Chris considers the future of passenger rail operation in the wake of the statement by the leader of the Government’s review of the railways, Keith Williams, that rail franchising needs drastic change

Last year marked the 25th anniversary of our publication of the first edition of Rail Industry Monitor, establishing a long tradition of monitoring and commenting on the outcome of rail privatisation. It is interesting to set the current debate over the future of passenger rail services in the context of what was going on then.

It is perhaps worth recalling what objectives John Major’s Government was trying to achieve when it embarked on the process in 1993. 20 years ago, in the editorial to the 1999 edition of our publication, I suggested that there had been a number of key objectives, being:

  • Improved management focus – including local investment decisions, better industrial relations and improved marketing
  • A stable funding regime – the franchise agreements locked the Treasury into a more stable funding regime for the railways than it had known since nationalisation
  • Improved efficiency – breaking down an old-fashioned public sector bureaucracy to bring better, faster decision-making
  • Lower costs – previous privatisations resulted in substantial reductions in unit costs of production.
  • Transfer of risk – in return for a stable funding regime, almost all revenue risk was transferred to the private sector
  • Better value for money – the combination of greater efficiency, lower cost and risk transfer should mean better value for taxpayers’ money in the long term
  • Tighter regulatory regime – transfer to the private sector would allow the railways to be more tightly and transparently regulated. This included safety, service specifications, and the sanction of fines or loss of franchise for quality failures. None of these sanctions had ever applied to BR, since there had been no alternative provider.
  • Higher investment – with the industry’s investment needs judged on a business case basis, rather than limited by the overriding needs of Government fiscal policy
  • Improved quality – greater efficiency and higher investment would lead to the provision of better quality services, especially with train operators incentivised to improve passenger numbers.

25 years on, many of those objectives seem just as sensible as they did then: many have been delivered to a greater or lesser extent – though, with the benefit of hindsight, I think it would be fair to say that there were three things that the regime did not allow for:

  • The unprecedented and largely unforeseen growth in demand, which has seen rail patronage more than double since
  • The costs of devising and implementing the sort of safety regime that the network quite clearly needed – this had been identified by inquiries into crashes at Clapham Junction and Purley in the run-up to privatisation and were highlighted by Southall, Ladbroke Grove and Potters Bar in the years following.
  • The difficulty in changing the industry’s culture and its long history of adversarial industrial relations.

I would argue that it was the combination of these three that derailed the attempt to attract private sector funding into infrastructure investment. This has been the real problem, and the principal cause of the continued cost of the industry to the public purse. Thanks to cross-subsidy between franchises, railway operations have been self-financing for a number of years – an outcome which few could foresee back in 1993 and 1994.

The Labour Government elected in 1997 pursued a more interventionist approach. In fairly short order, Messrs Prescott, Byers and Darling made three sets of changes to the railway: the creation of the Strategic Rail Authority, followed three years later by the effective re-nationalisation of Railtrack and then within five years of its foundation the abolition of the SRA and its replacement by ‘direct rule’ (aka micro-management) from Whitehall via the Department for Transport.

Alistair Darling’s concept of the Government providing a High Level Output Specification for the next five years, which the Regulator and Network Rail would then price seemed to answer many of the strategic issues which previous Governments had dodged or failed to answer – and that element of the structure has now survived for 15 years – though it has been brought into some disrepute by Network Rail’s seeming inability to deliver projects on time and on budget – though, as Crossrail and other schemes are proving, this problem is not unique to that company, or indeed to the UK.

So, if Williams is going to replace or radically reform franchising, what has a new system got to do?

I would give four broad answers: maintain private sector involvement; enhance competition and provide effective incentives for downward pressure on operating costs and to deliver continued long-term investment. It follows from that there must continue to be strong, genuinely independent regulation (if for no other reason than to keep the Treasury’s nose to the grindstone).

It also seems to me likely that the Treasury’s price for maintaining a contractual structure for funding the industry will be a continued transfer of risk to the private sector. Some provision for time-limited contracts will continue to be needed, I suspect, even if timescales are longer with specified break points. All that should be achievable at reasonable cost but would need to allow for much greater flexibility in risk-sharing than DfT has been willing to show in the past.

This seems to argue for the creation once more of an arms-length body to organise and regulate passenger operators – and for an approach which allows different regimes for different types of service: competition for paths on profitable InterCity routes, for example, as advocated last year by the Competition and Markets Authority. At the same time, TfL-style concessions might be let for urban operations that will always require public subsidy (and might benefit from light rail or tram/train conversion).

There should be room, too, for experimentation with micro-franchises and other innovative approaches to the operation of rural routes and self-contained lines. We need to remember that a strong element of the rail market is very local, and that – as Community Rail Partnerships have shown – strong brands can be created which deliver a wide range of benefits. Big is not necessarily beautiful: in light rail over the last 20 years, we have seen how fleets of 25 to 30 vehicles can deliver local services, be cost-effective and make a powerful contribution to their local communities.

I do not believe that there is a single ‘one size fits all’ model for railway operation. Talk of ‘returning’ to a single integrated national network is completely misplaced. Even under a fully public sector model, management was always devolved to regions and divisions. Eventually, British Rail came to recognise the benefits of stronger devolution into the local profit centres that eventually formed the framework for the original train operating companies. That was even achieved whilst giving the profit centres control of their own infrastructure as well.

Whatever solution Keith Williams offers, the nine issues I flagged up in 1999 remain at the heart of the debate about the future of our railways. There are severe political, regulatory and financial constraints, and in promising change, he needs to beware of over-promising. Doing nothing may not be an option, but doing something just to please politicians – especially ones with as little credibility as Mr Grayling – is even more dangerous.