The private-sector entrepreneurs that built many of Britain’s railways in the 19th century had – through a process of market discovery – settled on vertical integration, with the same firm owning the track and operating the trains. But, when railways were returned to private sector in the late 1990s, the government created one national infrastructure company (Railtrack), 25 train-operating companies (TOCs), 3 freight operating companies, 3 rolling-stock leasing companies, 13 infrastructure service companies and other support organisations. The Office of Passenger Rail Franchising was tasked with selling franchises to the TOCs, while the Office of the Rail Regulator (ORR) regulated the infrastructure. This artificial and fragmented structure was designed to give the impression of competition.
Despite these constraints, in the early days of John Major’s flawed privatisation some of the more enterprising private train operators managed to bring innovation to the sector, including improved marketing and very low-cost “yield managed” advance fares. Where allowed, competition between different operators brought improved customer service, additional direct trains and lower ticket prices. However, the flaws in the initial privatisation soon became apparent with failed franchises leading to increased government intervention and renationalisation by subsequent governments.
While attempts were made to downplay the significance of July’s decision by the Office of National Statistics to put train operators on the public balance sheet, it is in fact only the latest in a worrying string of signals about the direction in which the railway and Boris Johnson’s government are headed. In June, the transport secretary Grant Shapps announced to a parliamentary select committee plans to introduce concessions across the rail network. Private operators will simply be paid a set fee to provide a basic service – another nail in the coffin for commercial investment or innovation.
Attention is now turning to what the government will do when the current “Emergency Measures Agreements” – hastily put in place to ensure trains kept running when passenger numbers nosedived by 95% as lockdown began – comes to an end in September.
One suggestion is that the government is offering operators deals on such wafer-thin margins that they will struggle to even cover their overheads, in effect forcing private operators off the tracks. The pleas of train companies for government to write into contracts incentives for them to regrow passenger numbers have apparently been rejected. This is utterly perplexing given the DfT is calling for innovation as it appears devoid of any purposeful ideas itself.
Then came the idea that Network Rail (the state-owned infrastructure successor to Railtrack), which looks after 20,000 miles of track, could be put in charge of running the entire system, including letting contracts for passenger services.
Rail executives understandably baulked at the prospect of a company which carries with it a history of profligacy and delays – its upgrade to the Great Western mainline trebling in cost and arriving years late – being put in total charge. Its corporate culture is entirely focused on looking after the track infrastructure, not passengers, but it is the latter that is crucial to the commercial recovery of the sector left reeling from the impact of Covid-19.
Sources I speak to within the industry talk of a government – or rather a civil service – which rather enjoys playing trains, with their hands firmly glued to the signal box levers and the prospect of a beefed-up Network Rail. In one sense you can see the logic, however misconceived and potentially damaging for the industry and crippling financially to taxpayers this might be. By holding the purse strings ministers would be able to carry out changes to policy swiftly without the need to negotiate at length with 20 different companies as used to be the case.
While fragmentation would disappear, this would not be replaced by a more sustainable competitive private railway system, but by an army of Whitehall pen pushers deciding the colour of the vestibule doors. Such moves would lead to a railway that risks losing its focus on passengers and becomes mired in Whitehall bureaucracy. A recent example I’ve been told about by worried senior figures includes a simple set of changes to refund policies and ticket rules. Currently swift decisions – usually taken within hours by operators – are to be replaced by two separate committees of civil servants prior to ministerial approval. The whole process is estimated to take weeks, hardly the makings of a “customer centric world” so espoused by the DfT of late.
Given that the initial artificially fragmented privatisation model has led to a situation of train operators increasingly reliant on taxpayers’ money, the temptation for meddling by the state is understandable, but it must be resisted firmly if the sector is to recover. The Exchequer, who is pouring in an extra £800 million a month to keep the trains running, must act quickly and delve deep into the DfT’s motives to avoid exposing the taxpayer to a bottomless pit of funding.
The ability to spot an opportunity, take a risk and reap the rewards will be crucial to the railway’s future. In my own small way I know this only too well having just set up the UK’s first ever multi train timetabled dedicated tourist rail service in North Yorkshire.
In its first week the business – Rail Charter Services Ltd – has received widespread press coverage both at home and abroad. There has been enthusiastic support from councils, MPs, tourism authorities and local businesses. By adopting a true customer centric approach, lateral entrepreneurial thinking – and a strict zero tolerance approach to “jobsworths” and “nae-sayers” – we saw bookings grow 550% in the first week! This is what can be achieved if only closed political minds could be opened. Critics have pointed out that under the current system we are partly reliant on taxpayers, who have been forced to pay the infrastructure costs of the tracks we use, but we can only work within the system that has been mandated by government.
In the coming weeks and months, the DfT will decide what will replace the current short-term contracts it has with train operators and will set out a plan for long-term reform of the railway. While there may be a role for the state in light-touch regulation and considerations of underwriting uneconomic routes for social, political or economic development reasons, I believe that this review should halt the creeping renationalisation of the railway and unleash the market discovery process – which may lead to mergers and vertical integration – if the Conservatives wish to reclaim the mantle as the party of free enterprise.
Adrian Quine is an entrepreneur and former BBC World Service broadcast journalist. He is a director of “Rail Charter Services Ltd” and developed the concept for this service. He was one of the founders of Open Access operator Alliance Rail Holdings Ltd, now owned by Arriva Group PLC. He has written a number of think tank policy papers and briefs and Telegraph op-eds about transport.