1. Sir Christopher Foster and Chris Castles
Presentation of the submission to the Secretary of State for Transport on Reform of the UK Railways
Sir Christopher Foster and Chris Castles
July 2004

2. British Rail was bound to be difficult to privatise
Railways operate in a highly sensitive political and media environment
Many services are unprofitable and need government support, so that it is difficult for the Government to distance itself from decisions when it is paying for the consequences.
Mix of profitable and unprofitable services are hard to disentangle and so it is difficult to ‘target’ subsidy.
Government’s roles of policymaking, purchaser of services and regulation tend to get confused

3. Long debate over the options for privatising BR 1989 to 1992
Privatise BR as a single unit
Break it into regional companies
Break it into sector-based companies (intercity, network S.E., Provincial and freight companies)
Separate the (monopoly) infrastructure from the provision of train services.
All options presented difficulties for targeting subsidy, deciding investment priorities and creating incentives

4. ‘Track Authority’ option would facilitate competition within the railway industry
Previous privatisation experience had demonstrated the importance of competition (BT and British Gas).
Separating components of the industry would facilitate competition, either ‘in the market’ or ‘for the market.’
But the option was controversial and the decision was made late, before the details had been thought through and under pressure of the impending 1992 General Election.

5. There were many questions still to be answered during implementation
How to break up BR – what companies to create?
How would competition operate in the provision of train services, rolling stock and maintenance?
How would investment be planned and coordinated between infrastructure and train services.
How to preserve network benefits?
How to target and determine subsidy?
How to regulate the industry?
Details of contractual relationships between industry parties

6. Implementation process was poorly coordinated and was rushed
Too little time for inclusive debate to work through the details
Railway bill in the form of enabling legislation with no detail. It met strong opposition delaying the process and adding pressure to the timetable.
Working groups of civil servants, advisers and BR staff to work through individual issues.
But no ‘master plan’ or White Paper, defining how the relationships would operate and the components fit together.
Not surprising that there were flaws which needed to be fixed as there had been with other privatisations.

7. The new structure had a clear logic
Government
Regulator
OPRAF/Strategic
Rail Authority
Infrastructure maintenance companies
Railtrack
infrastructure
provider
Train operating companies (TOCs)
Money
Contracts &money
Rolling stock companies
Regulation
Customers
Policy

8. Initial results were encouraging, despite a hostile press and politicians ‘spin’
The outcome of the franchising process suggested that subsidy would fall from £2.1bn to £0.9bn by 2003/04.
Rail traffic grew remarkably, by some 35% for passengers - reversing a long term decline since WWII.
Train performance improved marginally, largely due to a 40% fall in delays attributable to Railtrack.
Investment increased, particularly in rolling stock.
Until Hatfield, operating costs were under control and falling.
Safety performance improved, even though there were some well publicised accidents.
Franchising and contracting
1996 increase in delays due to TOCs

9. (000,000 passenger-km and ton-km)
Rail Traffic in the U.K.
(000,000 passenger-km and ton-km)

10. Passenger Service Quality (punctuality and reliabitity)
1996 delay due to TOCs

11. U.K. fatal accidents (per billion train-km) since 1967

12. But there were flaws in the arrangements after the rushed implementation
The contractual arrangements for infrastructure maintenance did not operate well and weakened Railtrack’s ability to manage its assets.
The regulatory arrangements were confused by a failure to define the respective roles of OPRAF and the Regulator adequately.
TOC bidding assumptions were optimistic, resulting in SRA bail-outs and some transfer of risk back to the tax payer.
Some of Railtrack’s major projects slipped out of control.
The contractual incentive structure contained inconsistencies.
Competition in the market for rolling stock has been inadequate.

13. The M&R contracts weakened Railtrack’s ability to manage its assets
Railtrack inherited M&R contracts negotiated by BR staff, officials and advisers which contained clauses to encourage the sale of the INFRACOs.
The contracts were fixed price and output-based, with incentives that were capped and with limitations placed on Railtrack’s ability to renegotiate.
Skilled staff and essential asset information were passed to the contractors. Asset data bases were not updated and Railtrack was denied access to information
Lack of information (and loss of skills) made it difficult for Railtrack or the Regulator to understand, or to forecast, infrastructure costs reliably.

14. Confusion in policy and regulatory roles which crystallised around investment
OPRAF/ SRA failed to give leadership or support to the original contractual-based investment planning process in the industry.
Under Government pressure, the Regulator introduced new licence-based controls requiring Railtrack to invest.
But, unlike other privatised industries, it was SRA/Government, not the user, who would pay for this investment.
Consequently both SRA and the Regulator have been planning infrastructure investment without coordination, resulting in conflict between them.

15. The accident at Hatfield precipitated a crisis in the industry
Railtrack’s response to Hatfield was sensitised by the public reaction to earlier accidents and continuous denigration by politicians, the media and the Regulator.
In response to Hatfield Railtrack’s senior management imposed speed restrictions all over the network resulting in profound disruption.
Engineers were no longer willing to make sensible judgements on safety and a programme of massive replacement began.
Risk aversion, rather than safety, has resulted in industry costs spiralling out of control.

16. Safety or risk aversion?
Safety has shown greater improvement than under BR.
Main instruments which increase safety are not cost-intensive.
RSSB has suggested £3.36m as benchmark cost to be incurred to save a life.
Many post-Hatfield schemes may imply a more than tenfold cost per life saved.
Risk aversion rather than safety dictates much of the huge increase in NR’s costs.
Need for a determinate balance to be struck between safety, reliability and cost to control costs.

17. Relate to argument on underinvestment

18. Simple unit cost measures
Figure 1
Total Rai
l Industry Cash Costs per Train Kilometre
0.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
20.0
22.5
25.0
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985/86
1987/88
1989/90
1991/92
1993/94
1995/96
1997/98
1999/00
2001/02
2003/04
£ Per Train Km, 2001/02 Prices
Average = 15.0
Previous peak = 16.5
Hatfield accident
19.3
(a) Note: preliminary estimates for 2002/03 and 2003/04 are based on rises in Network Rail costs since 2001/02. Other industry costs are assumed
constant in real terms, as data is not yet fully available beyond 2001/02.
Source: Smith (2004). Mimeo, Institute for Transport Studies, University of Leeds.
21.7 a

19. Network Rail is poorly placed to ‘lead’ the industry
The decision to place Railtrack into administration for over a year and then to create Network Rail(NR) reinforced the escalation of costs.
NR has weak incentives to control costs and aspires to ‘engineering excellence’, rather than cost control.
NR presented a business plan to the Regulator proposing to double the expenditure which Railtrack had carried out over the previous 5 years (which itself was about 30% higher than BR).
Consequently, the Regulator increased his expenditure estimates made 18 months earlier by about 25%.

20. At current cost levels Britain’s railway represents poor value for money
Project costs for capacity enhancements have increased even more than running costs. West Coast Mainline upgrading costs increased by a factor of 5.
At current levels of costs investment in the railways is not economically justified.
The Government’s plan for a major increase in traffic on the railways is now unachievable.
Therefore, the Government’s main priority in its review of the railways should be to reduce costs and restore reliability.
Enhancement investment

21. The existing structure of the industry should be allowed to work properly
The institutional arrangements for policymaking, planning, public service procurement and regulation need to be streamlined so they can work in harmony. Existing conflicts and duplication of roles should be removed.
The contractual incentive structure of the industry should be improved and strengthened.
Industry managers must be supported so they can recover their confidence and achieve a sensible balance between safety and costs.

22. Responsibility for four distinct, but linked, roles must be clarified.
Policy formulation- the industry needs a coherent and consistent policy framework within which to operate.
Strategy and investment planning - to translate policy into action plans.
Procurement of public services and contract management.
Regulation – to strike a balance between protecting both the public and private sector investors.
Currently these roles are confused, inconsistent or neglected, resulting in conflicts and duplication of effort.

23. The Government must provide clearer policy leadership
Government must provide a consistent overall policy framework. The key policy decisions needed are:
- balance of resources between road and rail,
- balance of subsidy and fare box revenue
- criteria for the allocation of subsidy and investment to determine the size of the network and the level of services to be supported.
Investment criteria
To date, the Government has failed to provide this.

24. SRA should translate policy into action and provide advice on policy options
With clarity of policy from Government, SRA/Agency can develop a consistent strategy and investment plan for the railways, working closely with NR and the TOCs.
This will require the hard choices to be faced on the use of subsidy, fare levels, priorities in the use of scarce capacity, affordable investment levels and rational criteria for safety expenditure.
These issues must no longer remain unresolved and ‘floating’ between Government, the SRA and the Regulator.

25. The functions of the SRA/Agency and the Regulator should change.
To ensure consistency between the outputs required from the TOCs and the corresponding infrastructure outputs, the SRA should decide the outputs to be provided by Network Rail. A contract would then be negotiated to decide the price of these outputs.
The Regulator would no longer have the role of deciding both Network Rail’s outputs and the price to be paid by the TOCs/SRA.
. Instead, the Regulator would have a review role, facilitating agreement in the negotiation process between SRA and NR and would arbitrate in case of disputes.
This arrangement would enable SRA to control its own budget, while providing regulatory protection to private investors.

26. The current arrangements for regulating Network Rail has been ineffective
The current arrangements require the Regulator to make what are essentially policy decisions on the appropriate level of infrastructure outputs (including safety) and on the pricing of these outputs which commits Government expenditure.
RPI-X regulation requires an ability to forecast expenditure requirements over 5 years with a degree of certainty. This has not been possible, due to the current poor understanding of railway assets and its cost drivers.
Without the ability to forecast reliably how costs will vary with different policy options, there cannot be a productive dialogue between Government and the Regulator

27. Our proposals will cope better with these uncertainties
An SRA/NR commercial contract can adapt more flexibly to uncertainties in NR’s costs than a five year regulatory settlement.
SRA should pay NR through disaggregated, specific,charges for infrastructure outputs on individual lines, compatible with the individual TOC franchises. These charges could include specific performance incentives tailored to user requirements.
SRA has extensive technical resources which should enable it to operate as an informed buyer from NR and the TOCs, and judge the need to flex the contract terms to changing circumstances.
ORR should review all contracts in the interests of the customer and all other parties

28. Policymaking, Planning, Procurement and Regulation - NOW
Government
Sets constraints (no cuts in services)
Sets (unrealistic) industry targets
Complains about the results
Government
Sets constraints (no cuts in services)
Sets (unrealistic) industry targets
Complains about the results
Strategic Rail Authority
Specifies and manages TOC franchises
Fails to produce industry investment plan
Argues with Regulator about NR’s outputs
Has unproductive dialogue with Government
Regulator
Approves TOC/NR access agreements
Specifies NR’s outputs and prices
Changes contractual framework
Ignores the SRA
Network Rail
Aspires to ‘engineering excellence’ (efficiency?)
Negotiates an inflated ‘bid’ with the Regulator
Passes risks back to taxpayer
Train Operating Companies
Provide services to specification
Respond to contractual incentives
Pass risk back when fail to meet forecasts

29. Policymaking, Planning, Procurement and Regulation - FUTURE
Government
High level policy framework
Sets subsidy budget
Approves evaluation criteria
Approves major investments
SRA (or new Agency)
Prepares strategic plan
Advises Government on policy choices
Specifies train services and network outputs
Negotiates and monitors contracts with TOCs and Network Rail
Regulator
Reviews contracts
Arbitrates in disputes
Applies licence conditions on NR for cost transparency
Train operating companies and Network Rail
Operate under commercial contracts and incentives
Develop consistent output requirements
Cooperate in network planning and operational control

30. Multi-party contracts
Other contractual arrangements are needed to deal with complex situations such as:
major time-table changes
investment plans
investment implementation: managing disruption and possessions
These require:
Negotiation between interested parties
Analysis of losers and gainers
Compensation

31. Many of Network Rail’s initiatives are welcome
Network Rail is improving coordination of operational control with the TOCs.
It plans to optimise the timetable by reducing the number of trains to improve reliability.
It has adopted a more systematic approach to maintenance and it has invested in training and improved mechanisation.
BUT it is probably doing too much, since its costs have doubled expenditure on the infrastructure.

32. Network Rail should not be given a wider role in the industry
NR should NOT take over the planning role from SRA, to translate Government policy into proposals for expenditure which NR itself will then deliver.
NR should NOT be given the role of ‘managing’ the TOCs - creating a ‘ Fat Controller’ to ensure coordination in the industry
Neither should it dominate investment planning, timetable changes or other capacity optimisation
These proposals would create a major conflict of interest with NR’s role as a supplier of services to the TOC’s and Government.
They would give NR excessive power, while leaving it with poor incentives to perform efficiently.

33. Conclusions
Achievements of privatised railways until Hatfield under-rated
Most problems by then solved or soluble
Actions after Hatfield created two unparalleled problems
Darling should concentrate on solving both and not be distracted
To do so, the first need is to sort out , clarify and make more rational the roles of Government, SRA/Agency, TOCs, NR and other players
As important is to restore and extend reliance on contracts rather than be misled by the Fat Controller delusion