Rail 585: Rolling stock strategy is playing at capitalism, again

The rolling stock plan slipped out by the Department for Transport without any briefing or press conference at the end of last month is a typical example of the ‘pretend capitalism’ through which the rail industry is run. ‘Pretend capitalism’ is the fig leaf for continuing to keep the industry in the private sector when, in fact, it is being run by civil servants spending our money, and the rolling stock plan is perhaps the most stark example of this dishonest and expensive game.

The plan provides details of how the 1,300 new vehicles to be introduced to the rail network between 2010 and 2014 will be allocated to the various franchises and sets out the government’s approach to rolling stock procurement. (Suspicions about the political nature of the plan, rather than its details being determined by the industry’s market requirements is reinforced by the fact it sets out precisely the allocation of 1,300 new vehicles, 1,001 diesel and 299 electric, by 2014, in line with previous ministerial statements! Incidentally, it took a long email exchange with the Department to ascertain that there will be 1,300 net new additions to the stock, even though the table in the DfT document includes various cascades.)

The new document represents a radical departure from previous policy. In December 2003, the Strategic Rail Authority’s Rolling Stock Strategy specifically refused to set out such detail of future rolling stock requirements, arguing that ‘An SRA plan could unduly influence individual companies’ decisions about future rolling stock allocation and investment. This could undermine competition between Roscos and between manufacturers (for example, because TOCs simply follow the SRA’s plan and do not investigate other possible options), and could stifle innovation.’

At the time, I was highly critical of that position, arguing that it was dishonest since all rolling stock deals had to be approved by the SRA anyway and therefore there was little scope for innovation since the timeframe for TOC franchises was too short for them to come up with ideas that could be implemented.

Having a plan is clearly desirable. However, having it written in Whitehall by civil servants rather than railway people with a clear knowledge and understanding of the industry is madness. How on earth are people sitting in Whitehall offices capable of judging the market situation on the ground across a network of 11,000 miles with 2,500 stations. They cannot possibly be aware of local requirements, such as large new housing developments or new office blocks  that might lead to the need for longer or more frequent trains.

Worse, these people are running the railway while pretending that the private sector is able to make these sort of market sensitive decisions. Consequently the document is full of contradictions about precisely who is in charge of the procurement process because it tries to bend over backwards to pretend that the private sector is in charge when the opposite is clearly the case.

On January 22nd, Tom Harris, the rail minister, said in Transport Questions: ‘It is for the industry, and not the Department, to identify the areas where the new carriages will be best used.’ This document completely contradicts that statement. The Department is setting out allocation of rolling stock in such detail that the operators have no opportunity to obtain more stock in response to market need unless it is in the plan already. A senior rosco source told me that a fleet of his vehicles were being cascaded to various other companies and there was no scope at all for negotiation, even on timing and decisions over the order of the cascade. So even if he got a higher bid from an alternative franchise he would not be able to respond. This experience contradicts the statement in the plan which says ‘this rolling stock plan does not set out detailed lists of rolling stock fleets or exact dates for their introduction on specific routes. It will be some time before this detail is finalised, having been developed through close working with the industry.’ Either Harris does not understand the industry or he is, as they are not allowed to say in Parliament, ‘misleading the House’.

The plan is also equivocal about the role of roscos. It seems to accept begrudgingly their continued role, while undermining their long term position, continuing the Department’s vendetta against them which led to last year’s referral to the Competition Commission.

Quite apart from the fact that the plan does not seem to provide enough coaches to accommodate the growth expected of the franchises under their onerous financial deals, the micromanagement of the operators and rolling stock companies by civil servants is a recipe for disaster. Take the East Midlands franchise which is to get all of three new coaches. As a senior source at the franchise quipped, ‘gee, I hope  they don’t come all at once’. The ridiculous nature of this level of precision six years in advance is demonstrated by the fact that East Midlands will now need another train’s worth of coaches following the accident on February 1st involving a lorry hitting a footbridge which fell on one of its trains. (An accident, incidentally, foretold by Mystic Wolmar – see Rail  582 on bridge bashes.) Procuring three extra coaches is an expensive business which hardly seems worth the trouble. But there it is in paper and it must be done.

Essentially, the plan is an attempt to ensure that the Department for Transport is as much in control of the allocation of rolling stock without, however, appearing to do so, in order to avoid the possibility of the stock being nationalised from an accounting point of view and therefore ending up on the government’s balance sheet. It is an elaborate charade  which allows the Department to suggest the private sector is in control when it is clear that civil servants are running the show.

Here’s another example of the dishonesty. The document says that while rolling stock is privately owned and financed, ‘it is sometimes appropriate for DfT to specify rolling stock in franchises’ (my itals). That’s totally misleading. The detail of the plan makes clear that the DfT will always specify rolling stock for franchises – that’s what caused the fiasco on Great Western in late 2006.

Let me pause for a moment to explain why I find this all this so objectionable and hypocritical. In both my latest books, The Subterranean Railway and Fire & Steam, which recount respectively the histories of the London Underground and the railways, there are tales of real heroism and derring-do by Victorian entrepreneurs who created these assets. They and their investors took risks to provide the nation with much needed infrastructure that stimulated economic growth and development.

The current train operators and other players in the rail industry often portray themselves in the same light, suggesting that they earn profits in return for taking risks and for investment. But that is simply not the case. They are not free to operate in a way which involves much risk and their returns are more or less guaranteed. Even when things go wrong, such as with Railtrack or Metronet, not much money is lost and ultimately the state picks up the tab. The only business acumen the private sector needs nowadays is to attempt to guess what the government is doing next and then accommodate their business to maximise profits out of the new situation. I was pretty shocked when I asked a senior executive of Network Rail who was his client and he replied: ‘the regulator’.

Pretend capitalism is an expensive way of running the industry because it is complex and therefore does not allow for proper scrutiny since no one understands it, and leads to the employment of expensive professionals and consultants who increase the price of doing anything in the industry. Moreover, the cost of borrowing money is always higher in the private sector than the public, and yet there is a very strict limit to the risk which can be transferred to private companies because the railway must keep running.

The rolling stock strategy shows we are in the worst of all worlds. The private companies are not able to use their initiative and commercial judgement to tailor investments where they are most needed and the public sector, by being deprived of a BR type organisation run by experienced railway managers, no longer has the skills required to run the railway which is what, in effect, it is doing. All for the sake of pretending that we live in a world of unfettered capitalism where public is bad and private is good.

When I discussed this situation with a senior rosco source, he admitted it is a ridiculous game that is designed to fit in Treasury rules while costing the taxpayer more than it would otherwise. But, he stressed, without these shenanigans, the Department for Transport would not be able to squeeze us much out of the system as it does, and there would be less investment for the railways. Therefore, he concluded, it was worthwhile. That is why everyone plays the game of pretend capitalism which is the only one in town.

Playing the game leaves everyone happy: the roscos, the operators, the Department, the Treasury and the politicians. Except, of course, the taxpayers, but they are kept in the dark anyway. If there were a decent political opposition, of either Left or Right, or if Gwyneth Dunwoody’s Commons Transport Committee had more teeth, then perhaps this scandalous situation would be properly exposed as the sham that it is.