Network Rail must change to survive

Network Rail is getting a new chairman Rick Haythornthwaite in the summer and he will have to show far greater mettle than his predecessor, Ian McAllister if the company is going to survive in its present form. There are growing concerns at the way the company is spending vast amounts of taxpayers’ money with very little accountability.

For a couple of years, now, I have heard ministers privately brief against Network Rail and, in particular, its governance structure. They have sussed that the so-called supervisory committee of over 100 members is little more than a sounding board and an opportunity for some superannuated trainspotters to get free tea and cakes at three star hotels. Therefore there is little to stop Network Rail bosses doing pretty much what they like.

Now, Lord Adonis has gone a step further by criticising Network Rail publicly for closing both the East and West Coast Main Lines at the same weekend and then, behind the scenes, questioning whether its bosses, including chief executive Iain Coucher, should pay themselves massive six figure bonuses at a time when such payments are as popular as their chief beneficiary, Fred Goodwin.

Adonis’s action has highlighted a contradiction that reaches into the heart of the issue over the government’s relationship with Network Rail. Adonis cannot interfere directly in the affairs of the company because it is technically a private company despite the fact that it has £20bn debt guaranteed by government and receives most of its £6bn annual income from taxpayers.

In the early days of Network Rail soon after its creation in 2002, ministers made the mistake of setting the terms of the bonus incentive scheme. As a result, the Office of National Statistics decided that this meant the company was effectively controlled by the government and that its massive borrowings would have to be included as part of the national debt which is precisely what Gordon Brown did not want.

So, the government relinquished its control over the bonus system and Network Rail slipped off the books back into limbo land. Now Adonis is quietly trying to influence Network Rail without crossing the line that would bring Network Rail back onto the government’s books.

This little episode demonstrates the extent to which the management and structure of the railways have descended into farce, and it seems that Adonis realises this. His predecessor, Tom Harris, was also prone to making private remarks about the lack of a proper governance system for Network Rail but did not manage to do anything about it.

There are, in fact, two problems with Network Rail’s structure. First, it does not have any proper oversight. It is subject of course, to the Office of Rail Regulation, but that involves an outside organisation, staffed by people with little day to day knowledge of how to run a railway, second guessing decisions by Network Rail management. It is not answerable to a group of shareholders, nor, as the above example, shows, to the government. Yet the company managers reward themselves with big bonuses for what is, at best, a tolerably competent level of performance, acting as if they were huge risk takers at the cutting edge of capitalism.

The second problem is that Network Rail runs half a railway, the infrastructure and not the operations, and has complex legal contracts with the rest of it that lead to endless disputes and huge amounts of compensation flying back and forth. There is no doubt that this is an inefficient way of managing a railway as highlighted by a research project for Leeds University by a Japanese researcher, Fumio Kurosaki. He looked at various examples of railways across the world and found that the various problems caused by vertical separation are far greater than the benefits. Separating out railways increases costs, leads to interface difficulties and inevitably results in contractual disputes.

Look at what has happened on the London Underground since the collapse of Metronet. Now London Underground operators sit on the same table as the ‘Head of Infrastructure’ (who runs what used to be Metronet) at board meetings and that means they can thrash out problems without recourse to lawyers and arbitration proceedings. According to Tim O’Toole, the departing boss of London Underground, it is far easier to get work done at a lower cost. He is adamant that separating the infrastructure from the operations on the London Underground was a fundamental and expensive mistake made at the instigation of Gordon Brown, a man who has never shown any knowledge of the railways – or indeed any interest in them.

Therefore, it is impossible to separate out the question of Network Rail’s governance from the issue of the structure of the railway. Lord Adonis has already complained about the fact that Virgin received around £600m in compensation for the disruption on the West Coast Main Line, money which was not passed on to its passengers and a scheme whose main effect is to improve the operators’ service. But that is an inevitable result of separation and it seems impossible to devise a way out of these contractual obligations.

Paradoxically, concerns about the governance of Network Rail have arisen at a time when the company should be licking its lips at the prospect of spending £28.5bn over the next five years, as agreed in its regulatory settlement. Yet the company claims this is not enough and had it not been for the recession, it is certain that Iain Coucher would have appealed to the Competition Commission to try to get more money. Coucher feels hard done by that having improved efficiency by 30 per cent since 2004, the company is now being asked to take out a further 20 per cent costs over the next five years. However, by both historic and international measures, Network Rail is still remarkably inefficient and expensive.

Instead, NR now claims that it does not have enough money for the normal operating, maintenance and renewal expenditure, and has dramatically cut back on some aspects of this work, provoking union anger and concerns about safety.

In fact, while safety has not been compromised, the performance of the railway will deteriorate as a result of this reduction in work because it will lead to an increase in temporary speed restrictions, with an inevitable impact on reliability. That will only serve to put yet more focus on Network Rail and raise issues about its performance, serving to emphasise the difficulty of the task to the new chairman.

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