Rail 671: McNulty fails the test

There was something fitting, poignant even, about the fact that when Sir Roy McNulty was speaking at the press conference on his report, he kept on clicking back to the previous slide by mistake. That summed up the problem with his analysis of the ills of the rail industry. Rather than looking forward to a different way of running the railways, his recipe is really more of the same, with the same ingredients but perhaps in a slightly different order.

It is stunning that in a report of 320 pages, summarised in 70, McNulty never asks the question of what the present system of franchising is for. Or questions in any analytical way the results of having privatised the railway in the present structure compared with, say, other models or not at all. He illustrates quite comprehensively that the system has not been working, saying that unlike on the continent where it has been used mostly for regional services, ‘franchising in Britain has shown little, if any, reduction in unit costs’. But he was clearly acting within constraints imposed by his political masters, which means the report was yet another missed opportunity for finding out what went wrong with the railways.

Yet, as numerous commentators in the national press pointed out, there is copious  evidence in his report that points to the all too obvious conclusion that it was the fragmentation of the industry, resulting from the Railways Act 1993 which prepared it for privatisation, that has caused the cost explosion. The obvious answer would be to bring the disparate bits back together again, except he could not say that.  Instead we get the staggeringly depressing comment, given by McNulty to a recent conference, that ‘the situation is complex and difficult, so any solution will be complex and difficult’. Well, no, actually, if fragmentation is the problem, then the solution is all too obvious. And yes, there is ‘a silver bullet’ even though ‘we are where we are’.

Much of McNulty’s final report had been well trailed in his earlier findings. So we got the same ‘savings of £1bn’ by 2018/9 which seems, frankly, pretty modest given the levels of overspending in the rail industry. We got the same tired old ‘better alignment’ of incentives across the industry which frankly I have heard oft repeated since the days of the terrible series of accidents in the immediate post privatisation period. And we got the same doubts about the efficiency of the government’s decision making system and the demands that there should be less interference even though shedloads of taxpayers money go into the railways. Such naivety.

We knew all of this already. McNulty did not need his army of consultants to set out these problems. The question is what to do about it, and here  McNulty’s findings exposed the bald truth, although he fails to state it: the rail industry is out of control and there is precious little the government can do about it.  On almost every page, the impotence of the government in the face of a debacle, brought on by its Tory predecessors a decade and a half ago, is all too apparent. The levers to make substantial changes are simply not in the government’s hands and cannot be without revolution, not evolution.

This was well demonstrated in the days running up to the publication of the report when there were a series of leakettes, with added spin, in newspapers favourable to the Tories (the Libdems and their promises to reduce fares and reopen lines seem to be an irrelevance in all this). So fares were going to go up in the off-peak or maybe  in the peak – it was all a bit confusing – but changes were afoot. The unions were going to get well and truly bashed, and Bob Crow better watch out (actually dear old Bob sounded so sensible on the Today programme that Philip Hammond was actually nice about him in subsequent interviews). At one point, it seemed that ticket offices would be closed, too.

However, the details were ducked. And the reason is simple. When you look at such changes, it is clear that either the government does not have the power to mandate these changes or, if it does, the savings will not go to taxpayers or passengers, but to the private companies. Take fares. A fares review is indeed a welcome move. But under the franchising system, it would be impossible to impose massive changes, with risks of reducing revenue, without paying compensation to the operators who might, by then, have 15 year contracts. You can bet that the operators will take the most pessimistic view possible of any changes and as incumbents they will be under no obligation to compromise.

Giving operators more freedom is another theme. Essentially this would involve giving them more control of the timetable. Adrian Shooter, the boss of Chiltern Railways explained the present situation to me well by saying that at times of recession, BR would take out trains in order to save money but he cannot through fear of breaking his contract.  Indeed, McNulty suggests there are many off-peak trains with poor loadings. But, again, how can the franchises bid on this basis? Surely any savings will go to them, which is fine, but it does not address the industry’s overspend. It would be nigh on impossible to force them to pass such savings back to the Department and, of course, if the contract insisted on that, they would not bother cutting back.

Or take renegotiating staff contracts. For a start, there is as much chance of persuading ASLEF to accept a pay cut for its members as there is of seeing a flight of hippopotamuses take to the air. But again, even if savings were made, it would take an awful long time for either passengers or taxpayers to benefit because initially it would be the franchisees who would make the savings. The same goes for closing ticket offices or even lines. It is precisely because the opportunity for savings is so diffuse that the industry’s costs have soared. There is no controlling mechanism.

Actually, line closures have been ruled out, despite all those dark hints in the early McNulty process, with suggestions that if savings could not be found, closures were inevitable. That’s all been stamped on by the politicians. In the  first slide of his presentation, McNulty stressed there would be no suggestion of closures and clearly that suggests he was under orders to drop the idea as politically too contentious. McNulty’s report has been through the civil service grinder and that is why, as the Julian Glover in the Guardian said, it is ‘reassuringly dull’.

I will stray, briefly, away from transport but there is a wider message beyond all this which needs stressing. The neo-liberal agenda of privatisation, outsourcing, obscure financing arrangements and complex contracts, which is so necessary to feed the plethora of consultants, lawyers and bankers in the City has failed miserably in the rail industry. That much is made clear by McNulty who, analysing the objectives of privatisation, says ‘there is quite some distance to go before these objectives [of privatisation] are fully achieved.

McNulty indulges in all sorts of contortions to avoid the obvious truth. Much of the rise in costs is the result of the way the industry was fragmented for privatisation and can only be reduced by reversing that process. No end of injunctions asking for stakeholders to work together will ever work. Tim O’Toole, the boss of FirstGroup who is now to chair the rail delivery group is a fine fellow but he will not be able to shift his fellow members away from their legal requirement to do their best in the first instance for their shareholders. That’s capitalism, folks. McNulty inhabits the world where a public sector ethos means Iain Coucher pocketing £1.2m for a risk-free job and therefore he will never understand why, at times, it might not be best to rely on the private sector.

Yet, we are not only failing to learn these lessons, but the government is about to apply the same methods to an industry that is even more important than the railways, the health service.  So not only will the dysfunctional nature of the railways remain, but we face the same type of mess in the health service because of the prevailing ideology. The lessons of the PPP on the Underground, Railtrack, countless PFI deals, numerous defunct light rail schemes, the Channel Tunnel Rail Link (Mark One), and, of course, many other failed projects which were all characterised by complexity and an overemphasis on the benefits of the private sector over the public realm, have not been learnt.

Don’t get me wrong here. I’m not even talking of nationalisation. That’s a separate issue and let’s keep out of it for now. But McNulty’s idea that we should have a pilot area for vertical integration, which means breaking up Network Rail, with the possibility too of private operation of the infrastructure, is a recipe for more fragmentation, not less. Vertical integration of a small part of the network would seem to be the worst of all worlds, creating more interfaces, complex legal contract and safety requirements. No one needs pilots to show that vertical integration works best. It’s the way that railways have been run since time immemorial and because the railway is an integrated system, whose parts are wholly dependent on each other. As Will Hutton in The Observer said, no one would think of breaking up ’the armed services or the National Trust…to compete with former parts of the integrated whole’. (Indeed, I have often wondered that if privatisation is such a good idea, how come the army and the police have never been hived off?).

The old canard that it is difficult to operate a complex route like the West Coast through vertical operation ignores history. The LMS did it before the war and it could be done again, especially now we have  a regulator. So here’s a brave suggestion. The big three Intercity franchises – East Coast, West Coast and Great Western are all coming up for renewal. Why not simply run all of them as integrated operations and see how much money would be saved.

Instead, the changes suggested by McNulty are superficial and will require far more co-operation from the private sector than it is ever likely to offer. All this talk of aligning incentives and better co-operation has been heard countless times before. Given the present framework is, with a few changes, remaining, the government will not have the levers at its disposal to make the changes to save money. The railways are clearly going to continue to cost far more than they ought to and there is nothing that the government can do about it.

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