Rail 389: A fabulous pot of gold at the end of the railway’s rainbow

The cash bonanza announced for the railway last month provides a unique opportunity to create a network fit for the new Millennium. There are inevitable risks and potential pitfalls but, as CHRISTIAN WOLMAR contends, the railway should rejoice about the barely believable amount of money it has been handed by the Government. What can go wrong? The railways seem to have achieved Nirvana with the announcements in quick succession last month of the Government’s spending review, the ten-year transport plan and then the results of the regulatory review of Railtrack’s access charges.

The spending review promised oodles of cash for transport, both revenue and investment, and the tenyear plan published a couple of days later fleshed out some of the details. The total sum announced, £180,000,000,000 – or £180 billion – is so high that it is incomprehensible until one starts to break it down. There is some double-counting, a lot of guessing about what the private sector will deliver and the effects of inflation has been included, so the overall sum is not quite so impressive.

Nevertheless, it would be utterly wrong to be churlish about the plan. Make no mistake: this is a radical departure from anything that has happened before and is an unprecedented opportunity to create a railway fit for the future. The railways are to receive a fabulous pot of gold over the next decade, some £49bn for investment (I like the precision of not having rounded it up to £50bn) out of which £34bn will be from the private sector.

The rest, though, will come from Government coffers representing around £1.5bn, with most of that coming in years three to six when the investment programme will have geared up. In addition, there is £14.3bn earmarked for subsidising rail, which at £1.4bn per year is a big rise from the £800m, and falling, annual subsidy which the industry was scheduled to receive in 2002/3 under previous plans.

Not all of this is new money. Assuming that subsidy would have tailed off at around £500m – even the Tories could not have tried to run a railway without Government support – and the new figures include inflation, there is something like £7bn extra money over ten years, £700m per year. The investment money is entirely new and therefore the Government can, quite rightly, claim to have put well over £20bn extra cash – £2bn a year – into the railways. To put that in perspective, that’s an extra £35 for every member of the population per year over the next decade in addition to existing subsidies of around £20 annually per person.

Before we, in the commentary box, had a chance to do a bit of Alan Hansen-type punditry about the Government having played a blinder but to beware of holes in its defence, out came the Regulator’s (almost) final thoughts about Railtrack’s access charges. And while there was a lot of coughing and spluttering from Chief Executive Gerald Corbett, in fact he went off on his hols beaming from cheek to cheek. Indeed, the City spotted that the news was good when it wrote the price of the shares up 5%.

Basically, Tom Winsor, the Regulator, has bought the Railtrack argument that without extra income it would not be able to carry out its role of improving the network. Mr Winsor’s problem has always been how to find a way of encouraging the company to invest without just giving it more cash to make more fat cats. So he is allowing Railtrack to raise £14.2bn through access charges in the next five-year period, requiring some £4bn more subsidy than implied under the previous regime. Note, therefore, that much of the extra money being paid by the Government will go into infrastructure rather than operations and passengers will only see any benefit in terms of reduced delays.

However, to keep Railtrack in order, Mr Winsor has set stringent efficiency and performance targets. Railtrack will have to improve productivity by 3% initially, rising to 5% at the end of the five years covered by the review, an average of 4.2% per year. Gerald Corbett said this would imply the loss of 2,000 jobs from its 11,000 workforce, but those sort of squeals are routine when a regulated asset gets its endof- term report from its regulator. There is also a range of incentives linked to performance and passenger volumes which could be worth up to £150m for Railtrack, and a penalty of £100,000 for every broken rail above a set target.

Interestingly, Mr Winsor has not been able to work out a good way of encouraging Railtrack to allow more trains to run on the network. One of the big problems of railway economics has been that more than 90% of Railtrack’s charges have been fixed – in other words, the company gets the money whether the trains run or not. Mr Winsor wanted to provide more incentive for growth but realised this would imply a heavy charge on any marginal trains, therefore preventing train operators from introducing them.

So instead, he is thinking of allowing Railtrack to increase the value of its asset base (the theoretical value of the company which is the amount on which it can earn a rate of return) when extra trains run, a rather complicated way of trying to provide an incentive.

What is amazing is that all the different players seem to be singing from the same hymn sheet. It is a virtuous circle. Railtrack says it needs extra money for investment, the Regulator gives it to the infrastructure owner knowing the Government will put in the bulk of it, and the Strategic Rail Authority will ensure bottlenecks are dealt with and new services will take advantage of the extra capacity that will be created.

I smell a bit of a Big Rail Conspiracy, here. The Regulator would not have allowed Railtrack to raise access charges so that £4bn more Government subsidy were needed unless he knew there was going to be plenty more money for the SRA. These people have got together behind the scenes and planned it all out in the smokeless rooms of Whitehall (the Government), Victoria Street (the SRA) and the old Prudential Building in Holborn (the Regulator).

So, to reiterate my initial question, what can go wrong? The first question is: can the investment be delivered? In particular, will all the players stick to the hymn sheet once the programme is up and running? The example of the West Coast Main Line upgrade is salutary in this respect, both in terms of cost and coordination. The project’s costs have leaped, the management of the scheme seemed to be sleepwalking for a couple of years, targets are likely to be missed and there is the ever-present threat of court cases between the various players, notably Railtrack and Virgin. The disaggregated railway has to up its game in delivering major schemes.

Secondly, as an extension of this point, there are an awful lot of details to be sorted out. How precisely will the SRA’s investment programme work? It is an unprecedented idea for a Government-funded body to channel investment into a growing private industry – there are all sorts of examples of rescues of British Steel, coal or the car industry, but never before has this type of delicate strategic investment role been carried out by a public body.

Will the SRA continue with its idea of Special Purpose Vehicles that are a way of channelling in investment by avoiding Railtrack despite the company’s hostility, or will it try to work with Railtrack to bring about the most cost-effective investment? It’s all in the detail and we await it.

Thirdly, there is the problem of overheating. There is a finite number of skilled engineers able to prepare and construct the large number of schemes which the investment programme entails. With engineering firms at full capacity, prices of projects are bound to increase, resulting in either fewer schemes ever seeing the light of day, or yet more Government money having to be pumped into transport. Mott MacDonald director Chris Livingstone told New Civil Engineer: “This is going to put even more pressure on us. Universities cannot start producing new graduates overnight.”

And finally, there is a political risk. Should the Tories win the next election – which I still think is as likely as seeing John Prescott going for a jog rather than a Jag – transport is going to be one area where they will wreak havoc on Labour’s spending plans. They are quite likely to do away with the SRA and its rôle in ensuring there is pump-priming money for vital schemes, which would wreck the whole programme. Transport, especially public transport, will not be a Tory priority.

Again, before I get castigated as a Cassandra, let me reiterate that all this is wonderful and exciting and that John Prescott and Lord Macdonald have done a marvellous job in wresting so much cash from the Treasury, although much credit also belongs to the great British public and, dare I say it, the media for pushing transport up the political agenda.

All these developments are something to savour for a long time, like one of those chewy caramels that takes an age to melt in your mouth. There are all kinds of wonderful questions such as what will now happen to the East Coast Main Line, which bits of the rail network will the East London Line incorporate, what light rail systems will be developed and, most immediately, how will the SRA spend the extra £300m it has to subsidise services next year.

These goodies will be chewed over in the next few months and years by this column and the rest of us at RAIL but for the moment, as a former Prime Minister, an arch-enemy of the railways, said nearly 20 years ago outside Number 10 Downing Street: ‘Rejoice’.

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