A Railway For the Common Good - by The Rail Reform Group

 

The Rail Reform Group is a group of senior rail professionals with decades of experience in managing UK railways. It is totally independent from any corporate body and receives no external funding 

Introduction and summary

1.      What do we want from our railways?

2.      Examples within the UK and across Europe

3.      Moving on from Franchising

4.      Gradually re-integrate infrastructure and operations

5.      A new business model

6.      Ensuring clear accountability

7.      Greater commercial freedom

8.      Financing the railway company

9.      A central ‘guiding mind’? A UK Rail Group

10.  Conclusion

 

Annex 1 Mutual Businesses

Annex 2: Glas Cymru

  Introduction and summary

There is a widespread feeling that Britain’s railways need a change of direction which builds on some of the positive achievements of the last 25 years, whilst moving on from a structure that is no longer fit for purpose. We need a new approach to how railways in the UK are managed, based on greater integration of railway operations and infrastructure and a wider social purpose than purely shareholder profit.

The reality is that modern-day railway technology has moved, in practice, back towards much stronger integration between train operations and infrastructure, yet this is not yet fully reflected in how the railways are run. Similarly, the need for long-term stability and growth to meet the potential of significant modal shift (to help meet a range of pressures, not least Climate Change), has become greater.

We use the example of the North of England, particularly the ‘metropolitan belt’ from the Mersey to the Humber – as a prototype for a ‘railway for the common good’ which is part of the economic and social fabric of the North; big enough to achieve economies of scale but focussed on key regional markets which have suffered historic neglect but are experiencing (in part) regeneration.  

We consider it essential that Network Rail’s regional structure should be aligned with that of this new railway company, covering the North of England as a whole (i.e. not the current traditional structure of east and west regions, based on the East and West Coast Main Lines, which is London-centric and deeply unhelpful to the North of England, with split responsibilities and lack of focus on the needs of the North as a whole). We advocate a Network Rail (North) which takes on most functions currently provided across the North by Network Rail’s two regions (LNE and LNW), whilst retaining a smaller ‘system operator’ for critical oversight of the network as a whole.

We argue for a fresh approach that combines a strong degree of commercial freedom and initiative whilst maintaining public sector support and accountability. The key argument is for a regional railway company – Lancashire and Yorkshire Railways - which would be constituted as a mutual business, in which most of the profits generated would be re-invested into the railway. As a mutual business it would be accountable to its Board of Trustees who would be independently selected on the basis of wide-ranging expertise and knowledge of the region and its needs, some by key stakeholders such as TfN, TfGM and similar bodies. Beneath the board, an executive with high-level rail expertise, would run the day-to-day operation.

 It would have a contract to operate for a long-term period (e.g. 30-50 years) with periodic reviews which are aligned with current rail industry Control Periods. It would be very closely aligned (but legally separate) from a re-structured and devolved Network Rail (North) broadly covering the area of the current Northern franchise.

An organic process of gradual integration between infrastructure and operations would start by Network Rail (North) and the railway company working together at board level, with a long-term business plan aligned by control period and train company periodic review objectives. Moreover, a joint culture and ethos would be established, over time, at all levels of the railway to achieve ever-closer integration in how it works. There is considerable scope to look at a range of pragmatic solutions which bring track and train closer together. The point is to ensure that the industry works together collaboratively and creatively, with a clear understanding of responsibilities and a reduction of unhelpful interfaces, which are expensive, inefficient and cause delays in decision making.

Whilst our focus is on the North of England, a similar approach could work in other parts of the UK, including East Anglia, the South-West and East/West Midlands.

1.    What do we want from our railways?

This is a crucial issue and relates to the well-rehearsed question of ‘what is franchising for’? The traditional answer to the latter is to deliver rail services which represent value for money. Yet there is growing recognition that franchising doesn’t offer value for money and adds to costs. There could be arguments that it has delivered some innovation but we believe that innovative ideas and practices can be developed in other ways (see below).

Railways are about much more than getting people and goods from A to B. A key element of public policy should, in the face of growing evidence of a coming climate catastrophe, be to reduce the need to travel and avoid long-distance movement of goods as much as is possible, thus saving on energy consumption. This has major implications for spatial planning, industrial strategy, housing policy, education and a range of other sectors. Conversely connectivity is a critical factor is creating a vibrant, dynamic and self-sustaining economy and society. The key challenge is to reduce the impact of travel but grown connectivity which is a key task that railways can deliver well.

Rail should be a key tool in the sustainable development of the UK, providing an attractive, accessible, efficient and environment-friendly means of transport which can ensure a switch from road to rail, combined with much greater connectivity with benign, active travel, modes (cycling, walking bus/tram) at a local level.

Rail services should be delivered in a way that offers good value for money to the taxpayer, and that implies a strong degree of public accountability – but not necessarily public ownership.

2.    Examples within the UK and across Europe

We have looked at other examples where there is already a degree of vertical integration. Both Northern Ireland Railways (NIR – Translink) and Irish Rail/Iarnród éireann (IE) are fully vertically integrated. The two businesses (both government-owned) have running rights over each other’s tracks.

Most light rail systems in the UK are publicly owned and have varying degrees of vertical integration. The Tyne and Wear Metro took the operation of the trains back into public control with de facto vertical integration in 2017.

In the Basque Country, Euskotren is owned by the state government and is vertically integrated, with a strong degree of commercial freedom. It also operates some feeder bus services. In Denmark, the local ‘private’ railways are local government owned and vertically integrated. Long-established local railways in Switzerland are typically owned by the cantons and integrate operations and infrastructure. Clearly, this is a very well-established arrangement which has stood the test of time and has permitted steady growth on each of the operators’ networks.

However, in the UK context, there is scope for looking at the experience of industries outwith the transport sector which do not have a conventional public or private ownership structure.

It is quite common in the UK for some public utilities to be run as mutuals. A good example is Glas Cymru/Welsh Water (see Annex 2). The UK building society movement was established in the 19th century on mutual principles and many societies have retained that model, though some have de-mutualised to achieve short-term financial gains.

Could a mutual structure work for rail? We believe it could, with a broadly similar structure to Glas Cymru (see Annex 2). Trustees would be appointed by a public body or bodies, e.g. Transport for the North and/or DfT but would represent a range of expertise and experience. Network Rail (North) would have an agreed number of seats on the board. Different models for passenger and employee involvement merit consideration within the overall ‘mutual’ structure.

3.    Moving on from franchising

Current regional franchises in the UK (e.g. Northern, GTR) are too complex; they need to be focussed on clear markets whilst maintaining demonstrable benefits of scale.

Franchising is an inefficient method for developing the rail network; it is expensive both in the competitions to award the franchise, then in their ongoing operation and contract management. It is immensely wasteful of the talent and creativity which goes into unsuccessful franchise bids. It de-motivates staff who are given little or no encouragement to offer long-term commitment to an employer who is likely to change every few years. For passengers, the frequent changes of ownership are often confusing, if they are understood at all. Their needs are often neglected in the pursuit of perverse goals e.g. such as train performance and connectional policy.

For the North of England, we are proposing a single business which covers the core ‘metropolitan belt’ from Merseyside to Humberside (but excluding the self-contained Merseyrail). We are mindful of the importance of the North-East and Cumbria, whose needs require focused attention. One option is to keep those rail services within the proposed structure with strongly devolved management, or create a smaller railway company for Cumbria and the North-east, with possibly a different level of integration, but more locally focussed to their regions.

The proposed structure should include much of the current TransPennine Express (TPE) services as well as those local and regional trains provided by Northern. However, TPE Scottish services may be better transferred to West Coast or – particularly given the development of TPE services to Edinburgh via the East Coast, to an enlarged Cross Country operation. Current ‘core’ TPE services (Merseyside/Manchester to Leeds and East Coast) would form the basis of a ‘premier’ intercity operation which would also include most if not all ‘Northern Connect’ services.

Freight services, provided by existing and new freight operators, would be offered paths on an ‘open access’ basis, based on other operators paying their marginal costs. The development of existing, or additional open access passenger services should be welcomed only providing they add value to the LYR network and the passenger offer.

We suggest that in place of short-term franchises the operator should have a long-term contract (e.g. 30-50 years) with an appropriate public body (this could be DfT or, preferably, an established regional agency such as a combined authority or similar, e.g. Transport for the North).

4.    Gradually re-integrate infrastructure and operations

We strongly support the greater integration of infrastructure and train operations but recognise that full integration would be a major challenge and could expose a regional operator to an unacceptable level of risk. This would arise through the sheer scale of rail infrastructure assets to be held on its balance sheet which could in turn lead to greater HM Treasury involvement in the business.

An effective initial form of integration would be to have a management board which includes Network Rail (North) senior management working collaboratively with the train operations team. At a local level, there is considerable scope for re-balancing responsibilities e.g. for station development, and the transfer of ‘operations’ into the train operator with then taking responsibility for the signalling and control staff whilst Network Rail retains its responsibilities for track and signalling equipment.

There is great scope to develop the existing infrastructure to meet the demands of a growing railway, as well as places where new infrastructure will be needed. With much greater co-operation between Network Rail (North) and the railway company, with long-term stability through 30-50 year contracts, there would be a much more positive environment for investment and borrowing and for more cost effective specification, design and delivery of projects.

Much can be done to bring greater simplicity and fewer interfaces to railway operations. In the ‘Chiltern model’, Network Rail continues to own the infrastructure, and undertakes the day-to-day signalling and maintenance functions. The train operator takes responsibility for specifying, procuring, funding and project-managing all enhancements, with appropriate legal agreements and protections both ways. Chiltern’s  experience shows that this can result in upgrades, etc, that are far more fit for purpose, more cost-effective in both design and delivery, and that much more account is taken of operational and passenger needs during the actual work.

5.    A new business model

Our vision is for a new, vertically-integrated regional railway business – Lancashire and Yorkshire Railways (LYR) – which is owned and controlled for the benefit of the economy and the people of the North of England – not by the state and not by corporate private interests, often based abroad.

We want to see a new kind of railway company which is there for the long term, with a progressive business culture which is inclusive, diverse and entrepreneurial. We advocate a mutual railway company which is part of the wider fabric of society which builds positive commercial relationships with business and education across the region it serves.

Most profits made from providing the service (broadly specified by the public sector, through DfT or Transport for the North) would be recycled back into the business, not primarily into shareholder dividends, though there could, and should, be scope for employee and passenger investment.

This would be on a recognition that neither the central state nor the private sector is appropriate to provide all of the required long-term stability, value for money, wider social value and passenger benefit. To do this suggests that there are potential solutions  with several ‘mutual’ models, including the long-established co-operative model of offering a ‘dividend’ to shareholders.

We consider that the most appropriate model would be for a ‘mutual’, based on the North’s strong co-operative and mutual traditions. The precise structure of the business requires detailed discussion but several options are available that meet the requirements of UK and EU law. We note that Vintage Trains is run as a community benefit society, which is one possible approach.

This would not be a dull, un-enterprising ‘utility’ but a dynamic outward-looking business which brings in talented people from across the North with a real passion for their jobs – at all levels.

6.    Ensuring clear accountability

A mutual railway company would follow in a long and successful tradition of ethical business. The closest to our vision in the UK is Glas Cymru, the Welsh water utility which is a mutual, accountable to the Welsh Government (see Annex 2).

A social enterprise railway, whatever its precise legal structure, should have clear public accountability. We propose what is in effect an alliance between the railway company and a public body which would oversee (but not own) its operations.

We suggest  a two-tier board structure based on a) a management Board of Trustees comprising key individuals selected for their wider skills, with Network Rail and Transport for the North nominees as well as passenger and employee benefits and other individuals with proven expertise in a wide range of fields e.g. business, academia, local government, voluntary sector etc.). Business plans would be approved by the Board prior to incorporation in the Periodic Review process. Below that, we propose an executive board which actually runs the railway, with a chief executive and directors covering a range of operational departments including train planning, HR, finance, commercial and safety/compliance. Network Rail (North) would have a seat on the executive board.

Within the structure there will be opportunities for employees and users to have a stake in the company, through a share issue. In addition, a separate fund could be created into which some profits are directed, which would be used to give all employees an annual bonus depending on how well the business has performed during the year. This should replace the practice of only offering (often large) bonuses for senior managers and be linked to salaries, which should be transparent, with the highest salary no more than 5 times the lowest.

We strongly support the ‘community rail’ movement and many of us in The Rail Reform Group have been closely involved in its development. We reject the idea that ‘community rail’ is only relevant to more rural parts of the network and we would like to see every part of the North’s rail network covered by a CRP with its own specific objectives based on the Government’s Community Rail Development Strategy, developing new approaches which link rail into the communities it serves.

7.    Greater commercial freedom

Future rail operations should combine greater commercial freedom and long-term stability with clear accountability to regional institutions (and national government in the case of inter-city services). For the North of England, the most appropriate body to partner with should be Transport for the North, but we want to see positive relationships with the combined authorities/elected mayors, and also local enterprise partnerships.

Instead of being tied down to rigid franchise agreements on service levels, the new company should work to outcome-based objectives and have freedom to provide new services on top of the core requirement, as well as new facilities. It should be able to purchase new rolling stock directly, if there is a business case for it, and/or if external finance can be found (see below).  Having a long-term investment horizon would be of enormous help in achieving this. Examples include the Castlefield Corridor widening in Manchester, route electrification, re-opening Skipton – Colne, Woodhead route and new stations where appropriate. In some cases, private sector funding may be possible, e.g. new stations provided through developer contributions.

8.    Financing the railway company

There are several options for financing a mutually-run railway. We recognise that many passenger services across the North require a high level of public support, and will continue to do so. This will ultimately come from the taxpayer, through devolved funding from the Treasury to Transport for the North (unless there is further devolution of powers to regional bodies which include tax-raising powers, similar to other European states).

It would be important to ensure that the public sector contribution to the railway (currently via the franchise agreement and Grants to Network Rail) is no less than it is at present. If our approach of reducing interfaces, long-term stability and targeted investment is correct, the long-term requirement from the public purse will steadily reduce as costs come down and ridership grows. So a combination of investment, growth, reduction in interfaces and recycling profit back into the business will progressively reduce the call in subsidy. Whilst public shares could be a further help in strengthening the company’s finance, this will not be the main source of finance; its main value is to develop a sense of ‘ownership’ by employees and users. Further revenue can be generated through property income and appropriate diversification.

9.     A central ‘guiding mind’? A UK Rail Group

We propose a different way of developing the national railway network, based on collaboration and consensus, rather than central diktat. Clearly there is a need for common standards and procedures, and the model of bodies such as the Railway Safety and Standards Board (RSSB) and Rail Delivery Group (RDG),e.g. on the revenue/marketing side, shows that the industry is very capable of working together positively and collaboratively. We recognise there is a need for greater co-ordination, through a ‘guiding mind’, but reject the idea of a highly centralised and centrally-specified approach.

At the regional level, the proposed railway company should provide the single ‘guiding mind’ through its Management Board (which would include Network Rail North) which develops the network. At UK level, there should continue to be pan-industry structures with representation from the rail industry and from national and regional government and promoting UK-wide standards and best practice, without ‘micro-managing’. We support the much greater devolution of Network Rail to a small number of regions but reject the current unhelpful division of the North into West and East. There is a need for a single Northern region, whilst retaining a national system operator based on the existing Network Rail which would ensure timetable co-ordination (not production) of the operators and national infrastructure standards. The ‘East Coast Overlay’ approach would solve the issues of the operation of this key trunk route, focussing on its key tasks without it being wrapped up with the surrounding local railway (similarly with the West Coast).

We propose the creation of a new body - ‘UK Rail Group’ to provide national leadership. While it will need to deliver Government’s broad strategies and purpose for the railway, we suggest a more collaborative rather than top-down way of working. Responsibilities of the Group could include a) promoting and supporting research into all aspects of railways b) ensuring synergies and best use of other transport modes c) encouraging the sharing of best practice between all parts of the railway industry, d) lobbying for rail and promoting its positive role in society e) promoting accessibility and connectivity f) working with other transport operators/agencies to promote integrated transport.

Conclusion

We need a new kind of railway to meet the needs of the UK, and the North in particular, not to satisfy ideological aspirations. In the North of England rail has for long been starved of investment in rail and other ‘public infrastructure’ coupled with the current start-stop in rail electrification projects (e.g. TransPennine). The increasing urgency of the climate change crisis offers real a great opportunity if it is able to grasp it. This includes network development, electrification and other low carbon modes. Our proposal for a Lancashire and Yorkshire Railway, working collaboratively with a devolved Network Rail (North) and Transport for the North, will provide the solid base for the long-term development of railways in the North of England.

Annex 1 Mutual Businesses

A mutual has been defined as “An.....organisation (which is often, but not always, a company or business) based on the principle of mutuality. Unlike a true cooperative, members usually do not contribute to the capital of the company by direct investment, but derive their right to profits and votes through their customer relationship. A mutual organization or society is often simply referred to as a mutual. A mutual exists with the purpose of raising funds from its membership or customers (collectively called its members), which can then be used to provide common services to all members of the organization or society. A mutual is therefore owned by, and run for the benefit of, its members - it has no external shareholders to pay in the form of dividends, and as such does not usually seek to maximize and make large profits or capital gains. Mutuals exist for the members to benefit from the services they provide and often do not pay income tax. Profits made will usually be re-invested in the mutual for the benefit of the members, although some profit may also be necessary in the case of mutuals for internal financing to sustain or grow the organization, and to make sure it remains safe and secure”. (Wikipedia)

Annex 2: Glas Cymru

Glas Cymru was formed in 2000 in the wake of financial difficulties besetting the then owner. In a report to the Northern Ireland Assembly (2014), Des McKibbin commented: “Glas Cymru was formed  in 2000 for the sole purpose of acquiring and then owning Welsh Water. Glas operates under the standard governance framework required under compay law. It is headed by a Board of Directors which is responsible for the strategic direction of the company and for reviewing operational and financial performance. The Board currently comprises 3 Executive Directors and 7 Non–Executive Directors (including the Chairman of the Board). All the directors of Glas are also directors of Welsh Water, and vice versa. The business model adopted by Glas or Welsh Water makes it markedly different from the investor owned equity financed water companies in England. As a company limited by guarantee Welsh Water does not have any shareholders and is instead focused on providing the best possible service at the lowest possible price for the benefit of its consumers. The role of shareholders is fulfilled by its members, who are experienced unpaid individuals–and not representatives of any interest groups. The main advantage of the model is the ability of Welsh Water to access cheap finance. For instance, in 2006, D?r Cymru issued a 50 year bond at a real interest rate of just 1.4%. This is significant due to the fact that servicing debt is one of the biggest costs for water and sewage companies, accounting for one third of the average household bill across the sector.”