Rail 421: We must seize this chance to travel toward railway Nirvana

After analysing the reasons for the collapse of Railtrack in RAIL 420, CHRISTIAN WOLMAR urges the industry to put the recriminations behind it and seize the opportunity of the next few months to make historic decisions about the future structure of the railway.

It is no exaggeration to say that the next few months represent the most important period for the rail industry since the row over privatisation in the early 1990s and the Beeching cuts in the 1960s. Hold on to your hats and watch history unfold over these crucial months.

When I wrote in my last column that there was a blank sheet in Whitehall entitled ‘the future structure of the rail industry’, I was somewhat guessing but now, having had the opportunity to talk to many more people, I know that it is entirely true. No one – but absolutely no one! – in government or anywhere else has a clear vision of how these months are going to pan out and what type of structure for the revamped industry will emerge. There are lots of ideas and strands of thought, but no blueprint.

In one way, that can seem scary as it would be reassuring to know there was a big Nannie who knew best and was taking us to Nirvana to play. But let’s look at it optimistically. This is a great opportunity to get it right and to create a structure for the industry that is appropriate for the 21st century. But it ain’t easy.

Briefly, let’s look first at the reasons for the collapse of Railtrack, set out in this column in RAIL 420, to make sure that the same mistakes are not repeated.

First, there was the crazy notion of Railtrack as a profit-maximising company at the heart of the rail network. That was always a mad idea and clearly the mistake is not going to get repeated. We know that ‘NuTrak’ will be a company limited by guarantee with no shareholders and a membership from across the rail industry and led by an executive of experienced business people. Well and good. This will reduce NuTrak’s tendency to make silly decisions based on narrow-minded criteria of profitability and, hopefully, will make it easier to align the organisation’s aims with those of the public, but it does not solve the fundamental problems which brought down Railtrack: its inability to keep costs down, its poor management and the flawed nature of the regulatory regime.

Let’s take these in turn. Railtrack’s failure to keep control of its costs is one of life’s mysteries. I have talked to many people in the company and the wider industry about it and there does not seem to be a clear answer, especially as one of the key levels of management was ‘Infrastructure Contract Manager’ in the zones who presumably spent their lives ensuring that Railtrack got value for its money. There are obvious reasons such as the fact that Railtrack did not have the ability to carry out maintenance and renewal work in-house, and the flawed nature of the original contracts (now being renegotiated). This meant that maintenance companies carried out as little work as they could get away with, because the price was fixed, and tried to push everything into renewal, where every job had to be paid for.

One Railtrack insider has estimated that only about three out of every ten hours for which the company pays result in productive labour, and he berates the fact that there is so little basic supervision at the foreman level and the existence of a virtual chasm between the Black Tower and what goes on in the zones.

The new structure of the railways does little to address this cost issue. Indeed, the very notion of ‘not for profit’ has induced some commentators to suggest that commercial disciplines will be completely ignored. That is nonsense. NuTrak will have financial targets and its managers will aim to operate the company as efficiently as possible. But that is a long way from saying it will be much better than Railtrack and, indeed, since it will have public-sector objectives, the new company may be more generous in, say, trying to work up minor schemes to boost rail usage by not, as Railtrack did, charging exorbitant amounts for its work.

So financial discipline will be a big issue when detailed plans are being drawn up for the creation of NuTrak. Creating massive systems so that the Treasury can count every penny would be self-defeating. NuTrak has to be trusted. However, the fact that the railway is receiving between two and three times the highest level of subsidy ever paid to BR (without taking into account rolling stock investment as this is largely funded privately) and yet there is little to show for it, must be addressed.

Of course, the biggest cost overrun is on major projects and NuTrak is not going to be dealing with those. The idea is to hand them over to Special Purpose Vehicles, in which NuTrak will clearly have to have a role as a partner to provide technical and practical help, but not as an investor. The idea being touted before day zero, October 7, when Railtrack went into administration, was for a joint Railtrack/Strategic Rail Authority called Fundco which would purchase the new asset on completion by the SPV, using money which it raised on the basis of future income from access charges for this enhancement to the rail network. This would have kept the investment from counting against Gordon Brown’s Public Sector Borrowing Requirement, but whether this is still possible with NuTrak is unclear.

The reliance on SPVs is worrying. The first one, being created by GoVia, Railtrack, Bechtel and the SRA to improve the SouthCentral lines, has hit a bureaucratic quagmire which has slowed down progress and it is nowhere near being established, despite being announced early this year. About ten SPVs around the country are expected to be created. The Government privately accepts it will have to share the risk with private contractors and, indeed, there will have to be a much closer line of accountability than under the old regime where Railtrack ran up enormous costs which the Regulator felt obliged to fund, leaving ministers no control over them – except, as happened ultimately, to pull the plug.

However, major questions remain to be resolved, such as how such schemes are drawn up – the SRA simply does not have the development and design capacity at the moment, although this is going to be addressed – and the extent to which NuTrak will be involved. It is quite simply impossible for such schemes to be undertaken without the active involvement of the railway’s infrastructure company.

Railtrack’s poor management will be equally difficult to tackle. NuTrak will inherit the same staff which includes a lot of very good managers, particularly at the zonal director level, but also a lot of dross particularly in middle management. Railtrack’s daft policy of employing senior executives with no railway experience can easily be done away with, but the recruitment of a lot of good middle managers who see the railways as a interesting career will be very difficult given the past decade of chaos within the industry. This is not a trifling matter. Getting well-motivated managers, with a public-sector ethos, could well be the most difficult task faced by the railways over the next few years and it is an issue that should be addressed urgently by pan-industry bodies such as the Railway Forum.

Clearly, then, the very creation of NuTrak out of the ashes of Railtrack does little to address the fundamental problems of the railway. That is because the privatisation of Railtrack was only one of the key mistakes. The other was the separation of the wheel-rail interface, and ministers have intimated they want to see a return to some vertical integration. To work, this would need to include not just ensuring operators and NuTrak work more closely together, but the maintenance and renewal contractors must be included, too. The precise mechanism for reintegration is, however, unclear: would it be a unified company, or some kind of regional board with powers granted to it by the Strategic Rail Authority or merely a loose coalition of interests?

If the structure is only loose, some of the existing problems are not resolved. Under the existing track access agreements, for example, train operators are eligible for compensation if Railtrack has to close the line to make improvements. But this is daft because the operator actually benefits in the long term from such work through improved reliability and reduced delays.

The new structure can only address these ‘perverse incentives’ if there is a very strong link between the three layers of the industry and they work together to improve performance. Indeed, I would go further. Unless the three layers are aligned in such a way that they stop trying to screw each other for compensation using the contracts which have been drawn up at vast expense, and which are supposed to stay in the bottom drawer but don’t, then the new system will be no better than the old one.

The best solution may be to abandon the compensation and incentives regime entirely. This would have enormous benefits for major schemes by cutting costs at a stroke and allowing sensible decisions to be made about line closures and possessions. Franchise payments would have to be tailored accordingly. It would also save all that money being spent on delay attribution clerks and the like, and ensure that rail managers’ focus was on providing the service, rather than on counting pennies for every delay.

But won’t that mean no one will bother to run the trains on time? Well, no. The railways survived for more than a century and a half without these complex schemes. There are good commercial and public-sector ethos reasons for running the trains on time. Let’s just forget the whole caboodle which has never worked, whatever Tom Winsor has tried.

And another part of my solution would be to abandon the money-go-round whereby train operators are given vast subsidies, most of which is handed on to Railtrack. Instead, the money should be given directly to NuTrak and operators should largely be self-funding. Marginal access to the tracks will, therefore, be cheap. NuTrak should be compensated by the Treasury at least partly in relation to the number of trains it has to cope with on its tracks. That would align the incentives because operators would make more money by running extra trains, while NuTrak will get more for providing the paths for them.

What makes this whole restructuring so damned difficult is that to every proposed solution, there is an objection. For example, integration is made more difficult because under European law, the accounting for the infrastructure must be kept separate from services, in order to allow for other companies to have access to the lines. The European Commission could well object to any attempt to reintegrate separate companies, fearing that it meant there was no longer transparency for open access operators.

Then there is the issue of train companies running over each other’s tracks, which brings us to the question of regulation, one of the causes of Railtrack’s demise. Clearly there will be the need for a strong regulator able to ensure they are charged fairly and that disputes over train paths are dealt with impartially. The Government wanted to see the Rail Regulator merged in with the Strategic Rail Authority to simplify the complex regulatory system but before Mr Byers could announce the change, he was lobbied by the train operators, fearful of not having an independent regulator, and the idea was shelved, at least for the time being. Given more space, I could address both these issues, but they do show the Herculean task being faced by those designing the new system.

All this serves to show just how uncertain this brave new world is. There is a fantastic amount of detailed work to be done both in Whitehall by the Government departments, by the Strategic Rail Authority and, of course, by the rail industry itself. Everyone in the industry must realise is this is a great opportunity rather than bemoaning past mistakes. Railtrack, in particular, should stop whinging about shareholder value and whether Mr Byers did the dirty on them, and instead begin to work towards the new structure through active dialogue with the Government and other players. In a revolution, it is the brave and the prescient who claim the ultimate prize.