Select Committee on Environment, Transport and Regional Affairs Appendices to the Minutes of Evidence


Supplementary memorandum by the Rail Freight Group (RI 07A)

INTRODUCTION

  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 network.

  This paper therefore provides an update on these and other issues, focussing to a large extent on Railtrack's management of the network.

RAILTRACK

  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.

Crisis management

  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 damage.

  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 RESPONSIBILITIES

  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 factored in.

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 actions.

  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.

ROLE OF THE RAIL REGULATOR

  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:
Earlier
drafts
Final
conclusions
June 2000Oct 2000
Allowable rate of return on Railtrack's Regulatory Asset Base, per cent 7-7.58
Efficiency savings per cent per annum3-5 3.1

  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.

RAILTRACK THE COMPANY

  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, page 36).

  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 Government's objectives.

THE INFRASTRUCTURE OWNER—OPTIONS FOR CHANGE

  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 smaller units

  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 companies;

    —  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 notice.

  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 mini-Railtracks.

  Safety and standards would have to be undertaken nationally, but separate organisations are already being set up to do this at present.

  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 gift—the 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:

    —  lower costs;

    —  competition to operate efficiently and safely; and

    —  a reversion towards state ownership of the infrastructure.

A SOLUTION

  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 organisations.

RAILTRACK'S ASSET REGISTER

  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.

November 2000


 
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