Rail 833: Better management, not privatisation, will solve Network Rail’s travails

Ever since the creation of Railtrack, Network Rail’s predecessor, there have been calls for the rail industry to seek new forms of funding for projects. In the days of the Strategic Rail Authority in the late nineties, there was an attempt to establish Special Purpose Vehicles, essentially joint ventures between various companies and Railtrack to produce enhancements but the idea foundered on insurance issues, lack of enthusiasm from Railtrack and paucity of interest from private companies.

Over the years, there have been numerous calls to introduce what is called ‘contestability’ in the provision of infrastructure enhancements, which means providing competition to Network Rail which essentially has a monopoly for this work. These endeavours have invariably ended in failure because of the complexities of the rail industry and the dominance of Network Rail. That is entirely predictable. Network Rail managers are bound to be defensive about encouraging competition which might ultimately threaten their jobs.

Under pressure from government, Network Rail decided to have yet another stab at stimulating contestability by launching a review – the latest in a series over the past two years following those by Peter Hendy, Nicola Shaw and Colette Bowe – led by Professor (always sounds good having a prof in charge) Peter Hansford into the potential of new sources of money to invest in the railways.

To sum up the report in a few words, it’s best to quote John Lennon ‘Christ, you know it ain’t easy’. There’s a good reason why it hasn’t happened before – or rather lots of good reasons – and while the Prof and his team analyse the situation well, I can’t see this being the big ‘unblocker’ for swathes of private sector cash. The review cites a host of reasons why this investment has not happened before such as the absence of a body with strategic oversight of the industry with the remit of pushing for private sector involvement, the fact that Network Rail is best placed to take the risk of projects because of its size and existing responsibilities, the complexity of the structure of the industry and the rigidity of standards imposed by Network Rail. There is very little in the report that suggests ways of overcoming any of these obstacles.

Rightly, the report distinguishes the difference between ‘funding’ and ‘financing’, something which often bemuses politicians. Funding is essentially providing money for the cost of a particular project in return for benefits which may be financial or non-financial (such as stimulating local business) to the funder. Financing is the means to pay for that funding, either through borrowing the money (debt) or issuing shares (equity).

The Government’s Nirvana would be if some wonderful benefactor, like a Victorian philanthropist, suddenly wanted to put large amounts of money into the railway network. It ain’t going to happen. There might be the odd case where a housing developer is willing to put some money into the railways in order to support the building of a station or even of a branch line. Even this, though, has proved extremely difficult. In 2008, a developer called Kilbride announced it would pay for a railway line from Bere Alston on the Plymouth – Gunnislake line to Tavistock to support a housing scheme but despite considerable effort and many subsequent announcements, the scheme has yet to see the light of day and will not do so until 2024 at the very earliest, in a very different form than originally intended.

Hansford recommends that when third parties bring forward ideas for enhancements to the rail system, there needs to be a much faster method to assess whether they fit into overall strategic objectives for the railway. This is difficult since there are a lot of stakeholders to consult, notably the train operators who may not want to provide services to a new station – such as the debacle over the new station at Coventry’s Ricoh Arena which cannot be used on match days for either football or rugby – though there are plans to resolve this with a shuttle service using the converted D Underground stock.

Obtaining finance is also problematic. This requires considerable ‘risk transfer’. In other words, the risk of a project going wrong or not meeting targets must be borne by the private sector companies putting in the finance. This is to overcome Treasury rules which favour government finance for projects, since it is cheaper to obtain, unless it can be shown that there is genuine risk being shouldered by the private investors that will justify the higher interest they charging. It is these Treasury rules which means obtaining finance from sources other than government for simple low risk projects is impossible and possibly explains why this report has little new to offer.

The report suggests that one area where private finance may be obtainable is for Digital Railway schemes using new technology. One really questions how a group of supposedly eminent experts could come up with such a daft suggestion. Have they no knowledge of projects like the supposed introduction of in-cab signalling on the West Coast Main Line in the early days of privatisation which not only never happened but cost the Treasury hundreds of millions of pounds to make up Virgin’s lost revenue? Or do they not know that the Hitachi IEP train is the most expensive in history because of attempts to transfer risk to the private sector?

Developing high tech projects is a fraught business and therefore any attempt to transfer the risk to the private sector will be very costly. Yet the report recommends setting up such programmes on the basis that ‘The case would be based on transferring significant risks of new technology and complex interfaces to the third party.’ When will they ever learn?

Oddly, the report misses the real point of trying to involve third parties (which, in reality, will often be public sector bodies such as local authorities) in the railway which is to stimulate developments that would otherwise not happen – true private entrepreneurship. As the Kilbride example shows, however, it is very hard to bring these ideas to fruition and there is little in the report to encourage any prospective promoters of such schemes.

Moreover, the whole report seems to be pushing in the wrong direction. It is now clear that for Control Period 6 – the five year investment plan that starts in April 2019 – the focus will be on maintenance and renewals rather than on enhancements. According to the Office of Rail and Road, there is a backlog of some £3.7bn in work that has not been done in the current Control Period because rather than improving efficiency by the expected 18 per cent, costs have gone up by 5 per cent. As a result, much less work has been carried out and therefore there will be precious little money available for enhancements.

The real need for Network Rail is to become more efficient. Yet, the chapter on reducing costs is almost the shortest in the whole report, just a couple of pages with two banal recommendations suggesting Network Rail should offer more choices when putting forward project outlines and that it should demonstrate ‘commitment to creating a more contestable market’. That is where Network Rail has lost its way and requires more in house talent, rather than seeking private sector expertise. Oddly, while maintenance was taken in house following the Hatfield disaster, renewals are still contracted out and according to the ORR it was overspending on these that has created the backlog. Perhaps the lesson of the past 20 years, therefore, is for Network Rail to learn to better manage contracts and to do more of the work itself, rather than using contractors. Perhaps Hansford was barking up the wrong tree.

 

Fish and chips at the National Railway Museum

 

I write this on my way up to the National Railway Museum in York to discuss the reorganisation of the Great Hall as I am on the Museum’s advisory board. The Great Hall is, of course, in many ways great. The collection of locomotives is impressive and awe-inspiring but the curators are conscious that it lacks a sense of narrative.

That’s what they are hoping to change. That is going to mean some tough decisions, with perhaps fewer locomotives on display or, at least, different ones. That choice is bound to rile some train enthusiasts who will disagree with whatever decision is made but my view is that the hardware is less important than the information that is conveyed. Visitors need to understand that the creation of the rail system was not simply about the technology, which was merely a tool, but was instrumental in creating the world we live in today.

The railways changed everything and the Museum is seeking to reflect that. In my book Fire & Steam (still available in paperback from booksellers or in hardback from me!) I set out the many ways in which railways had transformed people’s lives. My favourite example is the establishment of fish and chips as our favourite dish because the railways were significant in two ways . First, it was thanks to the railways that people were able to travel to the seaside for day trips for the first time and there they discovered the pleasure of fresh fish served with chips. And it was thanks to the railways that fresh fish could be transported quickly to towns and cities away from the coast, which meant that fresh, rather than salted and preserved, fish could be obtained cheaply in the whole country.

So perhaps the museum will have a great fish and chip stand as part of its new Great Hall. More seriously, though, do email me (Christian.wolmar@gmail.com) with any ideas you may have and I will pass them on.

 

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