Trouble ahead on the rails?

On the face of it, the railways are the least of the problems facing the new transport secretary, Douglas Alexander. In recent months, there has been nothing but good news on the sector. The percentage of delayed trains has finally returned to the levels before the Hatfield train accident in October 2000 and record levels of investment are going into the industry, a fact that Alistair Darling, Alexander’s predecessor, never failed to mention in speeches.

Moreover, there is talk of a high-speed line between London and the North, and the fourth anniversary of the last fatal train accident caused by the railways, Potters Bar in May 2002, has just been marked, an unprecedented safety record in the 175-year-old industry.

Alexander will even get the chance to cut the ribbon on a major project, an all too rare event. The new Channel Tunnel Rail Link is scheduled to be completed on time next autumn and within the construction budget of £5.2bn. The line will reduce journey times to just two hours and 20 minutes to Paris and cut 15 minutes off the journey to Brussels. It will also form the centrepiece of one of the biggest redevelopment schemes in Europe and significantly boost the rail industry’s efforts to show that it is a vital part of twenty-first century infrastructure.
The CTRL was an essential part of the Olympic bid, helping to convince the International Olympic Committee that London’s transport was equal to the task of dealing with the thousands of spectators and competitors. This is because during the Games it will be used to provide a rapid shuttle service between King’s Cross and Stratford in east London, the station for the main stadium.

Darling succeeded in largely keeping the railways out of the media, his primary aim on being sent to that unpopular department, but Alexander might not be so lucky. The short-term good news masks a host of issues bubbling away under the surface, which could put the spotlight back on the industry early in his tenure.

Money is at the root of the looming difficulties. Darling managed to ensure that the government bought its way out of trouble following the Hatfield disaster by pouring huge sums of public money into the industry. This has distorted the transport budget in favour of rail but failed to address the fundamental problems that resulted in costs soaring in the industry.

A few figures are instructive. Financial support for British Rail peaked at £2bn (in today’s prices) in the early 1980s, but a better base figure is the amount the organisation received at the height of the Lawson boom, just under £1bn. Contrast that with the 2004/05 subsidy of £3.8bn – after a long period of economic growth during which railways always do well – and last year’s figure of around £5bn.

This increase has not come about from a rise in the number of services or the enlargement of the network, but is due largely to a sharp hike in the cost of operating, maintaining and renewing the railways. BR spent around £1.8bn (at current prices) in 1989/90, compared with Network Rail’s expenditure of £5bn annually. The industry’s justification for this massive increase in costs is that BR had a vast backlog of investment, which is currently being made up. But Roger Ford, technical editor of Modern Railways, says BR invested judiciously and the present problem ‘is partly as a result of a dip in spending by Railtrack in the aftermath of privatisation. But the main reason is that it costs three times more to do anything on the railways than it did under British Rail because of the way the industry has been fragmented.’

In other words, it is the structure of the railways that is leading to the massive increase in subsidy. Ministers, realising this, decided to try to reorganise the way the railways were run. They had been infuriated by regulator Tom Winsor’s 2003 decision to increase massively the annual amount Network Rail can earmark for running the railway, from around £3bn to £4.5bn. This lasts until 2009, when the current five-year regulatory control period ends.

Under the reorganisation of the industry under the 2005 Railways Act, ministers were adamant that they should have the final say over how much money is spent on maintaining and running the railways. Winsor argued, with some justification, that this had always been the case. But Darling abolished the Strategic Rail Authority and divvied up its functions between the department and Network Rail in an effort to tighten the government’s grip on the supposedly privatised industry. In effect, this is the first time in history that we have had a railways ministry in which civil servants are making decisions over franchises and strategic investment such as the replacement for the high-speed train, the type of task that used to be undertaken by British Rail.

The new process to determine future investment in the network is byzantine and incomprehensible to all but a few insiders – Alexander will have to be on a sharp learning curve. Next summer, the government will publish a ‘high level output specification’, which will set out what it requires from the railways in the next five-year regulatory control period, from 2009 to 2014, together with a ‘statement of funds available’, not surprisingly nicknamed the Sofa.

It will then be up to the Office of Rail Regulation, now headed by Chris Bolt, to determine whether these two documents are compatible – in other words, can the outputs required by the government (in terms of lines to be operated) and the condition of the track (in relation to speed and capacity) be met by the amount of money on offer. This process will not only force ministers to specify the network, making any cutbacks very transparent, but will also lead to a complex iterative process that might result in further reductions in service.

This is no way to run a railway, since it ossifies for up to seven years what should be a complex dynamic process. What’s more, it is being done by a regulator who is not an engineer. Ministers have also created another rod for their backs by allowing continued independent regulation of Network Rail, although it is now universally recognised to be a government company as its near-£20bn debt is guaranteed by the state.

One example of this has already sprung up. A ferocious three-way row has broken out between one of the biggest franchisees, GNER, the government and the Office of Rail Regulation, which threatens to unravel one of the main ways the government is trying to reduce the cost of the railways – squeezing the franchisees.

GNER won a ten-year franchise last year promising to pay the department £1.3bn (expressed as Net Present Value). Then, to its horror, a new rival, Grand Central, backed by a bus company, was given permission by the regulator to run three daily trains between Sunderland and London. These would not only take up train paths that GNER had set its sights on but also abstract revenue under the complex pooling arrangement (known as Orcats), as the trains will stop at York, one of GNER’s major sources of revenue. The department was also infuriated by the decision because of the threat it poses to the revenue stream from the franchise. Its rail director, Mike Mitchell, wrote an intemperate letter to Bolt.

This threatens the government’s strategy to squeeze the franchisees. If the GNER franchise proves to be unsustainable, not only will another hole be blown in the industry’s finances, but future franchise bidders will be unlikely to bid so generously.

Not surprisingly, the government is also considering whether regulated fares – season tickets and savers – should continue to be controlled. Already they are going up by more than the rate of inflation, and there are widespread fears of a return to the situation when British Rail was forced to put up fares to price off demand.

While fare rises will deter some travellers from using the railways, they will not be enough to stop more and more people wanting to use a system that is fast running out of capacity. There is very little being done to increase that in the short term. There are a few small projects around the country but it is only where there has been devolution of responsibility and budgets that new schemes are seeing the light of day. This is particularly notable in Scotland, where a series of reopenings in the Glasgow area are taking place, and in London, where the Olympics and Transport for London’s new borrowing powers have combined to produce something of a rail boom.

In London, work is proceeding on two extensions to the Docklands Light Railway, and has started on the East London Line of the Underground, which is to become part of the overground network. Thameslink 2000 is also back on the agenda, following a second public inquiry. Then there are the new technologically advanced high-speed trains coming into play in Kent in 2009. These are designed to run on both domestic railway lines and on the high-speed Channel Tunnel Rail Link track. They were also a vital part of the Olympics bid, as they will be used as the ‘javelin shuttle’ trains, which will transfer spectators from central London to the Games in Stratford.

Despite this, there are still fears that transport will still be a problem during the Olympics. Transport consultant Reg Harman, who has studied the expected transport needs, believes that the infrastructure is insufficient and that a lot of people will be crammed on to the already overcrowded Tube network. For example, he found that the capacity of the javelin trains was 8,500 per hour in each direction, rather than the 25,000 quoted in the bid document for the Games.

His evidence to the Commons transport select committee, which examined the issue, concluded that far from considering the existing failings of the transport infrastructure: ‘Current plans for the Games propose to rely on makeshift temporary arrangements which will probably cause poor travel conditions for visitors to the Olympic Park, congestion for the rest of London, and further delay in addressing the key transport needs of the Thames Gateway.’

Harman suggests that the project to build Crossrail – the east-west London tunnel linking Paddington and Liverpool Street stations – should be brought into the Olympic timeframe. But not only is that now considered impossible due to delays in planning and financing the scheme, but there are now severe doubts over whether Crossrail will ever be built. The Treasury has repeatedly refused to guarantee its funding although it would relieve congestion on the Underground system by 15%, has the backing of Transport for London, and is currently the subject of a hybrid Bill now in Parliament. While there is broad support from business interests in London and even from the City for funding part of the scheme through an extra levy on the rates, there is still a big funding gap.

Moreover, there are doubts about whether the scheme that is subject of the Bill is now the most appropriate one for the needs of London and the Southeast. A rival scheme, Superlink, which claims a better cost-benefit ratio and a greater number of users, has been put forward by a group of experienced railway managers. While the Superlink is unlikely to go very far, it has had the effect of destabilising the Crossrail effort and raising questions over its affordability.

The other major scheme, a high-speed North-South rail line, is so far in the distance that it is difficult to take the regular ministerial expressions of interest seriously. The project was mentioned in Labour’s election manifesto but Darling did not even commit himself to a study on its feasibility, let alone any detailed planning work. Any progress is awaiting the results of the Rod Eddington infrastructure review, which is not now expected until the autumn.

So, while usage of the railways is booming, with figures reaching those last achieved 50 years ago on a much larger network and before the motoring age, there are few plans for any major increase in capacity. The problem is that while the industry might have been privatised, any major new investment has to be paid by taxpayers because it is never self-financing. With overcrowding both on the lines and in the trains becoming ever-increasingly apparent, there will be demand for more investment.

However, the ‘high-level output specification’ process is likely to put pressure on the industry to reduce costs and there is unlikely to be any slack for investment.

Alexander, therefore, faces a host of difficult issues. Even the CTRL is not an entirely rosy picture, given that the Public Accounts Committee last week highlighted that usage is likely to be far lower than predicted. In truth, it is as much a regeneration project as a transport one. The Office for National Statistics demonstrated this recently with its decision that the debt of this ostensibly private project had to be included on the government’s books because that was where the risk lay.

The status of the rest of the railways is equally anomalous. They are ostensibly privatised but with the abolition of the SRA, civil servants and ministers have an increasing role in decisions over them. As one senior railwayman, an ex-BR manager now with a privatised train operator, put it: ‘The government intervenes far more in the railways than it ever did in the days of British Rail.’

It is lucky that Alexander is a protégé of Gordon Brown since he might need to go knocking on the door of Number 11 for funding sooner rather than later.

Christian Wolmar is a transport commentator. His latest book, On the wrong line, how ideology and incompetence wrecked Britain’s railways, was published by Aurum in November.

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