At privatisation wheel/rail separation was chosen to introduce on-rail competition. Costs have risen and accountability lost. The future requires more cost-effective and responsive operation. David Prescott of the Rail Reform Group believes it is time to return to Vertical Integration…

For the third time since 1914 privatised railways are under government control. In 1914 and 1939 it was to support the war effort, by eliminating duplication, sharing resources and directing activity to essential war tasks. In 2020 the Covid-19 pandemic, with virtually all passenger travel suppressed, required complete government control to keep the industry financially viable.

Essential freight movement continues and railfreight operators have not been brought under direct Government control.

With Network Rail and all franchise passenger operators under Government control any structural change is easier. The privatised railway industry economic model, which was already struggling, is almost certainly untenable for the foreseeable future. The huge national pandemic costs will bring pressure for a significant reduction in operating costs to match reduced income and much quicker decision making required to re-allocate under-used or redundant resources to meet the new economic future. Conversely urgent national investment may rise to stimulate the economy, in particular, the ‘Reverse Beeching’ reopenings promised to deliver ‘levelling up’.

Three recent opinion pieces in the railway press by industry leaders: Sir Michael Holden, Professor Andrew McNaughton and Network Rail’s CEO Andrew Haines, looked at the future of rail in the 2020s. They have not strayed from the vertical separation model of the current railway; in spite of raising issues caused by vertical separation that they consider need solving.

Conversely John Nelson, who was at the heart of the break-up process, is clear in his recent book Losing Track, and elsewhere, that vertical integration is the most financially and operationally efficient method of running a railway.

The background

The current rail industry structure arose from an unlikely combination of a European Directive designed to solve European cross-border rail problems and policies developed by the free market, neoliberal Adam Smith Institute. John Major’s desire to recreate the former regional companies was overwhelmed by the free market view that operators should compete with each other for passengers. British Rail was not to be privatised as a single unit, and fragmentation was designed to prevent any subsequent reformation of British Rail.

Rail privatisation was carried out in considerable haste, with policy changing as the implications emerged and the parliamentary deadline approached. As the consequences of letting private operators run competing services on an open network started emerge, there was not time to revisit previous policy decisions. Franchising was created; on-rail competition in the passenger market was largely suppressed, with freight operations the only truly competitive market, but the operator/network split remained.

Single controlling mind

The financial efficiency that characterised the five Sector Business-led railway of the 1985 to 1994 era was result of the ‘single controlling mind’ concept. Local business managers were responsible for the entire business performance of manageable sections of railway. They were the building blocks of a classic chain of command with only a four level structure – local, Business sub-divisions, Business HQs and BR HQ. Vertical Integration was required for the ‘single controlling mind’ to deliver the whole system efficiency and cost benefits.

Two complementary management training programmes (Leadership 500 and 5000) based on the principles of “Align and Empower” resulted in strong delegation, within clearly defined parameters, and with clear objectives. This resulted in a responsive organisation which was able to substantially reduce the cost to the exchequer, whilst improving services.

Ultimately it was this organisation that carried through the privatisation break up so effectively and provided the management expertise that took the privatised railway forward.

There is no single controlling mind at any level in the current structure. Instead a tangle of contracts, and their associated bureaucracy and regulation, blankets the whole industry, including funders. Linkages between costs and benefits, which are so fundamental to the efficient operation of any industry, have been completely lost and with it all natural pressures on cost control. Contractual requirements can be in conflict, in spite of many coming from the DfT. No individual can be identified as in complete charge of any part of the railway. The concept of the railway as a ‘system’ has been lost.

Vertical Integration in the UK

Where there is little on-rail completion there is nothing to prevent a return to first principles that the early Victorians, in the era of unregulated capitalism, soon discovered; that the most efficient form of railway operation is as a vertically integrated system. The Stockton and Darlington Railway started life offering what we would now call ‘Open Access’, mirroring the Turnpikes and canals of the day. But it was soon abolished because railways, with their fixed tracks and need to manage and choreograph train movements are not the same as roads and canals, where the vehicle operators do that. Railways function best as a complete system, with the myriad of track/train interactions managed to deliver the optimum system output. It is a lesson that was not understood, or was forgotten or ignored in the drive for privatisation.

However there is already a slow return to vertical integration with two examples:

• The largely self-contained South Wales Valley lines network has transferred to the franchisee to create an integrated, upgraded, electrified and bespoke Valley Lines operation, which will also operate over Network Rail infrastructure. This is the ‘natural’ way in which to operate local rail infrastructure, as seen elsewhere – e.g. Tyne and Wear Metro (TWM), London Underground (LU).

• More surprisingly, DfT is promoting East West Rail as a vertically integrated operation, in spite of it being at the heart of the rail network in the South Midlands. It will have physical interfaces with, and its proposed train services require use of, four Network Rail Regions’ tracks, interfacing with eight other train operators. This is a significant added complication in managing the network and manifests itself in the limited connectivity offered by the proposed train services.

Major project delivery has been the justification for vertical integration in these both these cases. Other UK vertically integrated networks include: Northern Ireland Railways, LU and TWM, all of which interface with other networks and operators. Crossrail has been built with a new section of vertically integrated infrastructure, including its own, non-standard, signalling system which prevents other operators running through their tunnels. (Trams and Light rail systems are always vertically integrated.)

These examples demonstrate that there is no ideological or practical reason why vertical integration should not be re-introduced. The current railway structure is the exception, rather than the rule, and any continuation of the current structure requires justification.

At privatisation the network/train operator interface was relatively simple, largely revolving around the wheel/rail interface, with gauge (vehicle/structure interface – platforms, bridges, structures) and, for some operators, the electric traction power provision. Signalling remains a managed activity between the network operator’s signals, and the train operator based around simple and largely passive equipment and an intelligent human interface – train drivers.

Whilst these interfaces still apply, a totally new, intrusive, interface in the form of ‘Cab Signalling’ (ETCS/ERTMS) is coming, which substantially increases the network operator’s involvement in physical train operation. Seen as the new future, a huge programme of new cab signalling works is fast approaching which will require very detailed, complex and safety critical working between train operators and Network Rail. The scale of this project completely eclipses the projects which have recently triggered the move to local vertical integration.

The introduction of cab-based signalling across the whole network will be a long-running and safety critical project, which suggests a move to network-wide vertical integration is desirable.

A new industry structure based around Vertical Integration

A model akin to vertically integrated urban metros (LU or TWM) is proposed as the model best suited for heavy rail operation in metropolitan areas and for rural routes, where local, semi-independent, lines may be appropriate. Dense suburban networks (London or elsewhere) need efficient use of the constrained infrastructure to move large numbers of people and consequently there is a strong need for a single controlling mind to oversee the each network. The absence of such oversight has been well illustrated in Manchester. In these areas there is little likelihood of on-rail competition, so the current structure is not operating in the manner for which it was designed and this is hindering the delivery of cost effective and market responsive rail services.

Conversely on long distance routes on-rail competition can operate effectively. ORR has recognised this with its CP6 Open Access charging mechanism setting a train-mile based Infrastructure Cost Charge (ICC) designed to secure Open Access operators’ contribution to the fixed infrastructure costs. The ICC is higher than the equivalent fixed Track Access charges paid by long distance franchise operators. In these operations, where there is sufficient business to sustain more than one operator, on-rail competition can offer real benefits to customers. Open Access Operators are also serving locations that the London based DfT has not felt the need to serve at all, or with only token services, effectively providing an unremunerated Public Service Obligation role for these communities. The pressures of the market, rather than franchise compliance, are the driving forces of business success and real innovation thrives.

There are a finite number of paths on main lines and through junctions and limited capacity at terminal stations so train service design, especially stopping patterns and train performance, can have a huge impact on the capacity and capability of the infrastructure and vice versa. It is desirable to use the infrastructure intensively, as this delivers the greatest economic benefit from the network. Consequently even in this competitive and market driven activity the network operator has to be heavily involved in train service design to secure efficient and effective use of the infrastructure.

Privatisation was intended to deliver competition, but in practise it has brought more direct government involvement than ever happened with BR. But for the relatively few routes that can support fully competitive services the existing model still has the potential to deliver a truly privatised railway.

The proponents of the current vertical separation model need to justify why it is the correct way to continue to operate most parts of the current rail network in the face of vertical integration being the norm on urban networks, its creeping re-introduction elsewhere and the overwhelming benefits of a complete system approach to operation.

Developing the ‘vertical concession’ model

It is suggested that the cost effective and responsive way for future operation is provided by a number of long duration, local or geographic, vertically integrated concessions. They would lease their infrastructure from the state (a much reduced Network Rail) as protection against catastrophic infrastructure failure and to provide a degree of state control over nationally important infrastructure. This would eliminate many of the inefficiencies inherent in the current contractual system, eliminate the inherent double staffing and legal costs required by the contractual process, and will speed and improve decision making, reducing costs and responding better to market and business needs.

But there is no ‘one size fits all’ approach; long distance trunk routes using the privatisation vertical separation model to allow Open Access operators to provide fully competitive services to the public, can operate alongside a number of vertically integrated, generally publicly funded, regional networks.

The interfaces that remain with ‘penetrating operators’ can be managed by standard, bi-lateral agreements, as used between LU and Network Rail and LU and Chiltern Railways. The key difference to now is balance, as the roles may be reversed, with both parties being train operator and network operator to each other in different, often adjacent area. ORR’s model contracts could be used and ORR would provide any required oversight.

Interfaces between adjacent operators have been a regular part of railway operation for almost two centuries. The advent of modern technology provides much more transparency in train planning across boundaries than before.

Freight operators would have presumed general contractual rights to operate over most network operators’ infrastructure, with the ORR model contracts forming a good base for this type of operation.

The detailed geographic definition of the vertically integrated units will need careful consideration to deliver maximum benefit, minimise interfaces and provide local accountability.

Retaining a national network – ensuring national oversight

The benefits of a national network can be maintained by a combination of the existing over-arching organisations, brought under the overall control of the collective of operators, much like the Railway Clearing House prior to nationalisation and as ATOC and RSP currently provide in the commercial field.

Independent safety and economic regulation would remain with ORR and RAIB, with ORR having a light touch approach to economic regulation, but ensuring there is no anti-competitive activity. The DfT would set overall policy in England as it used to, without being involved in the detail.

Whilst this is a significant task, it is not unprecedented. BR fragmentation into a completely different form only took five years from concept to completion. This proposal is more of a re-arrangement and re-joining, without a deadline, with much of the contractual structure rendered redundant and only retained where it is required.

Now is the time to change

‘Never waste a good crisis’ – this is the opportunity for the industry to move forward, delivering a responsive, relevant and cost-effective railway to meet the challenging economic times ahead, to deliver on the climate change requirements and secure economic growth and ‘levelling up’.

With a strong need to reduce costs, before the massive, complex and costly network-wide roll-out of in-cab signalling, and with Network Rail and the passenger railway under government control, now is opportunity -THE Moment – The Time for Change. It has to be grasped before it is gone.

Failure to grasp this opportunity risks a return to the cash limits of old BR and ultimately to managed decline as the social and economic consequences of Covid-19 emerge.

In summary the options are clear, either:

• Tinker around the edges with an inherently cumbersome, bureaucratic, unresponsive, expensive and non-customer orientated railway industry.

Or

• Move to a much better defined, locally integrated, customer and market focussed, cost-effective and value orientated group of railway operations.

This is a ‘once in a generation’ opportunity. The railway industry – and Government – must rise to the challenge and grasp it while it can, to deliver a railway fit for future challenges.

David Prescott is a Fellow of the Chartered Institute of Transport

Tel: 07944 680648

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Visit: http://www.allanrail.co.uk/