Fire and Steam

by Christian Wolmar

  The government, though, was not listening, driven by the imperative to get the scheme completed within the lifetime of the Parliament. British Rail managers were deliberately excluded from the consultation process after one meeting with MacGregor at which the heads of the profit centres unanimously warned that the scheme was unworkable, a message the government did not want to hear. Paradoxically, they were also asked to bid for franchises, as the government favoured management buy-out schemes, but eventually they would win only three of the twenty-five franchises.

  The government decided that franchises were to be for terms of seven to fifteen years, which meant that the rolling stock would have to be leased, since trains generally have a life of twenty-five to thirty-five years, and franchisees could not be expected to buy them. Consequently, three rolling stock companies were formed which took over all of British Rail’s 11,260 coaches6 and these were the first part of the organization to be sold in early 1996. There was a paucity of bidders, because the City was wary of an unproven market, and they went for £1.8bn, which was far less than their value since, within two years, all three had been resold for a total of £2.65bn. The National Audit Office later found that the taxpayer had lost out to the tune of around £700m in the sale.

  Railtrack had been separated off from BR in 1994 and was privatized by a public flotation in the spring of 1996 with shares being sold to the public at £3.90. They eventually rose to a stunning £17.68 two years later, but then the boom collapsed after the October 2000 Hatfield crash and finally the shares were bought back by the government at just £2.62. The other important part of BR to go under the hammer were the thirteen infrastructure units, responsible for renewal and maintenance,7 which had been separated off from Railtrack, a disastrous decision as it meant the company had no engineering expertise. They were divided into regional maintenance and renewal companies, and were sold for a total of £169m, but the purpose was not so much to bring in money as to turn Railtrack into a kind of shell company whose main function was running contracts. It was to prove a terrible mistake.

  Meanwhile the franchise process was under way. It had taken a long time for the Office of Passenger Rail Franchising, created to run the franchise system, to prepare the contracts for privatization and there was a belated legal challenge from a pressure group, Save Our Railways, which delayed the process. However, after these delays the franchises were let out remarkably quickly in eighteen months, with the process being completed in time for the whole industry to be in the private sector by the May 1997 election. At first there was very little interest in the contracts but a bus company, Stagecoach, saved the day by bidding for the early franchises and winning one of them, South West Trains, in a very generous deal that was to give the firm handsome profits for many years. There were problems with the other two in the first batch, which resulted in the preferred bidders not obtaining the contracts but to a large extent the sales process went off smoothly. It was clear that the government was not expecting much growth or development of the railway but, instead, was attempting to manage a declining industry as cheaply as possible. Towards the end of the franchise process, many more bidders came forward, attracted by the early generous deals, and put in offers that proved to be far too optimistic. They obtained franchises predicated on rapid increases in revenue or, more usually, sharp cuts in costs which were not deliverable. BR had been far more efficient than the private companies had reckoned and consequently several new operators soon found themselves in financial difficulties.

  The biggest failure was on the West Coast Main Line where Virgin had bid very optimistically on the basis of a fully refurbished line with a new untried radio signalling system that promised to increase capacity dramatically – all of which was supposed to be delivered by Railtrack with private sector investment. In the event, Railtrack had been far too optimistic about the technology and its failure to bring about the West Coast improvement contributed in no small part to the collapse of the company. The government had to bail out the Virgin franchise and it became a management contract, which means that it paid Virgin a fixed fee (with a small profit margin built in) to run the trains, irrespective of passenger numbers and without any risk to the private company.

  Virtually every aspect of the sales process attracted controversy and the opposition was relentless, which forced the government into several concessions. There were rows over fares, the number of stations selling tickets and network benefits. On fares, the government was forced to accept that season tickets and savers would be regulated, initially at 1 per cent below the level of general inflation,8 and a proposal by the Rail Regulator that tickets should be sold only at 400 key stations was quickly thrown out. The government also promised that network benefits such as the inter-availability of tickets and railcards, like those for young people and senior citizens, would be retained under the new system.

  Labour ultimately ducked out of full-scale opposition to the privatization. There was a moment when, in the preparation of its statement for the Railtrack sale prospectus, it could have committed itself to reversing the process. Tony Blair, the new Labour leader, had indeed promised a ‘publicly accountable, publicly owned’ railway at the 1995 party conference, but when pressed he never explained what that meant. Labour allowed the moment to pass and, indeed, helped to ensure that all the franchises were let by the time of the 1997 election by encouraging the Passenger Transport Executives not to block deals over their local franchises. Worse, its posturing cost the taxpayer money. When Clare Short, the Shadow Transport Secretary in 1995, expressed Labour’s opposition to sale of the rolling stock companies, the City lost interest and consequently the price was lower than expected.

  Labour’s antipathy to the rail companies continued in government, but without any suggestion that renationalization was being considered. John Prescott, who took on the transport role after the 1997 election victory, was openly hostile to the train operators, but it was made clear to him by Tony Blair that the new structure would be retained virtually intact. After a couple of years of inactivity, Prescott managed to create a Strategic Rail Authority, which had the task of managing the franchises and setting long-term strategic goals for the industry, something it largely failed to do in its short existence.

  At first, privatization worked quite smoothly and the performance of train services even improved, mainly because the staff continued to work as if they were still serving one organization. There were some beneficial changes: the creation of a National Rail Enquiry Service, replacing the haphazard system of regional centres and stations, was a massive improvement and some of the new operators provided far better information systems on platforms. Fleets of modern trains were introduced on several lines, notably the Pendolinos and Voyagers on Virgin’s two franchises, although much of this investment would have been made even if BR had not been abolished. There was some expansion of services, notably on the Midland main line between London and Leicester, but on the whole it was business as usual.

  However, difficulties soon emerged as a result of the contradictions inherent in the policy and fundamental flaws in the structure. In particular, there were two successive and partly interlinked problem areas: safety and cost. During the first few years of privatization, there was a series of accidents that undermined confidence in the safety of the railways: Southall (1997, seven dead), Ladbroke Grove (1999, thirty-one dead), Hatfield (2000, four dead) and Potters Bar (2002, seven dead). The first two were caused by trains going through signals at danger, the others by poor track maintenance. The new post-privatization structure of the industry was responsible in some measure for all of these accidents9 and, crucially, the public’s confidence in the railways was dented, even though, statistically, this was one of its safest periods.10 The most damaging of these accidents was Hatfield, ironically, as it was the one which resulted in the fewest deaths. Caused by a broken rail which had not been maintained properly, it led to a panic among Railtrack executives who, thanks to the fragmented privatized struc
ture, did not have the engineering expertise to assess how many other sections of track might be in a similarly dangerous condition. With only the advice of consultants to call upon, they agreed to the imposition of hundreds of speed limits around the country,11 many of just 20 mph, which effectively brought the railways to a standstill in what the chairman of the Strategic Rail Authority, Sir Alastair Morton, called a ‘collective nervous breakdown’.12 Travelling on the railway suddenly became a nightmare, with nationwide disruption on a scale not seen since the Second World War. On several lines, such as the East Coast and West Coast, barely a quarter of trains were running on time and the media was full of horrendous tales of passengers being delayed for hours. The damage was long-lasting as it proved hard to remove the speed restrictions because of health and safety rules, and in performance terms it took the railways five years to recover.

  The long-term consequences of Hatfield were enormous. The accident bankrupted Railtrack because of the penalties it suffered under the performance regime for having imposed the speed restrictions and the cost of the often unnecessary repairs that it undertook. Railtrack’s shares started plummeting and despite making a staggering loss of £534m in the 1999/2000 financial year, the directors still made a dividend payment to shareholders. This daft move was the last straw for Railtrack as the company was forced into administration by the Transport Secretary Stephen Byers. Billions of pounds were spent across the network in order to prevent another Hatfield and the cost of the work soared as safety procedures were tightened up. Another half a billion pounds was spent on fitting the Train Protection & Warning System, that automatically prevents all but the fastest trains from going through red lights and significantly slows down the others. This ensured there would be no repeat of Ladbroke-Grove type disasters, caused by trains going through red lights, known as Signals Passed at Danger (SPADs).

  As fears about safety on the railways receded, another problem emerged: the massive cost of the railway to taxpayers, particularly when compared with British Rail. The biggest irony, and indeed failure, of privatization was that far from reducing the cost of the railway to taxpayers, it soared to unprecedented heights. Privatization also brought with it a lack of transparency about the financial affairs of the railway, making comparisons difficult, but a reasonable estimate of the cost to taxpayers since the creation of Network Rail stands at around £5bn annually.13

  The reasons for this increase are not at all clear,14 although there are some obvious pointers. There is, as supporters of privatization argue, more work being carried out than before but it is also very clear that much of it does not represent value for money. The hopes that operation by franchises would lead to a reduction in subsidies were soon dashed. Several companies got into financial difficulties and came begging, Oliver Twist-like, for more, which they were duly given (until Connex, the French company running the South Eastern services, was finally given the boot in November 2003 at the second time of asking). The idea that the total amount allocated for franchise payments, which had been doubled at privatization from £1bn to £2bn in order to attract bidders, would go back to the BR level within five years therefore proved fanciful.

  The rolling stock companies (roscos) were another source of increased cost. As we have seen they were privatized too cheaply, but then bought at more realistic prices, making it necessary for the roscos to keep leasing prices, particularly of old trains, relatively high. The roscos are not regulated but have an effective monopoly since there is very little spare rolling stock in the system and, in any case, it is often difficult to move stock between lines.15 The high profitability of the roscos finally angered ministers so much that in 2006 they launched an inquiry in an attempt to cut the cost by £100m (about 10 per cent).16

  However, it was the demise of Railtrack and the post-Hatfield traumas that did most to push up costs. With safety fears paramount and the depletion of engineering skills within Railtrack, both the cost and amount of work being carried out soared. There was a total lack of financial discipline. After a year of administration in which costs rocketed, Railtrack was replaced by Network Rail, a company of limited guarantee (in other words, it has no shareholders and profits are recycled through investment). In reality, this was a renationalization since it is a quasi-public sector company which can borrow money on the basis that the loans are government-backed. Yet it pays high salaries and bonuses to its top managers comparable with those in the private sector even though it does not take entrepreneurial-type risks. Network Rail sensibly took back the maintenance in-house, putting the private companies out of work, although they received considerable compensation and their workforces mostly joined the new company. Although this saved some money, costs still remained high and as a result subsidy has been far higher than under BR for several years.

  A veteran BR manager, Ivor Warburton, who used to be in charge of the West Coast Main Line, explains best how the new system fails to keep down costs by telling the story of a culvert which had some risk of collapsing during the days of BR. At the annual budget meeting, Warburton asked his local engineer whether the culvert would hold up another year. The response was equivocal, but Warburton, needing to save money and work to the budget, decided not to replace it. In fact the culvert did collapse that year, causing some delays, but Warburton remains convinced he made the right decision: ‘The single negotiation with government over the budget feeds through the whole organisation and someone makes a rational judgement that has a risk associated with it, with a possible operating inconvenience that has to be contained within the overall target.’17

  That story encapsulates why the railways are so expensive to run today. Under the current system, no one would be able to make such a reasoned risk assessment. Instead, repairs and renewal which could possibly wait a year or more are carried out because the industry has become so risk averse and no one is taking decisions in the context of a tight annual budget. The railways need to be under the control of a single organization with its own budget and a decision-making process that balances all aspects of the railway, from the ballast and rails to the catering and rolling stock, when allocating funds and resources. With the fragmentation of the industry into over one hundred companies, each of which needs to make a profit and has complex contractual and legal relationships with the other companies, the ability to control expenditure has been lost. Decisions, often incompatible, are made by the various stakeholders, none of which has the overall interests of the railway in mind. The most obvious case of lack of coordination was the debacle over the Southern power supply when train operators found that there was not enough power to run the new trains they had ordered through the leasing companies. Nobody, it seems, had bothered to check whether the trains could run on the existing power supply and they had to sit in sidings awaiting the upgrade which eventually cost Network Rail and therefore taxpayers £700m.

  Another pertinent example is the fact that train companies are paid millions of pounds annually in compensation because Network Rail closes a line for track repairs or for other improvements. In other words, the operators receive money for not running trains whilst at the same time allowing their supplier, Network Rail, to provide them with a better service. The great railway barons of the nineteenth century would never have tolerated exercising so little control; they were genuine risk-taking capitalists. Under the present system, in contrast, a game of ‘pretend capitalism’ is played, with the taxpayer always in the background to pick up the tab. Moreover, there has been a huge increase in staffing costs since all these companies have chief executives and finance directors on very high salaries, as well as other executives such as communication and human resource directors, in addition to the widespread use of lawyers and consultants.

  Alistair Darling, the Transport Secretary between 2001 and 2005, realized that the railway was not efficient and launched a rail review in 2003 to look at the structure of the industry. It reported the following year but ducked the fundamental issue about reintegrating the railway,
arguing that it was too complicated in an age of many rail companies as they would have to run over each other’s tracks. In the past, of course, such arrangements were commonplace.

  The Railways Act 2005 that resulted from the rail review abolished the Strategic Rail Authority after just five years of existence, dividing its functions between Network Rail and the Department of Transport. It also transferred the Railway Inspectorate from the Health & Safety Executive, which was thought to be imposing unnecessarily stringent safety requirements, to the Office of Rail Regulation, with the idea that there would be a better trade-off between improved safety and increased costs. Because the fundamental issue of reintegration was not addressed the high cost of the railways remains the industry’s greatest threat, since it presents a barrier to improvements and keeps alive the fear that an economic crisis could precipitate a sharp round of cuts to railway services.