Rail 444: Operators’ CUP will no longer runneth over in new rail era

The flat-earthers of the industry may not recognise the reality, but the Strategic Rail Authority has now effectively become BR Mk 2 since the creation of Network Rail and the announcement of the new capacity utilisation process, argues CHRISTIAN WOLMAR.

I had that George Muir at the back of my dinner table the other night at the RAIL awards. Mr Muir, the Director General of the Association of Train Operating Companies, is one of the public faces of the railways, coming on the TV screens whenever there is an accident or the latest bit of unravelling of the privatised structure, when he makes game, but unsuccessful, attempts to defend the indefensible.

Now Mr Muir is a jolly nice fellow who feels passionately for the railways. But he has a major flaw, an inability to realise the world has changed around him. He is a bit like the old guard in China who still believe that the regime they are living under is Communism and have not noticed that capitalism is now the prevailing ethic.

Mr Muir actually believes that the structure of the railways was right, only it had the odd problem or two. He has failed to recognise that the model currently being developed by the Strategic Rail Authority and the Government has as little to do with the original conception of the privatised railways as present-day China has with the country under Mao. So Mr Muir has to ask himself whether it is the original structure of the privatised industry or the current one which he is defending.

The differences are becoming more apparent almost every week. The publication of the dreadfully-named (CUP) document on September 5 shows just how far the railways have moved from the original conception at privatisation. The capacity utilisation process (sorry, but it’s difficult not to fall into this jargon very quickly) is essentially a planning tool which will look at the potential use of each line and allocate train paths to those services that make the best use of the available assets.

This, it must be said, is a very sensible thing to do. According to Jim Steer, the new head of strategic planning at the Strategic Rail Authority, it even goes beyond anything which BR did in terms of planning, and it is certainly a radical departure for the privatised industry.

Steer was a little vague on how the capacity utilisation (please, someone, come up with a better term) process will affect the shape of the franchises but it is clear that it will make a big difference. Franchises were originally drawn up on the basis of minimum levels of service (Passenger Service Requirements – PSRs). As long as those were met, the franchisee was free to run any extra trains which it thought worth doing, whether to increase its share of revenue on a particular line by taking existing traffic away from competitors (what is called ORCATS raiding, after the name of the allocation process) or providing useful new services.

There was, under this system, little down side to providing extra services. Under Railtrack contracts, there were no track charges for these extra services and, provided they could be operated with existing rolling stock, all the train operator needed was a crew and a train path.

Now, once the CUP process is in operation – parts of it are due to be implemented in time for the summer 2004 timetable – franchisees will no longer have such freedom. It will no longer be up to them to use their ‘entrepreneurial flair’ to introduce higher frequencies, but up to the SRA to decide whether this is the best use of the available capacity.

The changes will go further than that. The CUP process, if it is to have any value, will have to inform the whole shape of the new franchises so that operators tailor services to the assets they are using. Therefore timetables may have to be changed, with possibly trains taken out of the schedule if they are having a damaging effect on the overall performance because of over-use. Or franchisees may be required to run certain services at set points every hour to ensure that other trains can be timed suitably.

Steer and his colleagues at the SRA seemed to be reluctant to admit to the far-reaching implication of the process they have launched. The next logical step would be to put the timetable in the hands of the SRA which would then have the power to prioritise the services it felt were most important. Indeed, in the long term, this appears to be an inevitable result of the changes under way to franchises.

So the CUP represents another move towards much greater control of the industry by the SRA and will clearly be reflected in the refranchising process. The SRA intends to produce a revised franchise policy in November which will determine the shape of the refranchising process. It is clear that this has really been on hold for the past year.

An indication of what might emerge was given by the SRA’s announcement that the South Central franchise will last for seven years rather than 20 as originally proposed. It was highly significant that the SRA slipped this out on the same day as it also revealed plans for the blockades to sort out the West Coast Main Line upgrade, the issue which obviously grabbed the headlines the following day. That suggests the SRA does not want to discuss the way the whole design of franchises is likely to be changed, at least for the moment.

According to SRA insiders, a new franchise policy will be published in November, although given its importance I would wager that it slips a month or two. The South Central announcement shows that the idea of 20-year franchises is completely dead. Franchisees will no longer be expected to put in funding for upgrades and are no longer seen as vehicles through which investment in the railway will be channelled.

That change is sensible. Train operators, who were really only temporary users of the track, should not be expected to fund investments designed to last a century or so. But there are possibly even more radical changes afoot. Last year the total revenue of the franchises was less than their costs, including track access charges. This means that when they are renegotiated, a much higher subsidy will be needed to attract companies to run franchises.

Therefore the SRA is considering abandoning the notion of passing the revenue risk to the franchisee – that is, there will be a fixed amount to run the trains and the Government, in the guise of the SRA, will get the revenue. Now that seems very sensible because why should private companies take the risk over the way that the economy – the largest determinant of railway use – behaves over the next seven years or so. Risk, according to the SRA, should be allocated to where it is most sensible to manage it, and it seems daft for private companies to take the revenue risk. Ultimately, anyway, this risk has proved to be illusory since the franchisees that have done well have simply pocketed the money while those that overestimated revenue have just thrown the towel in.

While such a move is very sensible, however, it demonstrates exactly why the whole concept of franchising is questionable. What incentive will there be for franchisees to bother to collect any money? That was a problem encountered by London Transport when it let out bus franchises on the same basis. We know, too, that Richard Bowker, the head of the SRA, is intent on ensuring that the franchises will be much more prescriptive. In other words, there will be much more detailed specification of what a franchisee is expected to do such as, perhaps, have staff on trains and stations, and provide a set level of service. That is much more like the concept of franchise that has been developed by McDonalds or KFC.

So the franchises will be left with little freedom to manoeuvre, becoming what could be called ‘service delivery units’. The question that remains is: does that represent the right combination of public-sector control allowing private-sector flair (which has been rather lacking among most of the franchises) to flourish? Or would it be better to simply abandon the franchise concept altogether and think up a different way to run the railways? After all – and no-one in the industry is prepared to admit this because of a terror that the nationalisation word cannot be used in front of the children – but the SRA, by taking control of Network Rail, initiating the planning process under the CUP and completely transforming the shape of franchises, has become a British Rail Mk 2.

So Mr Muir, answer me this: which of these models of the privatised industry do you prefer – the train operators taking risk and working with a private profit-maximising Railtrack, or this new model, as yet not entirely worked out? And do your members want to retain the revenue risk, or would they rather be ‘service delivery units’ with a highly prescriptive SRA ever over their shoulder?

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