Rail 562: Department should not be running the railway

This is one of those weeks when I wish I had three or four times as much space, as so much is happening on the railway with many fascinating implications and we are coming up to a crucial period which will determine the industry’s future for a decade or more. There were two real biggies: the announcement of the 1,000 extra carriages for the network by Douglas Alexander, the Transport Secretary, which begs many questions and, most important, the ‘advice to ministers’ published by the Office of Rail Regulation which is the next stage in the access charge process. There is, though, much happening behind the scenes on progressing the High Level Output Specification process – the government’s wish list for the railways during the period 2009-14 – the ordering of the replacement for the High Speed Train, the ongoing row over the Great Western franchise (with ministers being harangued in private meetings by MPs demanding the head of First) and equally fierce arguments over the CrossCountry and the two Midlands franchises, and finally the Tories’ growing commitment to an integrated railway.

These may seem like disparate strands but I will try to pull them together as a whole like a rabbit out of a conjuror’s hat, which makes it best to start with Alexander’s announcement of extra carriages. Precious few details were given and Chris Grayling, the shadow transport minister, was quick to point out that there was no promise of any early delivery for the new trains, since the minister would only say that they would be brought in by 2014. Alexander’s precise wording was that ‘in the High Level Output Specification this summer, we will specify that 1,000 new carriages [which will be] be targeted at the most congested routes…In this way, if the price is right, I anticipate that we will significantly increase the number of carriages on the network by 2014’. Note the caveat on price. However, I suspect, both that and the slow timetable are merely Treasury prudence – Alexander is, after all, a Gordon Brown protégé – and that political pressure from MPs and passengers will ensure more speedy delivery.

The most interesting aspect of the announcement is that it was made by a politician which demonstrates the extent to which we do not have a privatised railway but one that is administered and effectively run by the government which raises the other issue about these new trains. Apparently train operating companies will have to put in bids seeking to expand their fleets but this is an extremely complex process given that these new trains will be additional to existing franchise requirements and essentially they will be in a strong position to dictate terms. Ministers will be under pressure from passengers fed up with overcrowded conditions and the train operators will be able to place the blame squarely on them. This will greatly constrain the ability of the Department to negotiate sensible pricing arrangements – for example, what assumptions will be made about extra revenue generated by these new trains, and how much of the extra cost will therefore fall on to the operators?

This is just another example showing the difficulties of advance planning in the fragmented railway. The main instrument is, of course, the High Level Output Specification process which is probably the most convoluted, complex and expensive way of determining railway investment that has ever been invented. The Office of Rail Regulation’s near 200 page advice to ministers sets out the basic numbers which we can expect to emerge from the process. The ORR expects efficiency savings of between 3.8 per cent and 8 per cent annually which means that NR will get between £1.95bn to £2.bn annually to run the railway compared with £2.47bn during the current five year period (I love the fatuous detail provided in these figures given that no one really knows the true numbers to that level of detail as demonstrated by the wide range offered). There is going to be precious little for enhancement, with most of the extra £5.6bn being taken up by Thameslink, and another big chunk, £700m, earmarked for Scotland.

It is clear from watching this process that the Department for Transport Rail Group do not bat unequivocally for the railway in a way that British Rail did in the past. They administer the railway, and they put forward the case for investment in a way that is expressed neutrally, as they are civil servants whose primary duty is to the minister, not to the industry and they are ever conscious always of the need to be fair across modes and of the restrictions imposed by the Treasury. Blue skies thinking, real innovation, courageous support for novel ideas – none of those are likely to be on an agenda created in that way. That is why the current structure and the HLOS process will not deliver the best possible outcome for the railway. The very opaqueness of its name demonstrates that this is a technical, budget-led exercise that is not about boosting the railway or creating a vision for the 21st century, but a dull, administrative process that has to be gone through because that was the way the recent Railways Act specified.

Moreover, surprisingly, the civil servants are not troubled by the fact that the industry is costing far more than it should be. Costs, they reckon, are declining and therefore there is little to worry about. Despite the collapse of the East Coast GNER franchise and the passengers’ revolt on the Great Western, the Department officials reckon that equally tight contracts can be signed for the new franchises. Yet, for most people in the real railway, the rigidity of existing franchises and the expense of running the railway are the most important threat to its future prosperity.

If proof were needed that the DfT is not in the business of making the railway a central plank of its transport policy, it is the attitude of its economists within the department. In a meeting late last year with the Railway Forum, the assembled Department economists expressed scepticism that rail traffic would keep growing and, specifically, said that road pricing would not lead to an increase in demand for rail travel. This seems to contradict the 200 years of economic theory which is based on the notion that increasing the price of a good reduces demand. Since much travel is not optional, then some of that demand would transfer to rail. But no. The Department logic is that road space would be freed up and people would be so relieved at seeing those empty lanes on the motorways as they whizzed by on the train that they would flee the ghastly railways and jump in their cars. Sure, there may be some people who do this, but surely not enough to be noticed to offset the rise in demand for rail travel from the others.

The convoluted process for ordering the new InterCity Express demonstrates the extent to which officials in the Department are floundering in their efforts to produce a long term strategy. The official European announcement specifies that there will be between 500 and 2000 coaches(again, what a huge variation), and that they will need to be powered both by diesel and electricity. In a rational world, the government, informed by experts, would have an overall concept of the sort of railway that will be needed in 2030 or beyond. The most obvious gap in thinking is over electrification. There is a trade-off between having electric trains, which are more environmentally efficient, and the cost of electrifying lines. But the required decisions are located in disparate bodies: it would be Network Rail that would electrify lines and bear the cost, whereas the investment for trains will come from the Department and be financed, presumably, by rolling stock companies, and the train operators, too, would need to have a say. This fragmentation ensures that whatever decision emerges, it will, in the jargon, be ‘sub optimal’.

All of this shows that my idea for an independent rail body will eventually have to bear fruit. It has attracted widespread support from various correspondents and this announcement highlights the need for it. It should not be officials inside the Department for Transport, advising ministers, which determine these decisions but professionals, who have a real understanding of the railway.

Which brings us neatly to the Tories. They are going to be issuing their own rail strategy document over the next few months – the timing is uncertain – and it is clear that Chris Grayling, following several high level seminars with people in the industry, is even more convinced than ever that integration is key to reducing costs and improving performance. However, as I have mentioned before, Grayling faces a fantastic dilemma in his efforts to reintegrate the railways: does he nationalise the train operators to merge in with the effectively government owned Network Rail or does he privatise and break up Network Rail. He promises me that he has a solution to this dilemma, a Tory third way, and I look forward to seeing it but in the meantime, anyone with an educated guess about what he means should write into our Open Access pages.