Rail 522: Say hello to HLOS – still a crazy way to run a railway

The grandly titled High Level Output Statement will simply gives a scientific veneer to the flawed process of deciding what sort of infrastructure should be available for operators under privatisation, contends CHRISTIAN WOLMAR.

HLOS is going to become a term familiar to Rail readers. This unprepossessing acronym stands for High Level Output Statement and is the key to what sort of railway we will have from 2009.

The process of determining that has just started. In August, the Office of Rail Regulation issued its first consultation document on the process of starting the next review of access charges, which will set Network Rail’s budget from April 2009. This process is so convoluted and complex that this first consultation only covers itstimetable , setting out the dates by which various events must take place.

This is all new territory. The years 2009-14 will, in effect, be the fourth period of access charges since privatisation, although the second and third partly overlap because there was an interim review following the demise of Railtrack and its replacement with Network Rail.

All the reviews of access charges have been undertaken in different circumstances which means that, as ever, we are in uncharted waters. The first, undertaken by John Swift, was in the context of a newly-created Railtrack which was expected to be able to raise considerable amounts in the City for financing extra projects. The second, by Tom Winsor, was published just after the Hatfield train crash and therefore was out of date by the time it was implemented, and Network Rail eventually asked for an interim review because of the huge rise in costs as a result of the panic by Railtrack’s executives in the wake of that disaster. This result in the current ‘control period’ under which Network Rail received a far more generous settlement than had been envisaged in the original second review.

Interestingly, there is a neat symmetry to this sequence of reviews, Railtrack/Network Rail received 50 per cent more than last time – broadly, £10bn, £15bn and £22bn successively for each five year period. Now it will not escape anyone who has been in the same room as Winsor for more than five minutes that he set the current budget for Network Rail on the basis that the government wanted the same railway with the same outputs. He says that he asked the government precisely what it wanted in order to allow him to determine NR’s budget but was met with ‘radio silence’ – in other words, ministers dodged the issue. He claims that had he been required to keep NR budget at the pre-Hatfield level – broadly £3bn per year rather than £4.5bn – then massive cuts would have been required throughout the network – he cited a 25 per cent cut in the size of the network, a 25 per cent reduction in services running and 6 per cent year-on-year real increase in fares.

Now I happen to think that Winsor’s doom laden warning was balderdash and merely reflected that as regulator he had an impossible task. Sure, there may have had to be some extra speed restrictions if NR had been brought to heel, but the railway would have muddled through as it always did under British Rail – though, admittedly, this is more difficult in the fragmented and contractual structure by which the railway is now run.

Amazingly, there has never been a clearly set out requirement for what NR is required to provide, despite the acres of contracts and regulatory frameworks produced in the past decade. In other words, no one knows what kind of infrastructure is supposed to be available for operators. A good recent example has been the fiasco over running loco hauled trains on the Boston Skegness line. Central wanted to do this on summer Saturdays when the trains are overcrowded, but NR decided that the line was not in good enough condition. But instead of bringing it up to standard, NR is suggesting the imposition of a speed limit of 35MPH, making the idea unworkable, citing the high cost of bringing the line up to standard.

Ministers felt they had been backed into a corner by Winsor who, they claim, was given unprecedented direct access to Gordon Brown’s wallet and that this must never happen again. So we had the rail review and the ensuing Railways Act 2005.

The process now, therefore, is supposedly more transparent and there is, arguably, greater control for the government (though Winsor argues, rightly, that under the old system it was open to ministers to control the expenditure by determining less expensive outputs – however, as we was suggesting that such draconian cuts would be required, it was hardly an option they were likely to choose).

Under the new system, the government is now supposed to produce a High Level Output Statement on what it wants from the railway in the period 2009 – 14. So what is this HLOS beastie? Well, no one quite knows. At one extreme, a very high level statement could be merely a requirement to add, say, 5 per cent capacity and ensure that trains run to a specific Public Performance Measure – say, 90 per cent trains on time.

Or, at the other end of the scale, it could be much more prescriptive, setting out frequency and speed of trains on every route, and specify the condition of the track throughout the network. Indeed, at the most extreme, it could even set out the timetable.

The HLOS will be produced by the government over the next two years and then it will get interesting. The Office of Rail Regulation will have to assess how much it will cost to obtain the required outputs. What if the ORR reckons it will cost Network Rail a billion a year more than the government has earmarked to spend under its spending plans? That’s when it will get interesting.

Now, the best outcome for the government would be for this process to be carried out behind closed doors and that ORR will agree that the costs is pretty much what the government reckons it can afford. But the Treasury has been infuriated by the rising costs in the industry and is going to be putting a lot of pressure Most people in the industry are expecting the figure might be something like £15bn for the five year period, a third less than NR is getting at the moment. That pretty much accords with the NR business plan 2005 which suggest, broadly, that annual spending will go down from nearly £5.8bn to £4.2bn at today’s prices, largely thanks to the fact that the West Coast Main Line project will be completed.

But what about if the Treasury, with all sorts of other calls on its budget brought about, say, by a recession or even a period of low growth, insists on the railways cutting back even more? Given that Draconian cuts to the network are unlikely, is there a third way.

Chris Bolt, the chairman of the Office of Rail Regulation tells a nice story. He says that a large plug manufacturer was facing strong competition from the Far East . A plug produced in the UK was costing 43p, three as much as those coming from China and the manufacturers simply set their research people a task – give us the 12p plug by simply rethinking the whole process. They failed but they got it down to 14p!

Is there a 14p plug solution for Britain ‘s railways? Certainly, there has been a lot of gold plating, risk aversion and simple inefficiency. It would be nice to think that Network Rail could come up with a similar solution, but the present structure does not give the company sufficient incentive. There is no doubt that the present hybrid between public and private sectors that we have now ended up with is a temporary arrangement that will change by the time control period 5 – 2014-2019 – is being discussed. Bolt, like his (sort of) predecessor Tom Winsor reckons that the Network Rail structure is unsatisfactory. It does not benefit from the low cost of borrowing that a directly financed government agency would, while it does not have the private sector disciplines of a company with shareholders who are constantly on the management’s back about efficiency. He reckons the structure has to go one way or another – a kind of reinvention of Railtrack, with some equity as well as debt financing, or perhaps merely different kinds of debt that reflect levels of risk, or simple renationalisation despite the fact that this would breach Gordon’s cherished Golden Rule.

I would argue that this whole process is a crazy way of running a railway. Under British Rail, there was a single negotiation with government over how much money was needed each year for operations and for investment. That figure, which was thrashed out between the BR Board and the government then informed the whole railway, right down to the track level. A myriad of small decisions over investment were made as a result of the determination of that figure, and this meant that there was tight financial control. The railways thirst for investment is unlimited; you can always improve the permanent way and there are always non-compliances. Under BR these could be managed in a sensible and disciplined way. Under this fragmented system, the ability to do so have been lost. That is the simple message of 10 years of privatisation.

Now, we have a regulator trying to guess how much a company should spend over a five year period. Sure, as Bolt says, there can be a broad statistical analysis that will provide some sort of overall figure, but, inevitably, the process will end up being highly inaccurate and, probably, far too generous to Network Rail – witness its £800m underspend last year.

The concept of a HLOS simply gives a scientific gloss to a process that is arbitrary, complex and which, quite simply, will deliver the wrong answer. In the meantime, however, it will be great fun to watch how this process unfolds – one could laugh at the madness of it all, if only it weren’t so serious, as it will determine the future of this great industry.

A decade of Wolmar!

Next issue I celebrate 10 years of doing this column, as the first one appeared in the issue date Sept 27 1995. I will be scouring the old columns for my worst howlers (and maybe examples of the odd time when I got it right) – if you have any favourites, do email me with them.