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INFORMED SOURCES March 2003

Cost explosion exposed by SRA

Correction – support for the railway will total £3.8billion

Drat and double drat. Oh the humiliation. Informed Sources' famed Weapon of Mass Dissection has been exposed as a paper tiger by the Strategic Rail Authority. Will I ever live it down?

Live what down? Well last month I got a lot of people excited when I estimated that Government support for the national railway in 2003/04 would be around £3billion. And now, in its Strategic Plan, the SRA has revealed that the budgeted figure will be £3.84 billion.

That is getting on for four and half times what British Rail got in its best ever year, at the peak of the 1980s economic boom. And almost exactly double the subsidy in the worst years 1982 and 1983.

So, given that this column likes to shock, actually under-estimating the scale of the problem is a blow to the old amour proper.

Table 2

Table 2 shows the SRA figures.

What I omitted in 2003/04, which starts on 1 April, was Project development and implementation costs at £170 million rising to £210million in the following year and the costs of running SRA at £210 million going on £230million. So that explains £380 million of my undershoot.

I also guesstimated franchise payments at a same-again £1.25billion when the SRA is budgeting £1.45 billion. Finally, my analysis was light on grants to Network Rail by around £80 million.

There were also some errors, deep in the GRICER database, in the compensation paid to Network Rail for the Rail Regulator's halving of freight track access charges. This didn't affect the grand total, but for the sake of good order will tidy it up when there is a space in the column.

Table 3

Rising costs

While the Strategic Plan is short on strategy it is pretty damn good on analysis of where we are. Table 3 shows how the railway's finances have run out of control. Since SRA can't bring itself to recognise that there was a railway before 1994, the first column is my contribution to understanding.

It is, I confess, a very quick and dirty raid on the British Rail Report & Accounts for 1989/90. The surplus/ deficit doesn't add up because BR was a very complex organisation with all sorts of things in house. But the costs and revenues are close enough

And what we see is that over the 10 years to 1999/00, the cost of operation, maintenance and renewal (OMR) went up by just over 50%. This is, intuitively, right, given the various factors introduced by privatisation, plus the changes in safety legislation.

Costs of train provision are much the same over the 10 years and then rise. SRA provides supporting evidence for this, of which more anon.

But when you compare 2003-03 with 1999/00, the underlying spend has gone up from £6.1 billion to £9 billion, or nearly 50%, while public sector support is up by just over 75%.

Table 4 comes courtesy a paper by Network Rail Chief Executive John Armitt. It shows how Network Rail's £5billion of OMR is made up.

Table 4

So that's infrastructure, and Tom Winsor's Boiling Frog Task Force (BFTF), aka the Interim Review Team, are even now getting to grips with the cost drivers,

TOC costs up

But the train operators are doing their bit too, As Table 4 shows, expectations that the cost of franchised passenger train operation would fall, and with it subsidy, have been disappointed. Costs have gone up

Table 5

Figure 1

Table 6

Table 6 (that's your limit –Ed) is irresistible. At the Strategic Plan press conference I asked Richard Bowker how such a thing could happen since much vaunted private sector management had taken over from old inefficient BR?. He sighed wearily and said ‘you know and I know that bad old BR was very good at cost cutting'.

As you can see, the franchise winners expected to cut their collective workforce by 11% over the first five years of their mainly seven year terms. In fact, employment rose by 8% - and a good thing too with ridership increasing.

But look at that bottom line. Where we all expected Stagecoach et al to repeat their wage cutting exercises in the bus industry, the railway trades unions played a blinder for their members, driving up average earnings by nearly 18% - something else I applaud.

Crucial year

So there we have a panoramic view of changing costs within the railway. And what do we see in all this data? Following privatisation costs rose, but the scale of the increase could be comprehended. Then in 1999/2000, something changed and costs went out of control.

Remember that it was the Black diamond Review in December 1999, which took West Coast Route Modernisation from £2.1 billion to £5.8 billion. Note a similar kick in the TOC costs.

What this suggests is that while my ‘boiling frogs' comparison with BR project costs (first published here in 2001), exposed the problem, the problem itself was relatively recent.

That is not to say that BR costs don't matter. We need to start with costs over the last 10 years of BR, and then factor in the effects of privatisation and safety legislation, if we are to understand whether 1998/99 costs were reasonable.

But the priority has to be getting Network Rail's current costs, which are clearly untenable if we want a modern railway, back to 1999/2000. And this analysis will form a central part of the BFTF's work on the Interim Review.

Continues.........

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