Supplementary memorandum by the Rail Freight
Group (RI 07A)
The Rail Freight Group submitted evidence to
the Sub-committee in connection with the above enquiry on 15 June.
In October, we were invited to submit supplementary evidence on
the same subject.
Since our initial evidence was written, the
Government has announced its Ten-Year Transport Plan. This contained
a much welcomed investment commitment of £4 billion over
10 years in rail freight and some £14.7 billion in rail infrastructure
overall. It has subsequently been clarified that, of this £4
billion for freight, £3.4 billion is expected to be from
the public sector and the remainder from the private sector.
The derailment at Hatfield more recently has
also caused a focus on Railtrack's performance in operating the
This paper therefore provides an update on these
and other issues, focussing to a large extent on Railtrack's management
of the network.
The aftermath of the Hatfield accident has provided
the opportunity to reflect on Railtrack's management of the network,
and whether the current structure of the railways is sustainable
and capable of even continuing at present traffic levels, let
alone delivering the growth that the Government wishes to see.
There is strong evidence that Railtrack knew
about the problems of the rails that appear to have been the cause
of the Hatfield accident some nine months previously. It has been
suggested that the same problem was identified as occurring at
many other sites around the network. Nothing was achieved during
the period to put the situation right on the ground at Hatfield.
There is also evidence that, if Railtrack had
implemented a policy of regular rail grinding, there would be
less cracking, less damage to the rail and also a better ride.
We note that, now that Railtrack has restarted its grinding programme,
the rate of grinding will be approximately the same as that of
British Rail at a time when it was maintaining the network in
a better condition.
Railtrack has also suggested on occasions that
heavy freight contributes to track damage. We understand that
only the occasional freight train uses the line damaged at Hatfield
and international experts are unanimous that heavy freight causes
little damage to a well-maintained track, whereas it can cause
much greater damage to poorly maintained track.
We believe that all these problems and assertions
demonstrate a very serious failure of Railtrack's management but,
from the shareholders' point of view:
the company avoided maintaining the
network properly and paying for the work;
after the Hatfield accident, the
company sought to deflect blame onto the contractors;
at the same time, Railtrack got a
commitment from Government to pay for the maintenance and renewals
that it failed to undertake and pay for itself out of money it
had already received for the purpose from access charges;
its lack of maintenance has caused
serious delays and cost increases for passenger and freight trains
services and substantial loss of business;
Railtrack argues that it should not
have to pay compensation for these delays due to the exceptional
nature of the problem.
RFG believes that the exceptional nature of
the problem is that Railtrack has been found out, and found wanting;
we conclude that the company is not competent in its present form
to retain its Network Licence but that the Regulator may be unwilling
to act since there is no apparent alternative to Railtrack.
These issues are explored in more detail below.
The response of Railtrack to the Hatfield accident
in imposing closures and widespread speed restrictions on much
of the main rail network indicates to us that, if they knew about
the potentially dangerous situation for nine months, they were
running a dangerous railway for that period. If they did not know
the potential danger, then the reaction to the accident can only
be described as panic mismanagement. Several days after the accident
Railtrack closed the West Coast Main Line North of Carlisle giving
its customers just two-hour notice. The Royal Mail trains were
already loaded, as were many freight trains when Railtrack's customers
were told of the closures. Requests for alternative routes were
refused, and freight traffic on that vital route came to a halt.
Railtrack's explanation was that they had decided
to undertake an ultrasonic examination of the WCML tracks between
Carlisle and Glasgow and that total closure was the best solution
to complete the job quickly. Whether this is correct or not, giving
customers about two hours notice is quite unacceptable, and we
would be very surprised if Railtrack could get together the contractors
to do the ultrasonic work at two hours notice.
Effect of delays on rail freight
Whereas in the immediate aftermath of the Hatfield
accident, the effect of the speed limits imposed on freight were
relatively limited, since they were applied mainly to the high
speed lines rather than lines on which most freight ran, the second
round of closures and wider speed restrictions imposed on the
network have had and are still having a disastrous effect on rail
freight. Schedules and driving times are much extended causing
operators who do not have more resources to lose up to half their
traffic and others to lose efficiencies. In all cases, costs have
risen dramatically without any means of obtaining reimbursement.
Already freight traffic is being lost permanently
and many prospects for expansion no longer exist.
There is strong evidence that, whereas rail
passengers may return to rail after a period of poor or no services,
the same is not always true for freight. Customers experience
first hand the delays, cancellations and poor services and compare
this generally with road. Notwithstanding the fact that rail freight
services have improved significantly in the last year, the present
situation will be seen by many as confirming their worst fears
about the railway's ability, in this case Railtrack, to self-inflict
In addition, customers may well be concerned
about the way the network is closed down for long periods after
even minor incidents, and compare it unfavourably with road, where
closure periods after a major accident are kept to a minimum.
Unfortunately maintenance possessions are frequently made at times
to suit the passenger traffic with little or no thought given
to the effect on freight traffic.
Railtrack's Network Licence requires it to maintain,
renew and operate the network in a safe manner. RFG has written
to the Rail Regulator asking him if he believes that Railtrack
has contravened the terms of the licence by failing to maintain
the network in a safe manner and, at the same time, operate the
network for the benefit of the train operators and customers.
The structure of the railways as inherited from
British Rail is that Railtrack is a company which operates the
network by providing the signalling and train planning/timetabling
function, and contracts out virtually all maintenance and renewal
work to contractors. Railtrack now appears to argue that it is
the contractor's responsibility to perform and undertake the obligations
of Railtrack to provide a safe railway.
However, in so doing, Railtrack appears to believe
that it has no overarching responsibility to monitor and manage
the contractors to ensure that they carry out these obligations.
This includes responding to urgent requests from the contractors
for authorisations to carry out works.
This management requires a wide range of expertise
within Railtrack so that, when an accident occurs which is thought
to be linked for example to poor rail quality with potentially
high cost and high safety implications, whereas the contractors
may provide the information to Railtrack as to the implications
of various actions to put the situation right, it is only Railtrack,
the owner and holder of the Network Licence, who have the responsibility
of making the decision about closing the network, imposing speed
restrictions, replacing rails etc, no doubt taking into account
the costs of the work.
We would have expected Railtrack to have ongoing
research and development programmes to ensure that they keep up
with latest developments in this and other areas and, most of
all, we would expect the company to have an engineering team of
the experience, quality and number to be able to take action and
advise the Railtrack Board on possible courses of action.
It is evident that Railtrack does not have this
high level of expertise at present. This inevitably leads to decisions
to play safe at all times (except when it comes to replacing cracked
rails within nine months), when more experienced companies operating
in safety related industries would take a more balanced approach,
and supported by a much greater level of expert information available
in-house, and up to main Board level.
Railtrack a large company
Railtrack's size and monopoly position as infrastructure
owner and manager puts it in a special position with regard to
its suppliers and customers. Whatever the contractual relationship
and notwithstanding the fact that Railtrack is regulated, the
company has the ability to make or break any of its suppliers
and some of its customers, overtly or covertly, if they happen
to disagree. There is an imbalance of size between Railtrack and
these companies which some say are used to their disadvantage.
This may well be a contributory factor to the sometimes poor and
often very confrontational relationship that are reported.
Keeping the network open and operational
Railtrack, no doubt encouraged by the police
and the Railway Inspectorate, are in our view closing parts of
the network for much too long after an incident. The aftermath
of the Hatfield accident demonstrated this, both in respect of
the national closures and speed restrictions referred to above
but also to the fact that the line is likely to be closed for
about three weeks, of which at least one week was taken obtaining
evidence at the site.
Railtrack states in its 1999 Annual Report that
a fatal accident involving one person at Haywards Heath station
caused the main Brighton line to be closed for two days.
We worry that, if and when the next incident
occurs, whether caused by a broken rail, broken wheel or vandalism,
there will again be an over-reaction to close parts of the network
completely. If a broken wheel is suspected, then several thousand
trains might be taken out of service until they are tested. If
a rail bridge crossing a river failed under a flood, is it possible
that all river bridges would be closed until they were examined?
Would this happen on the roads if a lorry involved
in an accident was suspected of having a defective wheel? It is
very unlikely that all lorries with similar types of wheel would
be required to be taken off the road as a precautionary measure
until the results of the accident were known, or all motorway
bridges over rivers closed under similar circumstances.
Similarly, British Airways continued to fly
Concorde after the Air France accident in Paris up to the time
when the cause of that accident was known.
We would argue that the precautionary principle
of closing or restricting rail operations when something goes
wrong has gone too far. Of course investigations have to be undertaken
and lessons learned, as in other industries, but for air or road
the pressures from the operators, airlines and road freight companies,
is taken into account by the safety authorities whereas, on the
railways, either the pressure from Railtrack is much less or the
safety controls excessive, or probably both.
Customers of the railways understand that accidents
have to be dealt with, but the feeling at the moment is that the
delays and disruptions are excessive, and that they are often
caused not really for pure safety reasons but because Railtrack
has neither the expertise to make informed judgements nor the
incentives to carry them out.
Railtrack has argued that the public will accept
this because they want a safe railway. We suggest that the public
want to be assured that they are travelling on a railway that
is safely and professionally operated; they accept that all travel
has risks and get frustrated by what many perceive is a policy
of closing the line or railway and think afterwards. After all,
the safest railway is one on which no trains run, but the additional
risks of accidents when travelling by road should at least be
Railtrack's high costs and low outputs
We hear from many sources that it is very difficult
to get things done in Railtrack. For the maintenance and renewal,
from published correspondence between Railtrack and one of its
maintenance contractors, it is clear that communications, action
and delivery became hopelessly bogged down in a protracted debate
as to who should pay, a classic case of companies fiddling while
the network falls apart.
When it comes to enhancements, we have already
seen the chaos surrounding the WCML upgrade in which Railtrack's
own management failure in basing their upgrade on an unproven
signalling system has cost about £4 billion extra on the
WCML budget. Whereas RFG argued strongly that this should have
been paid for by Railtrack, the Regulator decided that the Government
should pay because, if this did not happen, Railtrack would have
been in financial difficulties.
Railtrack's quoted costs of signalling are spiralling
out of control. Four years ago, the company was complaining that
the lack of signalling resources in the country could restrict
growth and that they would be forced to commission signalling
design activities overseas. Two years on, so few orders were forthcoming
that signalling contractors were laying off staff in large numbers.
Now Railtrack says there is a shortage of signalling people again.
As the only purchaser of signalling services and equipment in
the UK (except some metros and London Underground) Railtrack has
a responsibility to the industry to try to ensure a more steady
workload rather than complain about the consequences of its own
For freight enhancements, Railtrack has never
accepted that they should pay for these as "Reasonable Requirements"
under Condition 8 of the Network Licence. However, in expecting
customers to pay, they do not provide competitive quotes or explanations
for estimates and, in some cases, have started charging customers
for attending meetings to discuss enhancements.
Although Railtrack's Code of Practice for Freight
states that others may design and construct works adjacent to
or on Railtrack's subject only to Railtrack operational and safety
Control, it is generally found that the costs that they charge
even for such services outweigh the saving made by clients commissioning
designers and contractors directly.
Finally, we hear that a recent independent report
on station refurbishment states that over 50 per cent of the costs
are in "management".
It is evident that the market forces and regulatory
constraints are not working here. Railtrack is the monopoly purchaser
of goods and services; any supplier that queries or reports on
such matters is effectively excluded from railway work in this
country; train operators who have to negotiate work with railtrack
are similarly given a "take it or leave it" answer by
Railtrack, a company many times their size, making it clear that,
if they want something done, they had better not make a fuss.
There are of course means of making official
complaints about Railtrack and action can be sought through the
Rail Regulator. One route is that through Section 17 of the Railways
Act but this has not yet so far been fully tested since it is
seen as being both cumbersome and setting even more lawyers at
each other's throats than happens already.
Many are surprised at the apparent inability
of the Rail Regulator to create a situation where Railtrack performs
efficiently and safely. We are surprised that the Regulator has
seen fit to make so many and significant changes to his Final
Conclusions on Railtrack's Track Access Charges compared with
his many draft papers issued for consultation previously. In these
earlier drafts, the Regulator made many points about the importance
of being strong but fair on Railtrack. It is interesting to compare
his initial thoughts and his final conclusions:
|June 2000||Oct 2000
|Allowable rate of return on Railtrack's Regulatory Asset Base, per cent
|Efficiency savings per cent per annum||3-5
The Regulator has also allocated some £4 billion additional
funding from Government to bail out Railtrack WCML upgrade, and
yet further funding for sorting out the present maintenance problem.
This appears to have little to do with the rights and wrongs of
the situation, and all to do with political expediency since "we
cannot allow Railtrack to go into liquidation".
We agree that this would be undesirable in the short term
but, again, it puts Railtrack in the position of knowing it can
do what it likes, because there is not the political will or practical
alternative of removing their Network Licence or causing them
financial embarrassment or worse.
We hope that the ideas set out in this paper will demonstrate
that there are several alternatives.
With recent announcements by Government and the Rail Regulator,
Railtrack can expect to receive an increasing share of its revenue
from Government either through the passenger train operators or,
especially in the case of freight enhancements, directly from
the Strategic Rail Authority. The likely Government capital payment
over 10 years is estimated to be about £14.7 billion. To
this must be added £12 billion of revenue support paid through
the passenger train operators and, we understand, another large
sum to pay for the urgent maintenance and renewal after Hatfield.
This might total about £30 billion from the Government over
10 years. Compare this with the stock market value of Railtrack
of £4.7 billion in mid October (Source Economist 28 October,
Part of the above funding is to bail Railtrack out for risks
such as the cost overrun on the WCML, risks which RFG has argued
for years should have been carried by Railtrack because they relate
to their commercial performance.
Railtrack is essentially a procurement organisation. It procures
virtually all its maintenance, renewal and enhancement work on
the railways, its study work and many other activities. The only
direct work that it does is operating the signalling, the train
planning and timetabling.
The operation of the rail infrastructure was privatised in
order to enable the new company to have access to private sector
funding, expertise and creativity, and to carry the risks and
rewards appropriate to a private sector company.
Railtrack complain of the wide ranging and diverse workload
that it has to undertake and hints that this is putting too high
a pressure on management.
However, at the moment, Railtrack seems to be taking all
the rewards both from Government and the private sector, performing
its tasks apparently ineffectively and inefficiently, but with
Government taking on many of the risks which Railtrack appears
unable or unwilling to take itself.
Government is therefore getting the worst of all worlds;
paying out large amounts of money to a demonstrably inefficient
company and carrying the risks of these inefficiencies, and getting
precious few rewards back, let alone any ownership of the assets
it is largely funding.
Railtrack may receive two possible penalties for not performing;
one is the withdrawal of their network licence and the other being
fined for not running the trains on time etc. Whereas Railtrack
knows it can be fined, it also knows that, as things stand at
present, the Regulator cannot withdraw its Network Licence without
closing the railways down. Railtrack knows that closure is not
a practical option, so the threat of losing its network licence
is not a real one. It has therefore concentrated on keeping the
fines for delays to a minimum and ignored the activities such
as maintenance and renewals which both cost the company money
and cause further delays to trains because of the possessions
required and which add to the fines imposed for delays.
We conclude that Railtrack's management does not appear to
have the right experience to operate the network responsibly,
it appears to be unable to cope with the wide range of activity
demanded from it, and the obligation to give shareholders best
value is incompatible with its obligations under its Network Licence.
It follows that the present structure is incompatible with the
Railtrack at present owns and operates the rail network,
an essential part of Britain's transport network. There are a
number of options for improving the performance of the network
owner/operator, some of which reflect the belief that, if Government
give up to £30 billion over 10 years to a private company,
it is entitled to see something in return.
Public or private ownership of the network
The arguments about public or private ownership of the network
have been well rehearsed; the private sector is said to bring
efficiencies, entrepreneurial zeal, and the ability to respond
to market forces and to attract external private sector funding.
In the case of Railtrack, privatisation has undoubtedly brought
some efficiencies in the change from nationalised industry to
private monopoly, but there is strong evidence to support the
argument that there is a great deal more that can be achieved,
not by squeezing contractors, but by operating the company itself
in a less bureaucratic and more efficient way, and by the creation
of a system in which market forces operate effectively.
Success of the existing structure is still so far away that
one should not rule out a return to part of full state ownership
of the infrastructure. We do not see the Government about to sell
off our roads to a PLC. The Highways Agency manages the trunk
roads in an effective manner, and is itself largely a procurement
organisation, as is Railtrack. The Highways Agency is required
to demonstrate Value for Money for all contracts let and, now
that so much Government funding is to go direct to Railtrack,
it is clear that Railtrack will have to do the same.
Either way, most of the turnover of the Highways Agency or
Railtrack is contracted out to private sector companies so there
is every likelihood that efficiencies would continue to be achieved,
provided that the companies were not prevented from being creative
and were given long enough contracts to justify the purchase of
high output and high speed machinery.
We believe that the ownership question should be looked at
afresh in conjunction with the other options set out below.
Breaking up the infrastructure ownership and operation into
A number of smaller infrastructure companies has a number
of benefits. The companies, called for example mini-Railtracks,
would be of a size more commensurate in size with the other industry
players; senior management would be able to cope more effectively
with the wide range of workload necessary and there is the benefit
of an ability to benchmark between companies.
The easiest way of achieving this would be to turn each Railtrack
Zone into an independent public limited company, mini-Railtrack
plc. Each would be responsible for maintenance and renewal of
infrastructure, signalling, track, structures etc and for the
operations and timetabling within its area. They could and should
also have the parts of Railtrack Property within their areas.
We believe that this is an option that now deserves serious
consideration. It was proposed by RFG over a year ago. The advantages
of such a change include:
greatly reduced bureaucracy;
the introduction of a transparent opportunity
for benchmarking all the various activities and performances between
the provision of opportunities for suppliers of
goods and services to have a much more open and competitive relationship
with the mini-Railtrack plcs; and
most importantly, it provides a resource of skills
so that, if one mini-Railtrack plc is deemed by the Regulator
to have performed so badly as to warrant withdrawing its network
licence, this can be done in the knowledge that resources from
other companies would be available to take over at very short
This in turn would ensure that the mini-Railtracks would
be aware that withdrawal of their network licence was really a
possibility, unlike today when it is not.
Safety, timetabling and co-ordination
There would be a need for good co-ordination between the
Safety and standards would have to be undertaken nationally,
but separate organisations are already being set up to do this
The SRA would have a role in train planning and co-ordination
but it is, after all, involved in the timetabling principles through
the franchising process.
For freight, most of which operates across at least one zonal
boundary, there are obvious concerns about lack of co-ordination.
However, we believe that the merits as outlined here much outweigh
the advantages if we assume that carrying on as we are means continuing
excessive costs and poor management.
Franchising the infrastructure maintenance and renewals
The seven mini-Railtracks as the owners of the infrastructure,
could be required to franchise or contract out maintenance and
renewals to ensure performance, including for track, structures,
signalling and stations.
Again, any franchisee that did not perform could be replaced
by one of the other companies already undertaking maintenance
and renewals under contract to another mini-Railtrack. Franchises
would have to be for long enough, at least 10 to 20 years, to
ensure the successful bidders had an incentive to purchase and
operate the most modern equipment, such as for track and ballast
work, rather than relying on older more labour intensive and slower
methods as so often happens at present.
Infrastructure equity, bonds or freehold/leasehold
The Government's contribution of £14.7 billion over
10 years to Railtrack is at present a giftthe taxpayer
gets nothing in return apart from a railway that hopefully will
operate rather better than it does at present.
However, Government put similar amounts into British Rail,
but still owned the asset, Britain's rail infrastructure at the
end of it.
We question why such a large contribution to Railtrack's
funding should not be converted into equity. Alternatively, it
could be issued in the form of bonds to reduce the likelihood
of the Government taking on any contingent liability.
A further alternative would be to take a leaf out of the
property leasing market, and gradually convert Railtrack's ownership
of the network into a long leasehold at a rate and over a timescale
which reflects the government funding contribution. The freehold
would be transferred to government ownership alongside this. The
leasehold period should reflect the present likely life of the
main assets averaged out. We believe that, with a reasonably long
period, Railtrack could still be able to raise private sector
finance. It would still be liable to have its network licence
removed and therefore loose its right to the lease under the same
circumstances as at present.
With a Government investment of £14.7 billion over 10
years and Railtrack at present worth about £4.7 billion and
probably operating in an environment where its present costs are
inflated by up to 100 per cent, there is a deal to be done somewhere
here to achieve:
competition to operate efficiently and safely;
a reversion towards state ownership of the infrastructure.
Coupling these suggestions together, the splitting up of
the infrastructure company Railtrack into, say, seven mini-Railtracks
is essential to provide for benchmarking, to reduce its size,
to enable the new managements to cope with the high workload imposed
on them, as well as to make real the threat of removal of a network
licence if justified.
Letting out infrastructure maintenance and renewals on franchises
on the right terms also seems appropriate, leaving just the infrastructure
operations and signalling in the hands of them.
As a further step, options for reflecting the major proportion
of government funding in the rail infrastructure should also be
studied, including an equity stake in the infrastructure companies,
or bond issues or, alternatively, a reversion to Government ownership.
A strengthened SRA would set the policy and ground rules
with the day-to-day operation of the signalling again franchised
out, and safety and standards would be operated by separate national
The Regulator has issued a consultation paper on proposed
modifications to Railtrack's Access Conditions to require it to
prepare and maintain a Register of its assets. We welcome this,
and have responded positively except about the proposals that
the register should only be available for inspection by those
organisations having a contract with Railtrack. This will prevent
third parties, such as developers, terminal operators, potential
new train operators or contractors having access to information
which would enable them to prepare schemes and price them.
This is exactly the fear that we expressed (15) about our
seeking information about one tunnel on the West Coast Main Line,
so that we could demonstrate that construction methods first used
on the Northern Line before the last war could save £100
million on gauge enhancing the route. The information is still
being withheld. We believe that one objective in restricting access
to information is to prevent third parties investigating alternative,
potentially cost saving schemes and costing them at prices very
much lower than Railtrack's estimates.
Such activity by third parties could also support the Regulator
and the SRA in monitoring Railtrack's methods and costs, since
we doubt very much whether they will either of them have enough
resources to do this effectively themselves.
Unless the Regulator changes his current proposals to restrict
access to the asset register, we doubt whether any comprehensive
monitoring of Railtrack's proposals and actions will be achieved.