Rail 420: Why Railtrack’s fall was a revolution waiting to happen

The revolutionaries have triumphed over the evolutionists in the battle over the future structure of the railway industry. CHRISTIAN WOLMAR, firmly in the revolutionary camp, analyses the reasons for the Government’s momentous decision to put Railtrack under administration. In RAIL 421 he will examine the prospects for the proposed new non-profit making structure.

Wow! On the weekend that Railtrack collapsed, we watched history unfold. Had it not been for the coincidence of the launch of the war on the very same day, it would have been the biggest domestic story of the year and would have dominated the headlines for a week or more.

The political, economic and transport implications are quite simply enormous, extending well beyond the railways, and it would take several of these columns even to begin to do justice to the full extent of the consequences. In this one, I set out the reasons for the failure and in the next issue of RAIL I will assess the prospects for the Government’s suggested solution, the creation of a non-profit making company limited by guarantee.

The battle between those who wanted the railways to muddle through and those who, like me, felt the structure would never deliver an efficient, safe and growing railway has been won decisively by the latter. It is to be revolution and not evolution. Those who counselled ‘muddle through’, which included the senior civil servants dealing with the railways in Whitehall, have been roundly defeated.

It would be comforting to say that those who took the dramatic action to use the Railways Act 1993 to place Railtrack under administration have a clear charted path for the future of the railways. But they don’t. There is, as yet, no clear vision of what the railways will look like in, say, two years’ time, but that is not to say that Stephen Byers was wrong to force the issue by refusing Railtrack’s repeated requests for what was effectively a blank cheque.

What went wrong? As I have pointed out many times, the notion of having a profit-maximising Railtrack at the heart of the network was a fallacy and, as it turns out, a fraud perpetrated both on taxpayers (who were robbed of a key part of the national heritage) and the company’s shareholders (who were sold an organisation whose liabilities far exceeded its assets).

The minister had no choice. Back in July, John Robinson, soon after he was appointed Railtrack Chairman, told Mr Byers that he wanted the whole regulatory regime scrapped, and that instead Railtrack should be paid on a cost-plus basis. Mr Byers had no option but to send him packing.

So why did Railtrack go bust? First, costs were completely out of control. The WCML renewal – now reaching £7bn – is only the most infamous example of a company-wide phenomenon. The insistence, at privatisation, that Railtrack should have no in-house engineering facility was, with hindsight, one of the most far-reaching mistakes of the whole flawed process because it gave a little cartel of contractors carte blanche to charge exorbitant costs. The fragmented structure of the railways also meant that Railtrack was forced to pay compensation to train operators for possessions, and this added massively to costs. Over-stringent health and safety requirements did not help either. Nor can one omit the fact that Railtrack was woefully inefficient and incompetent, shorn of a generation of railway expertise because the iconoclastic anti-BR culture of its early bosses led to the departure of many experienced managers.

Secondly, the financial architecture of the industry was all wrong. Railtrack was expected to allow train operators to run more trains and yet not receive any extra money. Moreover, as we discovered in the aftermath of the Hatfield accident, the operators were insulated against risk of major incidents, such as the emergency imposition of speed restrictions, while Railtrack had no such cover. Railtrack could only increase its profits by cutting back on maintenance costs or having higher access charges. Neither of these benefited passengers. In other words, Railtrack’s aims were aligned to the needs of people using its network.

Thirdly, and a factor that is strongly related to finances, there is the flawed nature of the regulatory regime. The whole Byzantine nature of regulating Railtrack has been shown to be a complete waste of time. It was an attempt to impose some kind of rational economic basis on a structure that was inherently flawed. The Regulator was put in the position of running the company through a myriad of performance indicators, and the last straw was the imposition of a much harsher performance regime on Railtrack in the April 2001 regulatory review. The Regulator was in an impossible situation: he was supposed to ensure that Railtrack could fund its investment programme, and therefore he had to be generous; but he also had to be strict in order to ensure that the company was not making excess profits and that his political masters were happy. The rail industry was too complex to regulate in this way. Moreover, there were two other regulators, the SRA and the HSE. With so many masters, it was almost possible to feel a twinge of sympathy for Railtrack.

Tom Winsor, the present Regulator, must take some of the blame for failing to understand the effect his words had on the City. They drove down the share price, which needed to stay high for Railtrack to attract investment. In fact, his bark was far worse than his bite, but the City analysts mostly failed to notice this. Watching Mr Winsor get progressively more generous to Railtrack – having his tummy tickled, as it were – during the regulatory review, while saying in public that he was being increasingly tough, was one of the more amusing consequences of this crazy structure.

As I have pointed out before, he then continued flogging a near-dead horse by keeping on bashing Railtrack when it was clearly on its last legs (“Railtrack must put away the begging bowl”), and that was an act of crass stupidity that has now cost him his job. A simplification of the regulatory structure, which is code for ‘au revoir, Tom’, is high on the Government’s agenda. Still, there are plenty of well-paid legal jobs in the City.

Fourthly, Railtrack suffered from poor management. Initially, under John Edmonds, the first chief executive, and Bob Horton, the chairman, it set about maximising profits with no regard for the social duties of the railway. Then Gerald Corbett initiated Project Destiny which was based on only replacing equipment when it was fully life-expired, but since there was no register of assets or of their condition, it was a flawed strategy which led to the Hatfield disaster.

Although Mr Corbett rightly moved away from the profit-maximising agenda and began to understand the needs of the railway, he made another terrible mistake in appointing Jonson Cox, a man with no railway experience, as operations director. Within six weeks of the appointment, the Hatfield accident occurred and Cox found himself having to make decisions about speed restrictions for which he was wholly unqualified. As my book Broken Rails, published this week, shows, it is no exaggeration to say that had Cox not been appointed, Railtrack shareholders might be still holding on to certificates worth more than the paper they are printed on.

Then there is safety. The increasingly onerous requirements of the safety regime, often introduced with little regard for benefits, put further pressure on Railtrack. Again, there was no compensation for the ‘safety risk’ which forced up costs of working on the railway and determined how much of the money available for investment was spent. Railtrack had to foot most of the bill.

Finally, Railtrack’s relationship with government was appalling. That was not all the company’s fault. John Prescott made it clear that he hated the company and would love to have renationalised it if Big Tony had let him. He criticised the industry at every opportunity, failing to understand that the railways were perceived by the public as his responsibility. This made Railtrack’s job more difficulty and contributed to the over-emphasis on minimising risk after Hatfield.

Post-Corbett, Railtrack showed as much political nous as turkeys voting for Christmas. The decision to pay dividends to shareholders when losses amounted to £534m and the begging bowl had just been filled with a £1.5bn was, as I wrote at the time, suicidal. And so it has proved. Railtrack simply did not understand the political realm.

Hatfield was the catalyst which brought about Railtrack’s demise, but it was not the cause. Of course, Railtrack was a bit unlucky but if it had not been at Hatfield, it would have been somewhere else. Railtrack, lacking railway expertise and with no clear understanding of its own role, was an accident waiting to happen.

The question, then, is whether the transfer of Railtrack to a private company limited by guarantee will tackle these problems and whether outright nationalisation would be any better. The reasons, incidentally, that the Government will not take back outright ownership are threefold: it would have to buy out the shareholders, possibly, because of European rules, at a far higher price than the £2.80 at which shares were suspended; the Government does not want to be directly in charge of the railways, even if, in fact, it cannot get out of that responsibility; and – the most important reason – Gordon Brown does not want the railways messing up his balance sheet. It may seem unbelievable, but the Treasury has been in negotiation with the Office for National Statistics to determine precisely what ministers can and cannot do in relation to this new company in order to keep its borrowing on the money markets out of the PSBR. Crazy but true!

In my next column, I will assess whether the Government plans are a feasible solution. There are other factors to consider. Will the new structure bring more money in? Is it simpler? And does it make the railways appear safer to the public? We are in uncharted waters full of sharks and hidden reefs. Mr Byers’ decision to stop feeding the Railtrack black hole was the right one and offers the railways a new start. However, it is only a beginning and things could go the other way. This is a seminal moment for the railways and all the players must come forward with their ideas for the eventual structure of the industry.

Currently, there is a blank sheet in Whitehall headed ‘The future structure of the industry’. By this time next year, let’s hope it will have been filled in coherently.

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