Railways face battering in recession despite protection

We have entered a new era on the railways. The unexcitingly named Control Period 4 for Network Rail began on April 1st and certainly its import was stressed by Network Rail whose press briefings were picked up eagerly by, amongst others, the Evening Standard whose front page story seemed to suggest commuting nightmares were about to become a thing of the past.

The good publicity for the railway makes a welcome change. The process by which the investment programme for the railways allocated to Network Rail is guaranteed in five year periods is one of the few undoubted benefits of rail privatisation. I remember Bob Horton, the first chairman of Railtrack, stressing this when, in 1995, he explained to me why he wanted the company to be privatised rather than, as originally envisaged in the legislation, left as government-owned, which is the case with every virtually every other infrastructure provider in Europe.

However, behind the PR and the encouraging press reports, there is a much more complex situation which suggests that not all this programme is as assured as suggested in the Network Rail publicity.

The process for the settlement potentially offers the railway a degree of stability which it has not enjoyed before. Essentially the government specifies what work it wants down, the High Level Output Specification (HLOS), and sets out an amount of money that is available, the Statement of Funds Available (not surprisingly called the Sofa). The regulator then determines whether the money available is sufficient to achieve the specification required.

This highly complex arrangement was created because the government wanted the final say on how much money should be spent by the railways. It was created in the aftermath of the revised settlement for Network Rail after the demise of Railtrack, which was determined solely by the then regulator, Tom Winsor, and widely thought by ministers to be over-generous. However, they were stuck with it because that was how the system worked.

And therein lies the rub. Whereas under the old system Network Rail was entirely shielded from political considerations because the settlement was made by the regulator, now the existence of the Sofa means that the government retains at least some control over the purse strings.

The settlement should be looked at in two parts. There is the OMR (Operations, Maintenance, Renewal) which is the day to day expenditure on the railways and the enhancements. There is too, much more cash allocated to enhancements than in previous periods. The go-ahead has been given for major station renewals at Birmingham and Reading and large schemes such as Thameslink and Crossrail which will provide considerable extra capacity for the railway.

The OMR settlement is very tight. Already there has been a cut by NR in renewals expenditure and the company feels that the regulator has been too tough. However, the feeling in the industry is that NR has got away with spending far too much on its core task of keeping the railway going and, moreover, that it should start taking its commitment to a seven day railway seriously. Talk to any train operator and they will moan about how often the railway is closed, especially at weekends, to allow NR to carry out work when, in the days of BR, at least one track would have been kept open. NR in other words, should shut up and put up.

On enhancements, there are two concerns. First, is Network Rail capable of running so many big projects simultaneously, given both the cost and engineering overruns on the massive £9bn West Coast Main Line project? Secondly, will the government provide the funds once the recession really starts to bite. The Sofa is dependent on several train operators paying massive amounts of premium and with passenger numbers stagnating, those sums are no longer guaranteed. That will pose a major test for this elaborate process and enable us to discover whether the railway’s investment is really as ring fenced as the structure suggests.

Wisely, NR’s boss, Iain Coucher, decided that appealing against the regulator’s determination would not be a good idea in the current belt-tightening climate. That raises a wider question. In the past, in downturns, the transport sector was used as a way of moderating expenditure for two reasons, one good and one bad. The good one was that demand for transport is likely to be reduced in a recession and therefore improvements not longer have the same urgency. The bad one was that it was easier to chop big ticket transport schemes particularly if work had not yet been started compared with other spending areas where the impact would be immediately more noticeable.

Now, one could ask whether rail deserves to be insulated against this phenomenon. It could be argued that the industry should take its share of the cuts which everyone else has to suffer in a recession. My answer would be that this is precisely why the railways – and indeed other transport schemes – have suffered so badly from the lack of a sustained investment policy. Anything that forces the politicians to maintain a long term perspective must be applauded. However, the novelty of the allocation process, the depth of the recession and the inconsistency of politicians suggest that the investment plans for the railways are not quite as secure as Network Rail’s PR would like to have us believe.