Rail 607: Trusting Network Rail is hard to do

I wish I believed in Network Rail. By that I mean, I wish I had confidence in the structure, in the people running it, in its ability to deal with the train operators and passengers and ultimately in its long term strategy. And the trouble is that despite knowing that it has some excellent people working for it who really do want to make a difference to the railway and that it does not exhibit the sheer greed and bloody-mindedness that characterised Railtrack, I can’t quite bring myself to, well, think fond thoughts of Network Rail.

 Part of that is the top personnel. There really seems very little reason for Ian McAllister to remain as chairman after he lost confidence of the industry and the outside world after the fiasco of the overrunning blockades last Xmas. Sure, he is going in July, but that is at his convenience rather than reflecting the needs of either the company or of the wider industry. And while chief executive Iain Coucher is a wonderful Rottweiler, who must clearly terrify some of his managers to perform better, he has yet to prove that he is able to handle the public role of his job, something that will become crucial over the next couple of very difficult years. Robin Gisby, the operations director, is the best in front of the cameras but that still leaves the organisation without a sufficiently strong identity.

 The dissatisfaction with Network Rail, though, goes deeper. It is the fact that Network Rail is playing at capitalism when, in fact, it is a company with an administered income. Take the interim figures recently issued by the company. They are published as it if they came from a conventional company which has to make a profit in order to satisfy shareholders. But everyone knows that is not true. The directors pay themselves as if they were risk-taking entrepreneurs. And everyone knows that is not true either. And they get fat bonuses for pretty undemanding targets. And everyone knows that they don’t really deserve them.

 I sometimes get asked by the business programmes of the BBC to comment on their rising or falling profits and I have to explain, at length sometimes, to the producers that Network Rail make a profit when it is given more money by the government and that effectively it is an administered figure, not one with any bearing on the year’s performance. That explanation occasionally takes some time to sink in, and so it is hardly surprising that the public has by and large no understanding of the way that Network Rail is structured. Moreover, Network Rail senior managers are sometimes tempted to retain the illusion by commenting on their ‘excellent’ figures.

 The recent figures show, too, that Network Rail has fallen well short of its improvement targets both for both operating/maintenance and renewals. Yet, despite this and the debacle last Christmas, bonus payments to the directors were virtually unaffected as Mr Coucher ended up with a salary of over £1m.

 That brings us on neatly to the issue of governance. Network Rail’s bosses pretend that there is proper oversight of their affairs. Sure, the Office of Rail Regulation regulates their affairs but that is a very different matter from having the kind of detailed scrutiny which the company would have – by shareholders, were it genuinely private, or by the Treasury, were it nationalised. Instead, ORR sets the financial parameters for its operation, oversees the overall strategy but is pretty powerless to affect real change, as shown by the latest settlement which is, by historic standards of the cost of railway maintenance, very generous.

 The real weakness is the structure of having a ridiculous number of people, over 100, as members supposedly to keep an eye on the company. I have talked to several members who are shocked at the standard of most of their colleagues, suggesting that ‘many seem to do it because they like going to meetings and travelling around for free’ and ‘none of them appear to have any knowledge of their responsibilities’.

 The biggest pretence, though, is that Network Rail is viable. There’s a very simple way to refute that. Network Rail’s debt has risen from the £9bn it inherited at its creation in 2002 to over £20bn now and that is set to rise to a staggering £31.5bn by the end of the next control period in 2014. While we are all used to talking about billions these days, that is a staggering sum. In other words, before a single train moves, by the middle of the next decade, Network Rail will require, on the entirely predictable assumption that interest rates rise again, around £1.7bn to service its debt each year. And that is likely to keep on growing.

 These figures show that the entire income from franchising will soon go towards servicing Network Rail’s debt. In other words, all Network Rail’s other costs – operations, maintenance, renewal and expansion – will have to come from government subsidies, apart from a few bits and pieces like property income and freight payments.

 That is completely unsustainable. First, there is the risk that the debt will eventually get onto government books, and frankly, given his golden rules have been thrown out of the window, who would give a damn. Secondly, the government has made clear that it wants the railway to be more self-financing. Will this include a requirement to start paying back this debt? If so, then passengers are in for a real hammering as fares will be forced up dramatically. And it that is not the case, what is the long term expectation of what will happen to this debt? Certainly there has been little word from Mr Coucher and his colleagues on this. 

 Instead, we have the further fantasy that Network Rail will be able to borrow on the money markets without using its government backing. If that were possible, the cost would be higher making the railway need more subsidy just for the sake of making Network Rail’s directors pretend even more that it is a private company. More likely, though, given the credit crunch, Network Rail does not have a cat in hell’s chance of raising the money independently. In his statement to go with the interim figures, Coucher seems to acknowledge that, saying ‘the company needs to attain an appropriate investment grade from the ratings agencies to allow it to commence a stand alone corporate debt programme’. He does not specify what will happen if the company does not get the right debt rating, and that is all part of the crazy charade of pretend capitalism which Network Rail continues to play.

 The new transport ministers have made clear that they are not going to suggest any radical overhaul of the industry. But finding a way to rein in Network Rail and make it more accountable would be a lasting legacy for Mssrs Hoon and – sorry, Lord – Adonis. I may even grow to love it.

 

 Mystic Wolmar: clouds in the crystal ball

 

 

It’s gone so quickly, but as the sun sets on 2008, I thought I better see how Mystic Wolmar fared during the year. In 2007, you may remember, he scored five out of five, so for 2008, he set himself slightly harder targets. They were:

 

1.       The old Eurostar platforms at Waterloo will remain empty until 2009 at least, despite promises to the contrary.

2.       Ministers will become increasingly concerned about the lack of governance of Network Rail and will launch a review or enquiry into its future.

3.       The Competition Commission investigation into rolling stock companies will lead to egg on the face of ministers.

4.       Eurostar will announce plans to run services to a couple of new destination.

5.       As the economy begins to stutter, a franchisee will warn that they may not be able to continue operating without a change in their contract terms. 

 

 Well, the first one was a surefire winner. And things have gone very quiet on that front, so maybe even 2009 may be a bit optimistic. Imagine if it were a bit of empty road that needed commissioning? That would undoubtedly happen overnight. Score 1/1.

 The second is more difficult. Certainly there is widespread concern about Network Rail governance but it is hard to know how this has percolated up the food chain in Marsham Street. Score 1.5/2. The third was certainly correct, although, of course, the minister who launched the inquiry Douglas Alexander is long gone. Score 2.5/3.

 There are, sadly, no signs of any definite announcements for Eurostar services although that is much overdue. There is no shortage of train paths, as the fact that the closure due to the fire has barely affected services. Score 2.5/4. And finally, the last one was a bit premature. Watch this space for next year – it will certainly be the first of my predictions for 2009. So a final score of 2.5 out 5, not a vintage year but not bad.

 Do, as usually, make your suggestions on what Mystic should predict for next year. He always need a bit of help with that crystal ball.

  • Drayman

    ‘The directors pay themselves as if they were risk-taking entrepreneurs.’

    But then do so many other senior managers and directors of large companies and, as JK Galbraith pointed out, they aren’t entrepreneurs either. The problem is that entrepreneurs and business leaders have become muddled in the public mind. Branson has been an entrepreneur, but setting up Virgin Trains wasn’t an entrepreneural idea.

    Entrepreneurs create new businesses with new ideas. The senior managers and directors of large companies are bureaucrats; their job is to manage the assets competantly and buy up smaller companies that have had successful ideas to harvest their profits.

  • RapidAssistant

    The fundamental problem is that how can you be entrepreneurial in an industry that is so tightly regulated. Open Access arguably yes, but when it comes to the regulated majority (i.e the franchised bit) of the system it simply can’t happen. As you say it’s merely a private company running a public service.

    If BR had still existed surely it would now have a website and would be selling tickets online, and would be using mobile phones to track journeys and all the other “innovations” that the TOCs keep on trumpeting.

  • Dan

    Yes, the TOCs need to point to something another nationalised railway system has not done before they can claim anything they have done is more entrepreneurial. I’m not sure there are many, if any, examples of that – I am planning a holiday in France keeping to the rural and secondary routes of the netwrok – SNCF regional services (SNCF – TER) have a very clear website (in French) that I can easily operate – with very little French language skills and not being over familiar with their network. I don’t think I could say the same if I was French and trying to plan a journey round the equivalent routes of the UK network! Garppling with umpteen different semi regional TOC websited all laid out differently simply hinders understanding.

  • Christian

    I will be interested to see how you get on, Dan. Most reports about the French non-TGV network are fairly poor, though last year I did have an excellent ride from Chamonix to Lyon on a regional train through wonderful underpopulated countryside.

  • Dan

    Yes, well from the pre planning stage of the SNCF TER website (plus of course the always required Thomas Cook Timetable and Rail map) one can see that the services on these lines are nearly always sparse (2 or 3 in the morning, 2 or 3 at lunch time, 2 – 4 late afternoon / eve is often the pattern) one can work out how to get about at a leisurly pace. And these sparse services are in much contrast with the UK – where only the remotest Scottish and other rural lines have such limited services. I’m planning on using the real branch line network, not the secondary ‘Classic’ main lines I should say.

    Politically, though, this is interesting. These lines are maintained and kept open for the use of levels of service that make ex BR Regional Railways lines look well populated with trains. Although I suspect some lines have been closed and there is evidence that some routes are provided with buses – but I’m not sure if these are routes that once had trains, or links designed to make a network and sponsored by SNCF. We shall see.

Shares