Ian Brooks Assistant Director, PricewaterhouseCoopers The UK Rail Industry Ian Brooks Assistant Director, PricewaterhouseCoopers PwC

Agenda UK Rail Privatisation Lesson learned UK Rail - 5 Years on The Industry structure UK Rail - 5 Years on Industry statistics The passenger companies Lessons learned Railtrack

UK Rail Privatisation Objectives of UK rail privatisation Innovation and efficiency through management freedom and competition Minimising and regulating monopoly elements Maximising private sector involvement and investment Reducing government subsidy Preserving socially important services and network benefits Maintaining safety

UK Rail Privatisation Timetable General Election General Election Decision to privatise made at party conference White Paper: “New Opportunities for the Railways” Rail Regulator appointed Railways Act 1993 OPRAF established Railtrack established - assets transfered TOCs established as subsidiaries of BR - assets transfered ROSCOs established as Government owned Cos Railtrack Flotation on Stock Exchange Freight businesses sold ROSCOs sold TOC Franchise Letting 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

UK Rail Privatisation Who owns the assets? Lines - Railtrack Stations - Railtrack owns and leases to train operators (except 14 major stations run by Railtrack) Depots - Railtrack owns and leases to train operators Non operational - remained with British Rail; sold separately Rolling stock - ROSCOs/others - lease to train operators Freight stock - Freight operators or financiers The train operators own few assets in order to facilitate handover of the business at the end of a franchise Arrangements in place to ensure new operators can lease assets

The industry structure UK Rail Privatisation The industry structure Strategic Rail Authority Rail Regulatory Grants Franchise Operating licence and regulator access charges 25 Passenger Train Operating Companies (TOCs) Access to network Access charges Railtrack owns and operates network Maintain trains Access to network Lease trains Freight operating companies Rolling Stock Leasing Companies (ROSCOs) Maintain trains Haul materials Maintain and renew network Supply trains Infrastructure maintenance and renewal companies Supply trains Train manufacturers and mainteners

UK Rail Privatisation Subsidy savings from privatisation Substantial reductions in costs due to RPI-x pricing formula: Railtrack - RPI - 15% over 7 years Rolling stock - RPI - 23% over 7 years Passenger operations: £m

Subsidies The graph below shows the split between government subsidy and operating revenue for 4 train operating companies.

UK Rail Privatisation Infrastructure access and charging How do you recover the high fixed costs of infrastructure whilst maintaining optimum utilisation of capacity? Tariffs based on marginal costs (Sweden) and crude measures of notional value (Germany) bear no relation to total infrastructure costs. In Britain: all operators (passenger and freight) pay short run marginal costs plus incremental costs passenger franchisees (subsidised) also pay a contribution to fixed costs other operators also pay a negotiated element subject to regulation Charging is complex and costly: setting the initial structure and level of charges charging for variable items, such as traction current and wear and tear

UK Rail Privatisation Lessons learnt Highly complex - 11,000 contracts, 100 companies Need shadow running of reorganised industry Privatised businesses consolidate; investors make capital gains Cost savings and efficiency improvements available; loss-makers can be privatised Encourage new entrants; recognise practical limitations to competition Competition for track rather than on track

The Rail Industry - 5 years on Passenger companies Franchises, awarded on lowest subsidy bid, encouraged aggressive bids Franchise bids assumed revenue growth and cost reduction Growth- yes, except Regional Cost reduction- no costs broadly fixed wage inflation more intensive use of network increased maintenance Hatfield - impacted demand and put growth back at least 12 months

The Rail Industry - 5 years on Passenger journeys

The Rail Industry - 5 years on Train kms

The Rail Industry - 5 years on Freight Lifted

Investment in the Rail Industry The Rail Industry - 5 years on Investment in the Rail Industry

Lessons learnt The Rail Industry - 5 years on Infrastructure condition black hole Recovering passenger growth Financing and resourcing increased capacity Rolling stock delivery With subsidy fixed the role of the Strategic Rail Authority is to ensure delivery of quality Clarity of policy and funding priorities

What went wrong for Railtrack The Rail Industry - 5 years on What went wrong for Railtrack Industry structure Management knowledge of assets management of maintenance and renewal management of major projects customer relationships

Conclusion Lots of change Lots of challenge requiring vision and proper planning to ensure delivery of a strategy