Rail 862: Review must be radical

Here we go again. A review is in the offing. They may not have the frequency of buses but they certainly have the regularity. The response to any major cock up on the railways is to call in a reviewer, possibly someone with experience in the railways (Nicola Shaw, Richard Brown, Peter Hendy) or not (Roy McNulty), and give them a year to produce a report.

Then it gets worse. First, the terms of reference are generally narrowed so that areas uncomfortable, like renationalisation or scrapping the entire franchise system,   for the government are not explored. Then the analysis is carried out with the report author and their team left pretty much to their own devices until the first version of the publication is sent privately to ministers. That’s when the real trouble starts as minsters interfere with the recommendations and there is a lengthy horsetrading process. Then, just as everyone had got over the crisis which triggered the review, it is published suitably sanitised and amended. Perhaps a few of the recommendations are taken on board but  by and large they tend to be forgotten or kicked into touch.

Re-reading the Shaw report published in March 2016, I was struck by its vacuity. Shaw is one of the brightest and most impressive people in the industry and yet her report was as anodyne as Walls Vanilla ice cream. Its recommendations are a bunch of platitudes which, quite frankly, could have been written long before the 10,000 submissions made by people in the industry and the general public were read and analysed. For example, they included: ‘Plan the railway based on customer, passenger and freight needs’, ‘Explore new ways of paying for the growth in passengers and freight on the railway’ and ‘ Develop industry-wide plans to develop skills and improve diversity’. I am being a bit unfair by picking out a few key sentences but such banal clichés clearly show that poor Shaw’s report must have gone through a lot of Whitehall mangles to make sure it did not say anything that might frighten the horses.

These are the pressures which Keith Williams, deputy chairman of John Lewis, will face if, as rumoured he is appointed to chair the review. He does have some transport experience, having worked for British Airways and been a non executive director of Transport for London but his knowledge of the intricacies of the railways is bound to be limited. As one of my Twitter followers said to me, ‘I bet Peter Hendy is already planning to invite him to lunch’. Indeed, managers across the industry will be queuing up to bend the poor man’s ear and then, as mentioned above, it will be the ministers’ turn. Independent reviewers have a difficult job in keeping independent.

As I write, we do not yet know the terms of the review, but it does seem an unnecessary exercise. Surely, we know by now what is wrong with the railways and while finding the right cure might be difficult, it would be better if it were done by people actually working in them, rather than some outside reviewer making recommendations.

This is one of the scourges of the modern structure of government. Nobody seems willing to take responsibility and make decisions. Instead things are handed out to outsiders such as consultants who have no ultimate responsibility for implementing any recommendations and therefore make suggestions that are unworkable.

Let me just make a few helpful suggestions. I’m afraid regulars of this column will have heard it before, but surely any ‘review’, if it is to be thorough, must include the Wolmar question ‘what is franchising for?’.  Let’s restate the key problem. The idea of franchising is to pass risk on to the private sector. Franchisees bid for a certain amount of subsidy or agree to pay a set amount of premium in exchange for the right to run services on specific routes. Decisions about rolling stock, stopping patterns, train frequencies and so on are largely made by the government.

Therefore, given that many of the fundamentals of the business are outwith the control of the train operating company, there is very little risk that can be passed on. The main one is, of course, revenue risk but over the years the idea has been increasingly to only pass the part of it which is determined by the company’s behaviour rather than those which are the result of fluctuations in the economy. Richard Brown, in his report published in January 2013, was emphatic about this point : ‘Franchisees should be responsible for risks they can manage and should not be expected to take external macroeconomic, or exogenous, revenue risk; there should be a clear mechanism to adjust franchise premium/support payments for variations in Gross Domestic Product (GDP) and Central London Employment (CLE) growth rates’.

Well that hasn’t exactly happened, has it? This is made clear in the Commons Transport Committee report published earlier this month into the East Coast franchise failure. Despite various attempts by Virgin/Stagecoach to pass the blame on to Department for Transport, saying that it was not their fault they bid too high, the all-party committee makes clear they were responsible for the collapse: ‘Revenue fell short of expectations from day one and passenger growth that was anticipated never materialised; the franchise eventually failed after just three years of operation. Franchises should be able to withstand normal fluctuations in the economic cycle. The fact that this franchise did not suggests that Stagecoach and Virgin built very little resilience into their bid. Their assessment of the financial risk associated with their bid was wholly inadequate and VTEC’s bid for the franchise was over-optimistic. This was naïve…’

The collapse has proved yet again that it is quite impossible to pass on real risk to the private sector given that train operating companies have few assets and they know that the show will go on, even if they run out of money. As I have argued many times, rail franchising is faux capitalism. If the rail review recognises that, and makes appropriate changes, it will do the industry a great service.

Apart from risk transfer – or rather non transfer, the other intractable issue with franchising is over the length of the contract. The various transport ministers in the two decades of franchising have wavered over this – we have had short franchises, longer ones, medium sized with extensions and virtually every possible permutation. The basic problem here is that none are satisfactory. Long franchises are predicated on an assessment of revenue risk in years to come that is impossible to predict while short term means precisely that – there is no long term interest in running the railway and therefore short term considerations dominate.

The other issue which the review must consider is renationalisation. Interestingly, some of the owning companies are keen to ensure this is discussed and not simply by-passed because they are conscious that it is an issue that is very live with the public at the moment. They are confident that any thorough consideration of the issue will result in an unequivocal finding in favour of the status quo.

Their confidence may well be misplaced. The franchising process is in such a mess and the problems so deep-rooted, that it is quite possible that a review could result in a much diminished role for the private sector such as the downgrading of franchises into management contracts. Whatever comes out of the East Coast, it is unlikely to be a purely private solution given that Network Rail may well end up being a partner in any arrangement that is drawn up.

So Williams, if it be him, has a few challenging questions to consider but will he have the freedom to put forward the radical solutions that are needed.

 

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