Blood on the tracks

2004 will go down as the year when the government was longer able to ignore the crisis on the railways. The problems created by what is now widely recognised as a botched and hasty privatisation are deep-rooted and extremely difficult to solve.

Now, at last, recent reports in the press and various other straws in the wind suggest that ministers are beginning to realise that their ostrich-like approach of hoping that the railways would sort themselves out has not worked. In Whitehall, senior civil servants and ministers are contemplating the future of the railways in various meetings and brainstorming sessions with a renewed air of urgency prompted by the prospect of the railways becoming an ever larger black hole in the government’s budget.

A brief bird’s eye picture of the railways shows why ministers are getting a bit hot under the collar. The passengers who had to endure above inflation rises for the first time since privatisation at the beginning of the month will be bemused to discover that the railways are getting more taxpayers’ money in subsidy than ever before. This year, the railways are receiving a staggering £3.8bn in subsidy. To put that in perspective, in the last full year of British Rail, a decade ago, the railways got a third of that, just £1.3bn (at current prices).

And what is the public getting for this extraordinary sum? Not a lot. Twice as many delays as under British Rail and a big project to improve the West Coast Main Line which is several times over its original budget. There are quite a lot of shiny new trains, too, and more rails than before are being replaced, but otherwise there is not much to show for all this extra government cash. There are no plans for any expansion of the network and all this money is going on routine maintenance and renewal which is costing far more than previously. The biggest drain on resources is the upgrading of the West Coast Main Line, a project whose cost at one time soared from £2.4bn to around £13bn, but now seems to have been reined back to £9bn.

Admittedly, the railways are being well used. Passenger numbers have gone up by a third since privatisation. But that’s largely as a result of the economic boom and, indeed, the increase adds to the problem by placing more of a strain on resources. There are about 15 per cent more services than when the railways were sold off and that’s about all the network can take in many parts of the country.

For the past 18 months, ministers have been pinning their hopes on the notion that having got rid of Railtrack and replaced it with the not for profit Network Rail, the railways were now ‘sorted’. They could not have been more wrong. The first inkling that things might be getting out of control was the publication early last year of Network Rail’s draft business plan which suggested it needed £34.9bn to maintain and renew the railway over five years, a staggering £7bn per year compared with the £3bn allocated to Railtrack.

After a protracted review by Tom Winsor, the regulator charged with determining how much Network Rail should be allocated in track access charges, he came up with the figure of £22.2bn over the next five years, still a 50 per cent increase on Railtrack’s spending. Moreover, the process has revealed a bizarre feature of how the railways are funded. In effect, Winsor has the right to require the Treasury to fund whatever sum he comes up with as his assessment of what Network Rail needs to maintain the railways provided the money is spent economically and efficiently.

The fact that Winsor, who is due to be replaced by a regulatory committee in July, has had direct access to the back pocket of the Treasury is not only unique among regulated industries but has infuriated ministers who can’t quite understand how this situation has come about. It is, in fact, a result of the way the industry was privatised. The train operators are insulated against regulatory changes because no private company would take on the risk of suddenly finding that it is having to pay twice as much in access charges, by far its greatest cost.

Labour could have changed this system but only if it had been prepared for a radical upheaval in the way the whole industry is structured and that was ruled out by Alistair Darling, the transport secretary, soon after taking over from Stephen Byers 18 months ago. This was a lost opportunity. At the time Network Rail was emerging from the ashes of Railtrack and there was debate in Whitehall about whether to attempt to simplify the industry structure but ministers eventually decided to play it safe even though they realised that the privatisation was flawed.

They must be regretting that decision now. The railways are showing little sign of improvement as performance on delays is barely edging up despite the records amount of money being spent. Moreover, not only is Network Rail, so are the train operators. The refranchising process is well underway as most of the initial contracts were for seven years and as each one is relet, the SRA is having to fork out much more money in subsidy than expected and is expected to be £200m over its £1.6bn budget this year.

So what is wrong? The roots of the current difficulties of the railway lie in the fragmented state of the industry created at privatisation, even though there have been considerable changes since the railways were first sold-off by the Tories in 1996-7.

That first model of privatisation was predicated on creating on-rail competition between different companies (a notion that was quickly dropped), encouraging operators to run as many trains as possible with very little regulation and allowing them considerable freedom. At the heart of the industry was the profit-maximising infrastructure company, Railtrack, and over time subsidy levels were supposed to decline (eventually, so the Tories hoped in their more heady moments, to nothing).

Railtrack collapsed and many operators, too, found that their expectations of being able to cut back on the amount for subsidy they received had been far too optimistic, necessitating extra injections of cash. Now operators are on a much tighter leash, with profits being capped under new arrangements which allow them much less freedom. They need permission from the Strategic Rail Authority to run extra trains as the timetable is now more tightly controlled because the overall service deteriorates once the tracks become too crowded. Network Rail is notionally a private company but is able to borrow funds only because it has government backing. Although theoretically, as a company limited by guarantee, it could go bust, in practice the government could not allow that because it would undermine confidence in the structure it has created and because, following Railtrack’s demise, it would look rather careless for the rail industry to go broke twice.

Network Rail recently announced that it was taking its maintenance work in house in the hope of saving around a third of the £1.3bn annual cost previously spent on contracts but decided it would leave the renewal work with the private sector. However, savings will be slow to show through and there are concerns that the organisation has taken off rather more than it can chew, given that it is also seeking to shed staff.

Meanwhile, the plethora of companies involved, together with increasing interference from the Health and Safety Executive, means that attempts to bring down costs which rocketed during the year long administration period after Railtrack’s collapse have so far met with little success. While undertaking his review, the Regulator found a whole host of inefficiencies, ranging from the failure to use ‘possessions’ – closures of the railway – because schedules were badly organised to massive ‘goldplating’, the insistence by Network Rail on unnecessarily high standards for work on the track. So the Regulator is expecting only a minor reduction in costs over the five year period covered by his access charge review.

The argument that the current high level of spending is necessary in order to make up the backlog of underinvestment by British Rail does not hold water. Sure some extra work is being done, but nothing to justify the massive rise in costs. A detailed analysis by Roger Ford of Modern Railways has shown that while British Rail did try to keep down spending on maintenance and renewal, particularly at times of recession, its investment spending was largely steady and well-focussed.

Therefore, the subsidies have to continue to pour in. The option of cutting back on services in order to make savings is not realistic, especially in the run-up to an election. Calls to close branch lines miss the point. In order to make substantial savings, a Beeching style axe would have to be taken to large swathes of the network, particularly in the northern half of the country, a policy which no Labour government could live with.

It is now dawning on ministers that this is an unsatisfactory hybrid of a private industry which is state controlled but largely unaccountable to the government on whose funding it is increasingly dependent. Moreover, there is growing awareness that a huge and costly bureaucracy of regulation has sprung up in order to keep control of the private companies in the industry.

Research by the Liberal Democrats’ transport team has shown that there has been more than a four fold increase in the number of staff regulating the rail industry since 1992. British Rail employed around 340 people at head office and now there are some 1500 at Network Rail headquarters, the Strategic Rail Authority and the Office of the Rail Regulator. The Health and Safety Executive, too, has seen numbers soar from 31 in 1992 to 186 now, largely because the industry used to be much more self-regulating. While numbers are not strictly comparable and there were clearly more BR around the country who had a central managerial role, the broad picture is of a burgeoning bureaucracy that appears to contribute little to making the industry more efficient.

Moreover, the present model has no ostensible purpose. No one in their right mind would say that the current structure is an ideal way to run a railway and in private virtually everyone in the rail industry accepts that the model ‘sub-optimal’. There are too many different parties, private and public, all batting for their own interest, too much contractual complexity and a total absence of the overall corporate ethos that a railway needs. Railways require an integrated approach because the interfaces – say between wheel and rail, or operations and infrastructure – are in play constantly, unlike aviation where planes are free as the air once they reach the end of the tarmac.

The problem is what to replace it with. There are various options floating about most of which would require primary legislation. For example, Network Rail could be broken up into regional sections and integrated with the operations, in order to create the same type of railway companies that existed between 1923 and 1948. Some services could be provided by other operators, too, provided there was a regulator. Alternatively, InterCity lines could be run under an integrated system and other services could be handed over to regional bodies. Or, a British Rail type organisation could be created out of Network Rail, though ministers might find that idea a bit hard to swallow.

Opting for any major change would be a brave decision. It would undoubtedly cause considerable upheaval in the short term to an industry that has had more of its fair share of restructurings over the years. Until now, the argument has been that upheaval for a couple of years would be too high a price to pay. But now that the current mess is showing little signs of delivering an improve railway, the government is stuck between the current reality of having to shell out huge sums to an industry that appears much less deserving and popular than say schools and hospitals, or attempting a radical reform to cut subsidies with all the risks that entails. At this time last year, the odds were heavily on a retention of the status quo. Now, it is an evens bet on whether radical changes will be made. Should there be another major accident caused by the structure, such as Hatfield, or another financial crisis, the odds will favour reform.

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