The future of the UK railway system: Michael Brooke’s vision

International Business Review 13 (2004) 181–214 www.elsevier.com/locate/ibusrev

The future of the UK railway system: Michael Brooke’s vision Mark Casson  Department of Economics, University of Reading, PO Box 218, Reading RG6 6AA, UK

Abstract The UK rail system has been the subject of a bold ideological experiment in privatisation, which has failed. Public subsidy has more than tripled in ten years, new electric trains are in storage because there is insufficient power to run them, and punctuality and reliability have declined to amongst the lowest levels in Europe. The paper analyses the fundamental causes of failure. Its goes beyond the well-known problems caused by separating infrastructure and operation to analyse a wide range of perverse incentives caused by the fragmentation of ownership. It advocates a return to command and control (currently in progress), an integrated programme for the enhancement of the network, and radical changes to the recruitment and training of managers. # 2003 Elsevier Ltd. All rights reserved. Keywords: Railway; Transport; Organisation; Policy

1. Introduction Organisational complexity is a key issue in international business. It is also a key issue in the railway industry. Michael Brooke made an important and distinctive contribution to the analysis of organisational structure, as the other papers in this special issue show. Through his involvement in local politics, Michael had acquired a deep understanding of transport issues, which he shared with other members of his family. It is therefore no surprise that Michael Brooke chose the railway industry as the subject of his final research project. In this work, he applied the general principles of organisational behaviour to the rail industry. 

Tel.: +44-1189-318227. E-mail address: [email protected] (M. Casson).

0969-5931/$ - see front matter # 2003 Elsevier Ltd. All rights reserved. doi:10.1016/j.ibusrev.2003.10.002

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This paper summarises Michael’s findings, and brings his analysis up-to-date with the fast-changing situation in the UK rail industry. Michael had drafted a book on The Revival of Britain’s Railways, which he regularly revised. As he was confined to a wheel chair, he asked me to carry out, on his behalf, a programme of face-to-face interviews with senior rail industry executives. Twenty-five interviews were carried out between October 2002 and April 2003. Due to his illness, Michael did not have the opportunity to fully incorporate the material gathered from these interviews into his draft before he died. This material has been incorporated into the present paper, and some of the conclusions have been slightly modified as a result (Appendix A). As the title of the book indicates, Michael was very optimistic about the contribution that the rail system could make to economic performance and quality of life in the 21st century UK. This was no Utopian vision, however. Rail would not replace other forms of transport completely, but complement them. An effective rail system would not replace road transport, but would encourage people making long journeys to use the road to get to their nearest station, rather than to take the car all the way. Similarly, rail would not entirely replace regional air transport, but improved rail connections to local airports could help to reduce traffic congestion around them, and so cut journey times, reduce pollution and generally improve the quality of life (Waterfront, 2003). Rail has many passionate advocates in the UK, and the most enthusiastic ones often hark back to an earlier ‘golden age’. Michael was aware that there would be no return to an age when rail had a virtual monopoly of many types of domestic traffic, and competition from road and air could be ignored. He was also aware that the past was never ‘golden’ anyway—the UK rail system has suffered from serious limitations ever since it was first laid down in the Victorian era, as explained below. Michael approved the UK government’s Ten Year Transport Plan, published in 2000, which is supported by advice from the quasi-independent Commission for Integrated Transport, although he was aware that crucial details regarding the implementation of the plan remained rather vague. Michael realised that there were a number of constraints on the implementation of the plan, which had not received the attention they deserved. In particular, he believed that the management culture in the railway industry was wrong. The recruitment, training and retention of staff needed to be changed, as part of a major shift in human resource management strategies on the railways. Many people have argued that the cultural defects in the industry are a consequence of privatising the nationalised network in 1993. If only the railways were re-nationalised, services would quickly improve, it is said. Michael believed that improvements could be made even under present arrangements. He was not opposed to re-nationalisation, though he considered it unlikely because of party politics—he simply did not think that management changes should be held up until re-nationalisation occurred. Michael believed that rail industry culture should be: . Professional rather than pragmatic . Visionary rather than street-wise

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Michael felt that managers would benefit greatly from an MBA in railway studies. This would introduce them to general principles of management, and how to apply them in a cogent way. Many rail managers have professional qualifications, but some are in engineering—membership of the Institution of Civil Engineers, for example—whilst others relate to transport in general—such as membership of the Chartered Institute of Transport. Although some railway managers also have MBAs, Michael felt that there was a serious gulf between the general concepts that MBA students learned in lectures and the applications of these principles on a dayto-day basis. The principles were either wrongly applied, or not applied at all— managers simply failed to fit the concepts to the problem and therefore took a totally pragmatic approach instead. To make the industry truly professional, a radical change in training methods was required. 2. Basic concepts of management applied to the railway system From a managerial perspective, a national railway system may be regarded as a special type of multi-product multi-regional enterprise in the service sector. The service is transport, and three main markets are served: for passengers, parcels, and freight. Each market has a number of segments. Passenger traffic includes inter-city business travel, leisure travel, and commuting; parcels traffic includes mail; while freight includes coal, minerals and quarry products, container traffic for general merchandise, and perishables, such as milk and livestock. In addition, railways are still used for certain types of military traffic. Demands for all these services are time-sensitive, but to varying degrees. Passenger and mail travel are generally more time-sensitive than ordinary parcels, which is in turn more time-sensitive than general freight. Speed has always been an important factor in rail travel. It is time, rather than distance, that is the fundamental metric in transport. Speed and bulk are the two main factors that govern the competitiveness of rail relative to road and air. Railways are well-suited to the highspeed mass transit of passengers, and to conveying bulk freight on a train-load basis. These strengths are relevant over almost any distance: e.g. underground lines carry a typical passenger less than 5 miles, a suburban line may carry commuters up to 40 miles, whilst inter-city expresses may carry passengers up to 400 miles; it is only over this distance that air becomes clearly superior. North American experience shows that railways are also well-adapted to conveying containers and wagonload freight over distances exceeding 300 miles, though with greater road congestion in the UK, the critical distance could be as low as 100 miles. The crucial element is a constant flow of high volume traffic for which speed is a significant factor (Nash, Wardman, Button, & Nijkamp, 2002). Although the rail system is uni-national, it is multi-regional; the relations between a multinational headquarters and its national subsidiaries have their parallel in the relations between headquarters and regional management in a national rail system. Some traffic is purely regional—for example, coal traffic from port to power station, and commuter traffic into major cities—whilst other traffic is interregional—such as business travel from the provinces to London. Headquarters and

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regional management need to coordinate the flows of local and long-distance traffic where they are sharing the use of the same stations and tracks. The fact that transport is a service industry has major implications for its performance. Consumption of a service takes place at the point of production, because a service cannot be stored. When consumption is time-critical, production becomes time-critical too. . Timing is critical to product specification. For example, it is not sufficient for a passenger turning up in London in the morning to arrive in Bristol some time in the afternoon; a passenger turning up at 9:00 wants to be in Bristol by 11:00, whilst a passenger turning up at 13:00 wants to be in Bristol by 15:00. . Punctuality is critical to service delivery. For example, a passenger wants to arrive in Bristol at 11:00 because they have a meeting arranged for 12:00, so if they arrive at 13:00 the whole point of the journey is lost. Demand is not only time-specific, but also location-specific. Indeed, it is doubly location-specific, or trip-specific (Association of Train Operating Companies, 2002). For example, a passenger not only wants to start their journey in London but to finish it in Bristol. Just because they are travelling from London does not mean that any train out of London will do, and just because they want to get to Bristol does not mean that any train into Bristol will do. To cope with time-sensitive location-specific demands, service industries need flexible production systems. In labour-intensive service industries, part-time and temporary labour is used to cope with predictable peaks in demand. Spare capacity is also held—as when sales assistants wait around to greet customers. By contrast, the production of railway services is extremely inflexible. Railways are a capital-intensive industry with very substantial sunk costs, which means that capacity constraints are fixed and difficult to change. This stems directly from the nature of the infrastructure. The advantage of rail in the speedy transport of bulk consignments stems from the fact that the track affords a low level of friction between wheel and rail. To allow speed to be maintained, track curvature must be kept low. Moreover, the power required to move loads increases dramatically on an upward gradient—where friction is low, gravity becomes the dominant force— and so operating economy dictates that routes are flat. Building flat straight routes through undulating country necessitates embankments, cuttings and bridges, and occasional tunnels and viaducts too. Civil engineering works of this nature are expensive to build and maintain, and difficult to modify later on. Victorian railway builders sank huge amounts of capital into their infrastructure, creating great industrial monuments designed to last for hundreds of years. The financial debts incurred during construction have since been written down, but maintenance still imposes a substantial recurrent cost. The Victorians built the system to meet the needs of the Industrial Revolution, and it has proved difficult to adapt the system to the needs of a post-industrial service economy. The main adjustment has been in the form of closures—notably the Beeching cuts of the 1960s, which eliminated many rural branch lines and duplicate trunk routes.

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However, the remaining part of the system still imposes substantial maintenance costs on the present infrastructure owner, Network Rail. Another rigidity in the rail system stems from the need to carry traffic in trainload quantities. Unlike road and air, vehicles move in convoy on the railway system. Safety at speed requires vehicles to be kept a suitable distance apart, and this distance is very large on railways because the lack of friction reduces braking power. The solution is to couple up the vehicles into trains and keep the trains apart. This means that traffic must be consolidated into train-load quantities. Each train requires at least one locomotive or power car, and one crew, and so it is cheaper, in terms of motive power and crew costs, to carry a given amount of traffic using a few long trains rather than many shorter ones. This means that train loads can be quite substantial, and so a great deal of consolidation is required There are some cases in which traffic presents itself in train loads regularly—for example, coal moved from port to power station—and other cases occasionally— for example, leisure excursions to special events. But in most cases traffic needs to be specially consolidated.

3. Network economies There is a tremendous tension between the need to provide for all the different trips that people wish to make and the enormous cost of constructing railway routes. The cost of building direct routes between all the major centres of population in a country is prohibitive. The solution is a network centred on strategically sited hubs. For example, traffic between Leeds, Selby or Hull on the one hand, and Sheffield, Newark or Lincoln on the other, can all routed through a hub at Doncaster. Hubs provide junctions where through trains can branch off to different destinations—for example, trains from Leeds can diverge at Doncaster to either Newark or Lincoln. Alternatively, passengers can change trains—thus a passenger from Leeds to Lincoln can leave a train from Leeds to Newark at Doncaster and change to a train from Hull to Lincoln. Hubs are connected to other hubs to create a national network. Thus Doncaster is connected to York to the North, and Peterborough to the South, which in turn are connected to Newcastle and London, respectively. A network operates most effectively when it consists of a limited number of powerful hubs. The power of a hub is related to the number of different routes that radiate from it. A small number of powerful hubs allow a passenger to travel to a wide range of destinations by passing through only a small number of hubs. This means that if he is travelling on a through train then there are few intermediate stops at which other people join or leave to make connections, so his journey is quick, whilst if there are no through trains then he has only a small number of connections to make to complete his journey. There is a trade-off, however, because as the number of hubs is reduced, journeys become less direct—in the limit, for example, all trains would travel to and

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from a single hub. Some passengers might partially reverse their direction of travel when they reached a hub. This trade-off implies that the number of hubs should be sufficiently large that the direction of travel does not change substantially in the course of a typical journey, but should be sufficiently small that hubs are widely separated. In terms of network structure and provision of hubs, the Victorian legacy is poor (Turnock, 1998). Most private companies of the 19th century attempted to develop company-specific hubs which they discouraged their rivals from using. They were often located in obscure places such as Crewe, Swindon, Eastleigh, and Ashford, rather than in major centres of population, like Manchester and Leeds, where they could have served existing travel needs. Their potential for residential and office development was inhibited by turning them into smoky ‘railway towns’ by concentrating railway maintenance there. In practice, London became the major hub—specialising in inter-company passenger traffic. Each major company established its own London terminus, with passengers connecting by taxi or (later) underground. The major companies discouraged the building of cross-country lines, which they believed would siphon off their traffic before it reached London. As a result, there have never been many high-speed cross-country lines in the UK. Some secondary cross-country routes, which could have been upgraded were closed during the Beeching cuts. Thus the network potential of the UK rail system is relatively weak. The only significant orbital line to the north of London, from Oxford to Cambridge, was axed in the 1960s. Vestiges of potential orbital lines remain, such as from Bletchley to Bedford, and from Watford to St Albans, but they now function purely as dead-end branches. With the emergence of London as the mega-hub, competition between private companies led to the replication of services to London; thus three separate companies ran expresses between London and Manchester, all using separate lines. This replication was eliminated at the time of the Beeching cuts, but so drastically that lack of capacity has recently inhibited traffic growth. In assessing the recent performance of the railway system, therefore, it is important to bear in mind that the historical legacy is poor: while maintenance costs are high, the basic configuration of the network is weak. A major defect of the present network is that its geographical coverage is uneven. There are major areas, such as North Devon, Mid-Wales, East Lincolnshire and North Yorkshire where the principal local towns have no railway station. A traveller can reach almost anywhere by road, but only selected destinations by rail. If the time factor is added, then many journeys by rail are excessively long; a cross-country return journey can be made by road in the same time that a one-way journey takes by rail. As a result, many people have lost the habit of using rail altogether. Once this happens, they lose their knowledge of the network. They forget the way to the nearest station, they do not know how to judge when the car park is likely to full, and so on. Consequently, if they do occasionally travel by rail, their experience is likely to be stressful. Commuters tend to be the only people with a detailed knowledge of the system, and even then it is a very localised one.

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To fulfil its network potential, and attract a broader base of experienced customers, therefore, the rail system needs to become more accessible. This can be achieved both by extending the network—for example, through re-opening disused lines—and by access to stations through integrated local transport schemes.

4. Network operation Until the 1960s, the UK railway system relied mainly on steam power, when a crash programme of dieselisation came into force. Most trunk expresses remained locomotive-hauled, whilst local services were taken over by multiple units, which had power units mounted under the floors of the coaches. Multiple units avoid the track wear caused by heavy locomotives, offer better acceleration, and avoid the need to run the locomotive round the train at the end of a journey, reducing congestion at terminals and hubs. On the other hand, multiple units are less flexible in meeting peak hour and seasonal demands, since spare coaches are costly to keep and are difficult to add to a train. Network optimisation suggests that trains on trunk lines should be standardised so that through services can be run from any part of the network to any other. Standardisation of local trains is less important, except that it allows older trains to be ‘cascaded’ from one locality to another. Standardisation is still advisable, however, because it allows economies of long production runs and interchangability of spare parts. Notwithstanding this, little standardisation has taken place in the UK. For example, some trunk routes have been electrified using overhead cables, whilst others, like the ex-Southern railway suburban network, have been electrified on third rail. Different routes have slightly different loading gauges, their station platforms have different lengths and heights, and new train sets are still designed with specific routes in mind. It is a British tradition that everyone has their own opinion on technical issues, such as choice of safety systems and coupling mechanisms; there is one busy route where, until recently, the four different types of train each employed a different types of coupling! Rail, like every other transport system, is prone to conflicting traffic movements, and so traffic coordination is necessary in the interests of safety. In most modes of transport, head-on collisions are avoided by driving on either the right or the left, although on a single track railway lines other precautions are needed—usually a token system. On roads, co-ordination is decentralised to drivers: drivers in a moving line of traffic avoid accidents by ‘keeping their distance’ from the car in front. Trains move so fast, however, and are so slow to brake, that drivers must be warned of conflicts before they can see them, and this requires a signalling system instead. Another reason for signalling on a railway system is that drivers cannot steer their trains. The track is raised above ground, and the wheel rests on the edge of the track, so that trains can only turn on or off the main line if the track is switched. In Victorian times it required a signalman on the spot to control the points, although today a driver could, in principle, set the points ahead by remote control

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from the cab. Limited visibility again rules out this option, however. On the roads, conflict created by turning traffic is normally controlled by protocols, which give priority to traffic on the main road. But where speeds are high, and visibility is poor, traffic lights are usually employed instead. Signals are employed at railway junctions for a similar reason, and are interlocked with the points, to prevent misleading directions being given. A large number of conflicting movements are required in the daily operation of a railway system. Much of this conflict arises from the limited use of fly-overs—in the UK, at least. Fly-overs carry turning traffic over the on-coming stream. It is ironic that fly-overs are widely used on the road system—for example, at motorway junctions—but not on rail. Because rail requires modest inclines and gentle curves, fly-overs are long: they use up a large amount of space and are expensive to construct. The limited use of fly-overs means that railway networks are prone to congestion at junctions, which can be severe at multiple junctions near major hubs. One reason why the Victorian railway companies opted for many small hubs rather than a few large ones was that their hubs quickly became congested. Part of the problem was due to the changing of locomotives, which ceased at the end of steam, but the absence of fly-overs at some important hubs remains a problem to this day. 5. Timetabling The timetable is key to optimising the performance of the network. While it is not essential, it is highly desirable. Trains could run simply on demand—for example, they could depart when they were full. So far as passengers are concerned, the advantage of a daily timetable is that: . . . .

they can time their arrival at the station to minimise their wait; people joining trains at intermediate stations are properly catered for; connections at hubs can be guaranteed; and conflicting train movements, and hence delays at junctions, are avoided by allocating each train its own special path.

Similar advantages apply to freight, although they are not so strong, and indeed some freight trains run only on demand—although to scheduled times to avoid delay to passenger services. The timetable is central to the co-ordination of the railway system. The signalling system allocates priorities between trains making conflicting movements on the basis of the timetable. Trains and their crews are rostered on the basis of the timetable. The timetable trades off the competing demands of different types of traffic for track capacity, and minimises conflicting traffic movements to optimise the utilisation of trains and tracks. Together with fares, and quality of service, the timetable determines the basic offering which the rail system makes to the public, and therefore governs its competitiveness relative to other modes of transport. Projections of the revenue that will be generated by the timetable are factored into

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investment decisions, and compared with the costs of additional track and vehicles, to determine whether enhancements of the network are worthwhile. Optimisation of the timetable is one of the core skills required by railway management. The senior manager of the future need to fully understand the principles

Fig. 1. Principal activities in a railway system.

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of timetabling, and to appreciate how modern IT can facilitate their implementation on a complex network. 6. A systems view of railway management The key activities involved in running a railway are set out in Fig. 1. The figure also illustrates the relationship between the activities involved. Physical activities involving construction, maintenance and the movement of traffic are represented by boxes, whilst specialised information-processing activities are represented by circles. The two main elements of the railway system—track and trains—are illustrated by boxes 1 and 2. They are combined in the operation of trains (box 3), which delivers services to consumers (box 4). To simplify the figure, stations and terminals are included in ‘track’, whilst operations include the provision of the labour, fuel, and other inputs—for example, train crews and station staff. The solid black lines linking the four boxes summarise the relationships at the core of the railway system. The system evolves, in the long run, as the result of new construction: new track (box 5) and new trains (box 6). To simplify the diagram, both boxes include maintenance as well as new builds. Box 5 encompasses civil engineering work of all kinds—track, bridges, stations, and so on whilst box 6 encompasses mechanical engineering of all kinds, including the manufacture and repair of locomotives, coaches, and freight wagons. Investment in new track and trains requires substantial finance (box 7), which flows either from government or the private capital market, or both. The linkages between boxes 5–7, represented by solid grey lines, constitute the core of the rail investment subsystem. The utilisation of the track is controlled by the signalling system (circle 8), while the utilisation of trains is controlled by the rostering system (circle 9). These specialised activities both support operations (box 3). Both are driven by the timetable (circle 10). Consumers need to know the timetable so that they can optimise their travel and transport plans, or even decide whether to use rail at all. Advice and persuasion is delivered by marketing (circle 11), which also sets fares and assures quality of service (including punctuality, cleanliness, catering facilities, and so on). The timetable also feeds into investment appraisal, as explained above. The information-intensive activities represented by circles 8–12 are connected to each other, and to the physical activities they control, by flows of information, which are indicated by thin black lines. The arrows indicate the main directions of information flow. It can be seen that the timetable is a crucial internal source of information. It synthesises information on consumer demand, track availability and train availability, and communicates the synthesis back to the sources from which the information was obtained; it also broadcasts the synthesis to the signalling and rostering activities. Investment appraisal is another crucial activity: it synthesises information from timetabling, civil engineering and mechanical engineering in order to produce estimates of the expected rate of return, which govern the supply of capital.

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7. Changes affecting the railway industry The environment in which the railway system operates is in a constant state of flux. The continuing need to respond to change explains why management is always an on-going activity. Yet railways are tightly constrained in their ability to respond to change by the cost of adapting their infrastructure. It is therefore important for railway managers to be aware of all the things that can be changed, so that they can compensate for those that cannot. The idea of embracing change is alien to many railway employees. A well-functioning railway keeps to time, which means that the same sequence of events, dictated by the timetable, is repeated every day. Safety considerations also favour a strict routine. Regular commuters find the daily repetition of events reassuring, and many railway enthusiasts value the element of ‘ritual’ involved. Trades unions are also resistant to change, because the familiar rituals appeal to the staff who perform them.

Table 1 Major long-term changes affecting the future demand for rail services Change

Response

Economic: deindustrialisation has reduced heavy freight traffic Economic: higher standard of living raises opportunity cost of time

Give higher priority to passenger traffic Develop container freight services for smaller loads Higher speeds More frequent services, to reduce waiting times at stations Improved access to stations—Parkway stations, etc. Maximise productive time on the train by providing passengers with tables to work at, guaranteed seats, etc. Provide a wider variety of destinations, reached by good connections Rise of cultural tourism means that leisure destinations are not just seaside resorts More off-peak services Improved marketing of leisure packages through travel agents Better information at stations for passengers who are unfamiliar with the locality Move to regular interval services throughout the day Less need for special Saturday timetable Target regions with high motorway congestion Target shorter distances where air is uncompetitive Invest in retaining walls, improved drainage, etc. Stricter financial controls More transparency and accountability More provision for minorities, the disabled, etc.

Economic: higher standard of living raises stimulates leisure travel. ‘Mass transit’ gives way to ‘individual’ travel

Geographic: office decentralisation and flexible working hours have reduced commuter peaks Technological: improvements in motor car and jet engine intensify road and air competition Environmental: increased risk of slips and flooding Cultural: a more materialistic society is less tolerant of waste, more concerned with health and safety, and less willing to trust in authority

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Michael identified seven main factors affecting the demand for rail travel, which he believed had received too little attention from railway management (see Table 1). The challenge posed by these changes would feature prominently in the MBA syllabus. The core of the railway system was constructed at the time of the Railway Mania, or shortly after, and the economy has changed a great deal since then. It has changed from an industrial economy to a post-industrial service economy, with a much reduced demand for carrying minerals and other traditional forms for freight traffic. People have become more affluent, and this has raised their opportunity cost of time, reinforcing their demand for speed. As speeds have increased, they have been prepared to commute longer distances in pursuit of greater quality of life. Leisure time is taken very seriously, and leisure travel is no longer confined to popular seaside destinations. Cultural change is important too. Consumers expect higher standards of service, and are much less willing to trust authority; consequently there is a much greater need for transparency and accountability in all business activities, including railway operation. Changes in transport technology have also had a major impact. In the 19th century the introduction of the steam locomotive enabled the railways to supersede the recently built canals and turnpike roads, whilst in the 20th century the refinement of the internal combustion engine revitalised road travel and undermined the supremacy of rail. The type of rail network required to compete with the car in a post-industrial economy is very different from that required by a dominant carrier in an industrial economy. More emphasis is required on inter-regional travel between major business and leisure centres, and less on simply connecting manufacturing districts to ports—although the needs of manufacturing and foreign trade cannot be neglected entirely. Table 2 Long-terms trends in demand for rail travel by category (civilian use only) Type of traffic

1850

2000

Potential

Passenger High-speed long-distance inter-urban business travel Leisure travel

Large market Large share Small market

High

Commuter traffic

Small market

Large market Medium share Large market Small share Large market Moderate share

Moderate Moderate

Parcels and mail

Freight General merchandise (containers) Coal & minerals Perishables (cattle, milk, etc.)

Moderate market Large share

Large market Small share

Low

Moderate market Large share Large market Large share Medium market Large share

Large market Small share Small market Moderate share Small market Negligible share

Moderate Moderate Low

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Climate change is another factor that will impact substantially on the rail industry—as it will on other modes of transport too. As water levels rise, embankments and cuttings become liable to slip, and so they require reinforcement and better drainage. Tunnels will become more problematic; the Severn Tunnel, for example, was difficult to construct and has always been costly to maintain, and is particularly vulnerable to rising water levels. Rising sea levels will aggravate existing problems with sea wall on the South Devon coast and elsewhere. Table 2 summarises the net effect of all these changes on the share of rail in some of its major markets. It compares the position in 1850 with that today. It shows that rail no longer has a dominant share of any of its traditional markets, and that the range of markets is much narrower than before, because of the loss of freight traffic. The lack of diversification in revenue streams makes the rail industry of today very vulnerable to changes in its major markets.

8. Privatisation: a historical perspective The most significant change of the last 10 years has, of course, been privatisation, and no discussion of the UK railway system is complete without some analysis of it. The UK railway system has been privatised for much of its history, although it is only since 1993 that privatisation has taken its present form. Four historical stages may be identified (Simmons & Biddle, 1997): . . . .

Privatised promotion, 1825–1922 Private corporatism, 1923–1947 Nationalisation,1948–1992; and Privatisation through franchising 1993—date.

8.1. Privatised promotion Following the successful opening of the Stockton & Darlington Railway in 1825, the first components of the trunk network were laid out in the 1830s. Private companies, financed by business and professional people, and retired gentlefolk, hired civil engineers to plan suitable routes. They enlisted the support of local Members of Parliament to get the parliamentary powers they needed to purchase the land. Long-distance routes were created out of shorter routes by mergers between railways, which made end-on connections with each other. Liverpool, Manchester, Birmingham and Bristol were all connected to London by 1840, and Leeds, York and Sheffield were linked to London soon after by connections in the Midlands. Some rival lines merged to avoid damaging ‘fare wars’. Entrepreneurs like the ‘Railway King’, George Hudson, arranged the financing for these early mergers, which created the Midland Railway and the London and North Western Railway. Many local schemes were also promoted during the Mania, to connect particular towns and cities to the network. Most local promoters were more interested in the construction of their railway than its subsequent operation, and they often leased

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their lines to the more experienced companies, who eventually bought them out. The process of consolidation eventually resulted in about 20 major companies by 1922. As the network grew, alternative routes between major centres proliferated. During the Railway Mania, 1844–5, various cut-offs were promoted to shorten overall journey times, the most ambitious scheme being the Great Northern Railway, which connected Leeds directly to London by the East Coast route. Having formed the Midland Railway to mitigate competition between its constituent companies, Hudson found that, in the Great Northern, another competitor had emerged. Parliament became convinced that competition was in the consumer interest, and from the 1850s onwards only one large merger was permitted until after World War 1. 8.2. Private corporatism During the war, the railway system became run down, and after the war road competition intensified as military vehicles were sold off for civilian use. To provide financial stability to the industry, the 20 major companies (together with many minor ones) were consolidated into the Big Four: London Midland & Scottish, London & North Eastern, Southern, and Great Western (a pre-war company which retained its identity after merging with a number of small Welsh lines). Very little investment was undertaken in the inter-war period, except for local improvements financed by unemployment relief programmes. The Big Four joined forces to lobby (successfully) for the licensing of bus and lorry operations, to restrict road competition. 8.3. Nationalisation The post-war Labour government nationalised the Big Four in 1948. The new British Transport Commission made some very short sighted decisions, including ordering large numbers of new steam locomotives at a time when most other countries were phasing them out (Gourvish, 1986). The British Railways Board (BRB), which took over, did little better to begin with. They electrified the West Coast Mail Line at great expense, ignoring all the engineering lessons that the French had learned from their pioneering work. HM Treasury lost confidence in the industry, and introduced economies, which meant that some parts of the electrification scheme were never completed. It became a tradition in the Treasury never to trust the competence of railway management. Local political pressure can produce results, however, and some other electrification schemes were later funded, including the East Coast main line, and various extensions of the third-rail Southern system. In its later years the BRB became much more successful (Gourvish, 2002). The launch of the Inter-City brand revitalised business travel, building on the popularity of the 125 mph high-speed train. The reorganisation of London commuter services under the Network South East brand was one of a number of valuable local initiatives. By the end of the 1980s the BRB presided over a relatively

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decentralised (or ‘sectorised’) organisation in which managers of divisional profitcentres were showing considerable flair. 8.4. Privatisation through franchising Many transport experts believed that the BRB was ‘doing a good job’ at the time that privatisation was imposed in 1993. Privatisation was an ideological statement to the effect that the market has no limits, and was seen by some as an attempt by Prime Minister John Major to appease his right wing (and Euro-sceptic) critics within the Conservative Party. The BRB argued that, if the railways had to be privatised, then they should be privatised as an integrated concern, following the example of the gas industry. It is said that John Major (who as a cricket fan had a strong nostalgic streak) favoured re-creating the Big Four. But the free market ideologists, including civil servants in the Treasury Privatisation Group, favoured a new and untried approach. They believed that competition could be made to work in every segment of the railway industry except for infrastructure, which was a natural monopoly. They envisaged a regime of open access to train service provision, where rival operators would bid for train paths in much the same way as airlines bid for landing slots. As an interim measure, they would offer short-term franchises through a competitive bidding process. The initial franchisees would have to compete against new entrants in due course, and only the fittest of them would survive. The ‘devil was in the detail’, however, and there was too little time to sort out the practical problems before the next election. The Treasury finally decided that minimising the overall level of public subsidy was the main objective, which meant that the franchises had to appear attractive to bidders. Competition was therefore toned down, and franchises were designed to give operators effective monopolies on many routes. Overall, it can be seen that for a period of about 150 years, from 1825 to 1992, there was a progressive consolidation of ownership, culminating in unitary control from 1948. This evolutionary process was reversed in a single radical step on privatisation in 1993. Some people have argued that the evolution of consolidation reveals the work of an ‘invisible hand’, moving the system slowly towards the most efficient organisational form, whilst advocates of privatisation believe that this process was driven instead by collusion against other modes of transport, and the political advance of socialism. 9. Privatisation: the present position The current structure of the industry is summarised in Fig. 2. Track (box 1) is in the hands of Network Rail. Unlike its predecessor, Railtrack, Network Rail carries out some maintenance in-house, as well as hiring external contractors such as Jarvis and Balfour Beatty (box 5). Network Rail also has responsibility for signalling, because the signalling is interlocked with the points and most of the relevant hardware is beside the track. Its control of the signalling system gives it a significant influence on the timetable (circle 10).

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Fig. 2. Ownership and regulation under privatisation.

Train operating companies (TOCs) lease their train sets from the three rolling stock leasing companies (ROSCOs)—Angel Trains, HSBC Rail and Porterbrook— who purchase their trains from independent multinational manufacturers such as Alstom and Bombardier (box 6). Until recently most new trains were assembled in the UK, though making extensive use of imported sub-assemblies. The TOCs

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provide train crews and some station staff (box 3) and roster crews and vehicles (circle 9). Most importantly, the TOCs have the main responsibility for marketing rail services (box 11). They are focused strongly on setting promotional fares, improving on-train catering, and so on. The relationship between Network Rail and the TOCs is regulated by the Office of the Rail Regulator (ORR) which sets the track access charges paid by the TOCs and also fixes the penalties incurred by Network Rail when services are disrupted— for example, due to over-running weekend engineering work. Safety is the responsibility of the Health and Safety Executive (HSE), although the police and other organisations are involved in railway safety too. The costs and benefits of enhancing rail safety are controversial, and the bureaucracy involved in risk assessment and approval of safety cases is widely regarded as excessive. The performance of the TOCs in serving consumers (box 4) is the concern of the Strategic Rail Authority (SRA). The SRA awards operator franchises through a competitive bidding process inherited from the Office of Passenger Rail Franchising (OPRAF). When Richard Bowker, formerly of Virgin Trains, took control of the SRA it became involved in investment appraisal (circle 12). This was previously carried out mainly by the Transport Ministry and Railtrack. Whilst it was originally envisaged that most finance would be private, in practice much of it has come from the government (box 7). There is little investment from either source at the moment. The City is sceptical about future returns from rail investments, and the SRA’s budget is fully absorbed by subsidy payments, which are running at £ 2.8 billion per annum—more than three times higher than before privatisation. 10. Privatisation: potential benefits 10.1. Competition The Conservative government saw the main benefit of privatisation as the introduction of competition, which would both reduce costs and improve quality of service. Private operators would have a strong incentive to eliminate waste by tackling restrictive working practices. Transport Minister John MacGregor claimed that speed would improve as operators vied to provide the fastest service between cities. As a result, the consumer, and not the producer, would ‘call the shots’ in the industry. 10.2. Cost-awareness A significant advantage of privatisation claimed by the managers of current TOCs is that it has brought a new awareness of costs to the industry (Institute of Economic Affairs, 2003). The increasing use of prices to allocate resources within the industry makes costs more transparent. For example, each new automatic ticket barrier is now carefully costed to assess whether the revenue extracted from fare evaders will pay back the interest on the purchase of the machine. Similarly,

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every new promotional fare is carefully analysed to assess how far it will generate additional passenger journeys rather than simply allow existing journeys to be made at a cheaper fare. The danger with this short-term micro-management, however, is that people ‘take their eye off the ball’. They do not consider how far the installation of new additional barriers delays honest passengers, or whether people become confused by the proliferation of different fares—and upset when they realise that they could have got a cheaper fare. 10.3. Supply of private capital Privatisation can also attract private capital for investment. However, because rail was regarded as a ‘sunset’ industry in the early 1990s, there was little interest in this at the time of privatisation. Indeed, the emphasis was more on releasing capital through asset-stripping. If greater use of private capital had been the main concern, it would not have been necessary to ‘fragment’ the industry; the BRB could have been privatised as an integrated concern. When New Labour was elected to government in 1997, the focus changed. The use of private capital to fund public projects was a major objective of Chancellor Gordon Brown; it was his interpretation of Prime Minister Blair’s elusive concept of a ‘middle way’ between socialism and the market. Despite the shift away from competition to the supply of capital, the fragmented structure of the industry was retained. The government had not thought through the issue, and in any case, its legislative priorities lay elsewhere. An incremental approach was adopted. Franchises were awarded for longer terms to encourage TOCs to lease new trains. From 2006 franchises will be consolidated on a regional basis so that each London terminal is served mainly by a single TOC. The ORR set out to ensure that Railtrack received an adequate riskadjusted rate of return, so that it would be willing to invest. About the same time, Railtrack entered into an imaginative agreement with Virgin Trains for a major upgrade of the West Coast main line, using 140 mph tilting trains. To avoid being ‘soft’ on Railtrack, the ORR fixed Railtrack’s revenue scheme on the assumption of steady and significant productivity gains in track maintenance. It also maintained a high degree of transparency in the regulatory process, in order to reduce the political and regulatory risks incurred by the company. 10.4. Optimising the boundaries of firms A major advantage of fragmentation is that individual operator franchises can be traded in a secondary market—not directly, but through mergers, acquisitions and divestment amongst the franchisees. Thus the boundaries of firms do not have to remain as they were at privatisation—they can be optimised in pursuit of reduced transaction costs. Some franchises were consolidated at the outset, because they were awarded to subsidiaries of the same firms. For example, National

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Express owned both Central Trains and Midland Main Line, as well as London local services. Other franchises were consolidated later when unsuccessful bidders acquired successful bidders. For example, Prism Rail, a management buy-out which won the Great Western franchise, was subsequently acquired by the First Group, which already held franchises in the Eastern Counties and North West. 10.5. International transfers of technology and skills Privatisation also facilitates the multinationalisation of an industry. Privatisation of utilities world-wide has created a new generation of multinational utility firms— particularly in the energy sector. These multinationals have the capability to identify new technologies in any part of the world where they operate, and exploit them globally, bringing their operations in each country up to world-class levels. Given the limitations of the UK rail system noted above, there is, in principle, ample opportunity for inward investment to upgrade UK rail operations. In the passenger sector, the French conglomerate Vivendi (now Veolia Environment), which had global interests in water, media, entertainment and drink, acquired two commuter franchises. In the freight sector, the US rail operator Wisconsin Central Transportation, together with various groups of venture capitalists, acquired a portfolio of UK mail and freight operations. Collectively known as EWS, it placed significant orders for two new classes of diesel locomotive.

11. Results of privatisation: perverse incentives distort the timetable Although the potential gains from privatisation are large, the actual gains have been minimal. In many cases the outcomes have been the opposite of those intended. Competition between passenger train operators is most easily implemented when passengers buy their ticket from a conductor on the train. This directly rewards each operator for every seat that is occupied. But it requires a passenger changing trains to buy a separate ticket for each segment of their journey. When it was announced that sales of through tickets might be restricted to just 300 stations after privatisation, there was a public outcry, and so the old British Rail ticketing system was retained. This system was supported by ORCATS—a computer program (still in use) that allocates ticket revenue on shared routes. It is based on a probabilistic model of passenger travel, in which passengers arrive at stations at random, and take the train that will get them to their destination as soon as possible. This will normally be the next train, unless a later train is an express, or follows a shorter route. On the basis of timetable information alone, ORCATS calculates what proportion of travel between any two stations will take place by what type of train, and allocates revenue accordingly. For competing private operators, the implications are ORCATS are clear. If overall passenger traffic is constant, then company revenue depends mainly on imputed market share, and imputed market share depends on the timetable alone.

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If an operator timetables additional trains then they will increase their imputed market share. Their revenue goes up, and their rival’s revenue goes down, even if their trains run empty. If their trains run late, and passengers switch to their rival’s services, their revenue still goes up. If they run their trains half empty at offpeak times and leave their rival to cover the peak, their revenue still goes up. If ORCATS does not model a factor, it simply does not count. In summary, there is no reward for carrying extra passengers, but only for running extra trains. While the smarter operators realised this from the outset, many did not. Some operators cut down the number of trains on the grounds that it was wasteful to run them unless they were full. They operated the minimum service stipulated in their franchise agreement. They realised these economies by making train crews redundant, and leasing only small amounts of rolling stock. The smart operators did the opposite. They increased their frequency of service on competitive routes to divert revenue from their rivals. They hired extra train crew and leased extra stock, though because the additional trains carried few passengers, the number of additional coaches required was not very great. The other operators soon realised their mistake. South West Trains, for example, laid off a lot of drivers, who left to join some of the smarter companies, and then had to train replacements at their own expense when they increased their service frequency. Their drivers now run an intensive off-peak service in south-west London; indeed the off-peak service is more frequent than the peak hour service on some routes, and provides plenty of spare seats. The perverse incentives of the ORCATS regime quickly led to congestion, caused by the conflicting movements of all these half-empty trains. Between Ipswich and London, Anglia and First Great Eastern offered rival hourly services. One operator then doubled the frequency of their service, and this was quickly matched by the other operator. Similar competition occurred between Peterborough and London, where GNER and WAGN competed, and between Reading and London, where First Great Western and Thames Trains competed. GB Rail, the entrepreneurial owner of the Anglia franchise, gained a reputation in the industry as an ‘ORCATS raider’. It used the principle of open access, as set out in the Railways Act, to bring competition to monopolised routes. With powerful local backing, it launched Hull Trains, which provides a direct service from London to Hull, eliminating changes of train at Doncaster. It used vacant train paths on the East Coast mainline, where GNER had a monopoly of intercity services. Because its trains made intermediate stops on the GNER main line at Grantham and Doncaster, it was able to gain a share of the revenue on all the London traffic from these towns, even though the official reason for the stops was to provide connections to and from Hull. The diversion of revenue from GNER has been estimated at £ 4 million per annum. The lesson for other monopoly operators is clear. If they do not use up all the vacant train paths on their routes, entrants will move in to ‘steal’ a share of their revenue. Thus even on monopolised routes, service frequencies have been increased for purely defensive reasons.

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The increase in frequency has been good news for train drivers, who had expected to fare badly from a pruning of services after privatisation. In practice, demand for drivers has increased; driver training is a lengthy process, and the short-run supply is fixed, so wage rates have been bid up. Industrial relations problems have generally centred on the position of guards. TOCs have sought to economise on overall crew costs by making drivers rather than guards responsible for the safety of passengers. Guards have been replaced by specialist ticket inspectors, catering staff and security personnel. In the tradition of UK craft trade unionism, the drivers and guards are represented by different unions—ASLEF and RMT and interunion rivalry has made the problem more difficult to resolve. Perverse incentives affects other aspects of operations too. . Trains are slower because intermediate stops have become more frequent. ORCATS awards an operator a share of the revenue at every station at which a train calls, and so the more stations it calls at, the more revenue it earns, whether any passengers join the train or not. Many so-called expresses now make frequent stops. Passengers at intermediate stations benefit from a more frequent service, but passengers travelling long distances find their journey much slower as a result. . Trains are less punctual because they make very long trips with very many stops. If a train from, say, Wales to Birmingham is combined with a train from Birmingham to the East Coast, to form a through train from Wales to the East Coast via Birmingham, then the through train will normally be imputed more revenue than the two separate trains it replaces. This is because ORCATS assumes that passengers will use through trains in preference to others. On a congested network, however, through trains are more prone to delays, because delays accumulate as a journey progresses. Although through passengers benefit by avoiding a change of train, punctuality deteriorates, and this has knock-on effects on the rest of the system. . Rush-hour trains are over-crowded because there is no reward for giving passengers a seat. Investment in trains is dictated by the requirements of off-peak travel, since there is no financial incentive to provide longer trains at peak hours. Peakhour travellers are either priced off the network by premium fares, or forced off the network by lack of space on the trains. . Connections at hubs are not maintained. The SRA measures TOC punctuality in terms of trains’ arrival times rather than passengers’ journey times, so no account is taken of missed connections. This discourages TOCs from delaying the departure of trains to maintain connections, even when the only passengers on the service are those who are arriving on a connecting train. . Cancellations are common, even when trains are in full working order. The financial penalties set by the SRA for cancelling trains are small compared to the inconvenience caused to passengers. This encourages TOCs to turn late-running trains around before they have completed their journeys, so that the train’s next trip can start on time. When this happens, the passengers are sometimes deceived into believing that there is a fault with the train.

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12. Results of privatisation: compromising safety Stimulating the supply of private capital has fared a little better than fostering competition. The Ten Year Transport Plan called for substantial private investment in the rail industry, but after just 3 years it looks most unlikely that its targets will be met. 12.1. Infrastructure The greatest need for capital in the rail industry is to enhance the infrastructure. The bankruptcy of Railtrack in 2002 did considerable damage to the supply of private capital for infrastructure investment. Several influential city investors incurred substantial capital losses when the Railtrack share price collapsed. They assert that Transport Minister Stephen Byers acted improperly in putting the company into receivership. It remains unclear whether the new owner of the infrastructure, Network Rail, which is a non-profit company limited by guarantee, will perform any better. With the benefit of hindsight, it is evident the government made a serious misjudgement when it assumed that the BRB had been wasteful in its track maintenance methods. In setting the regulated track access charges, which determine Railtrack’s revenue stream, the ORR assumed that aggressive cost-reduction targets could be met without compromising safety. The ORR seems to have believed that regulation by the Health and Safety Executive would avoid a knock-on effect on safety. Alternatively they may have trusted in the reputation of Railtrack Board to maintain the safety culture inherited from BRB. In fact, Railtrack board members traded in their reputation with the government in return for short-term financial rewards. In the euphoria of privatisation, Railtrack shares rose steeply. The Board followed Milton Friedman’s doctrine that its principal duty was to the shareholders, which meant keeping the share price high. The city culture of the time required the board to hit short-term financial targets consistently. With the revenue stream effectively fixed by the regulator, targets had to be met either by selling off property or by cutting maintenance costs. Both tactics were followed vigorously. The haste to privatise meant that government did not compile a proper inventory of the network at privatisation. The BRB organised track maintenance on a regional basis, relying on the tacit knowledge of experienced local engineers. Information was also obtained from track inspection vehicles, which generated data that was analysed in an engineering laboratory. The ORR had no idea of the true state of the track because it had no access to either of these information sources. Most of the local engineers had either been made redundant by Railtrack, or sent to work for the subcontractors which Railtrack employed to carry out its work. The engineering data was Railtrack property and was treated as commercially confidential. The regulatory process was essentially bureaucratic. Lawyers negotiated the nature and content of the documentation, which Railtrack supplied to the ORR

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under the Railways Act. Civil servants employed by the ORR analysed the documentation and requested clarifications, which were supplied after a suitable lapse of time. Whilst this process dragged according to its annual cycle, two high-profile accidents occurred at Southall and Ladbrook Grove, both on the main line from London to Reading. It turned out that these accidents were mainly the result of human error, but the Hatfield crash in 2000, on the East Main Line, was clearly due to faulty track. Although the cause of the derailment was well known, no one came forward to take responsibility. Was the ORR a negligent regulator, or should the HSE have taken a more proactive role? Should Railtrack have replaced the faulty track earlier, or was their subcontractor simply not doing their job properly? The ORR naturally wanted the finger to be pointed at Railtrack, as this would distract attention from themselves. It was difficult for Railtrack to pass all the blame on to the subcontractor because the cause of the failure—gauge corner cracking—required Railtrack to give the contractor possession of the track in order for the rail to be removed. But Railtrack had another problem unconnected with Hatfield, and this was the final cause of their downfall. They had quoted a price for an upgrade of the West Coast main line which, it gradually turned out, represented only about 20% of the actual cost. The project included a ‘moving block’ signalling system which had not yet been designed, so Railtrack’s financial commitment was open-ended. Having dismissed most of their experienced engineers, and failed to take proper advice from technical consultants, Railtrack management simply appeared incompetent. So as they were already in financial difficulties at the time of the Hatfield crash, the government took the first opportunity to put the company in receivership. It had become a major political embarrassment, and a symbol of all that was wrong with the railway system. 12.2. Trains ROSCOs have made substantial investments in new trains since 1998. The increased service frequency, and the extension of franchises, coupled with the overall growth in passenger traffic prior to the Hatfield crash, stimulated demand for rolling stock. The ROSCOs were, until recently, the most consistently profitable firms in the industry. Some initial investors made substantial capital gains when they sold out to banks. It is been alleged that there are too few ROSCOs to guarantee competition in the leasing of trains, but there is no evidence to support the view that collusion has occurred. Most ROSCOs have made strenuous efforts to design trains to meet the specific needs of individual TOCs. A disadvantage of this is that ROSCOs have imposed little standardisation on the train fleet, despite the fact that standardisation would increase the ‘residual value’ of the trains after the initial lease has expired. As a result most new trains, like those they replace, can only operate on certain parts of the network. There have been more serious errors of judgement too, such as ordering new electric trains for routes where power supplies were inadequate. These errors, and the uncertain future of the

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system, mean that ROSCOs now carry significant risks, given the 30-year economic life of their new trains. 12.3. Operations Investment by TOCs is minimal. They lease their trains from the ROSCOs, and pay their weekly wages from the ‘fare box’ and from the subsidy they receive from the SRA. Most of the TOCs do not have capital guarantees from their parent companies, and so their ability to borrow in the money markets is small. Parent companies prefer to let them go bankrupt rather than ‘throw good money after bad’ into the rail industry. The most vulnerable TOCs are those, which negotiated franchise agreements in 1996–7, when expectations of traffic growth were high, and the Hatfield crash was 3 years away. The SRA has bailed out several near-bankrupt TOCs, because the cost of funding a replacement operator at short notice is greater than the additional subsidy required (though they have recently taken a tougher line, as explained below). 13. Results of privatisation: attracting the wrong sorts of skills The new skills brought in to the UK railway industry through privatisation have so far been very limited. The incompetence of Railtrack has already been noted. So far as TOCs are concerned, the principal entrants have been UK bus operators, such as First, Go Ahead, National Express and Stagecoach. Local bus operation has few similarities with train operation, although long distance coach services compete with trains in the student travel market. Since local buses often serve railway stations, however, there are opportunities for the development of local integrated transport systems. The main factor that explains why bus operators acquired franchises is that they had previous experience of the privatisation process when it was applied to the bus industry. Their special skills were in bidding for franchises, rather than in operating railways. Some of the bus operators, like Stagecoach, had a reputation for being ‘tough on the unions’—certainly in comparison with the BRB. Foreign investment in the UK rail industry provides an opportunity for UK rail to catch up with the international leaders. The leaders include France, with its TGVs running on dedicated high-speed lines, and Japan, with its bullet trains. The Dutch operate reliable intensive suburban and inter-city passenger services, whilst the German railways have very high standards of engineering and IT. The Swiss maintain a comprehensive integrated public transport system encompassing air, rail, bus and taxi, which provides exceptional punctuality and reliability Private rail firms in the US and Canada have developed imaginative freight haulage services which address the logistical needs of sophisticated manufacturers and distributors. The most significant foreign investor in UK passenger services is the French conglomerate Vivendi whose transport interests are handled by its subsidiary Connex. In 2002 Connex was operating in 22 countries, and held UK rail franchises for

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suburban services in south London and Kent. Connex management has commented on the lack of engineering skills in the UK. It might be expected that Connex would have addressed this issue by bringing French engineers to the UK and that, drawing on French experience, it would have upgraded its services. In fact, the reverse has happened. Connex has lost both its franchises in the last 2 years. One short-term franchise was not renewed, and a year later the SRA stripped Connex of its other franchise for failing to exercise adequate financial control. Connex has acquired a reputation, not merely for incompetence, but for the totally bizarre. On one occasion a Connex train driver abandoned his passengers to go and collect his children from school because, he said, the company would not pay for a taxi. On another occasion a Connex service was cancelled because of an infestation of fleas. Its trains are amongst the oldest in the UK and until recently there was little sign of modernisation. The skills of Connex are negligible compared to those of the main French rail company, SNCF. Connex’s investment in the UK appears to have been motivated by a desire to learn about privatisation. The company has sought to acquire skills of bidding for rail franchises which it can export to other countries. It has learned how to play this game at the expense of UK commuters. It is, of course, true that the Channel Tunnel and Eurostar joint ventures have successfully transferred French engineering skills to the UK. But these joint ventures pre-date privatisation. The Channel Tunnel was a political project sponsored by Mrs. Thatcher, who opposed to rail privatisation. The UK partner in Eurostar was the BRB. International joint ventures initiated by the BRB have been more successful than privatisation in attracting technology and skills to the UK. 14. The future of the railway: reversing fragmentation For both commercial and political reasons, most private companies in the rail industry are reluctant to recommend a return to nationalisation. Many managers assert, however, that the ‘fragmentation’ of the industry on privatisation was a mistake. To make privatisation work the industry needs to be re-integrated in some way, they claim. Michael agreed with this view. His proposals for improving railway management do not require privatisation to be reversed, but they would certainly be easier to implement if fragmentation were reduced, because they presume the existence of some basic system of ‘command and control’. The problem of fragmentation can be readily appreciated from Fig. 2. Responsibility for crucial activities such as timetabling and investment appraisal is ambiguous. Timetables are currently set by negotiations involving the TOCs, Network Rail and the SRA. It is said that the introduction of the new Virgin Cross Country timetable (Operation Princess) in 2002 involved over 80 iterations of the timetable. This is not surprising, given that speeding up the trains and doubling the service frequency had knock-on effects throughout the network. Under a proper system of command and control, timetabling would be centralised. The marketing of rail services has been damaged by fragmentation. TOCs have found it difficult to build brand awareness with passengers. Most of their attempts

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at improving service have been undermined by the poor quality of the track. Some operators realised that it was risky to invest in a brand whose reputation could be undermined by a monopoly supplier beyond their control. As a precaution, they created rail-specific brands. National Express, for example, has maintained his reputation as a coach operator even though some of its rail franchises have experienced difficulties from time to time. By contrast, the well-established Virgin brand was applied to trains at the outset, and it is said that it has been damaged as a result. A few operators made little investment in their brand at all. They doubted whether passengers would take much notice of the trains they were travelling, in and experience suggests that they were correct. Passengers have shown more concern about the basics—such as punctuality, safety and cleanliness—than about the ‘frills’ which the more brand-conscious TOCs planned to supply. According to Virgin’s critics, one reason why the Virgin brand has not sustained greater damage is that occasional Virgin passengers do not always realise that they are travelling in a Virgin train! One of Richard Bowker’s aims is to turn the SRA into a command and control centre. Timetabling and investment appraisal will become more centralised. The role of TOCs in proposing service enhancements will be reduced. The SRA will function increasingly as a ‘specifier’ of services, with franchisees bidding to run services to a predetermined timetable. Apart from this, though, the SRA’s plan for the organisation of the industry follows the basic structure established on privatisation. The only major change envisaged is a consolidation of operator franchises onto a regional basis. This regional structure does not appear to have been developed with an integrated vision of the national network in mind, however. It is rather a short-term response to specific problems of congestion at London termini (discussed more fully below). There are other models of devolution which appear superior, but which have not been considered. Under the BRB, all express passenger services were the responsibility of a single division—inter-city. Other divisions—such as Scotrail and Network South East—had a local and commuter focus. As this divisional structure is tried and tested, and was reasonably successful, it could be re-established. Another possibility is to devise a structure specifically to support the two crucial management activities identified above: the planning of the timetable, and the appraisal of investments. This suggests a focus on hubs. Hubs offer major benefits, through connections, but they also pose significant risks arising from congestion. The timetable could be planned in two stages: first, a skeleton would be created based on inter-city routes, and the ‘flesh’ would then be added in terms of local feeder services. An iterative process of adjustment would then be followed until an equilibrium was reached. To support this process, a management structure that separates traffic between hubs from traffic around each hub would be appropriate. A single trunk operator would provide the services linking major hubs, and local operators would feed traffic to and from the hubs. Devolving responsibilities to groups of neighbouring hubs, and then to individual hubs within each group, would generate a structure that combines elements of the present franchise system with the divisional structure of the BRB. The

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compromise is not a fudge, however, because it explicitly combines the principle of devolution with the principles of network optimisation. 15. The future of the railway: rationalising regulation Whatever the structure adopted, it is doubtful if the SRA, in its present form, is the most appropriate organisation on which concentrate command and control. The SRA would become both a regulator and manager. In other words, it would get into a position where it needed to regulate itself. Indeed, the problem already exists so far as the consumer interest is concerned. The SRA has a statutory obligation to represent the consumer interest, and to address problems raised by the Rail Passenger Council, which is the rail-users representative body created under the Railways Act. Notwithstanding its responsibility for consumer protection, the SRA has recently announced that in future regulated rail fares will increase faster than inflation rather than below inflation, as before. The objective is to reduce the overall level of subsidy to the industry, in accordance with short-term Treasury objectives. The long-term effects on modal choice, and on the targets set out in the Ten Year Transport Plan, have been ignored. It might be argued that the SRA already promotes the consumer interest by fostering competition between TOCs, but in fact the reverse seems to be the case: it seems intent on maintaining collusion instead. Where competing trunk routes exist, competition is inhibited by awarding an effective monopoly of long-distance traffic to just one of the operators, by restricting the other to handling mainly local traffic. Beginning in the 1890s, there was intense rivalry between the East Coast and West Coast routes from London to Scotland. Since privatisation, however, Virgin West Coast has operated a very restrictive service to Edinburgh via Carlisle, leaving GNER, the East Coast franchisee, with a virtual monopoly of the Edinburgh traffic via Newcastle. The excuse is that the principal competitor for Scottish traffic is air, and that additional rail competition is irrelevant. Whatever the merits of this particular argument, there are many other examples of the same approach. Between London and Exeter, for example, South West Trains operates a shorter route via Salisbury than First Great Western via Taunton, but it is condemned to serve only intermediate towns. The track was ‘singled’ some years ago, so that it is suitable only for local trains, and double-track has not been reinstated since. Retaining the SRA in its present form would also perpetuate the complexities of the current regulatory regime. There are three independent regulators, and the combined cost of salaries and offices is a significant burden on the industry. It seemed unlikely that the ORR and the HSE will passively acquiesce in a subordinate role. A power struggle could easily develop between the three regulators. Indeed, to some degree it has already begun. The ORR opposed the establishment of Network Rail as a not-for-profit company, and it has since drawn up a complicated executive pay package for Network Rail senior managers, on the grounds that linking pay to performance is the only way to get the managers of a not-for-profit company to do their job properly. If the SRA also intends to become more meddlesome, than conflicts are bound to arise when both regulators

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meddle in the same issue. The two regulators are aware of the problem and have drawn up an agreement to address it, but it remains to be seen how long this truce will last. The implication is that if rail is to remain privatised, the structure of regulation must be rationalised, and a new independent command and control centre be established. A possible model for the new organisation would be the old BRB. In the transitional period the successor organisation would acquire control of the network incrementally, as existing franchises expired. New operator franchises would be awarded to subsidiaries of the BRB successor. Once all the trunk line franchises had been acquired, a new inter-hub traffic division would be established. Independent local franchises would continue to offered around individual hubs, and local authorities and other interested parties would be encouraged to participate, following the precedent already set by regional passenger transport executives. The BRB successor would be able to borrow from both private and public sources. Different funders could act as joint venture partners in different projects promoted by the successor. The SRA and the ORR would be merged into a single regulator representing the interests of the public. The new regulator would also take over responsibility for safety policy, because fares, safety and investment are all closely linked: greater safety would warrant higher fares, which would fund greater investment in safety equipment. The HSE would focus purely on the technical aspects of safety, such as accident investigation. The powers of HM Treasury would be confined to those activities funded or subsidised by central government. The main objective of regulation would not be to minimise government subsidy, as at present, but to keep fares low, and the system safe, in order to promote rail travel.

16. The future of the railway: network enhancement One of the more radical implications of privatisation is that a wholly new railway system could be established along side the existing one. New construction can produce a dramatic increase in capacity on a congested network. It provides an opportunity to introduce advanced signalling systems and other technological features. Finally and most importantly, it is often just as cheap to build a wholly new line as to upgrade an existing one. The cost of upgrading a line that is used by regular traffic is very considerable. Modern safety legislation means that work must stop whenever trains pass nearby, so that major improvements can only be implemented when a line is shut altogether. Weekend working is one solution, but this disrupts leisure travel, whilst overnight working disrupts freight traffic. Both solutions increase reliance on casual labour, which is often less reliable than full-time weekday labour. Many diversionary routes were eliminated during the Beeching cuts, so the disruption caused by line closures is often considerable. For these reasons, work on wholly new lines is often relatively cheap, and safeguards revenues by maintaining cus-

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tomer service. By contrast, even minor upgrades to existing routes can prove very expensive—as the dramatic escalation of costs on the West Coast Main Line upgrade clearly shows. The Channel Tunnel Rail Link (CTRL) is a good example of radical new construction. It will join the British end of the Channel Tunnel near Ashford in Kent with a new terminal at St. Pancras station, London, and is due to open in 2007. It will cost the enormous sum of £ 7 billion, mainly because of extensive tunnelling through Kent to curb noise pollution in residential areas. It will reduce the travelling time from London to Paris from three hours to two-and-a-half hours or less. It is engineered specifically as a high-speed link extending the European network from the Kent coast into London. Construction of the CTRL is possible only because of a substantial government subsidy. The London to Paris and Brussels Eurostar service, which currently operates through the Channel Tunnel, has never earned a profit since it began, and so the new link could be dismissed as a case of ‘throwing good money after bad’. Sceptics argue that despite the role of private firms in the construction and operation of the link, it is the government subsidy which is the decisive factor in the scheme. Ever since Mrs. Thatcher and President Mitterand agreed on the Channel Tunnel project, the absence of a high-speed link on the English side of the Channel has been a political embarrassment. UK politicians and civil servants travelling to meetings in Paris and Brussels regard the slow running on the English side of the Channel as a national disgrace. The CTRL was authorised when ‘saving face’ became a political priority, it is said. A more worthy example of private enterprise is the Central Railway proposal for a dedicated freight line from Liverpool, through Manchester, Sheffield and Nottingham, to the Channel Tunnel at Ashford. The line will be built to the Continental loading gauge, rather than to the narrow UK loading gauge, thereby allowing lorry trailers to be carried piggyback on low wagons. The system is modelled on the successful Expressway service operated by Canadian Pacific Rail between Toronto and Montreal. If successful, it will remove many lorries from the motorways around London. Another appealing feature of this proposal is that it re-uses a substantial part of the old Great Central Railway line from Leicester to Aylesbury. Unlike many of the other lines closed in the 1960s, this portion of redundant railway is relatively well preserved—it has not been built over by supermarkets, car-parks and housing developments. The re-use of existing bridges, viaducts and tunnels will reduce the capital cost of the scheme to about £ 34 billion—which represents relatively good value for money, given the length of the route involved. Operating costs should be low as well because the line will be dedicated exclusively to the freight service. Experience has shown that lines dedicated to a single type of traffic are usually cheaper to operate than a multi-purpose line. It should be noted that the scheme does not involve an extension of the European high-speed network, since the freight trains will operate at only 60 mph. This means, that advanced signalling systems are unnecessary, and that the wear and tear caused by high-speed heavy freight trains can be avoided.

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This imaginative scheme has some practical drawbacks however. While much of the route is entirely independent of the existing network, some key sections of the route, between Liverpool and Manchester and north-west of London, rely on existing lines. This threatens disruption to existing services and, conversely, existing users could disrupt the Central Railway service. In the final analysis its performance will be no better than that permitted by the weakest—i.e. the most congested link.

17. Railway management in the future A review of enhancements recently completed suggests that, unfortunately, they do not always live up to their expectations. Recent investment at London Paddington, the terminus which serves the West of England and South Wales, illustrates the point. Paddington station has short platforms and cannot therefore accommodate long trains, which makes it unable to cope effectively with rush-hour traffic. The closure of the neighbouring goods station provided an opportunity to address the problem. But the land was sold off for residential and office development. At the same time, a major ‘enhancement’ was undertaken, financed by the British Airports Authority—the introduction of the Heathrow Express. Little change was made to the congested tracks approaching Paddington, apart from re-signalling; most of the enhancement, for obvious reasons, took place around the airport. Two of Paddington’s longest platforms were reserved for the exclusive use of the new service. Government was so keen to attract outside money to the project that it was allowed to go ahead ‘on the cheap’. The benefit to airport passengers is limited, because Paddington is some way from the City and West End; however, the disruption to inter-city rail passengers from the South West and South Wales is considerable, as their trains regularly queue outside the station for a suitable platform to become free. Investment in railways is inherently political. Even with a privatised railway system, it is not sufficient for the railway industry to enjoy the confidence of financial institutions and the City. The industry also needs the support of government. Where a railway scheme affords direct political benefits, such backing may be forthcoming, as with the CTRL, but where the benefits are more diffuse—such as the reduction of motorway congestion in the South of England—government may be less enthusiastic. The promoters of the Central railway have been waiting since early 2000 for the government to indicate whether it will support the scheme. Ministers may be worried that if the scheme is approved, and costs begin to escalate once it is underway, then public opinion will force the scheme to be completed with government funds. Whatever their thinking, the stalling tactics of the government shows that, even though a subsidy is not being requested, government still has the power to effectively veto the scheme. Railways have always needed public support, and no more so than at the present time. Transport is not always a high priority with electors, however, and so raising the profile of transport issues is an important aspect of railway industry lobbying. In a privatised industry, there is substantial tension between winning public support

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through a low fares policy on the one hand, and increasing short-term profits through a high fares policy instead. Because many people never travel by rail at all, the basis of public support is quite narrow, and so the support of the most regular users—the commuters—is vital. The recent action of the SRA in raising commuter fares is a step in the wrong direction, so far as maintaining public support is concerned. 18. Conclusion In almost every industry line managers maintain that their industry is different. By contrast, strategic management consultants make a living out of suggesting that all industries are fundamentally the same. Tensions of this kind were evident at the time of railway privatisation. Politicians and senior civil servants typically took the view that railways were not fundamentally different from any other network or utility industry. By contrast, many long-serving railway managers believed that the railways were fundamentally different from other industries that had been privatised. The final arrangement reflected a view that, while track might be fundamentally different, the operation of trains was not. Michael Brooke believed that management principles were universal, but a thorough understanding of an industry was necessary to determine how these principles should be applied. Politicians and high-ranking civil servants had little grasp of relevant detail, and needed expert advice from rail professionals. Conservative politicians, however, were suspicious of experts, believing that their advice was selfserving. Following their advice had led, in the past, to over-investment in the rail industry, and so this advice was ignored. The politicians failed to recognise that railways are a uniquely complex industry from an operational point of view. A railway system is inherently rigid, and yet, to deliver its services effectively, it must exhibit extraordinary versatility. Extracting versatility from an inherently rigid system is no easy task. Michael maintained that optimising the performance of a large and complex system like a railway network required both long-term macro-management and shortterm micro-management. If macro-management was wrong, or simply lacking, then micro-management could make performance worse. It was necessary to get the overall configuration of the network right: it should be part of a national system of public transport which allowed every mode of transport—from walking and cycling to waterways and railways—to play an appropriate role. Once the overall structure had been optimised, then micro-management could be applied profitably. The two are complementary; the view in the industry that micro-management is an effective substitute for lack of macro-management is completely wrong. Macromanagement issues would be a key component of the proposed MBA programme, and they feature prominently in the book. Michael’s specific proposals may be summarised as follows: . Eliminate perverse incentives by reversing the fragmentation of the network that occurred on privatisation. Create a ‘command and control’ centre, as part of an integrated private enterprise, such as a successor to the BRB.

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. Place timetabling and investment appraisal at the core of the command and control system. . Reform and rationalise regulation by merging the ORR and SRA, leaving the HSE responsible solely for technical aspects of safety such as accident investigation. . Address the legacy of perverse incentives by matching train service frequency more closely to the level of passenger demand, offering more guaranteed connections, lengthening trains to guarantee more passengers a seat, and promoting standardisation of trains to improve operational flexibility. . Target public opinion, not City sentiment. Switch from ‘subsidy minimisation’ to ‘value maximisation’. Adopt a cheap fares policy, with radically simplified pricing structures, to attract a wider variety of people to rail travel. . Unlock network potential by developing a nation-wide high-speed trunk passenger service linking all major urban centres and leisure destinations, through a small number of powerful hubs. . Remedy inherited weaknesses in network structure through selective new construction, and the re-opening of disused lines. . Develop an integrated public transport system, supporting the trunk rail network, such that a high proportion of the population can easily access a station by public transport, at both the start and finish of their journey. . Devolve management in a way that encourages local authorities to contribute to enhancements of their local hubs. . Improve management training through the introduction of an MBA in rail management. Develop a syllabus, which distinguishes clearly between ‘macromanagement’, concerned with the overall performance of the network, and ‘micro-management’, concerned with fine-tuning individual activities. Highlight the importance of planning enhancements in a holistic way. Appendix A. Sources

A.1 Interviews Train operating companies: Central Trains Chiltern Railways Eurostar EWS First Great Western GB Rail GNER Hull Trains South West Trains Thames Trains Virgin Trains

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ROSCOs: Angel Trains HSBC Rail Porterbrook Regulations and infrastructure providers: Strategic Rail Authority (SRA) Office of the Rail Regulator (ORR) Network Rail Representative bodies: Association of Train Operating Companies (ATOC) Rail Passenger Council Railway Forum Consultants and transport equipment suppliers: Interviewees do not wish to be named Conferences and talks: Business History Unit Seminar at ING Barings, November 2002 IEA Future of UK Rail Conference, London, July 2003 Oxford Railway Society—various meetings Railway Civil Engineers Association—various meetings Why Rail is Important—Conference, London, September 2003 Newspapers and periodicals: Modern Railways Railnews Newsheets produced by Train Operating Companies and Railtrack Websites: Sites of Train Operating Companies not listed above Department for Transport (especially statistics section) Sites of local Rail-users pressure groups Radio interviews: Interviews by various people, including Richard Bowker (SRA), Tom Winsor (ORR) and John Armitt (Network Rail)

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References Association of Train Operating Companies. (2002). Passenger demand forecasting handbook. (4th ed.). London: ATOC. Gourvish, T. R. (1986). British railways: a business history. Cambridge University Press. Gourvish, T. R. (2002). British rail, 1974–97: from integration to privatization. Oxford: Oxford University Press. Institute of Economic Affairs. (2003). The future of UK rail: third annual conference: proceedings. London: Marketforce Communications. Nash, C., Wardman, M., Button, K., & Nijkamp, P. (Eds.) (1997). Railways. Cheltenham: Edward Elgar. Simmons, J., & Biddle, G. (Eds.) (1997). The Oxford companion to railway history. Oxford: Oxford University Press. Turnock, D. (1998). An historical geography of railways in Great Britain and Ireland. Aldershot: Ashgate. Waterfront. (2003). Why rail is important: conference proceedings. London: Waterfront.