Rail 778: Network Rail debacle could be tragic for railways

It is impossible to exaggerate the extent to which the Network Rail fiasco is a setback for the rail industry. All the ducks were in perfect alignment with the industry getting support from all the main political parties and blessed with more money than Croesus. But somehow the gun misfired and the ducks are now wandering off with desperate Network Rail managers trying to catch them.

Everyone in the industry knew this was about to happen. For months it has been known that the electrification was burning up millions of pounds faster than an incinerator but Network Rail failed to come clean, blustering about rescheduling and ‘cost enhancements’. However, few realised it was quite this bad. The long radio silence from Network Rail has rebounded on its executives. Putting all the bad news into one statement meant that every serious newspaper and news outlet led on the story for a day and ministers had to come to the despatch box to explain what was going on.

Before assessing the impact, let’s try to ascertain the causes of Network Rail’s failings, From my conversations with various insiders, the debacle was entirely predictable and, with better and braver management and more understanding of the rail industry, utterly preventable. The problems stretch back to the early days of Control Period 4 (CP4, the five year investment plan covering 2009 – 14). The company, under pressure from the Regulator (now called the Office of Rail and Road) to reduce costs cut back on too many staff and was therefore, throughout the period, playing catch up and indeed left a number of projects unifinished by the end of the period. In the lengthy negotiating process for CP5 (2014/9), the Regulator was intent on ensuring that all the unfinished work in CP4 was completed early on in the next period.

Network Rail was reluctant to accept this, realising it would put extra pressure on the company. However, holding out would have meant a long and uncertain appeal process that would have delayed work and consequently the company reluctantly accept the £38 billion settlement for the five year period to carry out the work set out by the government in its specification (known as HLOS in the trade).

An aside here. First, £38bn is an awful lot of money and even though much of it is to be on normal maintenance and renewal, it does include some £12bn of enhancement, a big programme. Secondly, one source explained to me that he once asked a senior Network Rail manager, who was complaining about the parsimonious nature of the settlement, how much did they need: £40 bn – pursed lips ; £45 bn – mmm, maybe; £50 bn – yes, that might be enough. This shows that Network Rail was rather like a five year old let loose in a sweet shop with no understanding of its limitations.

So Network Rail started in 2014 in a bad place. The programme was ‘very ambitious and optimistic’ according to a senior manager. And the pressures grew. Passenger numbers are continuing to increase at a rate that historically is very high, well above the growth rate in the economy. (My hunch is that this is explained by the fact that the beneficiaries of the extra income in the economy tend to be ABC1s, the haves rather than the have nots, and they have a much greater propensity to use the rail network).

The supply chain, too, proved inadequate. Electification, in particular, hit numerous difficulties. Quite simply the work had not been set out in sufficient detail and costs started to soar because the scope of the work kept on increasing. Moreover, the new system being used to electrify lines had not been used in the UK before and the approval process is only now being finalised.

It is not only electrification which is causing problems. Other schemes are also delayed and over budget. The official explanation on budgets is to point out, correctly, that this time the Regulator decided not to put precise costs on schemes that had not started but, instead, to put them through – another acronym – a process known ECAM (Enhancement Cost Adjustment Mechanism). This little beastie is supposed to allow for rises in costs as schemes become more developed but, again according to inside sources, the costs have risen more than expected. Hmmm, I am unconvinced by Network Rail’s ability to manage costs. The company has been in existence for 20 years now (including its time as Railtrack) and its basic task is, euh, project management. Yet we keep hearing these complaints about being unable to control costs, let alone bring them down as happens in other industries. There is a fundamental flaw here.

Then there are the personalities. The appointment of Richard Parry-Jones as chairman was a bad mistake. He had no experience of the rail industry – he was Autocar magazine man of the year in 1997 and is basically a car man – and worse did not understand that his role was political, to glad hand the politicians and promote the company. It is difficult to trace anything he did and indeed, unlike all the past chairmen, I never met him (or worse I can’t remember if I did!). He did not see eye to eye with the David Higgins, the former chief executive and had, according to another insider (sorry but no one wants to speak on the record which is hardly surprising) ‘no political clout whatsoever’.

Moreover, there has been something of a brain drain. HS2 has lured away key players such as Higgins and Simon Kirby, who was in charge of major projects. Robin Gisby, the most experienced railway manager on the board has also recently left leaving the board terribly short of railway experience.

Finally, the chief executive Mark Carne has been pushing for the development of the digital railway at a rate far faster than previously. Ideally he would like to see the roll out of in cab signalling within, say, around 15 years rather than the projectedf 35. While there is only a small team looking at this plan, it does seem to have taken energy away from the exeuctive and put focus on what for most people in the industry looks like an impossible project.

Don’t either, underestimate the role that the effective nationalisation of Network Rail has played in this debacle. No longer can NR simply put costs onto the endlessly flexible credit card. With a debt that now stands at £38bn, decisions now have to go to the Treasury. I suspect that if Network Rail had not been redesignated as a nationalised industry, then the extent of the debacle would not have emerged so soon into the new Control Period.

The political fall out is enormous. The promises about the rail industry have become one of the quickest ever broken manifesto commitments. The Tory manifesto at the election they did not really expect to win said that ‘electrification is already underway across the North, the Midlands and South Wales’. Well not any more it is not with, it seems, only the original Great Western scheme emerging unscathed – though plans to go deeper into South Wales to reach Swansea have been ‘paused’ (a word which like ‘reshaped’ which I mentioned in the last issue one of these Orwellian Newspeak terms).

So in just a few short weeks the Northern Powerhouse has been turned into the Northern Powercut (as Ed Cox of the Institute of Public Policy Research North put it). It is the politics that are interesting here, or rather the lack of them. The choice of what electrifciation schemes to ‘pause’ seems to have been done without any understanding of the politics which is bizarre given Netwrok Rail’s closer association with government. Sure, it would have been difficult to ‘pause’ Great Western which is well underway, but to delay both South Wales, as well as the two schemes affecting the north, Midland Main Line and Transpennine. This is a big blow to George ‘ooop the North’ Osborne in his campaign to try to create a Northern Powerhouse Tory base.

As I said at the beginning, the consequences of this debacle are far-reaching and actually quite frightening. In my next column, when more of the dust has settled, I will be setting out some of the possible implications and in particular looking at where the cuts are going to be made and how this affects the immediate future of the railways. One hint: devolution is not necessarily the easy answer. Nor is, necessarily, Sir Peter Hendy.


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