Rail 604: Bank crisis has same roots as rail privatisation errors

While banks are collapsing with the same frequency as wickets normally fall in the England middle order, it is worth considering the lessons of this debacle for the rail industry and, in particular, the Department for Transport. There are, in face, some disturbing similarities between the causes of the banking crisis and the changes in the rail industry over the past fifteen years that may result in similar chaos.

While the catalyst for the chaos in the banking was the lending to homeowners who were clearly not just a bad risk but absolute surefire defaulters, the consequences would not have been anything like as disastrous had these loans not been bundled up into complex financial instruments and then traded by people who clearly did not understand the risks, or probably even what they were trading. The key point here is that the number of levels between the mortgagee and the organisation which ended up owning the debt increased so that they were remote from each other. That meant that everyone thought the risk was somewhere else until the banks discovered it was with them.

Similarly, in the rail industry, a whole host of organisations have been created which have complex interrelationships with each other that may be slightly more transparent than in banking but in which there is plenty of scope for it to be unclear about precisely whom is taking risk and who is paying for it. The list of failed or defunct organisations in the short history of the privatised railway (and Underground) is really quite remarkable for such a short time: Prism, MTL, Connex, GNER, Railtrack, Jarvis, the Office of Passenger Rail Franchising, the Strategic Rail Authority and Metronet. The government minister who once told me that having organisations which failed was good for the rail industry because it showed they were working in a competitive environment clearly does not understand the first thing about a successful industry.

Yet, in each one of these cases, it was the taxpayer which ended up footing the bill for the failure of these organisations and for wasted resources in the case of the two government agencies. The truth was that despite the elaborate charade, the risk remained with the taxpayer but in the meantime, just as with the banking industry, hundreds of managers and consultants earn huge sums in the process for helping create this crazy web. In a way, this is a strange difference from the banking industry: the banks and insurance firms which collapsed had clearly taken on risk and people lost out, whereas in the rail industry, except in a very limited way, the risk always falls on the poor old taxpayer.

But it is not only in the complexity and the failures that there is a similarity. In the banking industry, it is clear that much of what has happened has not been in the consumers’ interest. People have lost their homes when they did not need to, investors have lost their savings and we are all now going to have to pay higher taxes as a result of the games played by the masters of the universe.

Similarly in the railways, decisions have been based not on getting the best deal for taxpayers or passengers, but on playing ridiculous games in order to fulfil arbitrary rules or keep money off the government’s books. Nowhere was this more obvious than in the recent ridiculous charade over the procurement of two extra coaches for the Pendolino stock (hopefully with toilets that don’t leak and stink like the present lot). Instead of just buying them or even leasing them, the Department for Transport (it is difficult resisting its Private Eye name of Daft but this column does not go in for cheap insults) could not come to an agreement with Virgin, so it had to put out the scheme to tender through the mechanism of creating a notional train operator for them. Then after spending probably hundreds of thousands of pounds in going through this ridiculous palaver, the DfT selected non other than Virgin to procure the trains – which was inevitable because no one else would have been interested in the hassle of hiring 100 odd coaches which were to be installed in someone else’s trains. It demonstrated yet again the Department’s total lack of understanding about the nature of business.

The whole mechanism of leasing rolling stock is not about creating the most efficient outcome from a financial point of view because, as one senior rolling stock manager told me, ‘then the government would simply buy or lease the stock itself because it could do that far more cheaply’. Instead, it is about keeping rolling stock off the government books, or to put it another way creating complex financial instruments in order to serve the government’s narrow interests but helping neither passenger nor the industry in general. Instead of whingeing about the extra profit the roscos supposedly made, the government could have solved the issue at a stroke by simply taking on the long term risk itself, saving far more than it would have done had the Competition Commission ruled in its favour.

In the new economic climate, it is imperative that the Department starts to look at simpler ways of doing deals, stops trying to pass on unquantifiable risk at great expense, and be prepared to take on the real cost of assets onto the government books. Take the Intercity Express Project, the crazily complicated arrangement to lease new trains to replace HSTs. So far the government has tried to create a package that bundles up finance, manufacture and maintenance of trains over the whole life, say 30 years. I was assured by the civil servant, Graham Dalton, who was responsible for this project that over the lifetime of the trains, it would offer taxpayers the best deal.

Given the credit crunch is making the cost of capital rise almost daily, this is no longer remotely feasible and luckily for Mr Dalton he has now gone off the run the Highways Agency so he will not have to pick up the pieces. That, incidentally, is why the new ministerial team at the Department must ensure that a railways agency is created which is not staffed by civil servants passing through but career railway managers who know one end of a train from the other. The IEP should either be scrapped and the process restarted with a much simpler structure or the Department should accept that the deal as presently structured is unworkable.

I was very taken by a letter in another rail magazine a few months ago from a Danish rail manager who outlined how, within a few weeks of a need being identified, he had ordered a batch of new rolling stock off the shelf and that it would be delivered within a year or so. That is the way to run a railway.

In his otherwise favourable review (available on my website) of my book, Fire & Steam, published long before he became rail minister, Lord Adonis took me to task for rewriting history, suggesting I had ‘succumbed to unwarranted romanticism when it comes to the last days of British Rail’. That is not the case. I too remember that parts of British Rail were lousy and customer service was not always its strong point. But crucially, British Rail delivered projects that were value for money in a simple comprehensible way. Far less was spent on consultants and lawyers, and it was far easier to ascertain the cost of what was being bought. Now, for the IEP we will get a figure for providing the trains (availability of trains on a daily basis) for which it will be virtually impossible to ascertain whether that is a good deal because so much will be built into that single figure. Indeed, Mr Dalton admitted to me that it will be a high figure even though he stressed that it would still represent value for government. My sources within the rolling stock manufacturing industry confirm that they do not expect the arrangement to be cheap and, moreover, we will probably never be able to find out because of ‘commercial confidentiality’ rules.

That conversation took place a few weeks ago, before the credit crunch really hit. Now all these scheme must be in doubt, though ironically, with Brown seemingly convinced of Keynesian solutions to the recession, the future of Crossrail, IEP (or its successor), Thameslink and all the money for Network Rail’s Control Period 4 (2009-14) may be more assured than it was a few months ago. Despite this logic, my gut instinct is that out of those, there are still doubts about whether Crossrail will get the go-ahead.

There is no doubt that asking private companies to provide the long term finance for any of these projects will be at best very costly now, and at worst impossible. Since Gordon Brown has already blown a hole through his own strictures on spending requirements and the world has not collapsed (well, not for that reason anyway), playing these games is no longer necessary. It will be interesting to see that whether Geoff Hoon has learnt anything from the mistakes in his old department, the Ministry of Defence, which its fingers burnt numerous times over similar attempts to create complex deals. I wouldn’t hold your breath, though. Civil servants are particularly addicted to trying to dot every i and pretend they are wriggling out of every risk, and now seem to only feel safe if they have contracts half the size of a house which supposedly guarantee every eventuality.

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