Rail 447: Who really runs the railways under privatisation Mk 2?

The new model of privatisation is far preferable to its discredited predecessor but, asks CHRISTIAN WOLMAR, do we still need so many organisations with a finger in the infrastructure pie?

The consultation document produced by the Strategic Rail Authority on the West Coast Route Modernisation is a masterful effort in both senses of the word. Not only is it a remarkably clever digging out of a very tough hole, but it has also been written by the new masters of the railway, the SRA.

As Nigel Harris has already emphasised (RAIL 446), this is not a consultation document but a plan. All the consultation and the banging together of heads has already taken place to allocate the train paths and work out, more or less, what trains and services will operate. This is shown most clearly by the fact that Silverlink’s trains will no longer go to Birmingham, but stop at Rugby so they no longer clog up the overstretched bit of railway between Coventry and the second city.

Of course Silverlink’s franchise will probably be merged in with Virgin’s (or whoever has the West Coast contract) in any case, but this shows the readiness of the SRA to take control in what has now become what I term ‘rail privatisation model 2.0’ (RP 2.0).

I enjoyed, too, the slapdown First Great Western received from an ‘SRA spokeswoman’ when it put forward the idea of a new high-speed rail link with 200mph trains between Bristol and London. She told the BBC: “Train operators do not have responsibility for national strategic planning. This is the responsibility of the SRA and we may look into this in the future – after the 2006 franchise.” In other words, stop day-dreaming, and get back in your box. What a contrast to the ‘let a thousand flowers bloom’ days of Sir Alastair Morton.

But I digress. The SRA’s plan for the West Coast may well be very clever, but it still raises an awful lot of questions about how the railway is being run. Here, according to the SRA, is how RP 2.0 works in terms of the West Coast and, presumably, other major projects. The SRA specifies what it wants in terms of output. In the past this was done by Railtrack, and that, according to Richard Bowker, the Chairman of the SRA, was a mistake because it meant that the company had to both specify and carry out the work. Now, Network Rail – or rather its contractors – are only doing the latter.

But at what price? The bulk of the West Coast spending, some £7.5bn out of £10bn, is on renewing the existing infrastructure which is the responsibility of Network Rail. So it will be up to the Regulator, Tom Winsor, to determine whether that £7.5bn is a reasonable price. He will do that by ensuring that Network Rail receives enough track access charges to pay for the work. If Mr Winsor decides the cost is outrageous and should be cut back, Network Rail will have to cut its cloth to suit its purse. Should he decide that Network Rail has too much money, then presumably he would reduce access charges accordingly.

Before considering the difficulties facing Mr Winsor and his successor in carrying out this task, let’s think about this bizarre structure for a moment. Is this a sensible way to run a railroad? One state organisation (the SRA) specifies work for another (Network Rail – which Richard Bowker insists is a private organisation, but he has to say that) which is then priced by a third (the Regulator, who is independent but nevertheless Government-appointed) and the work will eventually be carried out by a contractor. One suspects, too, that the Treasury might just take a little bit of interest in Mr Winsor’s musings. Would it not be simpler and therefore far cheaper just to allow the SRA to specify and carry out the work, which after all is being paid for by the Government? Or would really be too much of a return to BR?

Mr Bowker’s analysis of Railtrack’s problem is partial. It is not the fact that it both specified and undertook the project that was the difficulty, but that it was working to an impossible brief which was never properly defined determined by a contract it could not fulfil, overseen by a hostile Regulator but with the knowledge that this was a must-do project backed by what seemed an endless source of money from the Government. Mr ‘Three-Brains’ Winsor – it would be rude to call him merely two-brains, the moniker given to David Willetts, the Tory politician who is far less clever – will face an impossible task in determining what is a fair cost of the project.

An analysis of past regulation produced in a recent report by the New Economics Foundation* highlights the difficulties he has to overcome. It says: “There is a permanent information asymmetry because the regulator is dependent on the utility for comparative information needed for the setting of prices, targets for improvement and so on.” The pamphlet stresses that the railway is particularly difficult to regulate in this way because there is only one supplier, Railtrack (now Network Rail), and, moreover, there is an intermediary, the train operators, between the end-users who are the passengers, and the company itself, requiring an extra layer of regulation.

In addition, there is a massive cost to this process which is a burden on the rail industry that should not be ignored. I discovered this while researching my book on the London Underground PPP, Down the Tube, which is about to be published. In the case of the PPP, there will be review points every 71/2 years at which the prices of the contracts will be reassessed completely. The bill for this process is a staggering £36m every time for a contract that is in the same order of magnitude (around £16bn over 30 years).

What this highlights is that the complexity of the structure of the railways results in costs piling up which ultimately can only come from increased subsidy or the taxpayer. Sure, as I have already said in previous columns, RP 2.0 is a much better model than RP 1.0 ever was, and may bring about some improvements. But the bureaucracy created by the regulatory mechanisms, contractual arrangements, interfaces and safety requirements that result directly from a structure that is still too complex and, to the public, incomprehensible is a millstone round the necks of the industry and, particularly, of all the good people who work in it and whose views inform columns like this.

Safety audits: a mistake in the offing

Mr Three-Brains has, as ever, been a busy bee recently and issued an impenetrable (not his fault, it’s the territory) consultation document on the future of Railway Safety, the old Safety and Standards Directorate hived off from Railtrack in the aftermath of the Ladbroke Grove disaster. Tucked away in it, there is the suggestion that Railway Safety’s auditing function should be hived off to the private sector.

Currently this work, which involves examining the safety cases of the 80 organisations that are allowed to operate on the railway, is carried out by a small team of around 15 auditors employed by Railway Safety. This is an eminently sensible arrangement. The team, whose members go round the country checking the management practices of train operators to ensure their safety cases are robust, meet regularly to exchange information and share best practice. Such auditing, which can only be partial and selective, is according to an insider “all about intelligence gathering and the swapping of information as we are the eyes on the ground for Railway Safety.”

Since privatisation and the development of the safety case concept, the team has built up considerable expertise, but now it is at risk. The consultation paper suggests that the auditing function should be put out to tender with the general presumption that “the Railway Industry Safety Board’ [the new name for the independent Railway Safety] should not provide services which are available commercially”.

Quite apart from the fact that such a doctrine clearly demonstrates the current Government’s obsession with ‘private is best’, it risks the repetition in miniature of what was probably the most fundamental problem of privatisation – the loss of collective expertise and corporate memory. Sure, there will be a lot of other companies able to become accredited to do the work such as those great bastions of corporate success, WS Atkins, but to what end? Each operator will be able to choose its own auditor, and it raises the Enron-type problem of what if that auditor also carries out consultancy work for the same company? Will there be a conflict?

Look what happened to the BR research department, its expertise lost so quickly that within years a relatively minor crash at Hatfield led to the paralysis of the whole network. Moreover, I am convinced that after a while the auditing process will become much more expensive, once the in-house team (who will undoubtedly get jobs at higher salaries) has been broken up. So the fate of this little auditing team will be an interesting test of whether some of the lessons of privatisation’s failure have been learnt.

There is a wider question about Railway Safety, due to be created in its new form next April, which has an impact on the issue about costs raised above. Having yet another body in the industry seems superfluous. Railway Safety was only hived off from Railtrack because the latter was a profit-maximising body that was not trusted by the public. Network Rail, however, is a not-for-profit organisation which is not riven by forces pulling in different directions like Railtrack. Cullen, in his inquiry, of course recommended the separation but he was writing long before Railtrack collapsed. Therefore, why not simply make Railway Safety a subsidiary of Network Rail and save an awful lot of costs? Or is that a no-brainer, Tom?

* A Mutual Trend: how to run rail and water in the public interest, New Economics Foundation, £6 from 6-8 Cole Street, London SE1 4YH

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