Rail 660: McNulty misses the target

In amongst all the news about snow chaos, high speed lines and refranchising plans, the interim report by Sir Roy McNulty, completed for the Comprehensive Spending Review  was published in early December. The McNulty review was set up by Lord Adonis that in recognition of the fact that, despite the good lord’s hyperactivity, he had failed to focus on cost reduction and, specifically, the structure of Network Rail.

 McNulty has gone about his task in characteristic civil servant style, first producing a ‘scoping study’ (aka, what the hell is all this about?) and now producing an interim report (aka here’s a few preliminary thoughts, hope the ministers like them). The interim findings, predictably, suggest there’s lots of savings to be made in the industry, and rather tendentiously McNulty puts a figure of £600m to £1bn that could be ‘saved’ by 2018/9 above current predicted savings. This is the language of the times as we are in age of austerity and tight budgets where everything is about cuts and savings.

 But what does it all mean? Here, I’m afraid, McNulty has fallen in the trap of constraining his own vision. The principal parts of his remit were to look at ‘what legal, operational and cultural barriers stand in the way of efficiency improvements’ and to examine ‘the incentives across different parts of the rail industry to generate greater efficiency’. But already, from the interim report, it is clear that he has confined himself to tinkering about with the existing structure, even though it is obvious, from his findings, that its contradictions lead, in the first place, to much of the excessive cost.

 McNulty’s preliminary findings, therefore, seem to merely reiterate what he was asked to investigate. The top two lines of his initial conclusions, for example, say there is a need ‘for greater clarity and better alignment of objectives, particularly in relation to costs [and]

greater clarity of roles between Government and industry, with Government involved in less detail, and the rail industry accepting greater responsibility for delivering the broad objectives set by Government’. Then he goes on about the industry and government developing a comprehensive set of strategies and a much stronger focus overall of cost reduction.

 Well yes, laddie, but we all know that. The question is what do you propose to do about it? Take the example I gave in my open letter (Rail  657), the compensation procedures. These are set deliberately in such a way as to boost one stakeholder’s income at the expense of another and that is at the heart of the whole fragmented industry. The interfaces are policed by expensive legal contracts that do not make for the type of coordination that McNulty seeks. Competition, which creates complexity and thus cost, is the prevailing mode in the industry.

 What McNulty has discovered is truly shocking. Unit costs in the industry since privatisation have stayed much the same even though technological progress should have resulted in a 2-3 per cent annual improvement. Yet, since 1996-97, while passenger-kms have increased by 59 per cent, there has been little or no improvement in the total cost per passenger-km, which is remarkable in an industry with high fixed costs. Moreover, they have been paying above inflation fare rises. Clearly someone is pocketing the extra dosh, and it’s not either the taxpayers or the passengers…

 McNulty has looked at ‘abroad’ and found that not only costs lower but, hey, franchising has led to reductions in costs. McNulty needs to answer one simple question: ‘Given that Britain has experimented with the most radical change in structure of the railways of any country in Europe, is it not the case that this is the root of the problem?’ And if so, what are you suggesting to change it?  Surely not just ‘better alignment of incentives’ and ‘an industry wide focus on costs’?

 If McNulty wants confirmation that the structure simply cannot be made to deliver the kinds of improvements and savings he wants, he only has to look at recent events. On numerous occasions during the ‘snow chaos’, I talked to railway staff who moaned about the other side for the failure: in other words, operators pointed to the failings of Network Rail and vice versa. Both were probably right. Network Rail procedures were certainly found wanting – the maintenance being carried out on multi-purpose vehicles highlighted by Nigel Harris in the last issue was but one example – but the operators were all too ready to throw in the towel. Moreover, the worst aspect of the whole crisis was the lack of accurate information, especially on websites which are easy to keep updated. The fact that some companies, such as London Midland, have created Twitter sites giving out up to date information – Chiltern gets a mention in despatches too – and responding sympathetically and informally to complaints, shows that social media is the way forward but that other companies have failed to cotton onto this, having cobwebbed sites that have out of date information (Sadly, the information failure was also apparent when there was good news to spread, notably the performance of the railways in the second bout of freezing weather which was certainly an improvement on the first, but as usual the absence of a Fat Controller to centralise and disseminate information – please note this Mr McNulty – has let the side down.)

 And by the way, those who talk about the aviation industry functioning perfectly well despite having a vertically separated structure must have been a bit taken aback by the grenades being lobbed at each other by BA and BAA as flight cancellations mounted. I am not suggesting that aviation could be vertically integrated, merely pointing out that at times aviation’s vertically separated structure causes precisely the same sort of problems as in the railways.

 Given all this, it is heartening that Philip Hammond has decided to commandeer the process, clearly mistrusting his civil servants, by appointing himself to chair a high level group examining the future of the industry. It is shame, though, that he too is constrained by the commitment to longer franchises while still failing to explain how he will get over the intrinsic Catch 22 in that policy: how do you discipline a poorly performing train operator without imposing such sever break points that they amount to a limitation of the franchise term that you are trying to avoid in the first place. Note, for example, what happened to the London Underground Public Private Partnership which was supposed to be 30 year and foundered at the first 7.5 year breakpoint.

 Hammond hinted at major changes with his statement announcing the high level group, saying: ‘Incentives on the railway have become blurred and interests mis-aligned, to the detriment of efficiency, value for money and passenger satisfaction. At present Network Rail answers to its regulator, not to its customers, the train operators. Meanwhile, train operators have no interest in Network Rail’s costs, since any increases or decreases are passed straight through to the Government.’ Will, he therefore, bite the bullet and be more radical than McNulty and follow the logic of his own argument, or simply go with the safe option of announcing longer franchises, despite the contradictions.

Mystic Wolmar scores again…

Well, not entirely. Rather like the England Test team, Mystic had a rather patchy time in 2010. Here is what he predicted for 2010 and, in brackets, his score.

1. There will be a hung Parliament after the election of March 2010 which, surprisingly, will bring more angst than joy to the Libdems (well, okay it was May not March, but that is certainly, especially the bit about the Libdems suffering from getting what they wished for  1/1);

2. The economy will recover just enough to ensure that no other major train operator will threaten to leave the industry (no brainer, 2/2);

3. The PPP on the London Underground (see above) will collapse entirely and the contracts taken over by Transport for London. (spot on Mystic, way to go 3/3)

4. The Intercity Express Project will be cancelled. (mmm, almost, but seems like there is going to be a reprieve, so sorry, 3/4)

5. Lord Adonis, who will not longer be transport secretary after the election, will announce he is leaving the House of Lords to try to get a safe Parliamentary seat for the following election. (pure fantasy, he has got himself a job as head of the Institute for Government, 3/5 since nul points for guessing he would be out of office)

6. Crossrail funding will be stalled following the election and there will be a review of the project.(well, sort of, Mystic, so give yourself half a point, meaning 3.5/6)

 Oh, and just as an after thought, I suspect Iain Coucher will be seeking a new job after falling out with his chairman (well, that counts as a seventh prediction and was spot on, so 4.5/7, although perhaps he can afford not to bother given his inflated bonuses). Not bad, certainly would have been worth going to the bookies. Watch out for the 2011 predictions in the next issue, and any suggestions by the more prescient amongst you, ever welcome.

  • Richard T

    I thought that on rail privatisation our system was delivered into the clutches of the three occupations least able to run it (let alone a whelk stall) – civil servants, accountants and lawyers. Nothing has happened to change that view; indeed your article strengthens it. The sooner the government alters the basic structure to give the operating companies control over the infrastructure and their rolling stock the better.

  • Dan

    Re reading this very good column Christain it occurs to me that it is a great shame that all the talk about HS2 (on this site and everywhere else) means that this critical issue for the industry is not getting the exposure it needs.

    I disagree with you on HS2 myself (but am far from convinced it will get built anyway) – but it seems a shame the dabet about the prospects of HS2 are overshadowing more criticval issues about the structure of the industry – which are the cause of so many probelms and so much wasted money.

  • Gordon

    McNulty has said everything and said nothing, 6 months to come up with a report he could have made up over the coffee break. Now a further 6 months work for the final report or will he recommend an extension for a further 6 months? How many are on his team?What are his credentials for looking into the rail industry? Its no good knocking on peoples doors and asking if they are doing a good job because surprise surprise they will say yes, and its very expensive, but we are looking into it, goodbye!