No way to run a railway

Britain's railways are too costly and inefficient and desperately need a shake up, according to a new government report. Simon Wilson investigates.

What happened?

The government's rail adviser, Sir Roy McNulty, has delivered a report on the future of the railways. Its main findings are these. First, that some of the inefficiencies built into the British system date back to the 19th century. For example, when Network Rail needs access across private land, the landowner is entitled to "extract ransom payments" under the Railway Regulation Act of 1842. Others date from more recent times, but are no less onerous. For example, McNulty says that many train drivers (who earn an average wage of more than £41,000) spend less than half their contracted hours actually driving trains. If a ticket machine at a station needs replacing, the task involves "at least ten decision-making stages". In short, he says costs are too high.

Didn't privatisation cut costs?

A lot has improved on Britain's railways since privatisation, but at a price. Improvements following a series of major accidents mean that rail travel has never been safer. Record numbers of passengers are travelling up 57% since 1996/1997. Punctuality has improved dramatically: fewer than one in ten trains runs significantly late. But all that has come with a hefty price tag. Subsidies have ballooned from £1bn twenty years ago (and less than £2bn in 1996/1997) to a peak of £6.8bn by 2007 since easing to £4.6bn in 2009/2010. Yet despite all that extra custom and subsidy, the average cost per passenger stuck at just over 20p per passenger kilometre; and in terms of today's prices, passenger spending has jumped from about £7bn a year to £11bn today. Meanwhile, the industry's £4.3bn operating deficit (ie, passenger revenues minus costs, ignoring subsidies) has barely shifted.

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What went wrong?

The British model is too complicated, too fragmented and has created a system overwhelmed by bureaucracy and lacking strategic leadership. Britain is the only European country to have developed such a proliferation of rolling stock companies (Roscos) and train operating firms (TOCs) and regulators instead of one powerful national operator. As McNulty has it: "fragmentation" between Network Rail and the train firms creates a "barrier to efficiency", which means costs are 40% higher than the average in France, Sweden, the Netherlands, and Switzerland.

Why does the structure matter?

Because it throws up all of kinds of disincentives and paradoxes. For example, the fundamental problem with the railways in London and the Southeast is a lack of capacity. This can only ultimately be addressed either by pricing passengers off the rail and onto the roads creating a rich man's railway and worsening road congestion or speeding up the programme of lengthening platforms to allow for longer trains. But, as the Public Accounts Committee pointed out recently, rail operators' contracts with Network Rail don't include any obligation to increase capacity to respond to surging demand, which is the reason so many rail commuters spend their journeys standing.

Don't private firms get penalised?

The franchise system, with its complicated fee structure based on predicted passenger numbers, means that some private firms are allowed to walk away from their contracts rather than face losses, as First Group did on the Great Western franchise earlier this month. First Group has been receiving "revenue support" from the taxpayer because passenger numbers have unexpectedly fallen during the recession. But it's still cancelling its contract three years early to avoid making premium payments (excess profit levies) of around £800m in 2013-2016. It's a no-brainer for First Group's shareholders, but a blow for the current structure. Responding to McNulty, the Confederation of British Industry said: "We will not see much-needed investment in our rail network unless the government delivers on more flexible, long-term rail franchises, and backs modernisation of outdated working practices."

What's the solution?

McNulty proposes maintaining more or less the same structure with a relentless focus on cutting costs. He says there should be no overall increase in fares. Rather, off-peak fares should rise to manage demand, especially on trains running close to the peak times. Other recommendations include phasing out ticket offices in small stations, removing conductors, and giving train operators control of maintenance on some routes. The aim? To strip out £1bn from the industry's £12bn costs by the end of the decade. Passenger numbers are predicted to double by 2030 and McNulty insists that cutting costs will lead to downward pressure on fares. However, without more radical reforms, that seems optimistic.

How will cost reduction work?

Commentators from The Times' Ian King to the RMT's Bob Crow have pointed out the apparent irony of appointing First Direct's Tim O'Toole the man who has just walked away from the Great Western franchise as the first chair of the newly created Rail Delivery Group, charged with co-ordinating cost reductions across the industry.

For the train unions, who have done a remarkable job in advancing the interests of their members over the past 15 years, cost-cutting is code for an attack on their pay and conditions. Tube passengers in London are already all too familiar with the take-no-prisoners approach of Bob Crow and the RMT; it seems likely that the rest of the country may be about to experience it first hand too.