Rail 718: Convoluted investment process may not deliver the right railway

We are now in the middle of the complex process that will decide on the railway investment plans for the five year period from April next year. Network Rail’s business plan published at the beginning of the year is currently being scrutinised line by line by the Office of Rail Regulation which will then publish its ‘draft determination’ in June and its final decision, after the consultation period, in the autumn. If Network Rail agrees and there is no appeal, the result will set out the money available for investment in the industry in Control Period 5 which starts in April next year.

This is a very strange and convoluted way of determining how much money should be spent on investment on the railways. The reason the process was created is because of Network Rail’s status as a pseudo private organisation rather than being owned directly by the government. Before Railtrack was morphed into Network Rail, the rail regulator, Tom Winsor, showed his independence from government by allowing Railtrack more money than ministers had thought reasonable. They were furious and created this system by which the government set an amount of money they wanted to see invested, the Statement of Funds Available, and also issued, in conjunction with the industry, an outline of the work they sought to have carried out, the High Level Output Specification.

The two then go to the ORR which is then charged with determining whether the plans are affordable and realistic. Or to put it in simple terms, ORR tries to fit HLOS into SOFA – which is perhaps why few people outside the industry can understand railway finances. The numbers, of course, get bigger every time. In Railtrack days there was talk of a fabulous £5bn spent in the first five year period, now Network Rail wants to spent a stunning £37.5bn (which actually includes spending across the whole industry).

There is definitely a feeling within ORR that Network Rail needs to up its game. Performance has tailed off recently and the ORR remains convinced that the company does not know enough about its assets to manage them properly. Asset management is at the core of performance which is what the ORR is most eager to see improved. The target of 92.4 per cent trains on time (according to the measure) seems out of reach at the moment.

Asset management means knowing when a drain will block, a track circuit fail, an overhead line fall down or a rail break. In some parts of the railway there has been improvement but the real worry is civils – the bridges, embankments, tunnels etc – that ensure the railway can operate. It is the ability to predict asset failures that is crucial. Without a sufficient knowledge of the asset base – something Tom Winsor, the rail regulator at the time of the collapse of Railtrack a dozen years ago, used to bang on about the whole time – the railway cannot perform efficiently.

So the ORR wants the determination of the budget for the industry to be more of a two way process and for it to extend into the Control Period under review. Therefore, rather than just simply allocating money in the draft determination for every project, the ORR envisages an ongoing relationship as the spending is made. That seems to make eminent sense. I have always been critical of a process by which bureaucrats sitting in Kemble Street (ORR’s HQ) second guess what those sitting in Network Rail’s offices (now in King’s Cross and Milton Keynes) over money budgeted by another set of pen pushers sitting in Marsham Street might work out up to 7 years in advance of the money actually been spent. That seemed to provide no incentive for Network Rail to economise and use the latest techniques. No wonder it cost a fortune before a shovel was ever turned in anger.

To take just one example. At a late stage, Network Rail decided to seek an extra £1bn because it was concerned about the condition of its civils – particularly embankments and cuttings which may be undermined by climate change. All very sensible, but ORR raises the question, quite understandably, that £1bn may be not be enough, or it may be too much. It would be rather daft to determine now what might be needed in half a decade’s time. Similarly on the £11bn enhancement programme. What does it cost to electrify a mile of track? And, moreover, what cost reductions will technological improvements made in the next few years allow to be made.

This is a difficult balancing act. ORR does not want to be too prescriptive and yet it has a duty to be on Network Rail’s case. Certainly, there are managers within Network Rail who see the regulator as the proverbial pain in the darkest place. There does though seem to be better communication now between the company and its regulator. ORR managers have been out and about more, and see the relationship as more collaborative rather than confrontational, though it is clear that there is a great deal of scepticism about Network Rail’s current performance.

I still have my doubts about this system. It seems overly bureaucratic especially in an industry where technology is fast developing and, in fact, should be leading to more rapid changes. I would rather see a self-confident Network Rail being allowed simply to spend money efficiently and effectively. Ah, but doesn’t it need a regulator, I hear people cry. No, not really. It is not a private body with shareholders, which is why there was one originally, but rather a public sector agency that requires good management and an board which includes independent and expert directors. Yes, there are risks with such an approach, but boy there are huge costs associated with the current structure. The very fact that after 20 years of this structure, both sides are still finding their feet and remain unclear about precisely each other’s role suggests there are doubts about the effectiveness of the system. Indeed, ORR admits that it is almost impossible to get it 100 per cent right. Simplicity, though, is not the fashion of the age.

 

 

An open letter to the train operators

 

Dear First, National Express, Stagecoach and Arriva,

 

As an old railway and Westminster watcher, can I offer you a word of advice? You have made a grade one error in announcing a legal challenge to the Department’s decision not to reimburse your bids for the collapsed Great Western franchise and you pull out as soon as is possible without loss of face.

Let me give you half a dozen reasons why.  First, most fundamentally, there is the weakness of the case in law. The bidding documents clearly say:  ‘Each bidder shall be responsible for all costs, expenses and liabilities incurred by it in connection with the Great Western franchise letting process, whether or not its bid and/or associated negotiations are ultimately successful or the process is subsequently varied in any way or terminated.’ That’s pretty unequivocal.  Of course your legal advisers will have found some part of the Human Rights Act or Dangerous Dogs Act that may have been transgressed, but remember just who makes the most money out of the legal system.

Second, it’s all about image. Don’t be fooled by the satisfaction ratings in journey surveys into thinking that train companies are popular. The whole paraphernalia of privatised railway companies with their silly logos, daft branded announcements and impenetrable ticketing systems merely reinforces the public image of operators as a bunch of money-grabbing short term capitalists.

Which brings us nicely on to the third point. You want to portray yourselves as exciting businesses which take risks in order to improve rail services but taking out this action merely seems to reinforce the point that you want it both ways. If you bid too high, the government bails out, if its too low you make lots of dosh. Bidding costs are surely part of the risk – a ridiculously expensive process if viewed by Clapham Omnibus passengers but actually small beer in relation to the potential rewards of gaining contracts worth several billion pounds in turnover.

Fourth, a judge worth their salt would point out that three out of four of you would have lost the money anyway. So why on earth should you all be reimbursed? This legal move, too, makes you look like a cartel prepared to act together to further narrow financial interests and suggests there is very little real competition on the railways.

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