Rail 657: An open letter to Sir Roy McNulty

An open letter to Sir Roy McNulty

Dear Sir Roy,

I am writing to suggest that contrary to the view you expressed at a recent presentation to the Derby Rail Forum there is actually a silver bullet to make the vast savings you are hoping to achieve in the rail industry. It’s very simple, really – the realignment of the whole industry into its natural structure, a vertically integrated organisation that can make all the investment and spending decisions across the board under a unified management.

 Let’s start with a simple point. As your preliminary report pointed out, the railways cost four or five times the amount they did under BR. Worse, this is after a period of unprecedented growth and consequently the bald statistics do not reflect the true scale of the debacle. The number of services, the main cost, has risen only 10 per cent since privatisation, but passengers numbers have increased by more than 50 per cent. Fares, too, have risen by well above inflation. Yet, the cost to the taxpayer has soared. Under BR, subsidy dropped dramatically in times of plenty, whereas the opposite has happened.

 So it is pretty obvious to assume that much or even all of the increase has been down to the restructuring of the industry, ironically carried out because BR was perceived as too great a burden on the taxpayer. No wonder John Major did not mention rail privatisation in his autobiography.

 A short history lesson helps. When the promoters of the Liverpool & Manchester Railway,  Britain’s first proper railway, were examining how they should operate their business, they considered allowing all comers and simply charging access to the track. However, they looked at the situation on the Stockton & Darlington, its ramshackle predecessor, where various users competed against each other, and decided they did not want to replicate the chaotic situation whereby different users came to fisticuffs over who should have right of way.

 By deciding on an integrated structure, they created the model for virtually every major  railway in the world. It was only when the European Union came along with radical ideas of encouraging competition and breaking up the state-owned monopolies that separation was ever considered. The Conservative government of 1992-7 then adopted that structure for purely ideological reasons in order to pursue the unrealisable dream of on line competition.

 Thus 150 years of efficient railway practice were tossed away on an ideological whim and it has backfired dramatically. Ok, so why does separation make such a difference? First, there is the basic conflict between the different players. Ivor Warburton, a long time BR man, once explained why the organisation was so efficient. He explained how  BR worked to a specific budget, given at the beginning of the year, and stuck to it. He told me the story of his permanent way man on the West Coast main line asking for money to repair a culvert which had a ten percent chance of collapsing during the year. Warburton refused, and the culvert collapsed, but he emphasised that the decision was still the right one. That sort of thing never happens nowadays – the money is always spent because there is no one who would any longer dare to take such a risk.

 A senior Japanese railway manager, who like all his colleagues was appalled at the way we run our industry, put it another way:  ‘How can the railways make the right investment decisions on say, signalling and track separate from the person in charge of operations or purchase of rolling stock?’ An irrefutable point. 

 In our system, franchise requirements, the High Level  Output Specification and Network Rail’s own priorities are determined by different people and while there is some attempt to align them, clearly that is an impossibility. Planning the railway has been effectively outsourced to people who are not up to the task, consultants and bureaucrats who are not responsible for carrying out the work they specify. Therefore, millions get wasted on investments that are not needed, or alternatively, not spent on assets that would save other players in the rail industry vast sums. Privatisation, which was supposed to have created flexibility, did precisely the opposite.

 Then there are the countless interfaces that suck up money faster than Uncle Scrooges coin counting machine. Every one costs money and requires the drawing up of legal contracts. The crazy money go round merely encourages the various participants to play to the rules to maximise profits, rather than work to benefit passengers. As the recent Public Accounts Committee points out, ‘at present there is no incentive for the rail industry to supply extra capacity without additional public subsidy’.

 The bureaucracy this has created is undoubtedly one of the drivers of the extra costs. So is the compensation scheme. Network Rail made a net profit of £42m from compensation – in other words because it outperformed expectations – but paid out nearly £150m, and received £190m. £42m at the end of the day is a trivial amount, representing less than 1per cent of the company’s turnover. Yet, the structure creates all kinds of nonsenses. Network Rail has to pay compensation for making improvements to lines which will then benefit the operators. That is a crazy system which in any case does not work since there are more weekend closures now than under nationalisation and the promise of a seven day railway is  never realised.

 I could go on but space is limited but I will give just one other reason for the increased costs: the privatised companies charge for risk they have taken on but for the most part there is no cost to them. Therefore, every player in the whole game gets extra money for risks for which they do not actually need compensating and trousers the money, to use the Private Eye term. And so on.

 OK, the arguments for vertical integration are irrefutable and widely accepted in the industry, but the question is ‘how do we get from here to a vertically integrated system’. Quite simply, the franchises can be allowed to run their course and gradually be reintegrated. I recognise there are difficulties, but there are some easy starters.  the Great Western is pretty much self contained, and so is the old Southern, third rail electric, system. Two elements of the old Eastern region, Anglia and C2C are easy to deal with too, and so is Wales and Scotland. Chiltern can be left in peace. That leaves the East and West Coast mainlines, and those complicated bits up North. There is no easy solution, but possibly one could recreate an InterCity organisation, and a regional railways one.  The crucial point, though, is to gradually reduce the interfaces, the number of companies involved and the duplication. It may not lead to saving all the extra money, since health and safety, and regulations have added to the bill, too, but it would go a long way towards it.

 Don’t by the way be fooled by the argument that the aviation sector works in a disaggregated way. Airplanes are only on the runway for a few minutes, and have the freedom of the skies thereafter. Trains are controlled every second by signalling systems and remain on the tracks all the time. They are not comparable industries.

 Nor let the defenders of the status quo get away with the line that third party users, such as freight companies, will suffer if they have to operate on the tracks of a rival company. In pre first world war days, there were over 200 rail companies, and many had agreements to operate on each other’s tracks, as do US freight companies today. All you need is a fleet footed regulator to ensure fair play.

 Ignore, too, the nonsense about EU rules, which require only accounting separation. In any case, rules on rail interoperability are widely ignored and the whole basis of vertical separation is flawed  and needs to be challenged. Neither the French nor the Germans show any sign of true separation of infrastructure from operations.

 I would just like to end on a point that worries me.  I see from the presentation in Derby that you consider that the cost of the rail industry to the taxpayer is unsustainable. I’m not quite sure what you mean by that. You went on to suggest that if that bill cannot be reduced, then there would have to be cuts to the service or to the network.

 I’m not sure how you come to that conclusion. The railways are a vital service which bring in far more benefit to society than the £5bn cost to the taxpayer.  Sure there is a waste, as the above suggests, but what makes you say that £5bn is unsustainable  – is £3bn, or £1bn, or are you trying to reach the Holy Grail of profitability for the industry as a whole, something  which is not only unachievable but fails to recognise the wider benefits of the railways, i.e. the externalities to use the economists’ term.

 I hope,  though, by pursuing my line of thought, you will find that you can make such large savings that on any rational basis you will consider the present network and the level of service completely sustainable.

  • David Sterratt

    Hear hear! How far would you suggest vertical integration should go though? Are you suggesting we should Bring Back British Rail?
    http://www.bringbackbritishrail.org

  • http://peezedtee.blogspot.com Paul Temperton

    A trifling linguistic point: the verb “to trouser” (money) wasn’t invented by Private Eye but by P.G.Wodehouse!

  • http://peezedtee.blogspot.com Paul Temperton

    Whether vertically integrated or not, I certainly agree that InterCity should be reconstituted as a single operation. It was sheer lunacy to chuck away such a successful brand.

  • David Sterratt

    At risk of turning this thread into Private Eye’s pedantry corner, according to the OED, P G Wodehouse (born 1881) is unlikely to have been the first to use “trouser” as a verb:

    “trouser v. slang (trans.) to put (money, etc.) into the trouser-pocket, to pocket.
    c1890 G. H. Kingsley Sport & Trav. vi. (1900) 183 The sheriff *trousered the dollars!
    1892 Labour Commission Gloss. (at cited word), To trouser is to put money into one’s pocket, that is, to earn; a slang expression used by cabmen.”

    You’re absolutely right about the InterCity brand though Paul!

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  • Dan

    This is all so obvious that it is interesting to wonder why people who are clearly intelligent and have skills fail to accept it (in public). After all – if someone said ‘do this reveiw, but if you mention this solution, it won’t be acceptable, so say anything but that’ if you had any sense you’d refuse to do the reveiw – wouldn’t you (unless you wanted to ‘trouser’ the fee, and had no other interest).

    It’s hard to find anyone who defends rail privatisation on the UK model apart from ideologues in the political sphere, and I expect some direct finanical beneficiaries.

    After all, in general one would not want to tarnish your reputation in the eyes of outsiders with making a foolish conclusion – so whay do poeple do that in many of these sorts of reports.

    It’s an interesting issue to consider. Christian – you have spoken to many / all of the players directly – an article or two on ‘why they seem to think what they say they think’ would be interesting.

  • RapidAssistant

    I think there are too many people with too many fingers in too many pies spread across both the rail industry and political spheres, and too many conflicts of interest fronted by people with too big a public voice standing in the way of vertical integration and from thereon – nationalisation.

    Following on from Dan’s point – has there actually been an impartial government review that’s actually came out and said the current structure is lunacy? Or do the conspiracy theorists among us think it’s been gagged before it ever saw the light of day because “we’re not allowed to say that”

    As I said in another thread – Tim O’Toole denouncing vertical integration now he’s the boss of First yet he was a vocal critic of PPP of the London Underground (admittedly that may be due to his background in American freight railways, which runs on a separated model)…..many of the ex BR managers who are now multi-millionaire bosses (or ex-bosses) of TOCs because of privatisation are equally against any reversal of the status quo. Tom Winsor, who was supposedly an impartial regulator in his day, seems to be erring on the side of being a ‘political idealogue’ given his idea about reprivatising Network Rail.

    The smell of the proverbial rat, really…..

  • Stuart Shurlock

    Tom Winser seems utterly obsessed with the idea of the ‘perfect contract’. It doesn’t exist, and is the reason why the current railway structure cannot work, even with brilliant communications and smooth interfaces. Any contractual relationship relies on someone predicting all reasonable future eventualities, and then putting that future into words, together with guesses on how to best resolve the problems that will arise in any real-life situation. Someone else then has to make their own interpretation of those words, and then assess the level of future risk, taking a conservative attitude to the other party’s future behaviour and putting a price on it all. That then is set in concrete (including all imperfections, mistakes, omissions and misinterpretations) for however long the contract is valid for.

    A unified structure means that the Government can set out the high-level requirements, a Board can decide how to realise that with a strategy (easily amendable if and when changes are needed) and the top management can ensure that everyone below them works together to achieve the best possible results. If they don’t work with their colleagues, they will not be hiding behind contractual niceties, or fighting the flaws in the document, they will be pursuing their careers elsewhere !

  • Gordon Murty

    I wonder if Mr McNulty is really independant and free to report totally without fear of censorship? If he is he MUST report the blatantley obvious, the one thing everyone knows but darent say, the thing that must only be whispered about. Renationalise and get back to providing a national service for the nations benefit and cut out all the middle men, consultants, managers managing things that no-one knew we needed, and get back to common sense. this may be the one and only chance to prevent financial collapse.

  • Dan

    Good point Stuart – is/wasn’t Tom Winsor a lawyer – they always seem to think that contracts solve all – and yet they make a living from situations when contracts don’t work (or fail to work as intended)?

    I’m not pro privatisation – but even if in private sector and unified many odf the problems / costs would decline – however you would then get monompoly provisions (or the appearance of it) you do actually have it now anyway – apart from a few routes.

  • RapidAssistant

    Exactly Dan – Scotland is the perfect example. Apart from East Coast and CrossCountry’s handful of services that go north of the central belt (Virgin now makes only a token stop at Lockerbie a handful of times a day…) – there is no on-rail competition in Scotland and ScotRail consequently enjoys a monopoly, which makes a mockery out of the competition argument. And the “competition” between the London sleepers and Virgin/East Coast is really academic to say the least, since you are affectively buying a night’s accommodation as well as a rail fare that only serves one station (Euston).

    I applauded when the SNP openly talked about a trial reintegration in their manifesto – which seems to have been kicked into the long grass (like a lot of other things) when they took office. There have been positive things – the decision by the Scottish Government to enforce a single brand, a single livery and corporate style has been a big plus – it FEELS more like a unified network – unlike the mess south of the border with every station you visit having a different look depending on who is in charge.

  • Mike Godwin

    Spot on!

    I thought it was fascinating how SNCF took umbrage when a German train crossed the Channel. The whole point of this ludicrous separation of train from rail was so that all continental trains could run on one another’s lines. The sooner the “rail-wheel interface” is integrated vertically, the better.

  • RapidAssistant

    I wouldn’t build your hopes up Mike – based on what is being printed at the moment about what the govt’s intentions are. Looks like more of the same to be honest…….

  • Dan

    OK – so the mainstream press maybe not the best place to make a full assessement of the man’s abilities but reading the below are we to really assume he has not heard of yield priced Advance Fares and Off Peak tickets then? And does he not note that access to the main competitor mode (road) does not get priced in this way?

    By going on to say (as the article suggests he may) that seasons are more heavily subsidised (which they are I suspect esp from reading Barry Doe’s excellent fares inflation analysis) will fail to recognise the electoral unpalatability in the home counties of addressing this issue.

    In fact I’m starting to think this is amusing if it was not so tragic – political unpalatability of making season ticket holders bear the full costs of the service provided to them VERSUS political unpalatibaility of “stating the bleed’in obvious” (privatisation has failed and costs a fortune).

    Review “Rock and a Hard Place” and Review “Poisoned Chalice” come to mind!!!

    “The rail industry could follow Ryanair’s example and introduce airline-style ticket pricing to deal with overcrowding, according to the transport grandee conducting a government-ordered cost review.Sir Roy McNulty said raising prices for peak services while cutting fares at less busy times could solve railway congestion and make the best use of multibillion-pound infrastructure improvements.”….”The interim report notes that season ticket prices, which are capped, receive higher subsidies than other fares.”

    From

    http://www.guardian.co.uk/business/2010/dec/07/rail-review-suggests-airline-pricing

  • Steve Ashford

    Dan may be right – McNulty may not be the towering intellect that one might have hoped. Fares on intercity routes already vary over a range of about 1:10, and that’s just standard class! Bit worrying if he does not know this! Are we taxpayers paying this man?
    Ultimately you can’t make people travel at times of the week that they don’t want to. I recall a business trip to Dublin aboard Ryanair. – outward on a Tuesday afternoon, fare 2p, plane two-thirds empty – return on Friday afternoon, fare £100+, plane full. So even o’Leary does not have the magic wand.
    Press reports of the McNulty review also don’t hold out much hope that he has really looked hard at the costs and benefits of the fragmented railway system that we have, and perhaps attempted to put a figure on those costs.

  • Ian Raymond

    Let’s not be too hard on McNulty (not yet anyway).

    Ok, he’s probably being paid a pretty fair deal for this report, but I’ve got to say unless you have an advanced knowledge of the operational / technical / legal aspects of UK rail, you’ve not got the faintest hope of untangling the gordian knot, so complex is the history and current set-up. And if you *do* have all that knowledge, chances are you’re already a player in the sector with your own axe to grind! My feeling is that a lot has been glossed over – perhaps to make it more readable, perhaps because it was genuinely a challenge to understand.

    Reading between the lines of what’s been put out in the pdf on the DfT website it really says precious little that is concrete – almost as if the detailed recommendations are being sent for ‘editorial approval’ to the ‘client’… Hmm. So who’s voice will we really hear in the final version?

  • Dan

    Fair point Ian – but then you should perhaps – a) not take on the job, or b) go on a serious crash course of learning – (hard work and most top dogs don’t ever want to bother with the hard graft to do that even if they’ve got the time). You could of course find academic experts who would not have so much of an axe to grind and could do the entailed economic analysis required – I’m sure.

    When we think of the great reports and Royal Commissions that have shaped our society (eg Beveridge) I don’t suppose they’d have got away with not getting to grips with the topic. But yes, let’s see what he comes up with and lets also hope for some quality analysis too.

  • Peter

    Well said Mr Wolmar.

    I can say from personal experience that the current structure of the railways is an unmitigated disaster:

    – Nothing is coordinated, the most basic tasks are festooned with red tape until they become almost impossible.

    – Everyone is looking to “cover their arse” – and never mind what happens to the passengers or freight customers.

    – Huge amounts of management time are wasted on pointless bickering eg over minor delays.

    – One train operator is always happy to score cheapjack victories over its rivals – with petty competition for train paths, systematic failure to assist failed trains of other companies and the way that one operator is always happy to inconvenience another.

    – Costs have ballooned everywhere.

    – Small armies of incompetent contractors roam the railways, often causing chaos and putting themselves and others at risk. Meanwhile crimes like cable theft flourish as no one really knows who should be where…

    – Many parts of the railway are permanently overcrowded yet there is no incentive expand the network.

    – TOCs are insubstantial franchises, none of which has a true long term future, and Network Rail is an inslovent and commercially inept quango that makes the old BR management look like gung ho venture capitalists. It doesn’t even have a credible corporate structure.

    The result is that numerous basic projects that should be underway: eg Lewes – Uckfield, Woodhead reopening, Coalville line etc just fester as roads become more and more crowded.

    So let’s hope someone reads your open letter. The railways are crying out for change.

  • Dan

    Well put Peter – All Sir McNulty needs to do is read your post and address each issue you have listed one by one (and a few other obvious ones from pertinent posts), probably read a couple of Christian’s books, plus Eleven Minutes Late and Parallel Lines by other authors and offer some coherent suggestions.

    Job done.

    I’m not being sarcastic by the way!

    PS – plus he could list the names of the people responsible starting from about 1993 so we can send them the bill and get our money back.

  • RapidAssistant

    Reading the Guardian article though Dan sends shivers down my spine. What exactly is new here? As I alluded to in my earlier post, all this seems to be is more of the same set-up with a small icing of trial vertical integration to keep the pro-renationalisation lobby quiet for a bit.

    If he’s saying that peak time fares should go up, and off peak go down – hasn’t this the model that’s been used for decades?? Give the man a cigar. No matter what model is used the public holidays will remain the same, the weekend will always fall on Saturday and Sunday. And whilst it’s easy for me being in a so-called “professional” role with flexitime and the ability to work from home to say that this is the golden bullet to the problem, the fact remains most of us aren’t free to travel outside the peaks. Simple as that.

    And anyway – you don’t see the price of petrol, car parking, bridge tolls or motorway tolls being hiked on Fridays now do you? And even if it were, I doubt if it would put motorists off….after all look at how many people are still prepared to pay the congestion charge to drive in to the centre of London.

  • Dan

    Well said Rapid – for most of their customers on most routes airline passengers probably have freedom to travel at other times – either because the journey is a one off (like a holiday, and thus might be more price sensitive) or a relatively rare event (not more than say once per month at most) – or not strictly required at all when it boils down to it (a weekend break).

    Contrast this with a daily commute (which is presumably what he was talking about) -it’s DIDO and people often have limited choice in certain areas eg London and South East (OK you can move closer to work, but not if you can’t afford it, or if it meant your spouse then had to travel further to their work). Outside London and SE (where there are few other viable modes) the other modes are overloaded too (so capacity to switch is limited). It is people’s employers that require them to be at work at certain hours etc. Does McNulty think this will change if prices are starker for seasons between peak and off peak? Maybe it will – I doubt it.

  • Ian Raymond

    Dan – “PS – plus he could list the names of the people responsible starting from about 1993 so we can send them the bill and get our money back.” – nice one, I like it!

    I’m not instantly jumping to the conclusion that McNulty’s going to go for anything more than we already see on fares, as I indicated above I’m just concerned that the shape of the whole final report is going to be shaped by dogma rather than facts.

  • RapidAssistant

    It may be though Dan – thinking about it more, that if the London commuter belt got stung badly by these proposals – it would only accelerate a trend that’s been happening for the last decade, in that increasing travel costs have forced a lot of lower paid, junior positions out of London completely and to other locations – undoing any attempts being made elsewhere to keep the capital affordable to young professionals

    We’ve seen already that many of the big banks and financial firms have for many years now, been setting up offices in the likes of Glasgow, Manchester, Leeds etc to house these (in that horrid management speak again) “low value-add” roles, or offshoring completely – taking work away from the country at worst, or at best helping to further centralise wealth and prosperity in one region – neither are a healthy outcome for the nation.

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