Rail 826: It is better management, not the search for private capital, that will rescue NR

As the railway lurches towards a financial crisis and an investment plan with no money, it is worth reflecting on a few basics. Over the two decades that I have been writing this column, there have been some hardy perennials that keep on popping up and which seem no nearer solutions.

I’m not talking about the periodic crises which seem to happen every 18 months or so when there is a franchise debacle, a technical crisis, an accident or industrial action, but the issues that never seem to go away which date back to the privatisation of the railway or even earlier.

The most obvious one is the cost of running, maintaining and improving the railway. The crisis looming over the railway, but yet to percolate through to the public or, indeed, many politicians, is that these excessive costs are going to be a barrier to many cherished improvements and are already having an impact on performance because of temporary speed restrictions. That is only going to get worse as money will be increasingly tight and, moreover, the extra spending on projects during the current Control Period (CP5, the investment plan for 2014-19) means that the next one, CP 6 taking us up to 2024, is widely expected to be very thin gruel indeed.

Railway managers I meet in the industry are in no doubt about the extent and dire effects of the impending crisis. There is a feeling throughout the railway that they are living on borrowed time and soon the positive feeling in the industry engendered by years of growth and high investment will turn to anger, despair and frustration.

I had a particularly interesting meeting with a longtime railway manager who did not hold back on discussing these issues but has to remain anonymous in order to express his views. He used to work for a train operator during what he sees as the golden period of privatisation when the BR managers were suddenly liberated by far greater commercial freedom and the availability of money for investment to expand services.

Now, still in a senior position and a railwayman through and through, he is deeply concerned about the state of the railway, despite the growth and the spending on investment. He is worried that despite the vast amount of goodwill from managers and staff, there is real concern about the future. As he puts it, ‘I’ve never met someone in Network Rail who doesn’t want to run a good railway but there are many obstacles in their way to bring that about’. He cites an example of a few years ago when he moved from one operator to another and was told, ‘they’re a bad lot on that route in Network Rail. They will give you hell.’ They didn’t – and the reason why was that he treated them as equals and partners, rather than as the ‘other lot’.

Rather than going in there all guns blazing, he talked to all the ‘stakeholders’, got people to analyse the precise reasons for delays and did not play silly games over the precise legal meaning of contracts.  He tried to limit the compensation claims on either side, preferring instead to try to sort things out more informally, rather the way that they were done under BR – not that he thinks BR was perfect!

Interestingly, he reminded me that one of the reasons for the success of the London Overground network has been so successful is that there is a different compensation regime. I have written before about this (see for example Rail 725) and it is one of the most dysfunctional parts of the franchising system.  Transport for London, however, has a different system for letting out contracts than the Department for Transport. And here is a possible pointer to why costs are so high and performance so poor on the franchised network. On the London Overground routes – and indeed for TfL Rail currently the temporary official name for Crossrail – the private company managing the contract does not benefit if Network Rail causes delays to its trains. Instead all the money for compensation goes through to Transport for London and, moreover, the company managing the contract pays a fine of 10 per cent for any delays, even if caused by Network Rail. There is therefore, a real incentive to avoid delays, whatever their cause. No wonder, then, that TfL Rail has been the most improved operator in the past year since it took over the Liverpool Street – Shenfield services from Anglia

This in sharp contrast to the way the performance regime works on the rest of the railway. The terrible truth is that poor performance is a money earner for the train operators, provided the problem has been caused by Network Rail. The difference between making a profit or loss is, for many operators, how much money they get through Section 8, the compensation system for unscheduled delays. To give one example, Anglia made just £3.6m profit in 2015 but it received around £16m from Network Rail in compensation.

The system leads to all sorts of game playing. If a fault is down to Network Rail, there is no incentive for the train operator to ensure that recovery is carried out as quickly as possible, whereas if the fault is down to the operator, then it is likely to pay far more attention to it. This is the realm of perverse incentives that was mentioned by the McNulty report published in 2011 but has never been addressed by the Department for Transport. For train operators, the perfect scenario is for every train to be nine minutes late. In that way, the delay does not appear in the Public Performance Measure but they will get compensation from Network Rail. Indeed, one of the reasons that National Express walked away from the East Coast franchise two years into an eight year franchise in 2009 was that it was not receiving enough money in compensation payments. In other words, the passengers were getting a service that was too good for them!

The other fundamental perverse incentive is that train operators are also compensated for planned work carried out to improve the railway for their benefit. The compensation system needs a complete overhaul – or frankly abolition. Interestingly, my friend does not believe that the solution to the performance problems of Network Rail lie in great big structural changes. Rather he sees it as being down to management, a point that has often been made in this column. Without good management, any system will not work properly. That is the problem with Network Rail. It has suffered for years from the failure to ensure that there are experienced managers in place and, most important, that it retains them. Far too often when good people have been employed for a particular project, they are ‘let go’ and allowed to join other rail organisations, which means their skills and experience are lost.

One of the things lost when British Rail was broken up was the career railway manger who went from job to job within the organisation, learning every aspect of how the railway functioned. It seems now that the railway no longer values that experience. I am not harking back to BR days or saying it should be recreated, but merely stating that those in charge of the railway should be examining ways to ensure that these skills are regained and, most importantly, retained. Too many senior managers in Network Rail leave for the private sector and never return.

Let me reiterate a point I have made previously. Network Rail will only start to get its costs under control when it builds up sufficient management expertise to control projects itself. Once it sub-contracts project management to the likes of Bechtel, then the incentive to keep costs down is lost. Network Rail needs to become an informed buyer. David Waboso, Network Rail’s head of Digital Railway, who I interviewed for this column in the last issue, understands this but I am still unconvinced that Network Rail’s top brass do. Until then, expect more crises, cost overruns and project debacles.

Privatisation, what privatisation?


There was an enormous fanfare back in December when Chris Grayling, the transport Secretary gave a much-trailed speech about how Network Rail would no longer have a monopoly over infrastructure developments on the railways. He said that East West Rail, the plan to complete the Oxford – Cambridge line would be built by a separate organisation in the private sector.

Well it has all gone a bit quiet since then with the only significant development being the appointment of Phil Verster to run the project. That will be the same Phil Verster who was previously MD of the ScotRail alliance between Abellio and Network Rail, and remains very much a Network Rail employee.

Clearly, if this project was really going to break the mould of the current way that schemes are managed, one would have thought that it would be set up as an entirely separate organisation. I understand, however, that just as with previous attempts to attract private companies to run rail infrastructure projects (older readers will remember the late great Alastair Morton’s failed attempts to create Special Purpose Vehicles to do the work) there is a marked lack of interest from firms willing to take on these schemes. Simply put, private companies realise that there is a lot of reputational risk from such projects – just consider the Great Western Electrification, for example – and little to be gained. We will have to see if the report Network Rail has commissioned from Professor Peter Hansford to look into the potential of third party funding in the rail industry comes up with any new answers. It was due to be published at the end of this month but will now have to wait until after the election.