RAIL 828: Reshaping NR in a new form

My last two Comment pieces prompted some lively reaction - not least the last one where Wolmar and I found ourselves in agreement (via diverse routes, admittedly!) that developing Network Rail as the railway’s desperately needed guiding mind is a necessary idea. 

As I forecast, a few folk did indeed believe we’d both become unhinged, while others thought we’d gone native. Yet more just dismissed the idea as impossible. 

“You know the old one about the difficulties of turning a supertanker around? Well, NR is a supertanker in a dry dock!” was one especially memorable riposte, delivered personally to me at the National Railway Museum annual dinner, in late May.

But this discussion must now take place because while the leaderless state of the industry has been problem enough during the heady years of around  6% compound growth, it will become yet more difficult when harder times arrive. And they will. Quite apart from the as-yet unknown impact of Brexit, there’s evidence of growth slowing already and alarm bells are already ringing in some parts of the industry. Quite right too, because if the 20 years of vigorous growth we’ve come close to taking for granted  should falter - or (worse) reverse into falling revenues - be assured that major problems will soon follow. The railway really does need to get its act together.

Stagecoach has been open about the challenges it faces in meeting the revenues it requires to satisfy the terms of the demanding East Coast franchise. Elsewhere, it is said that revenues are flattening. It is likely that Brexit will make matters worse - there is certainly nothing to suppose it will encourage growth! 

This is a major problem for franchise bidders, if they are to avoid becoming the ‘preferred loser’ by finding themselves staring down both barrels of undeliverable commitments. It is entirely possible that any kind of economic slowdown happening between winning a bid and actually taking over will become a very real risk. A bidder could easily end up being sunk from Day One of a franchise, 20 years into a privatisation that has had more public investment in the railway than BR could ever have dreamed of.

The short-lived Strategic Rail Authority was wound up in 2004 by Secretary of State for Transport Alastair Darling. This led to the railway first being rendered leaderless, and then increasingly sucked into detailed control by the Department for Transport. Around the same time as the SRA was canned, the independence of the Rail Regulator was also severely constrained. Enraged by Rail Regulator Tom Winsor’s imposition of a £7 billion financial settlement for the railway, Government changed the law under which Winsor had handed it this bill. The Office of the Rail Regulator became the Office of Rail Regulation and the Regulator as an individual was replaced by a board of nine people.

Winsor acidly quipped repeatedly at the time that nine folk were now required to carry out the work he had previously completed alone - but the die was cast and ORR’s power and independence were curtailed. Post-SRA, NR was seen to be nominally ‘in charge’ but in due course power was increasingly centralised at the DfT, where it remains today, entirely in the hands of civil servants.  Never (not even under BR) has the railway been under greater micro-management by officials than it is today - which is what makes calls for nationalisation laughable. This is a dead-end argument, as we made clear in the last issue.  

The need for a guiding mind is as stark as the impossibility of structural change to create one. Even if there was an appetite for legislation, there’s no way that the DfT would admit that it made a mistake abolishing the SRA, by creating a replacement. Given that NR is now an arms length part of Government, it offers our best chance of giving the railway the specialist guiding mind we so desperately need. 

That said, the NR of today cannot fulfil this role without significant change. The good news is that some of the core changes required are already under way. Indeed, behind the scenes, I am confident that NR itself accepts that significant changes are urgently required. 

Firstly, NR’s devolution programme must not only be successfully driven through, but the Routes must be run by Managing Directors with the cojones to seize the initiative, take control and create efficient, low-cost, business-focused organisations which take direct control of, and total responsibility for, their infrastructure projects. By implication, this means winding down and dismantling NR’s oft-criticised central ‘IP’ division. This will need to be done carefully, given it represents 22% of the UK’s entire infrastructure projects value. NR Infrastructure Projects has done some good work but it has no place in the fully devolved NR of nine routes, each with its own regulatory settlement, which will be in place by 2019. NR should make this clear now and begin the orderly dismantling and devolution of IP. IP should survive as no more than a plant hire division from which the Routes can hire the Kirow cranes and other heavy equipment they will not wish to own.

An NR system operator will be needed to ensure the timetable works properly for everyone - including freight and open access operators - and there will need to be a central custodian of standards, technology and environmental matters. This is a major shift from the NR of today, but it could indeed also serve as a guiding mind for the railway as a whole.

NR will still be a monopoly supplier of an essential public service, and so by law will be required to be subject to independent economic regulation. It will be necessary for a rejuvenated ORR to regulate an arms length NR of nine devolved Routes. ORR will need to improve its own knowledge and expertise. For example, third party investors (private and public sector alike) must be able to ask ORR how much a platform or a kilometre of plain double-track electrification will cost - and be confident of prompt, reasonable answers. 

The cultural permafrost of NR’s middle layers, which often makes the organisation slow and unresponsive (not because of a lack of commitment by staff, but more because of the monolithic nature of the company and its history), would also be melted by these changes. But this transformation will depend on the presence of gutsy, capable RMDs who are prepared to step up and really take control.

What I am describing is not the NR of today, and those who would pooh-pooh this future should remember this. But the building blocks are in place and we all agree that the railway desperately needs that guiding mind. Can NR and ORR drive this change - and take the operators and supply chain with them?

Or do we carry on with the current sub-optimal arrangements? If the industry doesn’t modernise then we’ll continue to muddle along - and those distracting arguments about nationalisation will never go away.

Comment: RAIL 828: June 7-June 20 2017