Rail 554: Mandarins model of madcap funding

The Treasury has never really trusted the railways over money. There are mandarins with long memories – or at least a sense of history – in Whitehall and they are wont to refer to the excesses of the Modernisation Plan in the mid-1950s which did, indeed, produce some awful white elephants such as the famous redundant Bletchley flyover and vast marshalling yards amid all the useful schemes such as electrification of the West Coast Main Line. Over the years, countless improvement schemes have been shelved or ditched on orders from the Treasury.

And when there is clearly an irrefutable case for investment, then the Treasury comes up with ways to try to control expenditure which, oddly, end up costing more. So it was the Treasury which imposed new structures on the rail industry with the idea of saving billions of taxpayers money which was, supposedly, being wasted on projects by British Rail and London Underground. On the national railway, we have had rail privatisation and the creation of Railtrack, that was intended to bring private sector investment into the railways because government money was never going to be available. On the London Underground, we have had the £30bn Public Private Partnership which offered a new way of upgrading the system through privatising the infrastructure while leaving the operations in public hands.

Both these ideas, it must be stressed, came from very clever people inside the Treasury. The brains behind rail privatisation belonged to Sir Steve Robson, who headed its privatisation unit which pushed heavily for a model that allowed on-rail competition and therefore required separation of track from operations. He also had a hand in the creation of the PPP but that was driven forward by one of Gordon Brown’s special advisers, Shriti Vadera, who ensured that despite enormous pressure from both inside and outside the Labour party, the scheme was eventually brought to fruition.

By coincidence, reports by different watchdogs on these two great experiments were published last month, and make grim reading for anyone who expects that the Treasury is about to release further dollops of cash for the industry to build Crossrail and the north south high speed rail link: The Modernisation of the West Coast Main Line by the National Audit Office and the Annual Metronet Report produced by the PPP Arbiter (who happens to be Chris Bolt, also the chairman of the Office of Rail Regulation).

Superficially, the NAO report appears to be good news. The project has been brought under control thanks to the intervention of the Strategic Rail Authority following the collapse of Railtrack (as an aside, I totally agree with Richard Bowker that the decision to abolish the SRA does not make sense). But when one starts to look at the wider history of the West Coast Main Line modernisation project, the extent of the catastrophic overspend becomes apparent and consequently of the inappropriateness of the model that was foisted on the rail industry. For example, the final cost is now reckoned to be in the order of £8.6bn which thankfully is a lot less than the figure of £14.5bn that was floating around at the time of the Railtrack’s demise. Remember, though, this started out as an upgrade that was to have cost £800m under British Rail or £2.2bn under Railtrack that included a new – and totally untried – moving block in-cab signalling system.

The detail of where some of that money has gone is enlightening. For example, £305m – enough to build quite a few schools – has been spent on compensation to train operators for disruption to their schedules which, of course, is designed to give them a better service in the end, not exactly a case of aligning incentives. Moreover, there is some lack of clarity about the precise nature of the compensation arrangements as there are two different payment systems depending on whether it is a ‘network change’ or not (don’t ask!). Network Rail has recently been taking a more robust approach, reducing claims by 7 per cent on average and 15-17 per cent to some operators. While operators have squealed in private about this, ‘none of [these claims] have required adjudication by the Office of Rail Regulation’. In other words, millions of taxpayers money (for NR is essentially taxpayer funded) were paid out in the past in undeserved compensation to the benefit of the shareholders of these private operators.

The in-house costs by Railtrack and Network Rail on the projects have, so far, been £615m, 8 per cent of the total, which seems inordinately high given that so much has been outsourced. Yet, there is very little way of checking whether that is offering value for money. Another detail which raises eyebrows is the fact that renewal costs are 60 per cent higher and signalling costs 100 per cent higher than elsewhere on the network. While there are some good reasons for this, such as the difficult working environment on the busy track, nevertheless these figures suggest that costs got out of control and have still not being reined in. Not surprisingly, a little noticed part of the report reveals there is still overspending on the West Coast Main Line upgrade. Network Rail will, apparently, spend £300m more than the £3bn allowed by the Regulator, but that will be transferred from NR’s underspend of £390m on its regional renewals programme: so that’s OK then!

Moreover, the cost of the modernisation does not, however, include the staggering sum of £590m which is the extra that the Department for Transport has had to pay Virgin West Coast because of Railtrack’s failure to deliver the promised upgrade on which Virgin’s 1996 franchise bid had been predicated. So taxpayers have ended up paying extra because a deal between two supposedly private companies went wrong. And these payments will continue over the next few years as the Department has found it impossible to buy itself out of the contract which Railtrack signed with Virgin. No wonder Richard Branson (fresh from his brief appearance in Casino Royale –don’t blink or you will miss it) can afford to bid for ITV.

The Arbiter’s report on the PPP is even more painful reading. Here, too, the idea was that by privatising the infrastructure of the Underground, the private sector would deliver the extra investment. The contracts themselves, remember, cost a staggering £500m to draw up but were supposed to be the final word on how to refurbish an ailing asset like the London Underground. In my book on the PPP, Down the Tube, I quote its main architect, Martin Callaghan of London Undergorund, telling a Railway Forum meeting in 2002 that ‘The PPP is a hugely well thought through, imaginative , rational, well-tested response to the challenge given to us by Government, which is to find a value for money and safe way of getting the best out of a billion a year of public expenditure.’ That’s not what the arbiter thinks of it now: his report find that Metronet, which won two out of three contracts, is set to rack up a 10 per cent overspend over the amounts set out in the contract, about £750m for the first 7.5 years of the project. For example, track maintenance is costing twice as much as expected, station refurbishment more than three times.

Now here’s the interesting bit. One would have thought that this would all be the responsibility of the Metronet and its five shareholders, who, largely, consist of its suppliers (Balfour Beatty, Bombardier, Atkins).But no. The numbers in the contract have no real meaning because it is up to the arbiter to decide whether the money has being spent efficiently, irrespective of the prices set out in the contract.

The underlying message of these reports is that the Treasury’s attempts to pass on the cost of investment and the inherent in such projects risk from the public to the private sectors have backfired. Rather than succeeding in reducing the taxpayers’ burden, these new models seem only to increase it, and yet the lessons do not seem to have been drawn from these experiences. Quite the opposite. Gordon Brown recently announced a revival of the Public Finance Initiative scheme that will further increase the risk to taxpayers of fiascos like the Underground PPP.

The Treasury, though, rides above all these considerations. The mistakes, those oh so clever mandarins will argue, are all the fault of the rail industry and not of the models they have imposed on the railways. Their love for complex models mean, too, that tram schemes are prohibitively expensive and the way that projects have been shelved suggests that there is, frankly, no chance of a north south high speed line ever being built. Crossrail may get the go-ahead simply because of pressure from the business world and the recognition that London is the driver of the UK economy, but each of these reports is a further nail in the coffin of a high speed line.

The railways are caught in a vicious circle of rising costs and Treasury antipathy. The Treasury fails to see either their wider importance in the UK economy or their value in stimulating regeneration, and, instead, imposes unworkable models on the industry which ensure that their worst fears are realised. It would, at least, be reassuring if the architects of these scandals paid for their errors. But Sir Steve Robson happily went off to lucrative non executive directorships with Cazenove, Xstrata and the Royal Bank of Scotland and surely does not lose sleep over the fact that one of his great experiments is costing taxpayers £5bn per year and the other could give Londoners a £750m headache. Martin Callaghan, too, went off to the private sector, working for PriceWaterhouseCoopers who were, euh, the main advisers to the PPP. And Gordon Brown is all set for No 10. Meanwhile, as the two reports show, the railways and their passengers are paying the price of being the guinea pigs for madcap schemes.

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