Rail 475: SRA should keep a TOC or two in house for costs

The SRA says it will refranchise SE Trains , the former Connex operation, at the earliest opportunity. But, argues Christian Wolmar, would it not be best to follow the Network Rail model and keep one or two franchises ‘in house’ to serve as cost benchmark?

Now that the Strategic Rail Authority has taken over the running of South East Trains, a little bit of the railway is almost entirely in state hands. It is not quite nationalisation but rather a diffuse form of fragmented state control.

But, of course, we are not allowed to say that. The fiction of Network Rail as a private company must be maintained in order to keep its spending off the government’s books, even though its borrowing is going to become an ever increasing drain on railway finances, a topic I will examine in this column shortly.

Here, though, let us focus on the strange situation of South East Trains. This was taken back in house because of alleged financial irregularities concerning the franchisee, Connex, after it had been bailed out once with an extra payment of £58m for the current year. When Connex came begging for more, Richard Bowker, the head of the SRA, refused and decided that it should be run directly by the SRA until it could be relet as a new franchise which includes the domestic services on the high speed link.

Of course, the supporters of renationalisation cheered when the franchise was taken back in early November. But Bowker has strongly rejected their hopes that this is the first step in taking back further franchises. Appearing before the Commons Transport Committee, he said it was government policy to have all the franchises to the private sector. South East Trains was merely a temporary move because of the circumstances, but ‘The policy is that the train operators will be private sector companies. It is a govt policy, in our directions and guidance’.

A few days later, I asked Bowker what would happen if running South East Trains directly proved cheaper in the way that Network Rail found running its Reading contract in house was saved so much money that it quickly took all the rest in. ‘That won’t happen’, he said baldly, ‘the private sector will deliver better value for money on a risk adjusted basis’. But what if the bids are too high? They won’t be, I was told.

But whose policy is this – Bowker’s or the government? I checked out the instructions and guidance and found no relevant reference. There is a paragraph about encouraging private sector investment, but nothing which seems to rule out the public sector running franchises.

So I phoned the SRA press office, which apparently was moving offices and had lots of people taking days off. Or at least that was the explanation as to why it took four working days to come back to me with comprehensive information. I was told that the requirement to have all the franchises was contained in the Railways Act 1993 and was pointed to Section 25, amended by the Transport Act 2000, which says ‘Public sector shall not be franchisees’ and goes on to list what it considers to be public bodies such as local authorities, Transport for London, any body “whose members are appointed by a minister of the crown” and ‘any metropolitan county passenger transport authority’. But hold on a sec, the SRA has effectively handed on the franchise for Merseyrail to the local Passenger Transport Authority which has become a kind of joint franchise authority.

Ah, that’s different I am told by the SRA on pressing. Merseyrail had to be de-designated – presumably a painful process – as a franchise in order for responsibility to be handed over to the local PTA. It is a special case.

The SRA says that ‘essentially, the concept of passenger rail franchises is fundamental to the structure of the rail industry’. Well, yes, but aren’t we always hearing from ministers as well as civil servants that the privatisation was ‘deeply flawed’.

This is all highly sloppy and dubious; sloppy because in giving evidence to a select committee, Bowker referred to his instructions and guidance, which was not strictly accurate – you can’t imagine Tom Winsor making such a mistake; and dubious because clearly the Merseyrail example shows that exceptions can be made when the government or the SRA so wishes but it is unclear, in the opaque world of railway policy, who exactly makes these decisions. Moreover, the press release announcing the Merseyrail franchise makes no mention de-designation, so the process was not explained at the time.

A group of Labour MPs, led by Clive Efford, a member of the select committee on transport are now pressing the SRA to keep SET in the public sector. Efford told me that the Transport Act 2000 allows a public sector operator if there are no other bids and the tender process has not started. However, in order to block this, the SRA appears to have delibrately started the process.

I am not arguing necessarily that many franchises should be brought in house, although, given that train operators have become little more than service delivery units, the purpose of the franchising process, which imposes enormous costs on the industry and involves little risk transfer or investment, remains unclear. But it is the inconsistency that is incomprehensible and which I am trying to highlight. Given the soaring costs of franchising, would it not be wise to do as Network Rail did and retain a couple of areas in house in order to help the SRA become an informed buyer, which is the original reason NR gave for taking three contracts in house. How will we ever know if we are getting a good deal when there is no public sector comparator? As with so many issues of railway policy, it is a blancmange which falls apart at the first attempt at dissection.

The politics of maintenance

I am always happy to be asked to give talks and lectures because I always end up learning more from the audience than they do from me. A good example was a talk I gave recently to the Institute of Railway Operators (SE branch) – an organisation that is increasingly important in bringing people from across the industry together in these days of fragmentation and upheaval – about how the supposedly banal activity of rail maintenance had become a highly charged political issue.

There was a lot of concern among the railway managers at the meeting about what is happening in the industry. While, in a show of hands, the vast majority supported the taking back in-house of rail maintenance by Network Rail, there are doubts about the organisation’s ability to tackle this huge task. One of the aspects of my talk had been about how, at privatisation, Railtrack seemed deliberately to discard everything that had happened before. As a manager quoted in a forthcoming book on loss of corporate culture by Tim Strangleman puts it, ‘It’s like 1994 was Year Zero. Anything that happened before that, they don’t want to know’.

And now we are in danger of repeating that mistake. Network Rail has just sacked 600 managers – including an experienced track engineer who was at the meeting and who said, with some bitterness, ‘I thought they were short of engineering experience’ – and is reorganising to do away with areas and regions, while bringing in maintenance in house, all in the space of a year. The idea is to concentrate control at the centre and the whole process represents a complete upheaval just as big as what occurred at privatisation. So it was hardly surprising that several people are terrified that given the state of flux, which always introduces risk, that there might be another disaster caused by an error resulting from these changes. And that will be more than the industry can bear. The consequences would be frightful, not just because there would be more loss of life on the railway, but the impact on an industry that has been battered by the events of the past decade.

Another member of the audience made another interesting point. The reorganisation of Network Rail has been couched in terms of reducing costs and making the industry more efficient. But what of the passengers? They seem to have been forgotten in this debate.

A third issue to arise was the future of renewals. There is little doubt that the separation of maintenance and renewals, with one being done in house and the other by contractors, is arbitrary and likely to lead to further changes. With a workforce of 18,000 people who may be sitting idle at various points in the maintenance cycle, is it not likely that they will start carrying out the occasional renewal, especially as the delimitation between the two is arbitrary and ill-defined? The notion, incidentally, that British Rail did not carry out any renewal, as suggested by some of the senior managers of Network Rail is clearly a nonsense. After all, how come six renewal units were sold by British Rail at privatisation?

There was, therefore, total agreement about one thing. Further change and flux is inevitable and the notion, as suggested by the SRA and highlighted in this column in the last issue, that taking back the maintenance in-house represented ‘the final piece in the privatised jigsaw’ was complete balderdash.