Select Committee on Transport, Local Government and the Regions Appendices to the Minutes of Evidence


Memorandum by TSSA (PRF 04)

PASSENGER RAIL FRANCHISING

  The present quality of train services is difficult to defend, particularly as punctuality is currently inferior in comparison to British Rail[2] and we agree with Sir Alistair Morton that it will require a decade of significant investment to raise performance to continental standards. Nonetheless this does not mean that real improvements in service quality can not be delivered sooner, but we are sceptical that the Governments proposed "directions and guidance" to the SRA will result in outcomes that will satisfy the expectations of passenger, railway employees and the needs of the country.

  We passionately believe that unless there is radical reform of the industry's structure, the SRA's actions, however sincere and professional, will only have a cosmetic and not the dramatic effect that is necessary to positively change industry performance and public perception.

  Therefore we agree with the conclusion of the independent report "A New Deal for the Railways? [3]" that the re-franchising programme should be postponed until robust conclusions following a full debate on the appropriate structure for the industry in the light of the causes of the Hatfield crash and the recommendations of the Cullen Inquiry Part 1 and subsequent publication of Part 2. This structural debate must deal with issues of:

    —  Horizontal or vertical integration.

    —  Fragmentation / no. of companies.

    —  Regulation.

    —  Ownership.

  Before advocating a solution it is necessary to describe the problems generated by the current system.

    "The explanation of the present mess [is] the particular scheme adopted by John Major in the mid-1990s. It is impossible to cope with a crisis when management, ownership and operation are divided between numerous uncooperative institutions with drifting lines of authority—Railtrack, the operating companies, the strategic rail authority, the Transport Department, the franchising director, the Railways Inspectorate and so on.

    The scheme was chosen because of a fleeting intellectual fashion of the early 1990s which favoured the invention of artificial pseudo-markets, even in situations where market competition had never worked in the past. [4]"

  These "serious flaws" have manifested themselves in the following fashion:

    —  fragmented structures and responsibilities with inconsistent messages about safety priorities, and divergence in the interpretation and application of working practices and rules;

    —  companies with conflicting commercial and operational interests and fewer incentives to co-operate together voluntarily, particularly in the training and development of skilled personnel;

    —  an exponential increase in interfaces and duplication of roles resulting in stifling bureaucracy and "privatisation inflation"— increased costs and less productivity;

    —  increasing reliance on sub-contractors, particularly for maintenance, the rigidity, bureaucracy and lack of clear lines of accountability;

    —  lack of safety in contractual relationships, compared with the accountability of a unified command structure, leading to a blame and claim culture; and

    —  short term maintenance contracts that do not encourage long term safety investment.

  These developments are a direct consequence of the erroneous assumption that the rail industry would benefit from market disciplines, when in practice, these disciplines often have pernicious effects. Privatisation has created a paradox—a government perceived as responsible for a privatised industry that receives significant public subsidy but remains unaccountable.

  The rationale for privatisation was threefold:

    1.  Divest government of liability (financial & operational).

    2.  Manage decline of demand/usage.

    3.  Introduce market disciplines to generate the benefits of competition and the dynamism of private management skills.

Outcome/reality/problems

  Government cannot divest itself—ie continued subsidy, public perception of responsibility and control, city perception that government will not allow this core public utility to fail and the government realise that rail is intrinsic to their transport plans.

  Rail demand at a post-war peak—patronage closely correlated with GDP (the Conservative privatisation was premised on stagnation not expansion, the structure was not intended or designed to cope with growth).

  Market disciplines irreconcilable with the exigencies of the rail industry:

    —  Industry needs cooperation and collaboration and not competition and fragmentation is inferior to vertical integration.

    —  Market forces are not applicable to the rail industry (passengers cannot exert market pressures—they can only use a particular line or an alternative mode, and they cannot select another TOC. TOCs must co-operate because of the national/inter-regional demands of the industry such as effective through-ticketing travel).

    —  Private managers are not inherently superior (Railtrack have 60 per cent of staff employed post-1995).

    —  Paradox: rail vital for public policy but privately owned and operated it cannot be directed by government [despite massive public subsidy] therefore subject to micro-management by the ORR and SRA (Government) but this negates the rationale for privatisation and created an inferior industry structure, ie market disciplines, private finance and divestment of government liability.

Fragmentation & "privatisation inflation[5]"

  There is considerable evidence that post-privatisation expenditure will not result in the quantity of work that a BR (vertically integrated) structure facilitated.

    "Every time you sub-contract work, there are mark ups on overheads. There are other costs the private signalling companies have to find which were previously lost in the vertically integrated railway. It costs money to manage processes, such as possessions, to hire works trains and plant. A prudent contractor adds in provisions against possession overruns and vagueness in the specification. Bidding itself has become more expensive—especially given Railtrack's tendency to ask if you have added in the phone number and please come up with a cheaper offer. Even prequalification includes a mass of documentation which all costs money to prepare . . . one of my signalling chums of long experience reckons that a scheme like the recently completed Woking costs twice as much as it would have done in the 1960s and takes twice as long.[6] "

  We consider the best structure for the industry is an appropriate form of public ownership—not for ideological reasons but because we passionately believe it is in the best interests of passengers, the railways and the country. The TSSA is not intrinsically hostile to the private sector and believes private enterprise has an important role to play but public ownership is a vital reform that is pre-requisite for reversing the malign affects of privatisation. Effects that the Government and the majority of commentators do not dispute:

    "In many respects privatisation was seriously flawed [and] has been compounded by the fragmentation of the industry into a large number of separate businesses (including train operators and rolling stock companies, Railtrack and its contractors) which have distinct commercial interests to protect. [7]"

  Returning Railtrack to the public sector and then ensuring that it possesses a directly employed renewal and maintenance workforce will begin to rectify the deleterious effects of fragmentation and will presage further necessary industry reintegration. The longer-term objective must be to reconnect the vital relationship between rail and wheel and end the damaging estrangement between infrastructure controller and train operator.

  The TSSA fears that the expansion of the rail network and the introduction of sophisticated signalling and train control technologies will be impaired unless the skill shortage in qualified engineering staff is properly addressed.

  We believe that contracting out maintenance and renewal work leads to a reduction in the overall skills of the workforce as companies decline to invest sufficiently in the training and development of staff because of the uncertainty about long term involvement created by the existing short term contracts.

  We propose that only a publicly owned Railtrack will possess the leadership, vision and strategic direction to enable it to provide an effective training and development programme for skilled railway engineers.

  The post-privatised structure does not always facilitate good industrial relations. Within the industry there are some good examples of employment practices but there are also situations that need urgent improvement.

  Railtrack's resistance to recognising the TSSA for management grades is another example of the malign effects of fragmentation. Individual contracts are divisive and inimical to staff morale and the effective team working that a modern company requires to be successful. Collective representation fosters the spirit of collaboration and co-operation that is a pre-requisite for business success for the knowledge-based companies that comprise the railway industry. As a modern and progressive trade union, the TSSA's agenda is to help the industry invest in, train and develop their most important asset—their people and our members.

  The prevalence of short-term contracts both at the individual level and between companies within the industry is not conducive to training and investment. Such an environment does not encourage employees to identify with a company or industry and is the antithesis of the public service ethos nurtured by BR. The maintenance, renewal and other engineering sectors personify these detrimental trends. The "directors and guidance" emphasis of short-term franchises and its silence on other crucial intra-industry relationships will do nothing to address these problems. Indeed, the Government's support for further fragmentation via SPV's and other third party financing and project management vehicles will only exacerbate this problem.

  Given the configuration of the industry and what Lord Bradshaw has described as an "adversarial structure[8]" which is the "root cause of the problem" because it prevents the "close teamwork" that is an imperative for the railways we doubt that "dialogue and persuasion" from the SRA will prove effective. The SRA's statutory powers over the privatised industry also do not provide the necessary powers to successfully direct the disparate companies whose commercial incentives often preclude the collaboration and co-ordination that is vital for the industry to function efficaciously. This tension illustrates the fundamental dichotomy of the privatised railway—it is well recognised that fragmentation, particularly separating the wheel from the rail, is inimical to efficiency and that the privatised railway required strategic co-ordination—hence the creation of the SRA. However, the necessity of government direction is a tacit admission that the market disciplines introduced by privatisation are inappropriate for the rail industry but without radical restructuring the SRA's ability to direct the privatised industry is inherently compromised. The result is a failing privatised industry receiving substantial public subsidy because it is a vital public utility but resistant to public control though correctly perceived by passengers and the City as ultimately the responsibility of Government. Ironically, a micro-managed privatised industry has produced an environment where the advantages of the public and private enterprise become counter-productive.

  The TSSA welcomes the duty on the SRA to produce a "first overall strategy in November 2001" but believes that the SRA's inability to publish one earlier demonstrates the analysis made previously. We also believe for a strategy to be robust and credible it must include plans for re-integrating the system as proposed above.

  We consider that the objectives of the Government's transport policy should dictate the resources needed to achieve them. The original wording in the SRA's "directions and guidance" (Paragraph 7.3.) will mean that the SRA's strategy will remain a wish-list rather than an action list.

  We note that since the 10-year Plan was published last July the financial situation the plans were based on have seriously deteriorated with Railtrack's share price collapse and the dramatic escalation in costs for the WCML and ECML upgrades. It does not seem credible to oblige the SRA with delivering a plan that financially now appears to be overtaken by events.

  Paragraphs 9.6 and 10.1 raise the important question whether current EU regulations will limit the SRA's ability to award longer-term contracts and it is imperative to establish what derogations are available to permit the letting of longer-term franchises.

  The instructions in paragraph 10.3 further highlight the inherent problems of franchising and privatisation. The SRA is naturally struggling with the problem that the rationale for privatisation is that commercial initiative and market disciplines require minimal regulatory touch. But reality that the SRA (and ironically the industry itself) desires a more prescriptive approach to ensure co-ordination, consistency and the maintenance of minimum standards. However, this then negates the alleged benefits of commercial freedom. The long running controversy of the ECML franchise vividly demonstrates this contradiction.

  The TSSA welcomes the recognition (Annex A, objective No. 6) that a fares policy must be used to stimulate patronage and that "commercial judgement" is not only factor in setting fare levels. Therefore we are opposed to using fare increases as a mechanism for inhibiting demand (Annex B, No. 6.2). This we believe contradicts the Government's objective to increase rail patronage. Increasing capacity is the only justifiable policy.

  We strongly suggest the thrust of paragraph No. 8 in Annex A and believe that increasing capacity is vital for the future prosperity of the industry and the acknowledgement that the private sector is unsuitable for realising certain vital projects.

  The TSSA is concerned that capacity allocation is not merely confined to TOC usage (Annex A, No. 9). With the infrastructure/operator split there is a danger that the interests of both will be poorly accommodated. The challenge is to maintain and enhance the network whilst delivering adequate services.

  The objective described in Annex A, No. 12 whilst laudable appears unrealistic in light of the present structure. We do not believe it is feasible for the SRA to provide "leadership and ensure that different parts of the industry work co-operatively towards common goals" when:

    —  The privatised industry has conflicting commercial incentives.

    —  The SRA is expected both to exercise its powers lightly as well as "actively manage" franchises.

    —  The SRA must rely on convoluted and protracted contract enforcement rather than managerial control.

  The TSSA supports the objective of increased personal security (Annex B, No. 6) but would rather see it as a "Directive" rather than "Guidance" to reflect the importance of this issue.

  The TSSA totally agrees that competition policy (No. 7.2) must not compromise the industry's ability to maintain and promote integrated services and that this tacitly recognises that collaboration and co-ordination are intrinsic to successful railway operation and that competition impedes efficiency.

  We propose that the SRA should conduct a property audit (Annex B, No. 9.1) and publish the results and invite consultation and feedback from relevant parties prior to producing a strategy for rail land usage.

September 2001


2   Independent, "Punctuality is worse than under British Rail" (28 July 2001) Back

3   A "new deal for the railways?-The SRA's Refranchising programme: Dr Jon Shaw (March 2001) Back

4   30 November 2000, The Times-"Why Blair is making Major railway errors" (A. Kaletsky) Back

5   Rail Business Intelligence-"Historic cost shows `privatisation inflation'" (28 June, 2001) & Modern Railways, July 2001. Back

6   Modern Railways, July 1999. Back

7   DLTR-Directions & Guidance to the SRA (R73/131) 29 June 2001. Back

8   Financial Times, 15 August 2001, Lord Bradshaw letter. Back


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 8 March 2002