Rail 788: Shaw sets out problems, but solutions will be harder to find

Nicola Shaw is one of those highly intelligent people who does not have to show it on every occasion. She is widely respected and liked within the industry and has an impressive CV , having  moving seamlessly from the public sector with the Strategic Rail Authority through to FirstGroup and now to the recently privatised High Speed One.

She will need all those brains and all that experience in order to produce a coherent and workable structure for the rail industry, the rather onerous task set for her by the Government. The scoping report (The Future Shape and Financing of Network Rail) which she has just published accurately reflects the challenge on several fronts but it is money that poses the greatest one. That is all too clear to see from a little table on page 56 (it is often tables on page 56 or 94 or whatever that are the most revealing in such documents) which shows the growth of the debt owed by Network Rail (which will be a tad below £50bn by 2019, the end of the current five year investment period known as Control Period 5) and of the Regulated Asset Base (the RAB which is the notional value of Network Rail’s assets used as a basis for calculating its income from track access charges which will reach about £70bn in 2019).

Savour, for a moment, that £50bn figure. First, this means that, broadly, the government has allowed Network Rail (or its predecessor Railtrack which started with a few billion as debt) to borrow more than £2bn annually in the two decades since it was privatised. In a way, that represents a hidden subsidy for the company since we know that the money will never be repaid (about which more later) that means in reality the taxpayer has been putting about £6bn into the railways annually rather than the oft quoted £4bn.

Secondly, it means that the interest which the railway has to pay annually is becoming an intolerable burden. By 2019, assuming an average of 5 per cent interest, a not unreasonable assumption, every year the railway will be paying £2.5bn before a single train wheel moves. This crazy state of affairs is a result of the game of Faux Capitalism that I have written about before. It is the result of trying to pretend that the rail industry is just like Coca Cola or Nike where the normal rules of capitalism apply.

Well it’s not the same for many reasons, but principally because it is a vital part of the nation’s infrastructure, it is dependent on state subsidies and it requires very lumpy amounts of investment to support very costly schemes ranging from station rebuilds to track renewals. It does not fit into the capitalist model.

In a rational world, we would simply accept that, cough up what politicians or regulators feel is a reasonable amount to sustain the industry, and let the rail managers get on with it. Instead, because of the regular crises in the industry, caused largely by its byzantine and bizarre structure, poor Nicola Shaw is having to look at all kinds of alternative ways of funding and financing the industry.

The reclassification of Network Rail as a government agency has blown a hole in the industry’s finances. Under the old system, it there was a cost overrun, it could be covered by what is esoterically known as the ‘risk buffer’ – in other words, extra money generated through track access charges. ‘Put it on the credit card’ was the tacit solution for when things went wrong. Now of course, as she points out in her scoping report, there is no risk buffer and, instead, the government has capped Network Rail’s borrowing. So if it does turn out that the cost of electrification of the Great Western has jumped from £800m to £2,800m, no one has any idea where that money is coming from and what its impact will be on the rest of the industry’s investment programme.

So Shaw’s report looks at the potential alternatives to conventional government funding. This, of course, is the section that attracted the most coverage of her report, with city editors getting overexcited about the prospect of seeing the infrastructure company back in the private sector. Well my advice to them would be ‘calm down chaps’. I think a full privatisation of Network Rail is about as likely as seeing Pacifics replacing 125s on the East Coast. Not only would it be very difficult to work out a structure that protected investors since they would remember that they got their fingers burnt last time, but the public would just not tolerate the idea. It would make the row over Tax Credits look like the typical handbag battles we see on the football pitches every weekend.

Her second option is giving Network Rail the right to borrow money on the capital markets with, or possibly without, government guarantee. All this would do is push up the cost of borrowing, merely in the hope of no longer having the Treasury sanction every bit of new investment. Frankly getting the Treasury out of the rail industry is rather like those pre privatisation promises about getting government out of the rail industry. Never happened – and indeed the opposite did.

The rest of Shaw’s proposals to involve the private sector are pretty thin gruel. Selling off a few non-core assets like car parks or vacant property is hardly going to bridge any substantial financial gap, and nor is handing out concessions for new bits of infrastructure. And to suggest that devolved governments are going to be happy to shell out for railway infrastructure at a time when their budgets are being cut to the bone is pure fantasy. And then there’s the usual suggestions about getting businesses to part fund schemes (remember how hard it was to get Gatwick Airport to shell out a few bob for the station improvement) and securitisation (i.e. raise capital to pay for a scheme against future income streams from fares).  All this comes up against Bowker’s Law – that there are only two possible sources of money for the industry, the taxpayer and the passenger. No manner of the dark arts of Faux Capitalism will get round that fact.  Therefore I expect the city editors will be less excited about Shaw Mark II than they have been about the scoping study.

In respect of the structure of the industry, she has asked a lot of pertinent questions. How, for example, does Network Rail fit in with the devolution agenda? And how does it cope with the aspirations for growth that at the moment seems unending? And she asks the age old question of who, precisely, are Network Rail’s customers – the operators or the public?

It is all good stuff and after 20 years of privatisation, it is the right time to ask these questions. But what if, despite the perennial crises (the electrification cost overruns, the West Coast debacle, the collapse of Railtrack, the post privatisation accidents and so on), she finds when she reports in the spring that we have, just as with democracy, the least worse option?  Apart from reintegration and renationalisation which is not really on the agenda. Then what will the politicians do?

Virgin passes first test but what about cheap tickets?


I am no fan of Virgin trains mostly because I loathe the Pendolinos with a passion. I have spent far too long on them feeling mildly sick usually north of Rugby either because of the tilt or because of the smell of the toilets, an issue that is still not entirely resolved, though it has improved. They are cramped, uncomfortable and poorly designed, though they have great acceleration. I have, over the years, found other aspects of the Virgin service lacking, and certainly not as good as other long distance operators.

So it was with slight trepidation that I took my first trip with the new East Coast operator on a warm Saturday in November from London to Newcastle upon Tyne and back to speak at a cycling conference. What, I wondered, had The experience on the whole was excellent. I was particularly struck by the efficiency of the two young men of the catering crew who replaced my dodgy cup of tea (a faulty little milk pot) without fuss and who ran the trolley up and down every hour or so rather than, as sometimes happens simply not bothering. There were no excessive announcements and the ticket collection was efficient, too.

So far, so good. However, the policy on cheap tickets seems to have changed for the worse. The train I needed left Kings Cross at 8am but when the conference organiser tried, several weeks in advance, to get a cheap ticket, she was told that the train was full. It was even implied that it would be risky trying to get on it. Yet, when I did so with a standard off peak return , the train had an occupancy rate of, optimistically, 10 per cent, more likely 6-8 per cent. I had a table to myself, just like in the old days. When I spoke to one of my fellow speakers, she said that to get a cheap ticket, she had taken the 07 30, despite having to get up far too early, and that it was ’quite full’. What on earth is going on? Surely this goes against any sensible yield management. My return, at 15 59 was also very thinly occupied and oddly had the same train crew who had waited biding their time in Newcastle for five hours which seems a very inefficient use of their time. But nice overtime for them. So clearly some things to sort out on the East Coast before Virgin paints all its their trains red and people realise that it is the Bearded One in charge. Although, of course, he is not really since Stagecoach owns 90 per cent of the franchise.