Which way now? Britain’s railways at the crossroads

This post is based on a lecture I gave to the Retired Railway Officers Society in January 2016. It was published in the March 2016 edition of Rail Review. As such this pre-dated both the Shaw Report publication and ORR's decision on Open Access on the East Coast Main Line. Also, various industrial disputes around the country have shone a light on old fashioned methods of operation. I hope my arguments remain valid despite all these developments.

Introduction

Principal changes to GB rail organisational structure from 1994 to 2015
Any review of the successes and failures of the last twenty years or so must start with a brief recap of what those changes were. I guess we can all just about remember that back in the early 1990s the European economic and political climate strongly favoured vertical separation of infrastructure and operations. The drive was to create conditions enabling more competition within countries and across national borders within the European Union.

John Welsby presided over a unified, nationalised organisation that owned all the assets you need to run a railway: trains, stations and infrastructure. Yes, there were business units shaped around the different markets served, but there was still a single line of command right to the top of the organisation, and hence directly to government.

As we all know, the British public has a love-hate relationship with its railways. With strong trade unions, what was seen as generally poor levels of customer service and reliability, and what seemed like bottomless demands for more money to operate, maintain and improve the network, the British government was casting around for a mechanism to get "the railway problem" off its hands once and for all.

The result of this was the Railways Act of 1993. I’m sure I don’t need to dwell with this audience on the structural changes put in place as a consequence, but in summary this separated out the twin key roles of infrastructure management and train operation. A single national infrastructure provider was created and a multiplicity of passenger and freight operating companies established, with the freight companies sold outright and the passenger businesses franchised.

Early progress
In the event, the process of selling the franchises went extremely well, and Railtrack - which had originally been intended to be a public sector company - was privatised. All appeared good for a time, but gradually cracks began to show. Railtrack struggled to successfully deliver on its outsourced maintenance and renewals activities, and also overreached itself on the West Coast Route Modernisation programme. A series of major train accidents focused attention on the mounting deficiencies in the way that the network was being run. Eventually the government of the day took the decision to push Railtrack into Administration, and its successor Network Rail was established on a not-for-profit basis.

Simplified GB rail industry structure
By 2006 the industry had regained some stability with the implementation of the 2005 Railways Act, which abolished the Strategic Rail Authority and moved its work into the Department for Transport. Structurally it has since remained largely unchanged, give or take the creation of the Rail Delivery Group in response to the McNulty Report, and so has effectively lasted ten years already. Quite a long time in railway organisational terms!

The passenger companies can be described as "asset light"; in other words they don't own the trains, they make little investment in infrastructure, and they are there to make a profit on the difference between revenue and costs over a defined period of time. In the passenger game, the competition has up until now been largely for the market rather than in the market.

Success stories of the last 20 years
And franchising has been a highly competitive business. Margins which were typically 5 to 7% twenty years ago are now down to an average of 2%. Many of today's franchises are struggling to make a profit after paying the agreed premium or receiving the agreed subsidy from the government.

But it's fair to say that much of the last 20 years has been a railway success story. Train ridership, admittedly helped by road congestion and high fuel costs, has more than doubled. There has been major investment in increasing capacity on the network and the majority of trains are now better maintained and more reliable than ever. The passenger experience, as seen through modernised stations, new or refurbished trains, and customer service, has been transformed and customer satisfaction is at relatively high levels. Punctuality, whilst not as good as desired, is generally much better than in the last days of British Rail. Whilst fares vary hugely according to time of day and week, class of travel, degree of flexibility of ticket, and by Operator, the average fare paid per mile travelled has increased slower than inflation, so many passengers are getting very good deals.

Freight companies have survived the collapse of King Coal and have aggressively moved into intermodal, as it has grown. They all compete effectively with road hauliers and all are just about making money in the process, although margins tend to be tight.

Operational safety has been radically improved, with the last passenger fatality in a rail accident occurring over nine years ago, and the British network now rated as the safest in Europe. Occupational health and safety has also improved, although perhaps not as much as many people feel should be the case.

Railway finances today
So there is much to be pleased about, in fact perhaps even proud of, that's been accomplished over the last 20 years. But despite the booming revenues and soaring demand, railway finances remain a persistently difficult issue for government. So let's take a look at the current high-level financial position of the industry.

This chart (available on request) shows the principal money flows in the industry. Turnover has more than doubled in the last 10 years or so, and the proportion of funding coming from the government has reduced from roundly 60% to roundly 40% in that time. In total however, and in cash terms, Britain's railways are costing the government roughly the same today - nearly four billion pounds a year - as they did 20 years ago. Why is this?

Why is the cost base so high?
Well, a big part of the problem is that the industry's cost base remains stubbornly high. Trade unions continue to hold a dominant position in the industry, with very high unit labour costs and inflexible working practices still rife. These remain difficult to tackle in a political environment where the government and its public continues to be unwilling to suffer the disruption associated with a significant strike. An early challenge to the Conservative government elected last year has been a dispute on the London Underground over the implementation of all-night services on Fridays and Saturdays. Essentially the dispute boils down to sheer muscle power demanding more money or better conditions for no more work. Whilst this dispute is not yet resolved, and would have been winnable at the cost of a longer strike, it is clear that a decision has been taken for political reasons to duck the issue to avoid a major confrontation which would be unpopular. All the time this approach continues, the high level of labour unit cost will not be successfully tackled. Given that we are in the first year of a new majority right-of-centre government and in the last year of a popular right-of-centre London Mayor, who was elected on a platform to sort out the Tube unions, and when tube drivers are paid twice as much as nurses, teachers and even bus drivers for a much easier job, it is astonishing that this issue is not being tackled right now.

A bi-product of this lack of political steel to tackle over-protective working conditions is that franchisees are increasingly not prepared to rock the boat. There are great savings potentially to be made from labour efficiencies on the railway, but generally they cannot be unlocked without confrontation, the costs of which a franchisee cannot bear without going bust. So we have seen recently that, even when franchises are re-tendered, the existing inefficiencies are simply ‘baked in’ as none of the bidders are prepared to tackle the status quo.

The other big part of the problem is that our industry also suffers from very high levels of construction cost, both for renewals activities and for enhancements. Partly this arises as a consequence of having to work on an open and increasingly busy network, which forces work to be carried out at night and at weekends with expensive compensation to operators for loss of business. But it is also a manifestation of a stop -go cycle of investment, and an under-developed supply chain which struggles to respond efficiently to Network Rail's requirements. Resignalling and electrification costs, in particular, are way in excess of what they once were, and now ought to be, if we had a mature market with a smoothed demand profile and stable suppliers.

You can see from the chart that Network Rail's funding comes mainly from two sources: currently ￡2.4 billion a year from the operators in the form of access charges - this broadly covers the cost of operating, maintaining and renewing the network - and ￡3.7 billion a year of network grant - this is the cost of enhancing the infrastructure.

You can also see from the chart that receipts from government by train Operators in the form of subsidy broadly equate to income to government in the form of premium payments. So we can conclude that the industry is today broadly covering the total cost of day-to-day operation, maintenance and renewal but is not yet able to support the costs of developing the network to increase its capability and capacity.

Two ways to reduce unit costs

There are two things in particular that I would draw from this. Firstly, there is a pressing need, either to improve labour productivity in the industry, and/or to reduce the net cost of each unit of labour. Secondly, there is a need to develop a longer term infrastructure development plan phased over a number of years, and to develop the supply chain such that it can deliver these enhancements more efficiently.

A new political imperative for railways

On the wider front, this data highlights that the enormous financial commitment of this government to rail enhancement expenditure is really quite extraordinary: transport, and rail transport in particular, has risen up the political agenda steadily over the last ten years or so, and this seems set to continue with the creation late last year of the Infrastructure Commission led by Lord Adonis.

So in addition to large scale rail transport schemes for London and the South East – Crossrail and Thameslink now coming towards fruition, and Crossrail 2 being developed with a clear political mandate – and with large fleets of new Inter City trains on order for both East Coast and Great Western main lines increasing capacity as well as making the offer to potential passengers more attractive than ever before, and with HS2 moving full speed ahead to improve capacity and connectivity on the main North-South arteries, we now have, in George Osborne, a Chancellor pushing significant investment through his idea of a Northern Powerhouse.

We can’t be sure yet how this concept will translate into spades in the ground, but the early signs of facilitating significant growth in rail travel across the north have been made very clear with the recent award of new franchises for both Northern and Trans Pennine Express, both which come with commitments to new trains and substantially larger fleets with much improved services, across the whole of the northern half of England.

This commitment from the Treasury to investing widely in rail growth during a time of austerity is really all the more remarkable when you consider that, from the politician’s perspective, we haven’t really managed to get our own house in order: PPM and passenger satisfaction are both currently on a downward trajectory, and we haven’t tackled the high cost base of the industry. My sister worked in the NHS all her life, and for the last few years they have been under the most immense pressure to save money in every direction. Do we see any of this pressure in our railways today? No we don’t, not at all if we’re frank.

Some things that have not gone as well

Now let’s take a look at some of the main areas where I would argue that the industry has not made as much progress at is should have done over the last 20 years, and ask ourselves why that might be so. There are four areas I’d like to briefly cover: Network Rail, Open Access, retailing, fares and ticketing, and finally, stations, before going on to propose some possible ways forward.

Network Rail – the 500lb gorilla

So first I want to take a look at how Network Rail is currently set up to achieve its goals. During 2014 Network Rail was reclassified so that is no longer a private sector company and is now effectively a nationalised infrastructure provider. This change was driven by the UK Statistics Authority, which considered that Network Rail’s huge debt mountain of ￡35bn - and increasing steadily each year - was in reality underwritten by the Treasury. This meant that it could no longer be considered to be “off balance sheet” and so ought to be brought back onto the government’s books. At the time this was presented as merely a change in accounting convention, but in reality it has far reaching implications for the whole industry.

Network Rail receives its income in five yearly settlements determined by the rail regulator, which has allowed it to plan effectively over a five year period. This arrangement of five yearly Control Periods is enshrined in law, and so ought to be sacrosanct without further primary legislation. However, with the Treasury looking to drastically reduce net government expenditure as part of getting the public sector debt under control, this is now coming under threat. So instead of having a secure and longer term framework for enhancement investment it rather looks as if it could become more short term and variable.

Making matters worse is the fact that Network Rail is a large monolithic beast and has insufficient incentives to encourage it to become more efficient and customer focused. Much as people might have loathed Railtrack, it did have shareholders who felt the pain and were able to influence its management. When Network Rail was operated as a Company Limited by Guarantee, between 2002 and 2014, it had neither the discipline of the market, nor control by government. In effect we had the worst of both worlds, what I have characterised as “the original 500 pound gorilla”. In other words, it sits exactly where it wants!

Now that Network Rail has effectively been renationalised, by having its debt reclassified onto the public books, we are seeing major changes to its governance. Out have gone the fifty or so Public Members, supposedly there to hold management to account, but in effect toothless. In has come the government’s special director on the board, and a sponsor team for the organisation sitting inside the Department for Transport.

In this environment there is less and less chance of a stable long term enhancement plan being created and adhered to over a period of five or ten years.

Open access – institutional conflict

The second feature of the post-1994 landscape that I want to examine is Open Access. The architects of the ‘94 structure wanted free market competition to encourage innovation, to challenge the status quo, and to drive consumer choice. So a key feature of the ‘93 Railways Act was the provision for open access operators to enter the system and challenge franchisees in open competition. The track access regulatory machinery was set up in a complex way to facilitate this.

In practice, genuine open access competition has so far been limited. There are currently just two free-market Operators using the open access provisions, Hull Trains and Grand Central. Both operate on the East Coast Main Line and compete head on with the franchisee. Services started in 2002 and have gradually grown so that today they provide over one sixth of all the long distance services to and from King’s Cross. They have moved from being unprofitable in the early years to being profitable today, and have plans for further expansion. Last year Grand Central was awarded rights to run an entirely new group of services from Blackpool into London using the West Coast route, bringing open competition to another of our main lines.

These open access operators have undoubtedly been successful, and by providing new destinations and enhanced services to others, they’ve introduced more choice and increased the attractiveness of rail services. Passengers like them – there are very high levels of satisfaction recorded by the independent monitor - and they have definitely driven fares lower in areas where they compete directly with the franchisee. So what’s not to like?
There are perhaps three problem areas. The first is that they aren’t competing on a level playing field. By only paying variable access charges and being able to undercut inter-available fares at key stations such as Doncaster and York, they are able to effectively cherry pick profitable parts of the incumbent franchisee’s business. Nothing wrong with this as such, if we believe in a free market, except that the franchisee’s business depends on the forward revenue projections made at the time of the bid and on which the premium line is based. So with some volume pinched, and yields squeezed, the franchise can move downhill easily. This problem could be fixed by restructuring the access charges regime, which is under review ahead of the next five-yearly control period starting in 2019, and by tweaking the regulatory regime for fares.

The second problem is the financial consequence to the government. The last East Coast franchisee estimated that open access was costing something in the region of ￡30m a year off the premium; this is money that is lost to government for ever and recurs each year. But the premia paid by those franchises where revenues exceed costs helps to cross-subsidise the bits of the network where the reverse applies; so a shortfall in receipts from East Coast can cause less funding to be available to support rural services in other parts of the country.

Worse than this, and the third problem area, is that when government wants to invest to improve the capability of the route, as it has done in the last control period and is continuing to do in the current one, it has no guarantee that the benefits of the additional capacity and capability it is buying will be captured by its franchisee, and thereby recovered to pay for the investment made. This makes it difficult for the government to specify and fund infrastructure capability upgrades.

Ossification of retailing, fares and ticketing

The third topic in my “what hasn’t gone so well” list is retailing, fares and ticketing. The 1994 organisational model for this essentially attempted to preserve the network benefits which were seen at that time to be most important for consumer protection.

Those main provisions, as I see them, are
? that you should be able to use the GB rail system as a single network, and buy a ticket from any station to any other station
? that the main ticket types would remain and be inter-available between Operators with a settlement system remaining in place
? that retailers should retail tickets impartially between Operators
? that fares setting is determined by identification of a Lead Operator for each flow
? that existing concessionary travel provisions, including the five Railcards established at that time, should be retained and protected
? that key fares should be regulated with fares control exercised by the government; for Inter City type journeys the regulated fare was the Off Peak or Super Off Peak Return; for others it was what we now call the Anytime fare. In all cases, season ticket prices were regulated
? and finally, that station ticket office hours of opening would be protected through Schedule 17 of the Ticketing and Settlement Agreement. This 45-pager lays out the opening and closing times for every ticket office. Tellingly, this Schedule was not intended at the time to be used as a regulatory tool – it was part of a large suite of agreements determining how Operators would inter-work to preserve network benefits – but as its provisions came to be tested it became apparent that DfT would exert its leverage to prevent amendments being made it didn’t approve of. In this way ticket office opening hours became subject to overt political interference, and this has acted as a severe constraint on sensible efficiencies from being made, as ticket buying practices have evolved over time.

With the benefit of hindsight we can now see that the collective impact of these provisions has acted to inhibit modernisation, add complexity, and impede innovation in this whole area. In many ways it has led to ossification of how things are done, with a very twentieth century feel about it. Let’s explore a few outcomes.

Outcomes seen

Fares regulation has acted as a sensible brake on free market exploitation of the captive passenger base. But freedom in the non-regulated part of the fares system , coupled with differing policies followed by different franchisees, has led progressively over twenty years to a number of undesirable outcomes: firstly, that season tickets have become under-priced compared to full fare tickets; secondly, that fares are inconsistent between different pairs of stations on the same route due to differing fare setters involved – and this particularly affects Cross Country routes; and thirdly, this has led to a situation where split ticketing creates an opportunity to significantly undercut the intended fare for a journey.

Added to this we have to layer on the impact of TOCs developing ever more sophisticated fares which are specific to their franchises. Advance fares had been successfully introduced by British Rail, based on simplified versions of airline ticketing demand management systems, but one of the big success stories of the last twenty years has been the development of revenue management technology to exploit the growth of internet retailing – something that could barely have been imagined when the current framework was being designed.

So we now have an unwieldy and over-complex fares system, so complicated that really only a handful of experts truly understand it properly and can spot potential pitfalls as further changes are introduced into the mix. Certainly today’s fares system is one that the wider public manifestly does not understand, and nor should it ever be expected to. This results in much negative media coverage, and a rise in consumer protection interest from forces as diverse as “Which?” and the ORR. Perhaps the worst impact though, is that this acts as a disincentive to rail travel at all, with many people giving up on rail when faced with the complexity of buying a ticket and the lack of flexibility provided by affordable fares. How much latent demand is there out there for a simple, turn up and go railway network at an affordable price?

TfL achievements

Looking at ticketing next, we see an even bigger problem as the national rail network has collectively failed to keep up with emerging technology in this area. TfL has led the way in London with the refinement of zonal pricing to keep things simple for customers to understand, and the widespread adoption of Pay As You Go smart card technology, branded as Oyster. More recently it has moved aggressively into Contactless payments via bank card, providing even more accessible ticketing for casual users as well as regular travellers. And just before Christmas it achieved the holy grail of ticketing, the closure of its very last ticket office, at Upton Park.

Frankly, it’s amazing to see the progress that TfL has made on its unified system, compared with the lack of progress in this area on the national rail network, where the client role is split between a multiplicity of organisations, but where, arguably, the Department for Transport has failed its primary role as the directing mind for the industry.

Ticketing dysfunctionality

On the national rail network we have had a number of attempts at smart ticketing around the country, but with no clear vision of what the desired end state situation looks like. We have a selection of Print At Home and bar coding systems running. We have various back office systems driving demand management and smart ticketing, none of which sit as Primary Franchise Assets so are not automatically captured at franchise changeovers. We have no flexible season ticket products available as yet, despite the enormous growth in less-than-five-day-a-week commuting. We have varied designs of ticket vending machines, all of which so far pretty much replicate the National Fares Manual in their presentation of fares to the customer, and thus are absolutely impenetrable to all but the most frequent user. And most astonishing of all, we still have almost complete dependence on the humble magnetic stripe ticket, which has reigned supreme as the default ticket format of preference for over 30 years.

Contrast this with the experience in the Netherlands, where the O-V Chipkaart has been established comprehensively for some time now as the preferred ticketing method for all long distance and suburban rail, as well as all tram and bus journeys across the whole country.

What is it that makes this essential difference between progress and ossification? I think it boils down to one word: vision. Obviously you need drive and commitment as well, plus the necessary tools and levers to use, to translate that vision into reality as well, but at the heart of the problem on the national rail system is a lack of clear vision. The reason for this difference is that TfL and NS have acted sufficiently as an intelligent client to develop and realise that vision in exactly the same way that DfT hasn’t.

I will offer my suggestion as to how to deal with this in a few moments.

Stations – a missed opportunity?

The final topic in my “what hasn’t gone so well” list is stations. Looking around the national network there now are some very fine stations: Reading, Birmingham New Street, St. Pancras, and so on. Yes, you can argue that these tend to fit into the category of “shopping mall with station attached”, but let’s acknowledge that the railway family has been successful at these very large station developments in making stations much more attractive to users, even becoming destinations in their own right when at their best.

Looking more generally around the network, stations are better maintained today than 20 years ago and have markedly better facilities: better quality customer information, better retail outlets, better and cleaner toilets, more car parking, and friendlier staff providing more help when needed. So far so good.

But many stations remain under-utilised, pared down to the bone, some having had many of the best bits sold off for third party usage, leaving rail as the poorer party on the site. Others have ticket offices ploughing on with ever fewer customers to serve, required to stay open forever, coated in aspic by the provisions of Schedule 17. All too often these stations are letting their local communities down, and they are also letting the railway down too: stations with poor facilities and few people using them are negative places which can feel unsafe and unloved, yet these are often the first contact point any member of the public has with mother railway.

Why are so many of our stations like this? Partly it’s about footfall of course: the larger stations will always be able to take care of themselves, as there is money to be made from lots of well heeled people changing between modes of travel. Smaller stations will struggle to develop stand-alone business cases for development.

It’s also partly about the contractual framework in which all but the very largest of our stations now sit. This is one where the asset is owned by Network Rail, but maintenance, repair and renewal obligations are split between Network Rail and the lead TOC for each station. Because the TOC tends to have a relatively short term interest in the station, and there has been no effective residual value mechanism for stations so far in franchise agreements, the tenant is not incentivised to take a long term view. Equally, from Network Rail’s perspective, there are an awful lot of stations and the best return will always be found at the biggest ones. Recent attempts to change this relationship with the concept of the 99 year lease are not showing much sign of beneficial outcome as yet, but perhaps it is too early to form a judgement on this?

But I believe that the biggest reason why the vast bulk of our stations are not fulfilling their true potential is once again due to a paucity of vision at the top of our industry. In my view stations should try to operate as vibrant places, full of life, and at the heart of their local community. The best way to do this is to bring ancillary businesses onto the site so that they are always staffed and there are reasons to linger. A good way of doing this at the bulk of smaller stations is to combine the role of ticket office and station staff with running a shop providing the basics: hot drinks, newspapers as a minimum, with a bigger grocery offer at stations with sufficient footfall to justify this.

When I was running South Eastern Trains we had two stations using this model which I inherited from Connex. The flaw in their approach was the tie up with CostCutter, whose core market demographics were not the same as rail users in the south eastern commuter hinterland. Thus the product mix wasn’t right, and so sales penetration not as it might have been. The other problem we had was that the staff were all railway employees rather than normal shop staff. This meant that they came with a railway rather than retail mindset, as well as a much higher cost base.

This concept of a grocery store that sells rail tickets is widely rolled out in Holland where it seems to be successful. In the NS model the shop is privately run as a concession, and acts a bit like a rail ticket agent. What makes it work effectively is the very simple mix of rail tickets needing to be sold, with the result that product knowledge is vastly simplified so that ordinary shop staff can manage the work without huge amounts of specialist training as required in Great Britain.

The only surviving exponent of this “grocery-cum-tickets” concept in the UK currently is to be found on Merseyrail. Here you can find “M to go”, introduced by Serco/Abellio in their 20 year franchise with the active support of Merseytravel.

Waterloo station is a smallish suburban station on the line from Liverpool to Southport. Nothing remarkable about it, except that it is one of nine Merseyrail stations to sport a convenience shop that sells rail tickets. The shop is open for reasonably extended business hours. The livery might be a bit garish, but the intention to make the station an attractive place to be is unmistakeable
There’s a train information display branded in harmony with the shop, and a night service window.

Inside the shop, which is one of the smaller ones, it is more CTN than grocery, but the shelves are well stacked and products nicely presented. And at the tills, two members of staff at a time can process shop sales and provide rail information and tickets all in the same transaction.

The big problem with this application is that Merseyrail is still required to act as a full service provider of rail tickets and information, so that in theory they could need to be able to sell a through ticket from, say Hooton to Horsley, including handling Advance ticket bookings, seat reservations, and so on. Of course in practice people wanting these sort of tickets either buy on line or go to a large station such as Lime Street to do this. If only Merseyrail could be relieved of this obligation, and only be required to sell Merseyrail zonal tickets and travelcards, the amount of training and knowledge required could be cut by 95%. This would enable the staffing of these outlets to be de-skilled, so that staffing could in future be provided by the concession operator, like at petrol stations.

I leave you to imagine just how much our station estate could be transformed if we could do deals like this on a much bigger scale, just like the petrol retailers have done with their forecourts across the country?

To facilitate this requires some vision at the directing mind of our railways, and a willingness to tackle the powerbase of the TSSA and the RMT, coupled with a simple regulatory change. That this hasn’t happened shows again how our government’s approach to rail is holding our industry back.

The situation in 2016 – challenges and opportunities

So, we’ve looked at the main structural changes which have taken place over the last 21 years, and considered some of the things that perhaps haven’t gone as well as they might have done.

I’d now like to assess these five features relating to the position the industry finds itself in currently, and then go on to suggest how things could change in the future.

Planning and using network capacity

Alliance Rail Holdings has two significant applications lodged with the Rail Regulator for new Open Access services. One is an hourly fast service between the capitals of Scotland and England, calling only at Newcastle, and formed of tilting high speed trains, which would require the franchisee’s trains to play second fiddle and be overtaken en-route. The other is a two hourly service via Leeds, which would eat into the franchisee’s prime market of West Yorkshire.
The existing franchisee has a fleet of new trains on order and an ambitious proposed new timetable which will use up much of the remaining spare capacity on the route. It needs to make its new timetable as attractive as possible with fast, repeating pattern services, if it is to realise its income projections and be able to pay the premia it has promised to government over the next eight years. Without this new timetable it will undoubtedly experience severe financial strain. There have already been two failed franchises on this Blue Riband route and the government will be desperate to avoid a third. Equally, government needs the proposed timetable to work because it ordered the new trains itself and instructed the franchisee to use them. The trains are on a long term deal where their full use is financially committed for twenty five years. The proposed new timetable is predicated on a series of infrastructure upgrades funded by government through Network Rail in the current control period. It is not yet clear whether the upgrades will be delivered on time and whether they can be completed within the available funding.

There is insufficient capacity on the route to allow all of the desired services to run, even if the upgrade work gets completed. To make matters worse, for the busiest part of the route, the last 70 miles or so into central London, the Thameslink scheme will add further trains and complexity to the service pattern, including over one critical, and shared, two-track section. The Thameslink timetable is tightly constrained by the need to funnel high-capacity commuter trains into the core section through central London. Making matters worse, the DfT has instructed that Thameslink’s timetable slots should be regarded as fixed and the long distance high speed services be flexed around the commuter trains.

Network Rail, as the system operator, has the impossible role of trying to plan the timetable to meet all of the Operators’ requirements, whilst also being on the hook for operational performance, which as we know is not good on this route. However, the decision on whether or not to grant the access rights is to be taken by ORR.

You can see that the stage is set for institutional conflict. Whichever way the decision goes on the access rights, there are going to be serious consequences. But, looking a little bit wider than this, just think about how complex all this transactional stuff has become around changing a timetable! All that time and energy has both a real cost in pounds, and an opportunity cost which is built into both the industry cost base and its barriers to entry.

The dog fight for paths on the East Coast main line has been a recurring soap opera over the last 15 years, and has consumed enormous energy from many industry parties. It has made planning a timetable to make the most effective use of increasing scarce capacity much, much harder than it would otherwise have been, and made the necessary collaboration between Operators and Network Rail, so necessary to run a modern railway cohesively, much more difficult to secure. I think that it has also served to inhibit development of the route which would have improved its capability and capacity.

So I conclude that the desire to have open access competition to franchisees, which was at the heart of the 1993 legislation, has become incompatible with the letting and managing of long distance franchises on a mixed traffic multi-operator railway. I think it would be possible to create a future state where the access charging regime for long distance passenger services was put on a level footing, and a phasing out of franchising in favour of open access operation. This would need provision for appropriate premia to be paid to the railway authority, and for the protection of socially necessary but unremunerative services.

Concessions versus franchises, and devolution

There has been a gradual move in Britain towards concessioning for urban railways as opposed to franchising. The key difference is that in a franchise, the franchisee operates on a net cost basis; in other words, he carries the full revenue risk and acts as an informed commercial business operating within a loose franchise specification, which typically sets out minimum train service and customer service levels and has fares and ticketing controls in it. Whereas in a concession, the client takes the revenue risk, and becomes the informed specifier of service levels, fares, and so on, with the concessionaire operating on a gross cost basis.

The concessioning model seems to work well when there is a local public transport authority which sees rail travel as a key driver of the economic and social fabric of its community, and is willing to make the necessary financial and engagement effort to improve it. I guess it also helps make the local case for change if the franchising authority is seen as remote and out of touch with local needs.

Thus we have seen a number of these introduced in Britain. All tram and light rail systems are operated on this kind of model, as is Merseyrail. In London, two parts of the heavy rail commuter system have been converted in the last few years to a concession model, and branded as London Overground. The results have been most impressive both from a passenger perspective and for regenerating previously less well connected parts of the suburbs. Other local authorities are keen to follow suit, notably in Birmingham and Rail North.

I reckon that this model works extremely well for urban and suburban rail within a significant metropolitan entity, with all parties happy. Even the contracting companies like it as it provides steady earnings, albeit at a lower margin than a “full fat” franchise. Given the strong political movement towards further devolution in the UK, surely this is an idea whose time has come?
Infrastructure

2015 was a turbulent year in Network Rail’s chequered life so far. The fuss really started at Christmas 2014, with two very serious overruns of major engineering works on main lines out of London. What made matters worse was that there was little warning of the overruns, and even less in the way of measures to cope with them when they happened. The result was a public furore which drew government ministers into the mire and got them seriously offside with the industry. The resulting investigation castigated Network Rail’s planning and execution of major projects. Worse followed in the early months of 2015 when it gradually became apparent that Network Rail’s major programme of electrification and route modernisation was in serious difficulty over both cost and timescale. Following the inevitable programme reviews, and much soul searching, the government very publically had to postpone two major enhancement projects, one of which was politically very significant indeed.

The fall out from this is continuing. The government acted to strengthen its control over Network Rail, removing the hapless Richard Parry-Jones, who had no rail experience, and appointing a replacement chairman with relevant sector experience. Three separate government driven reviews were initiated, two of which have now reported.

Peter Hendy’s review of the investment programme for the current control period concluded that the paused schemes could be “un-paused”, thus bringing a new word into the railway lexicon, and showing clear signs of political intervention to produce an acceptable outcome.

Collette Bowe’s review of how the investment programme got to be agreed and funded when it has since been shown to be unachievable, concluded that a variety of causes contributed to this. The most significant problem identified was organisational uncertainty over role between DfT, Network Rail and ORR. She recommended that the role of these three players should be reviewed with clearer governance and decision making frameworks put in place.

But potentially the most significant review is the one ordered by the Treasury and being led currently by Nicola Shaw, on the wider question of how Network Rail should best be funded and organised. Nicola is due to report before the Spring budget at Easter 2016.

Funding

At the end of this year’s comprehensive spending review, the DfT had agreed to a reduction in resource spending of 37%. This level of cutback is possible in the current economic climate of continued demand growth, but should there be a downturn at any time in the next four years it seems inevitable that Network Rail’s package of renewals and enhancements will have to be reduced. At the same time the government has got a stated political imperative to drive economic development across the North of England, and quite rightly sees major improvement to the transport infrastructure as critical to achieving this. The government is also committed to progressing HS2 during the lifetime of the current parliament. So at the moment we have a government using windfall revenue gains to balance its current spending, whilst being more committed than ever to capital spend on infrastructure enhancement projects. Whatever happens next, we can be sure that there will be enormous pressure placed on the rail budget, and anything that helps drive efficiency or make better use of resources should be welcomed.

Government’s role

Finally, let’s consider government’s role and capability in our industry. There are a number of problems with the way our government apparatus works in practice, and I speak from personal involvement with it at senior levels these last few years through all of Labour, Coalition and Conservative governments. The most obvious problem is one of the electoral cycle: the five year term of governments is important for democracy but tends, in practice, to produce a short term outlook. This is very unfortunate when substantial infrastructure investment is needed which obviously has very long timescales. The government should perhaps be congratulated for driving HS2 hard despite the short term pain it is producing, for what can only be a very long term gain. But this is an unusual approach as much of the government machine is concerned with what is happening now and over a much shorter time span than HS2.
Secondly, the departmental mindset is primarily administrative rather than entrepreneurial, and the civil service mentality is to service Ministerial requirements first and foremost, rather than leading policy development itself. Fragmentation of responsibility ensures that the Department is not even joined up inter-modally, never mind working seamlessly across government departments.

This leads to a number of undesirable outcomes: senior civil servants tend to focus on short term problems, especially crises which blow in almost weekly, and immediately rise to the top of the Ministerial agenda. Anything controversial is likely to be pored over in minute detail. Good examples being which trains should call at which stations, or how much performance buffer time should be allowed for in train schedules, but there are lots of other examples I could quote. Anything long term or strategic tends to be pushed to the back burner. Worst of all is the extreme dislike of taking difficult decisions, where the default position is always to delay, by asking for more information or referring matters up the hierarchy. No big decisions are ever made in a timely way, the net result of which is that enormous intellectual time and effort is spent going round in circles, and opportunity is lost in the process.

Railways at the crossroads

So, we sit today in a position where the “big ticket” issues of today’s railway organisational structure - funding, open access, franchising, infrastructure management and operation, and the role of government - are all problematic. If you take all five together in the round, it seems to me that there is a once-in-a-generation opportunity to re-set our organisational model to give it a better chance to work more effectively. Nicola Shaw’s review of Network Rail is looking at some big ticket issues, and she is making clear that she won’t restrict herself to consideration only of implications for Network Rail, where in her view, structural change is also required elsewhere to solve the problem. So it’s possible that some of her ideas may overlap with some of my own. We also now have the DfT-led review of the role of ORR underway, and also due to report in March.

For me, it is plain to see that competition drives improvement and innovation, so long as it isn’t stifled by the existing rules of the system it is plugged into. Equally, free market capitalism, red in tooth and claw, does not sit so well in an industry which has significant natural monopolies, severe capacity restrictions, consumes significant public funds, and requires extensive collaboration across its interfaces to make it work properly.

Today our railways are sitting at an important crossroads. My question is: “Which way now?”

Those problems in summary

Here is my summary of the problems we are trying to fix:
? The government is too closely involved in the minutiae of the day to day running of the railway. In doing so, it has lost sight of its main purpose which should be long term vision, strategy and funding. It has also resulted in too many decisions being taken for nakedly political reasons rather than for good economic ones.
? Secondly, Network Rail is too big, and has too broad a set of responsibilities to cope with: system operator, network developer, infrastructure maintainer, major project manager, regulated utility, property company. Frankly it does none of these well. And it can’t work out which out of the Regulator, the Department for Transport, or the Operators it should regard as its principal customer. Needless to say, all of them, plus the media and the end users, passengers and freight hauliers, want to be in the driving seat to tell it what to do. This is a recipe for chaos and loss of efficiency.
? Next, franchising as currently operated is unsustainable in the long term: franchises are being tightly specified, but by a central government department that is not close enough to the market; competition is between a small group of established players with little to differentiate them, and a race to the bottom on margins.
? We can also see that the conflict between open access and franchising on long distance has become a festering boil that needs to be lanced
? The approach to retailing, fares and ticketing is in need of overhaul
? Stations need to find a new operational model to enable them to be better developed
? And finally, unit costs across the whole industry are just too high. Better incentives are needed to tackle these.

Some possible ways forward

I think it is possible to develop a set of structural reforms that could, over a ten year period, lead to a much more effective and better valued railway. The following set of changes would work best if taken as a package, as they tend to inter-relate.

Government sponsorship and funding

First up, the role of government. In my view government should try hard to get out of the detail of managing the railway. This is always difficult as lots of government money is involved and railways are rarely out of the headlines. But central government ought to focus its energy on identifying what role it wants the railway to perform for society in the medium to long term, as part of an overall transport strategy, and should then seek to identify and then ring-fence the funding necessary to achieve it.

The actual year-to-year activity of network planning and access allocation should be handed to a separate arm’s length government agency, into which Network Rail’s current longer term planning activities should be transferred. Also transferred into this agency would be the specification, management and letting of inter-urban franchises. Access planning, both for timetabling and for disruptive engineering purposes, should also be transferred into this agency.

Matters requiring cross-industry consistency, for example fares and ticketing systems, would also be overseen within this agency. It would need to be run by well paid, competent people with the requisite railway, commercial and planning skills.

Infrastructure management and operation

Taking these functions out of Network Rail means that it predominantly becomes a delivery organisation. There are issues about property and stations, but these are second order considerations and unlikely to be mission-critical for the railway. So, delivery in this context means major project execution, day to day renewals and maintenance, and management and operation of the network. Given that all the cross-boundary issues would be taken care of by the government agency, it then becomes possible to carry out the delivery works in different ways in different parts of the country. Firstly, the organisation could be broken up into geographically based regional units, which could be of quite different sizes as appropriate. Network operation could be handled separately or combined with any of maintenance, renewals, and enhancements. The important thing is that it could be done differently in different parts of the country.

This would facilitate introducing competition in a controlled manner into a more mature railway structure. Elements of the network or activities on it could be sold off, or concessioned, or continue to run in the public sector. On some parts of the network vertical integration would become possible if this was considered desirable. One example where this could be made to work well would be the suburban electrified network of Merseyrail.

The important thing about this concept is that it wouldn’t have to be a “one size fits all” solution; rather, it would be an enabler to do things differently in different parts of the network to best meet the specific local needs. So how things were done locally would become a second order decision within a national framework with interworking standards as today.

Through a combination of these changes it would become easier to track and encourage efficiency because comparative benchmarking would become possible for the first time. Such an arrangement would encourage competition between different parts of the network to innovate and drive down unit costs. I think this would also make the Regulator’s job in accurately determining the level of funding required more practicable, perhaps for the first time ever?

Train operations and the customer experience

Turning now to the train service part of the railway industry, there are three broadly different types of market reflected in passenger franchises in the British model as it is today: suburban, InterCity, and inter urban. Rural routes are represented today in all three different types of market-led franchises. Each of these markets possibly can be managed in a different way in future.
Where local or regional transport authorities already exist, or can be cohesively formed, then I would advocate the devolution of client responsibilities for relevant service groups to these authorities, so long as they are prepared and willing to take these on. The obligations should be transferred along with a financial dowry equivalent to the current net cost of the services transferred. How services are then taken forward becomes a matter for the local authority concerned to be considered in the wider objectives relating to public transport and other economic and social objectives. But I would expect to see more movement away from revenue risk franchises towards gross cost concessions. The West Midlands area and parts of the current Northern franchise serving the Manchester, Leeds and Newcastle City Regions would all benefit from such an approach.

In Scotland, transport is already devolved and Transport Scotland has let a hybrid franchise with revenue risk allocated to the franchisee but tight specification over services and service development sitting with the client. The arrangement also has a heavily incentivised service quality regime in it to ensure satisfactory delivery of the required quality of service. This arrangement seems to work well and I see no reason why it should not be extended to Wales and possibly other distinct service groups in other parts of Britain. Rural services in Devon and Cornwall, and suburban services in the Bristol and Avon area, might all fit this category.

In London I would see further expansion of the changes already made so far whereby suburban services which are loosely within the Greater London area are operated as concessions managed by Transport for London. This would leave the rump of the existing commuter franchises serving the Home Counties, and elements of other franchises to be reshaped as premium paying franchises, but managed by my embryonic government rail agency.

This leaves the InterCity franchises. Given that open access is enshrined in primary legislation, and given that it has demonstrably created fresh competitive impetus to improve the customer proposition, and is clearly here to stay, it would be absurd to suggest a future without it. So, the incompatibility between open access and franchising that I have discussed earlier should perhaps be resolved by a gradual replacement of long distance franchises by open competition with a fresh financial model, but using open access provisions. This could be trialled on the East Coast Main Line first, where open access competition is already well established, and could be planned to start from when the existing East Coast franchise expires naturally in 2023. This gives enough time for the necessary precursor activities to take place:

Firstly, for a revised regulatory and charging framework to be devised. Secondly, for unremunerative yet socially necessary elements of the route’s services to be identified and a protection mechanism devised. And thirdly for the supply side market to develop, and for its potential players to refine their business propositions.

Genuine open competition amongst players on a level playing field will act to create innovative new services and new service concepts, and to reduce unit costs dramatically. We have seen this in the airline and coach sectors and there is no reason at all why it shouldn’t be transferable to rail.

The biggest issue will always be designing a timetable that works and provides reasonable connectivity as well as resilience. But with network development and timetabling transferred to my proposed government rail agency, which will also receive receipts from the competing operators for a share of revenues over and above the genuine costs of day to day track access, there is the incentive to create longer term capacity improvement plans, and enough time between now and then to develop workable timetables.

Conclusions

The coming together of a need by government to reduce the amount it subsidises the railway, the requirement to do something to solve the Network Rail problem, and the obvious political demands for further devolution away from central government, coupled with the success of concessioning and open access models in Britain today, suggests that the time is ripe for a structural shift to enable a revised railway organisational model to emerge. One which has appropriate levels of competition within it to drive improved value for money for governments and consumers alike, and which enables the railways of Britain to provide greater value to the communities served.