Rail 668: How to transform the ethos of the railways

Christian Wolmar

A few months ago, a senior train operator met with the head of Co-operatives UK, which lobbies to spread the co-operative idea, to discuss the feasibility of applying the co-operative model to Britain’s railways. The result is a pamphlet I have just written for Co-operatives UK setting out how creating a co-operative or mutual structure could work in practice on Britain’s railways (you can find it at http://www.uk.coop/rail).

When I was commissioned to write the pamphlet, I was surprised that a train operator should be putting forward such a radical proposition. After all, a common accusation levelled against operating companies is that they are just in it for the money and have little interest in any wider issues relating to the industry. Such a welcome approach suggested that within the industry people are worried about its image and its future role.

According to this person (whose identity I obviously know but sadly cannot reveal because some of his/her colleagues in the industry cannot see beyond their bottom line), the co-operative model would fit particularly well within the industry. S/he is right. The fact that private companies can make considerable profits without providing any investment is a source of much antagonism towards the railways.

Despite my political leanings, I have never suggested that the profit motive is wrong per se in the rail industry. Indeed, as my books on the history of the railways show, I am full of admiration for the raw tooth and claw capitalists who created the railways not only here but across the world. Rather, I have always opposed the ‘pretend capitalism’ that masks as the real thing in the rail industry. In normal companies, profits are a reward for two things – to obtain a return on money invested and to pay for the risk taken by equity (share) holders. Train operators, I have always argued, take very little risk and invest hardly anything – ‘thinly capitalised equity profiteers of the worst kind’ as Gordon Brown’s adviser, Shriti (now Lady) Vadera famously called them back in the days of the Railtrack collapse. Uniquely, they express their profitability in terms not of the rate of return on their capital – which is the norm – but rather on the percentage of turnover that is profit because the low level of investment means profit as a ratio of investment is very high.

And that’s the nub of the problem identified by our co-operatively-minded train operator. S/he said:  ‘Train operating companies are seen as siphoning money away from the railway for the benefit of avaricious shareholders and adopting a short term agenda in pursuit of profit. This is not a view based on objective assessment, so much as a strong feeling about what is still seen as fundamentally a public service’. This is powerful stuff for an industry insider, an admission that at root there is a fundamental problem about the way that the public perceives the privatised industry, even after a decade and a half since it was sold.

ASLEF, the union which represents drivers, has expressed interest in preparing a mutual bid for the East Coast franchise. ASLEF’s initiative is particularly encouraging as it suggests that the union is moving away from the ‘industrial relations as warfare’ approach of the RMT and moving towards the notion that co-operation between management and unions is the way forward. The public would see the railways as being run for their benefit rather than, as they see it, for the shareholders of the private operators and, according to the senior manager, ‘the great attraction of a co-op is that it would make people far more understanding of the difficulties faced by operators and shift the debate onto another footing’.

There are numerous other ways in which the co-operative concept could be adopted in the railway industry, from very large ones such as making Network Rail into a mutual, to much smaller ones, such as a microfranchise or simply a station retail business. The co-operative idea also fits in with the government’s concept of the Big Society. At the small scale end of the idea, such as co-operatively managed station shops, co-operatives could incorporate both paid and voluntary labour.

The most obvious candidate is the biggest fish, Network Rail. It is, actually, halfway there given that under its ‘company limited by guarantee structure’ its profits are already reinvested in the company rather than paid out to shareholders. However, as has been apparent in its dealings with the regulator and particularly the shocking behaviour over bonuses, it is unaccountable and its governance arrangements are structurally flawed. The board members are effectively a law unto themselves, able to make decisions with little regard for outside opinion or the needs of their customers. As I have mentioned many times before, the present regulatory regime was created for a conventional profit-maximising  – like Railtrack – company and it seems difficult to get round that. A co-operative structure would build in a far better framework for self-regulation and much better accountability. The abuses over board bonuses under Iain Coucher would no longer be possible, and incidents such as overrunning engineering work would be subject to far closer scrutiny.

The government has expressed strong support for the John Lewis model of capitalism. John Lewis is the biggest mutual in the country and has been remarkably successful. In particular, its workers feel a sense of belonging to the organisation, not least because the gap between the highest and lowest paid is far smaller than in conventional companies. In November last year, Cabinet Office minister Francis Maude announced a £10m fund to help with start up costs for mutuals in the public sector and suggested that workers would be given a right to create them. All sorts of services were included, ranging from Sure Start care centres and probation services to prisons and even tax collection, and therefore railways would seem a potential candidate. He stressed that co-operatives could improve management performance, encourage innovation, and reduce absenteeism: ‘John Lewis’s staff absence levels are half of the average in the retail sector. Staff turnover is lower when employees feel they can influence the way their organisation works, and productivity can be up to 19 per cent higher in organisations where staff feel they have a stake in success.’ (I love the nonsense of 19 per cent rather than 20, a ridiculously specific statistic but nevertheless we get the point).

However, when it comes to actually doing anything about such initiatives, the barriers go up. Creating a co-operative franchise would require government support. As my column in issue 665 showed, the franchise bidding process is long and complex. The cost of a full franchise bid is reckoned to be in the order of £5m, and requires the involvement of 30-40 professional staff, with around half a dozen employed full time for the duration, which is unlikely to be much short of a year. ASLEF’s efforts are being stymied by the lack of help available to new entrants. The very nature of the bidding process now requires past experience, a Catch-22 that will kill any initiative.

As a result,transforming Network Rail into some sort of co-operative structure – it could be run by staff, or by the train operators, or by a combination – might be easier than developing a franchise co-operative. Any such move, either with franchises or Network Rail, would need the active co-operation of government. Ministers have to do more than just make the right noises. Getting something like a co-operative railway structure through would require a minister to grab the bull by the horns and push hard for it. I can’t see Theresa Villiers, the present rail minister, having the drive or ambition to bring about such a radical and exciting change, but thanks to the visionary anonymous train operator, at least the notion has been planted and perhaps seeds will grow from it if the obvious hurdles can be overcome.

Chiltern in the wars

The Deutsche Bahn owned Chiltern franchise, whose 20 year contract includes a series of major investment schemes that has made it Theresa Villiers’ model for the future, is in trouble. The company, which is already in difficulties over its investment plans for the Evergreen 3 project to speed up services between London and Birmingham, appears to have got up the nose of the Department for Transport. Chiltern has been threatened with a half million pound fine for what, on the face of it, seem fairly breaches of its franchise arrangements. The complaints from the Department involve a one month delay to installing a shelter, a delay of several months to building lifts at Aylesbury and two complex but relatively minor matters to do with timetable requirements and the relationship between Chiltern and the now demised Wrexham & Shropshire open access operation.  Extraordinarily, Andrew Murray, the Department for Transport contracts manager who has instigated the charge admits ‘I should make it clear that the penalty is not related to Chiltern’s operational performance’, and yet warns of the massive sum that Chiltern may have to pay.

Not surprisingly, Chiltern has responded angrily, saying that the £500,000 would reduce its ability to make further investments – though of course, it could be argued that it means Deutsche Bahn (a state owned company) will take the hit. Nevertheless, this does seem a heavy-handed response from the department for what rather trivial breaches and may well deter any franchisees from putting forward investment plans. Such schemes, given the complexities of contractual arrangements and ‘elf and safety’ requirements in the industry, can be difficult to deliver.

Certainly this action will not encourage potential franchise bidders to put forward ambitious investment plans. In the short term, it suggests that the micro-management which came under such heavy fire from Villiers in the Labour years, is alive and well in Marsham Street. Together with the difficulties over Evergreen 3, Chiltern’s travails have wider implications for the proposed new model of franchise that involves investment from operators, and I will endeavour to examine this in a forthcoming issue.

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