Rail 657: An open letter to Sir Roy McNulty

An open letter to Sir Roy McNulty

Dear Sir Roy,

I am writing to suggest that contrary to the view you expressed at a recent presentation to the Derby Rail Forum there is actually a silver bullet to make the vast savings you are hoping to achieve in the rail industry. It’s very simple, really – the realignment of the whole industry into its natural structure, a vertically integrated organisation that can make all the investment and spending decisions across the board under a unified management.

 Let’s start with a simple point. As your preliminary report pointed out, the railways cost four or five times the amount they did under BR. Worse, this is after a period of unprecedented growth and consequently the bald statistics do not reflect the true scale of the debacle. The number of services, the main cost, has risen only 10 per cent since privatisation, but passengers numbers have increased by more than 50 per cent. Fares, too, have risen by well above inflation. Yet, the cost to the taxpayer has soared. Under BR, subsidy dropped dramatically in times of plenty, whereas the opposite has happened.

 So it is pretty obvious to assume that much or even all of the increase has been down to the restructuring of the industry, ironically carried out because BR was perceived as too great a burden on the taxpayer. No wonder John Major did not mention rail privatisation in his autobiography.

 A short history lesson helps. When the promoters of the Liverpool & Manchester Railway,  Britain’s first proper railway, were examining how they should operate their business, they considered allowing all comers and simply charging access to the track. However, they looked at the situation on the Stockton & Darlington, its ramshackle predecessor, where various users competed against each other, and decided they did not want to replicate the chaotic situation whereby different users came to fisticuffs over who should have right of way.

 By deciding on an integrated structure, they created the model for virtually every major  railway in the world. It was only when the European Union came along with radical ideas of encouraging competition and breaking up the state-owned monopolies that separation was ever considered. The Conservative government of 1992-7 then adopted that structure for purely ideological reasons in order to pursue the unrealisable dream of on line competition.

 Thus 150 years of efficient railway practice were tossed away on an ideological whim and it has backfired dramatically. Ok, so why does separation make such a difference? First, there is the basic conflict between the different players. Ivor Warburton, a long time BR man, once explained why the organisation was so efficient. He explained how  BR worked to a specific budget, given at the beginning of the year, and stuck to it. He told me the story of his permanent way man on the West Coast main line asking for money to repair a culvert which had a ten percent chance of collapsing during the year. Warburton refused, and the culvert collapsed, but he emphasised that the decision was still the right one. That sort of thing never happens nowadays – the money is always spent because there is no one who would any longer dare to take such a risk.

 A senior Japanese railway manager, who like all his colleagues was appalled at the way we run our industry, put it another way:  ‘How can the railways make the right investment decisions on say, signalling and track separate from the person in charge of operations or purchase of rolling stock?’ An irrefutable point. 

 In our system, franchise requirements, the High Level  Output Specification and Network Rail’s own priorities are determined by different people and while there is some attempt to align them, clearly that is an impossibility. Planning the railway has been effectively outsourced to people who are not up to the task, consultants and bureaucrats who are not responsible for carrying out the work they specify. Therefore, millions get wasted on investments that are not needed, or alternatively, not spent on assets that would save other players in the rail industry vast sums. Privatisation, which was supposed to have created flexibility, did precisely the opposite.

 Then there are the countless interfaces that suck up money faster than Uncle Scrooges coin counting machine. Every one costs money and requires the drawing up of legal contracts. The crazy money go round merely encourages the various participants to play to the rules to maximise profits, rather than work to benefit passengers. As the recent Public Accounts Committee points out, ‘at present there is no incentive for the rail industry to supply extra capacity without additional public subsidy’.

 The bureaucracy this has created is undoubtedly one of the drivers of the extra costs. So is the compensation scheme. Network Rail made a net profit of £42m from compensation – in other words because it outperformed expectations – but paid out nearly £150m, and received £190m. £42m at the end of the day is a trivial amount, representing less than 1per cent of the company’s turnover. Yet, the structure creates all kinds of nonsenses. Network Rail has to pay compensation for making improvements to lines which will then benefit the operators. That is a crazy system which in any case does not work since there are more weekend closures now than under nationalisation and the promise of a seven day railway is  never realised.

 I could go on but space is limited but I will give just one other reason for the increased costs: the privatised companies charge for risk they have taken on but for the most part there is no cost to them. Therefore, every player in the whole game gets extra money for risks for which they do not actually need compensating and trousers the money, to use the Private Eye term. And so on.

 OK, the arguments for vertical integration are irrefutable and widely accepted in the industry, but the question is ‘how do we get from here to a vertically integrated system’. Quite simply, the franchises can be allowed to run their course and gradually be reintegrated. I recognise there are difficulties, but there are some easy starters.  the Great Western is pretty much self contained, and so is the old Southern, third rail electric, system. Two elements of the old Eastern region, Anglia and C2C are easy to deal with too, and so is Wales and Scotland. Chiltern can be left in peace. That leaves the East and West Coast mainlines, and those complicated bits up North. There is no easy solution, but possibly one could recreate an InterCity organisation, and a regional railways one.  The crucial point, though, is to gradually reduce the interfaces, the number of companies involved and the duplication. It may not lead to saving all the extra money, since health and safety, and regulations have added to the bill, too, but it would go a long way towards it.

 Don’t by the way be fooled by the argument that the aviation sector works in a disaggregated way. Airplanes are only on the runway for a few minutes, and have the freedom of the skies thereafter. Trains are controlled every second by signalling systems and remain on the tracks all the time. They are not comparable industries.

 Nor let the defenders of the status quo get away with the line that third party users, such as freight companies, will suffer if they have to operate on the tracks of a rival company. In pre first world war days, there were over 200 rail companies, and many had agreements to operate on each other’s tracks, as do US freight companies today. All you need is a fleet footed regulator to ensure fair play.

 Ignore, too, the nonsense about EU rules, which require only accounting separation. In any case, rules on rail interoperability are widely ignored and the whole basis of vertical separation is flawed  and needs to be challenged. Neither the French nor the Germans show any sign of true separation of infrastructure from operations.

 I would just like to end on a point that worries me.  I see from the presentation in Derby that you consider that the cost of the rail industry to the taxpayer is unsustainable. I’m not quite sure what you mean by that. You went on to suggest that if that bill cannot be reduced, then there would have to be cuts to the service or to the network.

 I’m not sure how you come to that conclusion. The railways are a vital service which bring in far more benefit to society than the £5bn cost to the taxpayer.  Sure there is a waste, as the above suggests, but what makes you say that £5bn is unsustainable  – is £3bn, or £1bn, or are you trying to reach the Holy Grail of profitability for the industry as a whole, something  which is not only unachievable but fails to recognise the wider benefits of the railways, i.e. the externalities to use the economists’ term.

 I hope,  though, by pursuing my line of thought, you will find that you can make such large savings that on any rational basis you will consider the present network and the level of service completely sustainable.

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