Rail 612: Tories caught between rock and hard place

Remember the Tories. They used to run the country under an iron lady by the name of Thatcher and a philanderer called Major but it seems so long ago that we have almost completely forgotten them. That is not surprising because, in terms of rail policy, they have rarely surfaced except for a brief period when Chris Grayling was shadow spokesman and was busily engaged with the industry.

Grayling had promised that a rail policy would be published in 2007 but it got stuck in the system, a victim of David Cameron’s unwillingness to commit himself to any firm policies. There was, too, another problem. Grayling quickly became convinced that integration of the industry, creating a single organisation responsible for both infrastructure and operations, was an essential prerequisite for a successful railway. However, as I have pointed out before in this column, there was a fundamental issue about integration which Grayling could not solve: integration meant either privatising Network Rail or nationalising the train operators, neither of which seemed feasible or palatable to the Tories.

Therefore, we waited and waited for Grayling’s review and like those trains on that snowy Monday morning, it never arrived, despite lots of suggestions that it was only held up at the signal round the bend. Now, at last, we have a Tory party policy on railways produced by Grayling’s successor, Theresa Villiers who, for a long time, made dormice seem noisy.

Of late, though, we have seen more of her and she has even impressed recently at rail industry conferences. Ms Villiers first emerged in the spotlight at the Conservative party conference in the autumn by announcing that the Tories supported the idea of a high speed line. It was even costed, sort of, with the suggestion that the public investment would be paid out of the existing rail budget though, of course, it was not explained how cuts could be made without severely damaging the network. Nor was this an immediate commitment, with no plans to start work until the middle of the next decade but nevertheless it put Labour on the back foot. As an aside, it is a daft convention, forced on politicians by the press, that they have to work out how every pledge will be funded when even trying to work out next year’s government spending is nigh on impossible, let alone what will happen in ten years time!

The reiteration of that promise for a high speed line is about as exciting as the new rail policy gets though. Certainly the title – Conservative rail review: getting the best for passengers – hardly catches the eye and nor does much of the rest of the 20 page document.

Interestingly, the notion of vertical integration is retained, at least for Merseyrail and one other, as yet not selected, area of the country. This will not please Network Rail but otherwise the organisation, which had previously been targeted for criticism by the Tories, does rather well in this document. While the Conservatives want to reform it and appoint a supervisory board to represent the interests of passengers and freight users, essential Network Rail will survive in its present form. There is to be ‘better coordination’ between the organisation and the franchisees, but that is something which the politicians of all sides have been urging ever since its creation and the basic structure of allowing Network Rail a large amount of freedom to spend taxpayers money is not challenged.

It is on franchises that Ms Villiers tries to be more radical. She wants longer franchises of 15 to 20 years and less meddling from government. Longer franchises are fine as an overall concept if they encourage investment but the fundamental issue here is one of public accountability. If franchisees were given twenty year deals, they would probably require more, and not less, ‘political meddling’ in order to ensure that public money is being spent wisely.

Lord Adonis, in an interview I undertook with him for Public Finance magazine (available on my website) made clear why he was prepared to intervene to prevent South West Trains carrying out a series of closures to ticket offices, and why he did not consider that to be micromanagement: ‘What is the distinction between micromanagement and protecting the public interest? You have to make a judgement about the point at which protecting the public interest becomes unnecessary interference in the delivery of a service. I do not regard specifying in detail the franchise as that.’

This suggests that longer franchises would need even tighter specifications in order to ensure that train operators did not just cream off profits without regard to their public duties. Moreover, the Treasury might well block such a move. When the Strategic Rail Authority under Sir Alastair Morton wanted 20 year franchises, the Treasury quickly realised that this would mean that it would need to fund most of the investment and quickly put a stop to them. One suspects the same fate would befall any future attempt to lengthen franchises, even though it may well be the only policy with regard to franchising that makes any sense.

How Chiltern, the only current 20 year franchise, fares over the next couple of years will obviously be the test. Chiltern faces quite a reduction in subsidy (indeed it is supposed to go into paying premiums in the next financial year) which is a big ask in the current climate. If Chiltern gets into difficulties in the downturn and the company – now effectively owned by Deutsche Bahn – seeks to be bailed out, it will demonstrate that longer franchises are not realistic if they are operators are expected to take the revenue risk, something the Tory document is silent on.

In order to reduce the scope for political meddling, the Tories would hand over franchising monitoring activity to the Office of Rail Regulation to make the process less ‘political’. But the process should be political. When First Great Western was performing badly, it was ministers, under pressure from passengers, who intervened. Given the ORR’s feeble oversight of Network Rail, passengers interests would be undermined, not strengthened, by such a move. It would give ministers even more of an opportunity to say ‘nothing to do with us, guv’ when things got bad on the railway.

Moreover, by making the ORR into the passengers’ champion, its role would be confused with that of Passenger Focus. The ORR is already a huge bureaucracy employing 350 people (at an average salary of £57,000) and costing £30m per year which imposes vast expense on the rail industry. Advocating its massive expansion (the manifesto suggests that the ORR’s phone number should be printed on every ticket) would seem to go against the Tory policy of reducing bureaucracy.

The problem for the Tories is that they realise that the current structure for the railways is, as the management consultants say, ‘sub-optimal’ but they do not have a sufficient clear vision to be able to work out a way of making sensible changes that would improve the situation. And they are hamstrung by their ideology which precludes suggesting full integration since this would be effective nationalisation.

In practice, should they win the next election (and Mystic Wolmar has his doubts about an overall majority) I suspect that they will do little to change things. At least, though, there is now a Tory rail policy. It will be interesting to see if Labour produces one before the election – which according to some Westminster commentators could be in the Spring.

Time to can the bonuses, Iain

While on the subject of Network Rail, here is a bit of free advice. If the bosses of Network Rail pay any regard to the organisation’s public image, then it would be very opportune for chief executive Iain Coucher and his colleagues on the board to abandon the bonus system of payments. Given the massive rows over bankers’ bonuses, it will not be long before attention is focussed on the rail industry and the huge subsidies it receives. The bonuses are not justifiable and nor, given the weakness of the stakeholders, are they determined in a properly independent way.

Bonuses are unjustifiable at the best of times, let alone today. Why should highly paid executives get extra money for doing their jobs competently? The performance targets for Network Rail have been notoriously easy to achieve and, moreover, staff still get part of their bonus even if they are not all reached.

One of the reasons for the high cost of work on the railways is this bonus culture, combined with the use of expensive consultants – some of the people at Bechtel, for example, get more than £1m per year, and that is money paid out of the public purse.

What of the lower paid? While the bonuses may be a welcome addition to wages, they are not a realistic incentive to do the job properly as there will be very little relationship between performance and payment. Best to scrap the whole system and increase wages concomitantly, putting all the savings towards the bottom end of the pay scale.

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