rather than franchise renewal. This would help create stable, forecastable procurement, enabling rolling stock manufacturers to better prepare their investment and assess supply chain options. This approach would also provide more visibility and certainty to suppliers in the rolling stock refurbishment market, which has been significantly impacted by the substantial increase in new train order in recent years.

Exports The IS states the Government will promote exports and inward investments and will support the development of the UK supply chains that will create jobs and drive future exports. According to the Oxford Economics Report, the total amount of rail-related exports goods and services amounts to £800 million a year – investment in rail both enables and helps suppliers to develop goods and services to be exported to markets around the world. This is a significant opportunity, with the global rail market estimated to be worth €163bn and expected to grow by over 2% each year until 2023.

Exports is a key pillar of the rail sector deal. The Government and rail industry are already working closely together on the rail sector deal, in which increasing rail exports is an important objective as part of the deal, with an aim of doubling exports by 2025. Some of the initiatives in the rail sector deal to enhance rail exports are being offered by Government organisations, such as supplier references provided by NR for UK companies to include in their tender pitches, which is why RIA values continued support from the Department for International Trade (DIT). The DIT recognises and assists the rail sector in achieving these goals, using the full might of the UK’s diplomatic networks to promote sectors skills and expertise.

There are likely to be increasing exports opportunities around low/zero carbon expertise and the UK is recognised as a leader in this field. Moreover, the Government wants to harness the UK as a centre of expertise to drive low carbon innovation and travel behaviour. RIA therefore recommends the Government promote the UK’s zero carbon rail expertise and looks for opportunities to support UK rail companies to develop and export zero carbon ideas and initiatives.

The Government should continue to provide financial support for trade promotion, to support export guarantees and look for opportunities to link UK aid to export opportunities where the UK can share its expertise with emerging economies. It is also worth considering that good connectivity also supports foreign direct investment in the UK, as well as additional inward investment from businesses already located here. This is because transport links are a key component of business location decisions (along with access to a skilled workforce). A successful inward investor can also become a successful UK exporter. As noted above RIA would like to understand the Government approach to procurement policy as international procurement rules which support free trade will be essential to underpin UK rail exports.

Measuring Success Has the IS increased national and regional GDP and GDP per capita and should it aim to deliver a more inclusive and sustainable economy? How should IS success be measured and are current tools/metrics adequate, especially if seeking to deliver goals broader than GDP?

13 / 14

As detailed earlier in this submission, the metrics published by the IS Council to measure the success of the IS look about right, not least given these are a mix of conventional and wider economic performance measures.

GDP per capita is a blunt measure of economic performance/ prosperity as it does not measure the distribution of income, which can be skewed towards higher earners that raise the mean value. We welcome the fact that the new Measures seek to address this. We would also like HMT to bring forward their proposed review of the Green Book to reflect the indirect, whole life and catalytic value of infrastructure investment.

If you would like further information, please email RIA’s Policy Director, Kate Jennings (kate.jennings@riagb.org.uk) or Senior Policy Manager, Damian Testa (damian.testa@riagb.org.uk).

14 / 14