Rail 415: Simplifying the structure is how our railways will recover

Railtrack’s collapse, emergency speed restrictions, and soaring costs: the railway is still in crisis. CHRISTIAN WOLMAR argues that a ‘back to basics’ approach represents the best solution.

The most worrying aspect of the crisis in the railways is that no one has any real idea of how to get out of the mess. Certainly, there are plenty of schemes and blueprints floating about, some are even vaguely coherent. But no one has worked out a clear strategy for both what is needed and how to get there.

This has become very clear from the series of conversations I have had with senior people inside the industry, as well as with many Whitehall insiders, over the past few weeks. It’s widely recognised that there is a crisis but, as mentioned in this column before, there are two camps – the ‘muddle-throughers’ (let’s say muddlers for short) and the revolutionaries – and neither have any vision for what the industry should look like in, say, five years time.

The muddlers include many train operator managing directors who are prepared to give Railtrack one last chance. “If things have not improved in the next six months, then we have to consider other alternatives. But for the time being we should let them have a go.” Indeed, at the launch of the Pendolino, Virgin’s Richard Branson suggested a year’s grace for the beleaguered company, expressing some sympathy for Railtrack’s plight.

Frankly, this is balderdash. The case for revolution is unanswerable. As every week unfolds, the messes created by the present structure mount: Railtrack’s collapse, soaring investment costs, the collapse of the franchising process, ever more pompous and unrealistic injunctions from the Rail Regulator, the take-over of the Strategic Rail Authority by the Department of Local Government, Transport and the Regions which, in turn, has been subsumed into the Treasury. And so on.

The rail industry would be making a big mistake if it decides to back a ‘steady as she goes’ approach. Certainly, the feeling among the more influential people in Whitehall is that the present structure is unworkable and will not deliver a better railway at a reasonable price. They may not know what they want, but, boy, they do know what they do not want. And, as foreseen in this column, the last straw for Railtrack was its suicidal decision to pay dividends to its shareholders in a year when it lost £534m and had just received £1.5bn in a bail-out from the government (masquerading as advance payment of grant).

With Railtrack in a state of collapse and paralysis, and the franchising process effectively in limbo, this is an unprecedented and unique opportunity to recast the railway. Stephen Byers’ decision to abandon the concept of 20-year franchises was partly motivated by a desire, as he put it, for quick gains. But abandoning the 20-year franchise concept may well be a cannier move than has been recognised. It is, in effect, a holding move while options are being considered – and that is good news.

When, briefly, this column welcomed the move in the last issue, a number of respondents e-mailed me saying this was wrong because there would be no investment forthcoming from the franchisees. The whole 20-year franchise deal has been predicated on the notion that this would attract investment from bidders and critics suggested short-term deals would not deliver on such schemes.

But it was always a silly idea. There is no reason to suppose franchisees are a good source of investment. They own nothing and have no assets as they lease their rolling stock and the stations. Sure, they can promise to introduce new trains but that will largely have been factored in by the Strategic Rail Authority when it calculates the subsidy required. Franchisees are essentially management contractors running trains for a fee (or, on very profitable lines, by paying for the right to gamble on the future of the economy).

The idea of 20-year deals was for the franchisees to pay for some of the investment that Railtrack was unable or unwilling to provide – in other words, improvements to the track and signalling to increase reliability and punctuality. The franchisees are expected to invest on someone else’s assets which, incidentally, have never been the subject of an asset register, in order to improve train performance. Calculating how to pay for this and determining an adequate rate of return is almost impossible.

So, for example, a set of points that is giving a lot of gyp will be replaced. How much will that cost? What compensation has to be paid to the principal and other operators? How do you measure the improvement in train performance (Railtrack could argue, for example, that a simple repair would have yielded some improvement anyway)? The system seems to ensure that the lawyers and consultants rather than the passengers are kept happy.

Even the simple matter of getting access to the track has proved difficult in the one example which is being developed, GoVia’s Special Purpose Vehicle (SPV) for the SouthCentral franchise it won last autumn from Connex. The new franchisee took three months to get its people on the track to check on the existing asset conditions because of the complexities of insurance. No wonder that, according to a reliable source, the SPV has cost £20m to establish so far without a deal being anywhere near completed. It is hardly surprising some of the people involved in the scheme now argue the only way to make an SPV workable is to hand over the whole functioning of the railway and enhancement project to one company. In other words, a kind of design, finance, build, operate scheme that has been used for roads construction.

This is why over the past few months this column has argued that the very basics of the structure of the railway need to be addressed in any future reorganisation, rather than tinkering about on the fringes. The franchise system is simply unworkable and will not deliver a better railway at a reasonable cost.

The system can only deliver the type of limited ‘plain vanilla’ deals which were the hallmark of the first round let by OPRAF in 1996/97. The one exception was the Virgin deal for West Coast where costs are now spiralling out of control on a scheme whose second phase seems of dubious value but is being proceeded with – at taxpayers’ expense – because the contracts have been signed and there seems to be no way out of it. This showed the difficulties in trying to get long term investment schemes through the franchising process and the experience has, quite understandably, caused terror in the Treasury as it has watched the costs of improving the railway soar out of control.

But short term franchises are pretty useless, too. They entrench the problems of a fragmented railway with all the costs that go with it. Frankly, there is little possibility of obtaining two year extensions at a reasonable price. Why should any operator agree unless there is a lot in it for them? They are in the position of being a ‘preferred bidder’ as well as the incumbent, a position of enormous strength since there is no pressure on them to cut a deal.

The failings of the SRA have largely been attributed to Sir Alastair Morton’s mistake in not drawing up coherent franchise propositions. In fact, the problems are more fundamental. As the above analysis shows, the very concept of 20-year franchises has been impossible to realise because of the complexity of the structure. Moreover, trying to assess what franchise payments should be made in two decades’ time is a finger-in-the-air job and such risks come expensive when bought from the private sector.

Moreover, as soon as operations are separated from the infrastructure, the costs for any enhancement projects mount up because of the complexity and the need to pay compensation for disruption. The rising costs for the West Coast Main Line, Thameslink and any other project on the railways are not an incidental result of poor management and greed on the part of the various players – it is a fundamental problem that will never be resolved within the present structure.

The key lesson from all this is that we need to go back to basics. All these problems go back to the daft separation of the wheel-rail interface and the privatisation of Railtrack.

Franchises were always a bad idea. They were created in order to have on-rail competition and as a side effect of the Tories’ decision to go for a track authority model of privatisation, again a consequence of their emphasis on competition.

The abandonment of 20-year franchises and the collapse of Railtrack therefore can be seen as an opportunity, rather than a disaster. There is a growing feeling within Whitehall that the privatisation of Railtrack was a tragic mistake. Those of us who have been intimately involved with the whole process since the White Paper was published in 1992 tend to forget the flaws which underpin the whole system.

Japanese railway manager Shoji Sumita, in his book Success Story (Profile Books, £20) pointed out the crazy nature of having a privatised Railtrack. If anyone doubts the structure needs radical overhaul, they should read these words written so presciently before the Ladbroke Grove and Hatfield train disasters: ‘The first point I have difficulty with is that Railtrack, which had been expected to run up deficits, is making profits, paying dividends and has listed its shares on the stock market.

Operation of infrastructure resulting in profits is unthinkable in Japanese railway operations. If profits by Railtrack have resulted from high levels of usage rates, the UK government should reduce its subsidies to operating companies and insist on cuts in track usage fees… If the profits have come about by cutting costs required for upkeep and maintenance of infrastructure, there would be problems regarding operational safety.’

Japan privatised its railways in 1987 into six integrated regional companies, the three largest of which are profitable. The solution in the UK is to work towards that objective. Railtrack should, as an interim measure, be brought into public ownership and, as the franchises come naturally to an end, much of the railway could be recast as an integrated system either through franchising or through the flotation of these new integrated companies with some sort of public involvement. Rail privatisation was once dubbed poll tax on wheels. The poll tax was abandoned as a bad idea, and so could this flawed privatisation, provided Mr Byers exhibits courage and foresight.

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