Are we on the right lines?

There is a paradox about the railways. On the one hand, they are in crisis. Every week, there are stories in the press about something going wrong on the railways. While admittedly some is media exaggeration because the railways are a favourite Aunt Sally for journalists, there is indeed a fundamental crisis in the industry as the botched privatisation has led to a remarkable conjunction of soaring costs, record levels of subsidy and unprecedented levels of train delays.

On the other hand, the railways are booming. Passengers are flocking to rail, there are more services than at any time since the 1960s and plenty of gleaming new trains are haring up and down the rails, together with a whole host more waiting in the sidings. And Britain even has its first high speed rail link, a modest 40 miles from the middle of Kent to the Channel Tunnel.

Assessing the future of the railways is therefore a difficult task. It is quite easy to be uncommonly gloomy, with predictions that the Treasury will finally get sick of throwing in nearly £4bn annually to run the trains and will pull the plug, resulting in Beeching style cuts. Or, alternatively, one could argue that with such buoyant demand, the railways are bound to be able to sort out their economics and their future is assured.

The paradox arises from the fact that the crisis in the railways is due to internal factors specific to the railways, which has still yet to emerge from the mess of privatisation and the related chaos caused by the Hatfield accident in October 2000 whereas the demand is a result of external factors, notably the booming economy and growing road congestion.

It is hardly surprising that the railways are popular. The most important factor behind the rise in overall passengers numbers is employment in London which attracts commuters, always the biggest growth market for the industry. Sure, some of the better train operators, like Anglia, have managed to increase use of their lines through effective marketing or massive investment such as the new trains and services introduced by Virgin CrossCountry – largely paid for by the taxpayer – but essentially the growth has been based on the healthy state of the economy.

But the growth is also part of the problem and was one of the causes of the demise of Railtrack which was asked to cope with a 20 per cent increase in the number of services without any extra money. Growth does not, in fact, come free and the government has only just realised that. In launching its ten year transport plan in July 2000, the government set a target of a 50 per cent rise in passenger numbers by 2010. But then wiser counsel prevailed and the target has been quietly dropped.

That is because increasing the use railways quickly results in extra money being required from the taxpayer. While the system can absorb a bit of growth by filling up empty trains or running on underused parts of the network, once there is a need for new trains, new track, new stations – broadly any major new addition to capacity – or even new services, extra government cash, either capital or revenue support or both, is required. That is a fundamental law of railway economics for which, possibly, only Japan with its greater population density may be an exception (and only because a staggering debt of £144bn has been set aside).

Hence, far from solving the crisis of the railways, the increased demand exacerbates it. The fundamental cause of the crisis is, of course, the privatisation which everyone now agrees was botched. However, the contradictions in the privatised model only really became apparent in the aftermath of the Hatfield crash.

The railways were broken up into over 100 companies and sold, in a great rush, in 1996/7. At root, there was a fundamental flaw which always doomed the exercises to failure. One loss making organisation, requiring around £1bn subsidy per year, was broken up into many parts, all expected to make a profit. Given that British Rail was pretty efficient, having cut its workforce to pretty much the bare minimum during the Thatcher years, this foolhardy experiment was doomed to failure. The ideal of a privatised railway was, though, kept afloat for a couple of years by the blinkered city investors who thought it could work and boosted Railtrack’s share price to over four times its offer price with similar rises being made by several of the train operating companies.

But it was all a house of cards built on shaky foundations, exposed mercilessly by the Hatfield crash caused by a broken rail which should have been replaced earlier but was left unrepaired due to a breakdown in communication between Railtrack and its contractor, Balfour Beatty. Railtrack panicked, imposed thousands of speed restrictions across the network and had to spend hundreds of millions of pounds on patching up the network and in compensating the train operators for the delays. The company never recovered and was put to death by Stephen Byers, the then transport secretary, in October 2001.

But the demise of Railtrack and its replacement by the not for dividend Network Rail, a supposed private company that has no shareholders and receives massive subsidy, has failed to stem the soaring costs in the industry which threaten to wreck its economics permanently. Whereas maintaining and renewing the infrastructure used to cost around £2bn per year under British Rail, it now costs nearly three times that and this year the government is putting a staggering £3,8bn into the industry, compared with the £1.3bn (at the same 2003/4 prices) in British Rail’s last year, 1995/6. Although the regulator, Tom Winsor, is forcing Network Rail to cut back its spending, its expenditure will still average around £5bn over the next five years, historically an unprecedented sum.

Ministers argue that this high level of expenditure is necessary because of years of underinvestment by British Rail but this analysis is not supported by a recent analysis of its spending by Roger Ford of Modern Railways for Transport 2000 which shows that while BR did scrimp and save, its investment spending was steady and well-focussed.

The depth and intractability of this crisis poses a big dilemma for ministers and for the organisation through which they exert control over the railways, the Strategic Rail Authority headed by Richard Bowker. Any attempt to rein back on the subsidy would either provoke a financial crisis for Network Rail, which would be too politically embarrassing for the government given that it was only created just over a year ago. And, in any case, its replacement would face the same difficulties.

Alternatively, there would have to be Beeching style cuts, also unthinkable for a government given the popularity of the railways with the public – even those who do not use it – and the sheer difficulty of trying to assess what lines to cut. Closing the odd branch line or two, while deeply unpopular, would hardly make a dent in the large subsidy requirement of the railway. Only a radical excision of some 10-20 per cent of lines would actually deliver sufficient savings to rein back subsidies to pre-privatisation levels and even then, the concomitant loss in revenue might still leave the system in the red. In any case, that is politically unfeasible.

Given this context, it is hardly surprising that any hope of major improvements on the railway has already gone out of the window is. The ten year plan was full of hopes about major upgrades on the Great Western lines out of Paddington, London to Brighton, and the East Coast line out of King’s Cross. Thameslink 2000 – a project which its very name reveals as slightly tardy – was to have increased capacity on the most overcrowded route in London and there were to be major improvements for freight services. None of this is now expected to happen by 2010, if ever. The only major improvements for passengers in the near future will be the completion of the West Coast upgrade, the introduction of new rolling stock and the opening of the second section of the Channel Tunnel Rail Link.

Partly this is a result of the way that the biggest project, the West Coast Route Modernisation, has gone so out of control that it helped bankrupt Railtrack and is now reckoned to cost at least £9bn, four times the original estimate. But principally, it is because the railway is absorbing so much money as a result of the complex structure created by privatisation just to be kept in a workable condition that the Treasury will not sanction any major new projects.

This is short sighted (but then what do you expect from the Treasury?). As a recently published pamphlet, What future for rail?, prepared for the all party Parliamentary rail group and the Railway Forum, points out, the railway is likely to become even more important as an alternative to roads in the next few years. In July, the transport secretary, Alistair Darling, made clear that congestion would continue to rise on the roads unless there was some form of demand management – i.e. road pricing. If people are to be priced off the busiest sections of roads, where will they go? Of course, only a proportion of those journeys can be absorbed on the railways but they are precisely the ones which would do most to relieve congestion – trips into central London and on motorways.

Therefore investment in the railways is a valid alternative to spending on the roads, but not if they are in such a mess that the money will be wasted. At the moment, that is the prevailing feeling in the Treasury and begs an even more worrying question – will the Treasury be prepared to keep on coughing up even enough to retain the existing level of services going? Until the election, there is little choice.

Even afterwards, it is difficult to see a Labour government pushing through major cuts in service. Interestingly, though, the transport minister Kim Howells has recently tested the water with statements about rail not being value for money and not having any chance of getting extra money. Moreover, things could even get worse. The railway is particularly dependent on the state of the economy. Its costs are largely fixed and therefore any loss in passenger income has to be compensated by a subsidy rise. The predicted interest rate rises over the next year could send the railways into a further downward spiral.

That could prompt the Treasury to take another look at the convoluted structure which is the root cause of these soaring costs. When Railtrack went down, the Treasury and the Department for Transport did look at the possibility of re-integrating the track and services, but they felt that the upheaval would be too great to impose on the railways. But since then, the structure has changed, with both the preparation of signalling schemes and day to day maintenance being taken back in house by Network Rail. Indeed, Network Rail hopes to shave off £300m off the £1.3bn annual spending by doing the maintenance itself.

But the train operators, who have the franchises to run services, are also now getting much more money than before and they, too, could be brought back in-house or melded with Network Rail, recreating a kind of series of regional mini-British Rails. While that is a better way to run a railway, the Treasury would only sanction the idea if it felt that sufficient money could be saved. And what an irony that would be. It was, after all, the Treasury and its crazy demands for a structure which allowed on-rail competition that created much of this mess in the first place.