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The Enterprising Railway

Elephant on the Line: time for Vertical Integration

The Elephant on the Line – has the time come for ‘Vertical Integration’?

David Prescott, Rail Reform Group

For the third time in just over one hundred years privatised railways have been brought under complete government control.  In 1914 and 1939 it was to support the war effort, and to concentrate the whole of the rail industry in supporting the war effort and also compensate for supressing non-essential travel.  The same has happened with Covid-19. This time it is more to keep the industry on life-support as virtually all passenger travel has been suppressed to help tackle the health crisis  Essential freight is still required and arrangements needed to be made to ensure as much national resource was directed to moving essential supplies.

Due to the fragmented nature of the rail industry and the wider scale and reach of the multi-modal logistics industry, the rail freight operators have not been brought under direct government control.  However they can still benefit from the general economic support arrangement available to all employers, if they require this.

So with all franchise passenger operators and Network Rail under government control any changes to industry structures will be easier to make.  Moreover as the current railway industry economic model is almost certainly untenable in the foreseeable future there will need to be both a significant reduction in operating costs to match the changed income and much quicker decision making to reallocate under-used or redundant resources to meet the new economic future, in particular the ‘Reverse Beeching’ re-openings as part of the ‘levelling up’ that has been promised.

There have been three recent opinion pieces from industry leaders in the railway press: Sir Michael Holden, Professor Andrew McNaughton and Network Rail’s CEO Andrew Haines all looking at the future of rail in the 2020s (RAIL May Issues 904/5)

None of these commentators have strayed from the current vertical separation that characterises the current railway; in spite of all of them raising issues that need solving, but which arise specifically as a result of vertical separation.

The background

The current rail industry structure arose from a mix of a European Directive designed to solve a European cross-border rail problem and policies developed by the free market, neoliberal Adam Smith Institute.  This was used at the time to support the policy to privatise the railways with the desire to introduce competition on the railway.  It was specifically intended not to privatise British Rail as a single unit.  Rail privatisation was carried out at incredible speed, given the scale of the change.  Consequently, as the implications of the initial decision to privatise operations and leave the network (Railtrack) in the public sector started emerge, there was not time to revisit previous policy decisions.  So franchising was created; on-rail competition in the passenger market was restricted (and still is), with freight operations being the only competitive on-rail activity.

The key driver to the growth in efficiency that characterised the Business-led railway of the 1985 to 1994 era was the ‘single controlling mind’ which was well structured, starting at the local level with business managers responsible for the entire business performance of manageable sections of railway.  They were the base of a classic chain of command and were overseen by sub-divisions of the five Businesses, the Business HQ and finally BR HQ.  This coupled with clear delegation, within clearly defined parameters, and with clear and agreed objectives, resulted in a responsive organisation which was able reduce the costs to the exchequer and to improve the quality of the services provided.

Ultimately it was this very organisation that was able to carry through the privatisation break up so effectively and lead to where we are now.  John Nelson who was at the heart of the break up process is clear in his book “Losing Track” that that vertical integration was seen as the most financially and operationally efficient manner in which to operate the railway.

Lack of a guiding mind

There is now no single guiding mind at any level in the industry.  In its place is a mass of bureaucratic process across the industry, including funders, to regulate the contracts and interfaces.  The linkages between costs and benefits, which are so fundamental to the operation of an efficient industry, have been completely lost and with it all natural pressures on cost control.  Contractual requirements can be in conflict, in spite of them all coming from the DfT.  In short the industry has become too fragmented, too big and too complex to be managed effectively as a single unit.

It is suggested that this issue is at the heart of the problems of the current rail industry in that it is trying to perform in a way that is contrary to the model for which it was designed.   It says something about the general resilience of the railway industry and the dedication of many of its staff that it has managed to get this far.

The key issue will be to reduce the interfaces between the many organisations. To do this the industry needs to return to its first principles; that the most efficient form of railway operation is one that is vertically integrated.  The early Victorians, in the unregulated capitalism that operated then, soon discovered that, when inefficient businesses went bust.  It is often forgotten that the Stockton and Darlington Railway started life offering what we would call “Open Access” mirroring the Turnpikes of the day.  But railways, with their fixed network and need for moves to be fully choreographed, are not the same as roads.  This lesson was forgotten in the privatisation era.

In fairness the DfT is not against vertical integration with two examples: the largely self-contained South Wales Valley lines network has transferred to the franchisee as part of the planned upgrade of the Welsh network and the creation of a bespoke Valley Lines operation, which also operates on Network Rail infrastructure.  Perhaps more surprisingly the 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 English South Midlands, having physical interfaces with at least three Network Rail Regions and all of its train services requiring access onto Network Rail infrastructure.  This is fairly obviously an added complication in managing the network, but seen as more appropriate for the project delivery phase.  However it illustrates that arguments about fragmentation of infrastructure management are not sustainable.

Vertical Integration in the UK

Other vertically integrated networks remain in the UK including Northern Ireland Railways, London Underground and the Tyne and Wear Metro, all of which interface with other operators.  Crossrail has been built as a section of vertically integrated infrastructure, even going as far as providing its own, non-standard, signalling system which prevents other operators running through their tunnels.  The concept of vertical integration is also integral to the operation of tram networks in the UK, in spite of the obvious option of the track being provided by the highway authority.

At privatisation the network/train operator interface largely revolved around the wheel/rail interface, with the vehicle/structure interface (platforms and bridges etc.) and for some the electric traction power provision (third rail or overhead).  Signalling was a managed activity relying largely on passive equipment and a human interface (drivers).

Whilst these interfaces still apply a totally new interface in the form of ‘Cab Signalling’ has arrived, which substantially increases the involvement of the network operator in physical train operation.  As this is seen as the new future for signalling, there is a huge programme of new signalling works fast approaching which will require very detailed, complex and safety critical working between operators and Network Rail.

Now is the time to change

Now is the time to change, while all of the operation is under government control and with a strong need to reduce costs – and before the massive, complex and costly provision of network-wide in-cab signalling starts.

A model more akin to urban metros, (London Underground or Tyne and Wear Metro), where track and train are still run as a vertically integrated operation, is suggested as the model that is also suited for heavy rail operation in metropolitan areas.  The dense suburban networks (London or elsewhere) need to secure efficient use of the constrained infrastructure and consequently there is a strong need for a single ‘controlling mind’.  The absence of such oversight has been so well illustrated in Manchester.  In these cases there is little likelihood of rail-on-rail competition, so the current structure is not operating in the manner for which it was intended and is hindering the delivery of cost effective and market responsive rail services.

For long distance operators it is conceivable that a rail-on-rail competition model could operate effectively and ORR has recognised this with its CP6 Open Access charging mechanism, designed to ensure that Open Access operators contribute to the fixed costs of the infrastructure. In fact the rate for the Open Access Fixed Track Access charge is higher than that 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 sought to serve at all or only with a token service.

There are a finite number of paths on main lines and capacity at terminal stations is potentially a limitation, so the design of the train services, especially stopping patterns and train performance, can have a huge impact on the use of the infrastructure.  Surprisingly it appears that HS2 is not intended to operate as open access infrastructure, in spite of all its paths being the same on the High speed Line, but that the train paths will effectively be under HS2 (i.e. DfT) control. It is, of course, desirable to use the infrastructure insensitively as this will deliver the greatest economic benefit for the expenditure on the network.  The consequence of this is that potentially the network operator will be substantially involved in train service design with a number of competing operators.

So for long distance routes a different model may be appropriate.

Developing the ‘vertical concession’ model

The operation of the railway as a number of long duration, local or geographic vertical concessions, leasing all of the infrastructure for the state (i.e. a much reduced Network Rail to provide protection against default of catastrophic failure either of the infrastructure or of the market as seen with Covid-19.) is suggested as the most cost effective and responsive way to operate the railway in the future.  It eliminates a lot of the inefficiencies that the current contractual system contains, reduced the double staffing implied by the contracts, will speed decision making so reducing costs and responding better to market and business needs.

The interfaces that remain with ‘penetrating operators’ can be managed by standard bi-lateral agreements, as used between London Underground and Network Rail and LU and Chiltern Railways.  The industry is used to ORR’s “Model Contracts” so this is an established process but one which will at least have the potential in many cases to be more balanced with the roles being reversed and both parties being train operator and Network Operator to each other in different, often adjacent area.

Freight operators would be expected to have a presumed general contractual right to operate over most infrastructure belonging to the various network companies.  The ORR model contracts form a good base for this type of operation.

The detailed definition of the vertically integrated units will need careful consideration to deliver maximum benefit, along with local accountability.

Ensuring national oversight

National oversight can be maintained by a combination of the existing organisations, all under overall control of the local operators, much in the same way as the Railway Clearing House Operated prior to nationalisation.

Independent oversight would remain with ORR and RAIB to ensure safety and prevent anti-competitive activity, but with ORR having a light touch approach to economic regulation.  The DfT in England would set overall policy just as it always used to, without being involved in the detail.

Whilst this is a significant task it is not unprecedented as British Rail was fully privatised into a completely different form in only five years from the start of the concept to completion.  This is more of a re-arrangement process with much of the fundamental contractual structure already in place, only needing adaption where required, but with a lot of it redundant.

The current crisis gives both the government and the rail industry an opportunity to adapt the industry to the new future and deliver cost-effective railway to meet the challenging economic times ahead.   ‘Never waste a good crisis’ – this is the opportunity that the industry needed to move forward.  They must take it, otherwise the risk is back to cash limits and managed decline as the financial impacts of Covid-19 begin to bite.

So the options are clear:

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 focussed, cost-effective and value orientated group of railway operations

This is a once in a generation opportunity. The railway industry – and the Government – must grasp it while it can, to deliver on the future net-zero emissions requirement.

David Prescott                       25 May 2020

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