(This is a copy of the speech given to the Railway Studies Association on March 9 2005.)
I have thought long and hard what to speak about tonight. Conscious that many of you read my columns and my books, I thought possibly I should do something different. Perhaps, I wondered, I could really surprise you and talk about the success of rail privatisation and how I was looking forward to a period of success and stability in the rail industry. Or I could just have had a bit of fun, giving you my picture slide show on my latest book, The Subterranean Railway, which is a social history of the Underground (signed copies on sale afterwards).
But actually, I did not want to waste this opportunity of addressing such an illustrious audience. And I am taken by the fable of the frog and the scorpion. The frog, as you know, agrees to carry the scorpion across the river, even though he is a bit worried about the insect’s intentions. Then half way across, the scorpion stings him. ‘Why did you do that?’ asks the frog. ‘Because I am a scorpion’, comes the reply.
I am, I’m afraid, the scorpion, and I think that’s why you have come here today to listen to me. Scorpions are more fun than frogs, in any case. I had hoped to have my new book ready for this lecture but as ever was a bit optimistic about timings. It is a rewrite of Broken Rails and I have largely finished it – its title is, perhaps, a bit of a giveaway: On the wrong line, how ideology and incompetence wrecked Britain’s railways. It will be published in the summer. Well, I am going to do something similar tonight, though my theme is a tad different – it is ‘let’s stop pretending’.
I am deep down a journalist – the media may occasionally suggest that I am ‘an expert’, and I let them do it because it is good for my business and after all I do know more than most people about the subject, but fundamentally I am a hack, and proud of it. Tom Winsor was never convinced of my expertise, incidentally. On one of the numerous occasions he lost his rag with me, in the middle of a press conference, when I asked him an innocent question about whether he had been hard enough on Railtrack, he lost it totally and said ‘right Christian, the media call you an expert, so let me try to make you one’ and proceeded to lecture me and the rest of the hacks at the press conference on the virtues of the contractual railway. Inevitably, that found itself into The Times diary.
There is no nobler art than debunking myths and helping to convince people that the emperor has no clothes and that is really all I have ever tried to do during the past decade of writing about the rail industry. Much of that time has been spent listening to people in government and in the industry bullshit – excuse the language – and in this lecture I am going to try to set the record straight – so prepare yourselves for 45 minutes of bullshit vacuuming.
1. Let’s start with a big one.
Let’s not pretend that privatisation was undertaken with the passenger in mind or that fragmentation could ever have worked It would have been a miracle if the railway had ended up with a coherent and workable structure given what the privatisation was about. Let’s not be naïve here, and pretend that it was anything else but a Treasury driven attempt to rid the government of a troublesome industry. The drivers behind the selection of model meant that failure was inevitable. Privatisation was about reducing subsidy, getting government out of the railways, breaking the unions and fostering competition in a sunset industry. The passenger figured nowhere in this process.
I have been digging in my files and have come up with Steve Robson’s reasons for privatising the railway. For those of you who don’t know who he is, if there were a Gang of Four who ought to be put up in front of a wall for what they did to the railway, then he is certainly the leader of them :the Mrs Mao of rail privatisation. Robson was the Treasury mandarin responsible for establishing the structure the privatised railway, with the emphasis on separating infrastructure from services in order to facilitate competition. You may remember that at one time the Treasury was seriously discussing the idea of selling individual train paths at once a month auctions. So how much are we bid for the 9am from London to Newcastle? That was the sort of madcap idea they go for in the Treasury.
In one of his rare public forays, a panel discussion in September 2002 for a book on Japanese rail privatisation, Robson outlined the aims of rail privatisation the flaws of the nationalised model that would be addressed by privatisation:
• The lack of clarity about the objectives of enterprises in the state sector in UK, and hence, there was no definition of success and no real accountability for performance.
• The interference in the activities of the enterprises by civil servants and politicians
• The fact that the public sector in the UK was motivated by aversion to risk and therefore avoided doing new things
• And finally, the finances of state enterprises in the UK are often constrained by the state’s own fiscal position.
Now let’s stop pretending any of those have been resolved:
1. Do we know what the railway is for? Do we hell?
2. The civil servants and the politicians no longer interfere in the industry? Don’t make me laugh
3. The private sector embraces risk and, moreover, does not charge for it? Pull the other one
4. The finances of the railway are no influenced by the government’s fiscal position? Ha
Robson goes on to say that the improvement in customer service would only come about if there were competition: ‘So we sought to create a structure for the railways which was not simply moving from the public sector to the private sector, but was also introducing, as far as possible, competition’.
He was delighted with his subsequent efforts, oblivious to the chaos and disarray he had caused: ‘When we started the privatisation, British Rail was a monopoly employing about 120,000 people, whereas at the end of the privatisation the only monopoly element was Railtrack employing some 10,000 people.’
So the railways are a world that has embraced competition which has driven down costs and made it more efficient. Ah Steve, what a fantasist you are.
This is the biggest pretence of all – I should really have kept it till last, but it informs much of what comes after this. When the railways were privatised, BR was a loss making concern requiring about £1bn per subsidy per year. The notion, the pretence even, that you could break that up into 100 or so separate companies, all seeking to make a profit and end up whereby there would be less call on the Exchequer than previously. It was rather like the story of Jesus and the fish and bread loaves. Sure, if the railway had been woefully inefficient, some of those savings could have been made, but even then it would have been a tall order. So we should not be surprised that fragmentation has proved expensive and unworkable.
2. Another aspect of this notion that you could have your cake and eat it is the franchising process. OPRAF used to have regular press conferences to announce the winners of the franchise process, attended by the minister, Sir George Young who always used to start off by saying: ‘This is a good day for passengers and for taxpayers’.
Well, it clearly wasn’t. The franchise strategy at the time was to pay extra money at the early stages with the expectation that it would go down over the subsequent seven years. Well, we all know it didn’t. Total subsidy in 2002/3 was £1.9bn, nearly a billion more than it should have been under the OPRAF plans. Those franchises that made a profit, pocketed it, while the others did the old Oliver Twist number.
You could not drive down costs at the same time as improving the railway. Either the aim was improvements, which was good for passengers, or it was to make reductions in the franchise bill, which was good for taxpayers. But you could not have both.
So let’s stop pretending that franchising is a cheap option. You get what you pay for.
3. There is a bigger pretence hidden here – and that underlines so much of what has happened in the intervening decade. And it is this. There is a fundamental rule of railway economics which means that, apart from very limited circumstances, adding extra passengers onto the network will require extra subsidy. There is, of course, an opportunity to fill up a bit of spare capacity, but as soon as you need extra coaches or trains, longer platforms, new station capacity, new junctions or doubled lines, then the economics are such that you will need more subsidy. Let’s stop pretending, therefore, that you can get new railway for free or that it can be paid for by the private sector. There is, of course, have a choice – the government can put money up front in terms of supporting investment, or the government can do some sort of PFI deal and pay for it over time. In other words, ex ante or ex post but either way, the money comes “ex us”, you and me the taxpayer.
4. On the issue of structure, let’s stop pretending that change in the industry since privatisation has been incremental and coherently planned. The original model is so different from what we have now and what we are going to have that, in effect, there have been three great experiments with different versions of rail privatisation, rather than just one. And none of them have worked I won’t bore you with the details, except to list a few of the major changes:
• The curtailment of open access (before it started)
• The privatisation of Railtrack (not in the original plan)
• The length of franchises (you need a graph for that)
• Creation of SRA
• Hiving off Safety and Standards Directorate
• The management of franchises (laisser faire or strict)
• Franchise freedom to run extra trains removed
• The death of Railtrack
• The notion of Special Purpose Vehicles (stillborn)
• Creation of Network Rail
• Maintenance contracts taken in house
• Office of Rail Regulator becomes OR Regulation
• Creation of virtual boards and joint control centres
And now we have the Railways Bill:
• Abolition of SRA
• Transfer of HMRI from HSE
• Reduced independence for ORR
• More power with Network Rail
So is that evolution or revolution?
5. The other lesson here is let’s stop pretending that whatever structure happens to be in place at the time is the ideal one. The rail industry should make more of a fuss about the calumnies imposed on it. Certainly, the structure we are about to end up with is quite possibly the worst of them all, and I shall return to that.
6. And here is one just for Tom Winsor. Let’s stop pretending that if we got the contracts right, the railway would run smoothly and efficiently. Well Tom, are the contracts right yet? Or is it that in your five years of issuing a document a month from the ORR, you did not manage to get it quite right.
7. Which brings me on easily to my next one. Let’s stop pretending that TOCs invest in the railway. They don’t, and nor should they be expected to. They are temporary custodians of a bunch of services, management contractees who, if the past record of the refranchising is anything to go by, will be gone next time. Why, therefore, should they invest?
Well, because they make massive profits, I hear Smith Junior murmuring at the back. Well, no, they make profits because they have taken a punt on revenue risk and have bet the right way. Or, in many cases, because the SRA has given them a jolly nice deal in the contract. SWT’s management, for example, still cannot believe the generosity of the deal that saw them get three times as much subsidy, even though it was the most profitable franchise on the railway. The issue of TOC profits is therefore a different one.
Tony Collins, the chief executive of Virgin Trains, does not seem to have understood the point about investment. Writing in the latest Modern Railways, he says ‘Virgin Trains has made a £2bn investment in new train fleets’. Well, no Tony, I think if you look at your accounts – which I can’t since Virgin is a private company – you will find no trace of these trains, apart from the leasing charges. They are not on your balance sheet. The investment, of course, has been made by the Rolling Stock Companies, but it is being paid for by us – Virgin is getting £250m subsidy this rather than the £60m premium they were supposed to pay, but I recognise not all this is their fault!
The figures for investment are these: In 2002/3, the TOCs spent £50m on capital expenditure, and much of that was paid for through the mechanism of extra subsidy. Since TOCs have no assets, that is hardly surprising, but let’s stop pretending that TOCs invest in the railway. Paying for leasing equipment does not count as investment.
8. Still on the subject of TOCs, let’s stop pretending that TOCs are proper businesses with real bottom lines. Some TOCs do pay a premium while others receive subsidy. But that is dependent on the arbitrary allocation of the track access charges by the regulator. GNER, for example, benefited from a £60m change, which then pushed it into premium, but that was nothing to do with its own efforts.
9. Let’s stop pretending that growth is down to the efforts of the TOCs. Can anyone name what TOCs have done to promote growth? Of course there has been the odd initiative, such as special offers, but then there were many under BR. Is it the cheap fares on InterCity? But then Virgin is the main proponent of these and its numbers are virtually unchanged since privatisation, again not entirely due to its fault.
Is it low fares generally? I am indebted to Roger Ford for pointing out that the average fare today is £3 84 and the average fare in 1990/1, was, euh £3 84, adjusted, of course for inflation.
Is it the great service? My colleague Barry Doe, put it neatly in his column when he analysed the change in provision and reckoned that a quarter of franchises do better, about a quarter the same and half far worse.
So fares are the same as they were in 1990/1, marketing is not particularly effective, service is no better. And is there anything to compare with the wonderful InterCity ads and all their promotions? And the food is pretty much the same – It is better on GNER but worse on FGW and Virgin. Remember, the curly BR sandwich had long gone before privatisation and Delia Smith had been brought in with more success than she has rousing Norwich City at half time.
So the growth, to paraphrase Gordon Brown, has been a result of exogenous rather than endogenous factors.
10. Therefore let’s stop pretending that rail privatisation has been a success because there are many more people using the railway. The biggest driver has been economic growth and, in particular, London commuters. Remember, each passenger mile is costing 28p in subsidy, rather than 19p under BR. Well, what business wouldn’t attract a few more punters on that basis? Sure numbers have risen, and they are impressive, but here is what John Prideaux, not a man who is hesitant about blowing trumpets, speaking last year said about it:
‘The general impression is that the railway industry has not done particularly well..I find it depressing that despite a large reduction in fare levels, InterCity patronage was down by 2.4 per cent in 2002/3 from the previous peak in 1989/90. Moreover, that instead of being profitable, InterCity requires very substantial taxpayer funding (£265m direct to TOCs and a fair proportion of the £1bn going direct to Network Rail), that trains are generally slower and that trains are less punctual….None of this is in line with what people hoped for from privatisation.’
11. While we are at it, just a little aside: let’s stop pretending that ATOC serves any function other than its own very narrow self-interest. Look at what happened to the Network S E card. Or at attempts to change the attempt to restore priority to Class one trains, that was stymied by one company’s objections.
12 . And lastly on the subject of TOCs, it was great to hear Keith Ludeman of Go Ahead the other day say we need fewer controls on our activity. ‘We have far too many KPIs – Key Performance Indicators – administered by the SRA, he said. ‘Let us get on with running the trains’. It was less fun to travel on one of his trains the following day and discover the closed disabled toilets, out of action for months, the worst ever toilet I had ever been into completely covered in graffiti that seemed to predate privatisation and the stench of faeces– and yes, I have travelled by rail in India – and the frayed carpets and generally rundown feel.
So Let’s stop pretending that the TOCs are anything but the short term custodians of the railway as set out in their contracts. That means they do not deserve widespread consideration when discussing the long term future of the railway.
13. So onto rolling stock. Only one, here. Let’s stop pretending that having roscos is a sensible cost effective way of providing rolling stock. Or put it another way, if you want the trains to be cheap, then just ensure the government underwrites their cost, rather than having the expense of Roscos. Even managers in the roscos have admitted that to me.
Nor have the Roscos provided many more new trains than we would have got otherwise. There were orders for about 10 per cent more trains in the first ten years after privatisation than there was in the previous ten years, before the hiatus.
And now we are going to go for a long period without any. And what will happen to HST 2? The rolling stock strategy issued by the SRA at the end of 2003 was not a strategy but a counsel of despair. It suggested we can’t do anything because we have to allow market freedom to the TOCs and the Roscos. But they don’t have much freedom anyway, so why not just specify how many new trains the railway needs over the next few years and work to that. In any case, the answer seems to be hardly any so that get this particular problem out of the way.
14. And while on this subject, please can we stop pretending that much commercial information needs to be kept away from the public under the cloak of commercial confidentiality. The public deserves to know what is happening to its £5bn going into the industry annually and therefore it should be incumbent on companies to release as much information as possible, and the DfT should make sure they do so.
Now onto infrastructure.
15. A biggy. Let’s stop pretending that we can ever have an affordable railway with the current system determining NR’s budget. It is neither sensible nor realistic to have the expenditure of a major engineering company, Network Rail, determined by a regulator sitting in Holborn between 2 and 7 years in advance of that spending. One of the other times the much missed Winsor lost his temper with me was when I said that at a meeting in the National Liberal Club. But he blustered, I have reporters and consultants to advise me and find out what was happening on the ground. But this is another madness. The fact that Network Rail is underspending by £800m – just savour that figure for a minute, £800m is £15 for every person in the country – this year shows the railways would not have collapsed had Winsor being a tad less generous in his opposite of a scorched earth final determination of access charges.
Let me put that in another way. The DPP tried to prosecute Gerald Corbett and various other Railtrack executives after Hatfield. The reason was that they had put profits before safety and were running a non-compliant railway, with lots of defectives. But the charges melted away when it was realised that the railway has always been non-compliant, ever since the Board of Trade first established inspectors in the 1840s. Yet, the way that Winsor et al have allocated money to the railway from their office in Holborn on the basis that you have to drive the railway towards a permanent state of compliance. Network Rail for its part is delighted to have the shedloads of money delivered daily to its offices – that is £18m per day. And that, simply, is unaffordable.
The railway has lost the ability to manage itself within a budget, a budget that under BR may have required constant compromises but which was affordable. Ivor Warburton tells a good story about a culvert on the West Coast main line. He tells this better than me but he says the ‘West coast civil engineering used to be broken down to a district level. The civil engineer at Crewe Derek Smart, used to chew on the end of his pipe, an old style engineer who knew his patch.’’
The budget had to be cut and one thing that got knocked out was the immediate rebuilding of a culvert on the slow line between Nuneaton and Rugby. Warburton asked him what were the chances of it requiring attention during the year: ‘”might last, might not”’ – about 40 per cent. I said right, I will take the risk – ‘mutter, mutter’.”
In the course of the year, the culvert collapsed. Warburton recalls: “Derek just muttered and sucked on his pipe and did not say things like I told you”.
This is how, from the budget set by government, a whole host of micro decisions were made, mostly correct. This one was wrong, but Warburton still says it was the right decision. Now, of course, you do not get that. Everyone wants everything repaired, and there is no way to control that cost.
Yet, we are now stuck with this system for four more years and while some people in the railway might be delighted at the fact that enormous sums are being spent by Network Rail, those who view these numbers with concern are more on the ball. The Treasury has a long memory and is in vengeful mood.
16. The corollary of this is: Let’s stop pretending that the railway has more right to funds than a host of other calls on Treasury cash. There is a feeling among many industry leaders that the railways are more important than schools, hospitals, local government services or whatever. Well, then prove it.
There was an interesting quote in Transit magazine the other day. It ran: ‘A senior rail boss recently confided that he believes that his industry colleagues appear unaware of how close to the edge the railway is currently trading. ‘They seem to think that however much it costs, the government will write out the cheque. The mentality is: “They can’t shut us down, we are the railway.” ‘ Indeed. Its called the Ostrich syndrome.
17. While on the subject of infrastructure, let’s stop pretending NR is a private company. Frankly, I can’t even be bothered to elaborate on this one. Suffice to say that a very senior recent departee from the industry said, ‘there’s one thing I agree with you, Network Rail is a public company’. You all know the arguments – suffice to mention the duck test. If it looks like a duck, quacks like a duck, walks like a duck, then it probably is one. While on that subject, the pretence that the rail industry is largely in the private sector costs taxpayers dear on both infrastructure and rolling stock, all because Gordon Brown insists on playing silly games.
18. Let’s also stop pretending the stakeholders have any control over Network Rail. Last week, they voted not to have a council because of the feeling it would be toothless. And clearly they are weak at the moment. They do not make the decisions that shareholders would normally make – like appointing the non executive directors. It is a lovely system in theory, but in practice it does not work. It is only functioning well at the moment because in John Armitt, Iain Coucher, and Ian McAllister there is an excellent top team. But what happens if there were an Edmonds or a Horton back in control?
19. But the truth about NR is that it can’t keep on spending money like that. So let’s stop pretending that we can avoid the looming crisis looming on the railway.
I have no idea how that crisis will evolve. It may be just in bits and pieces, a squeeze of the railway which will sap morale and destroy its potential. No enhancement, no new rolling stock, no vision, no strategy, no ideas. Or there may be a squeeze on the PTEs to cut services in their areas. Or, if our long term economic growth suddenly reverses, there may conceivably be a big bang, with a swathe of proposed cuts. But the quote Jim Callaghan never used, ‘crisis what crisis’ is not the appropriate response.
20. Indeed, let’s not pretend that we understand the finance of the railway. No one does. I wrote a book about the PPP on the London Underground (on sale afterwards) and it is almost simple compared with trying to find out exactly how much taxpayers money is being absorbed by the railway.
Roger Ford and I have been trying to work out how much the railways is costing taxpayers at the moment. We have even enlisted the help of a kindly accountant, John Stittle from the university of Essex.
Mr Stittle explained that really Network Rail moved to showing assets at depreciated replacement cost i.e. current values. The net result is a considerable reduction in depreciation in its profit and loss account because most assets are now depreciated over 25 years – a much longer period. The change removes a colossal £1.5b – £1.6 billion of depreciation from its profit/loss account.
Even the government does not really understand the finances. A couple of weeks ago Alistair Darling said that ‘it is forecast that 47 per cent of Network Rail funding will be from the Public Sector, and 53 per cent from the Private Sector, of which the bulk (44)came from train operators and 9 from other, mainly freight, sources. But about a quarter of train operator income is from subsidy from his own department, which means that 58 per cent is from the public sector, and in addition there £1.5 bn borrowing that is also effectively backed by government. It is not as private as you would like it to be, Mr Darling.
We have ascertained, with much effort, that subsidy is around £4.7bn, this year without taking into account the CTRL, compared with £1bn in BR’s last years. And this will go up to a staggering £6.5bn in 2005/6 and the debt will climb to £20bn within a couple more years. Does anyone really think they will let the industry have Crossrail?
21. Here’s a couple of quickies. Let’s stop pretending that there will not be a management crisis on the railways when the last generation of BR management trainees goes off into the sunset. Who will be left to run the railway?
22. Let’s stop pretending that we can ever get government off our backs in the railway. That again was another of the drivers of privatisation. It was always a fallacy and rightly so. It is, of course, even more of a fantasy if the government is putting £5bn or more into the railways, than if it were only spending £1bn. But do you really think the railways have the right to lots of government cash without the state being involved.
23. And here is a painful one. Let’s stop pretending that the railways can ever make a big impact on road congestion.
As Professor Rod Smith has shown, without a big increase in capacity, rail is only able to scratch the surface in terms of congestion. Sure, we know that removing rail in central London would be disastrous but that is not being suggested. And yes, there would be a few extra cars on the motorways, but would anyone really notice.
The reasons for supporting the railways are that they offer a fantastic form of transport that is much more pleasant and attractive than the alternative. In many cases, too, they are socially vital, but they should be sold on the basis that their effect is strongly regenerative and crucial to the economy, rather than on the notion that they can save the world.
24. And finally, above all, let’s stop pretending that the costs can be brought down without reintegrating the railway. And here is why. It is very simple really: the railway is inherently an integrated system, different from aviation or oil. You can spend money on the track, on signalling, on communications, on rolling stock, on new services, on marketing, on safety, on investment to save money in the future and so on. But under the current structure, those decisions are taken in different places by different companies with different interests and aims. No rational decision making process can emerge.
For example, a Rosco will, rightly, try to avoid having equipment on its trains, even if that is the most cost effective solution to a signalling issue; Network Rail may well decide not to hand back a possession on a Monday morning because it the penalties it faces will not be as high as the extra costs of returning the following weekend – something that is clearly happening a lot on the Underground under the PPP regime; or, for example, say a train operator wants to stop at an extra station but needs a platform extension, as happened at Portchester – you end up with crazy estimates.
And here is a tale from Japan to prove it. In the autumn of 2003, the Shinagawa station in south west Tokyo opened to allow people in that part of the city easy access to the high speed Shinkansen services. Simultaneously, the operating speed of the whole line was increased to 270 kph, shortening the standard travel time between Tokyo and Osaka from three hours to two and half. In a speech given before the opening, Yoshiyuki Kasai, who used to run one of the JR companies, stressed that these improvements would not have been possible had the Japanese railway been broken up in a different way on privatisation when they were split into six regionally based companies, vertically integrated. Kasai argued that the improvements had come about because of a sustained long term investment programme. Had management responsibility been split between a track company and an operator, ‘it would have never been possible for them to make comprehensive and integrated investment, and continue it over the long term’.
There were have been practical problems, too, under a different structure. Introducing the new fast Nozomi trains over time meant that other services had to be changed or curtailed. Had these been run by different operators, a not dissimilar situation to the rows over train paths on the West Coast Main Line, then it would have been difficult, if not impossible, to create a reasonable timetable.
Kasai concluded: ‘In order to modernise and improve railway services, investment in ground facilities and rolling stock, which have different time scales, and train operations planning should be managed in a comprehensive manner….railways require a form of vertical integration, that is integrated management and unified operations, to improve efficiency and have good results. It is not an accident that railways traditionally have preserved an integrated management and operation structure. British railways’ disaster resulted directly from failure in recognising this fact’.
I know it hurts to be lectured at from the Far East, but can anyone really quibble with that argument? Apart from Tom Winsor.
You can accuse me of being an old reactionary – or indeed, as Haydn Abbot of Angel is wont to do, of being an unreconstructed Marxist – of wanting to return to bad old days, or to a system that had many flaws. That is not my point. I am not suggesting that BR was perfect. However, my purpose here is to argue that the present system is simply unworkable and unsustainable in the long term. We have a railway that is unmanageable because of the complexity of the structure and the impossibility of bringing cost under control. The recent reforms have failed to address that issue. They ducked the central point and I suspect that the politicians and the cannier people in Whitehall know that. This is why they are talking of a Virtually Integrated Railway and Virtual Vertically Integrated Companies – VVICos. They sound jolly sexy but don’t ask me what they mean.
25. So as a last one, let’s stop pretending that the new structure is either workable or stable. It represents the worst of both worlds. For those of us who opposed the manner of privatisation, it enshrines the high cost base from which the railway is suffering; for those who supported privatisation, it is the creation of a system of government control that is far tighter than ever occurred in the days of nationalisation and BR. Odd that, isn’t it – none of us are happy.
I first lectured to the RSA in 1997 – will I return, now, in another 8 years and say, well it is all sorted out now? That we will then have an integrated railway, with a clear and simple relationship with government, with a cost structure that is much lower, and an enhancement and growth programme that is fully funded and supported by the politicians.
I somehow doubt it but I remain an optimist.