Rail 507: The journey from SRA to Sir Humphrey may not be seamless

Many industry figures remain unconvinced that the transfer of SRA functions to Whitehall will be as smooth as senior civil servants promise, says CHRISTIAN WOLMAR.

It will be fascinating to see how civil servants cope with playing a central role in rail. While ministers and officials may try to persuade us they are not going to run the railway, the new Department for Transport Rail Group (needs a better name, offers please – and no, not British Railways) will be at the heart of all major decisions concerning the industry. Therefore it is going to be accountable and will have to be responsive to all kinds of external forces.

It will be a sharp learning curve. In order to convince the industry there will be a seamless transition, the DfT organised a conference on February 3 to reassure the industry that the it had mapped out the post-Railways Act future. However, many present remained unconvinced. Lots of civil servants had emerged from their bunker and clearly this is going to be a feature
– they cannot play a central role without attending such events and hearing the views of key players in a relatively informal setting. However, they have no idea how to handle the press which seemed to have been invited very late. Indeed, the mere thought of talking to a journalist can send them into a blind panic. Sue Killen, Director General Railways, Aviation, Logistics and Maritime Group (don’t they have snappy job titles), sent the estimable Times man Ben Webster off with a curt “don’t ask me for any information” when he had the temerity simply to pose question on whether the appointment of the new Director General of the Railways had reached the shortlisting stage.

Another, Mark Lambirth, the Department’s Director of Rail Strategy and Resources, responded to a question about overcrowding by stating bluntly “I do have views on that but I am not going to give them in this forum”, because there were a couple of hacks sitting in the front row. This is something that must be sorted out. The SRA was always willing to put its senior personnel forward for press briefings which were held relatively often. Yet such openness goes completely against civil service ethos, as they like doing things behind closed doors and to hide behind their political masters. Simply referring journalists to press officers, as Killen did, is not the answer. Press officers act as filters but they cannot possibly answer the type of detailed and difficult questions that are bound to arise in an industry as complex as the railways.

However, despite this reluctance to engage in debate, we did learn a bit about how the new DfT Rail Group is going to be organised, and there was the best attempt I have heard to answer my perennial question, “what is a franchise for?” from Keith Ludeman, the Chief Executive (Rail) of Go-Ahead.

In a confident-sounding and impressive speech, Killen promised there would be a seamless transition from the current situation to the new structure. She emphasised the Rail Division would be a completely new organisation, and not bits of the Department and the SRA cobbled together. But it would not happen at once. Some things could be transferred straight away, while others would have to wait for legislation, which had finished its Commons stage, and is now in the Lords, to be enacted. Nor did she give a date for when the new structure would be in place.

Killen also referred to a new beastie that we are clearly going to have to get used to in the new railway: Virtual Vertically Integrated Companies or VVICos. This is the sexy new name the DfT is giving the local partnerships between Network Rail routes (the old areas) and operators, but NR itself is playing down the concept and has no plans to use the name. This suggests that the Department is rather keener on vertical integration than the 500lb gorilla down Euston way.

As is always the case in these events, the public utterances of the various railway industry representatives were somewhat at variance with their private thoughts. From the rostrum, there was plenty of praise for the Department for its boldness in tackling the problems and compliments about the thoroughness of the White Paper.

These interventions were often from the same people who had defended the old structure when possible changes were mooted early last year. Isn’t it amazing how people change their tune so quickly in response to changed circumstances? Ludeman, however, was an exception, not mincing his words, by launching a robust attack on Richard Bowker’s regime at the SRA. He attacked the fact that operators had been far too closely regulated, mentioning there were 227 Key Performance Indicators (targets to you and me) on stations alone. Ludeman made it clear that he expected the new Rail Division to back off from such attempts at close supervision and leave the operators to get on with the job. He also emphasised that he was not representing ATOC, the Association of Train Operating Companies, and it soon became clear why. He referred to the fact that the operators were receiving £1 billion more than had been predicted by the old OPRAF in subsidy and he blamed most of that on Virgin, which was getting more than half that extra amount for its two franchises that are currently under management contracts.

He argued strongly against the notion of such management contracts. “It is essential that TOCs retain revenue risk,” he said, but the Department is clearly not entirely convinced about this. In a workshop session, Lambirth would only say that he agreed franchises must be incentivised by the farebox, which is not quite the same thing. They could, for example, share in any extra revenue with the Department, and that may be a cheaper option when putting out franchises to tender.

Indeed, Lambirth said he was not at all sure whether operators should take the risk on ‘GDP revenue risk’ – in other words, the well-known phenomenon that more people use railway when incomes go up, and vice versa. But separating out such growth would not be easy – there is not necessarily a one-to-one relationship between GDP rises and passenger number increases, and therefore a complicated formula would be needed.

The issue is an interesting one. The fact that franchise costs have soared is partly a reflection of the realisation by bidders that it is very difficult to predict revenue more than a year or two ahead – there could always be another Hatfield, or the bottom could drop out of the economy. But how could you incentivise a private sector operator unless it shared in the pain or gain from revenue? Well, South Eastern seems to be doing a perfectly good job without such incentives but that is very old-fashioned of me to refer to it. Inadvertently, however, Alistair Darling did.

He recounted how a woman at Charing Cross station had pushed through the throng to congratulate him on how the service had improved on her line. He had clearly forgotten that the service was provided by South Eastern Trains, the renationalised franchise which the government is busy reprivatising in the teeth of opposition from the unions and many passengers. Ah well, Alistair, only three months in the job to go! Back to franchises. In setting out the advantages of the franchise system, Ludeman argued that TOCs take various risks: revenue risk, operating cost risk and even risk on major projects. But do they? As Ludeman himself pointed out, the operators were receiving £1bn more in subsidy than had been predicted under the original franchise agreements, and there had been a 38% increase in passenger numbers. So where had all that extra money gone?

Yes, OK, Virgin has nabbed a lot, but several franchisees in the first round effectively demanded more money with menaces, since the alternative was to hand back the keys which would have meant an increase in subsidies anyway. Remember that on privatisation, the subsidies to the TOCs doubled from £1bn to £2bn, with the intention that they would go back down. So even taking into account Virgin’s profligacy, operating the railway is still costing a lot more than it used to and therefore the operators have to demonstrate that they are giving us value for money. The example given by Ludeman about major project risk was particularly unconvincing. He said the operators, principally his own Go-Ahead and South West Trains, had taken a hit when the trains could not be introduced on schedule. Not so, according to a former Bombardier executive at the conference, who said operators had gained from the delay: “They got liquidated damages from us and increased subsidies from the SRA to pay for the new trains, and only had to pay a small amount for the leases of Mk 1 stock.”

So, yes, the operators take operating cost risk, but surely otherwise there really would be no point in having franchisees. It is difficult, therefore, to agree with the proposition that the operators face enormous risks when taking on a franchise. Ludeman is right to say that this is an opportunity to sort out the franchise agreement, after the OPRAF and Bowker versions. But is not the difficulty in getting the details sorted out caused by the very fact that the concept is flawed?

As a footnote, I travelled on one of Ludeman’s trains a couple of days after his speech and that certainly did not seem any advertisement for the benefits of franchising: quite simply, it was the most grubby and revolting train I have travelled on since my trainspotting days. The carpets were frayed, the first class was deplorable – keeping people out of that compartment, empty since it was Sunday, was the main priority of the revenue protection inspector – the disabled toilet looked as if it had been locked out of order since Thatcher was in power, and the normal one was filled with graffiti dating from the same era. Clearly all those ‘KPIs’ have been in vain.

This was the unit painted in garish yellow as an advertisement for day trips to Brighton. I hope it is now given the refurbishment it needs as a matter of urgency.