Why is this? 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 the 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. While this dispute was not yet resolved at the time of writing, and would have been winnable at the cost of a longer strike, it is clear that for political reasons a decision has been taken to duck the issue to avoid a major confrontation, which would be unpopular.
However, 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. Thus we have seen recently that even when franchises are retendered, 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 underdeveloped supply chain that 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 Chart 1 that Network Rail’s funding comes mainly from two sources: currently £2.4bn a year from the operators in the form of access charges (this broadly covers the cost of operating, maintaining and renewing the network), and £3.7bn a year of network grant (this is the cost of enhancing the infrastructure).
Receipts from government by train operators (in the form of subsidy) broadly equate to the 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.
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.
On the wider front, the data highlights that this government’s enormous financial commitment to rail enhancement expenditure is really quite extraordinary. Transport, and rail transport in particular, has risen up the political agenda steadily over the past ten years or so, and this seems set to continue with the creation late last year of the National 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), with large fleets of new inter-city trains on order for both the 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, in George Osborne we now have a Chancellor pushing significant investment through his idea of a Northern Powerhouse.
We can’t yet be sure 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 TransPennine Express. Both 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. Public Performance Measure (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 past 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.
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 as it should have done over the past 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 stations. I’ll then propose some possible ways forward.
Network Rail: the 500lb gorilla
During 2014 Network Rail was reclassified, so that it 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 NR’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, allowing 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 seeking 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 with 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 50 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
The second feature of the post-1994 landscape that I want to examine is open access. The architects of the 1994 structure wanted free market competition to encourage innovation, to challenge the status quo, and to drive consumer choice. Thus a key feature of the 1993 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 more than one-sixth of all the long-distance services to and from King’s Cross.
