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After two decades of privatisation we are starting to appreciate the virtues of the much maligned state owned utilities. With the long time constants dictated by their capital equipment, and the seemingly indefinite need for their services, they were good at the slow, unexciting aspects of business life, such as career development, research and investment.
Over Easter, the House of Commons Environmental Audit Committee warned of an emerging gap in electricity generating capacity over the next 10 years as the base-load coal-fired and nuclear power stations come up for retirement. Since it was now to late to build direct replacements, more gas-fired generating plant would have to be installed.
Former Labour energy minister Brian Wilson confessed that the Government had failed to think long term. ‘If you write off nuclear and you write off coal then you have to make heroic assumptions about how the gap is to be filled’ he said in a radio interview.
That the invisible hand of Adam Smith, favours quick fixes against the long haul can also be seen in today’s railway. And it provides the answer to the ‘Wolmar Question’ – what is a franchise for?
After trial, and much error, the Department for Transport has arrived at the current third generation franchise specification which makes the role of the train operators clear. A franchise exists to generate the maximum amount of money for government for a specified level of service and over a finite period of time.
This is the inescapable message of the recent franchise awards. The highest net present value premium, or lowest in the case of subsidy, always wins. While an operator’s track record counts during prequalification, when the bidding starts in earnest it is devil take the hindmost – or, perhaps, the foremost.
Of course, there are some perks. There is the right to give a franchise a silly name for the next seven to 10 years. And Directors can indulge their artistic pretensions with new liveries. But in terms of the service operated, a franchisee does what DfT Rail specifies in the invitation to tender.
There was an almost surreal air to the unseemly to and fro between First Great Western and DfT Rail over service levels on the Cornish branch lines. Initially First claimed that DfT would not let them run any more trains. DfT said that if First wanted to run more trains no one was stopping them.
What no one would admit was that any extra trains would be loss-making. A franchisee with a billion pound premium to deliver is only going to run loss making services if a subsidy is forthcoming.
This further diminution of the role of the train operator, to management of a service provision contract, is bad news for the future of the railway. Train Operators, with their seven year franchises, plus an option for a further three if they have got their sums right and want to continue, are inherently short-term. Chilter, with its long franchise, is the exception which proves the rule.
Short franchises also make downward vertical integration a nonsense. As Network Rail Chief Executive John Armitt put it, responding to a call for vertical integration by First Group, “What investment is (First Group Chief Executive) Moir Lockhead going to make when his objective is to sweat the assets and get what he can out of the system over his seven-year franchise? Fundamentally, he is a short-term operator with a long-term asset. It would be a disastrous approach, like going back to the days of Railtrack. It would be more rational for us to go and lease the trains’
Quite. But neither is Network Rail incentivised to take the long view. While for Ministers, as the energy debacle shows, there is a tendency for the hard decisions to be filed under ‘too difficult’, unless relentlessly chivvied along.
Currently several long term decisions are becoming essential – we nearly said unavoidable, but dodge and bodge is the Transport Secretary’s forte . HST2, Thameslink 2000, Crossrail, capacity increases all over the network and, as we highlight in this issue, the electrification are vital to the long term railway.
History tells us that great things happen on the railway only when bold managers make big decisions; yet events in this century have conspired to make even the boldest spirit cautious. But we would argue that Network Rail should be taking the lead as promoter of the big projects which are now overdue.
When it took over Railtrack, it was understandable that the new management should concentrate on restoring control of the infrastructure and train services. Operations, Maintenance and Renewal (OMR) was at the heart of the company’s mission statement.
But now, it is time to leave what has become a comfort zone and start building for the long term. While it is welcome news that ploughed back ‘profit’ will double the discretionary investment fund to £400 million, we are concerned that Network Rail is thinking small when it comes to spending the money.
Yes, four hundred £1 million schemes will spread the benefit but we would like to see some early medium sized projects in the mix, notably civil works such as flyovers and under passes at congestion bottlenecks, extra tracks on the busiest routes and more, not just longer, platforms.
Time, then, for the railways, through Network Rail, to starting thinking big again. But are Chief Executive John Armitt and his Board willing to accept the challenge?
Correction, are they incentivised to accept the challenge? The answer is ‘no’.
For the Network Rail board, bonuses are linked to public performance, financial efficiency and asset stewardship – in other words the quotidian tasks of OMR. Bluntly, the purpose of these bonuses is to modify the behaviour of directors and senior manager so that they wake up each morning determined to do the best job they can.
Contrarily, it means that they are not going to do something which will imperil the bonus – such as major civil engineering or electrical works which could affect public performance or financial efficiency. With an unconscious nod to his bonus, when asked about electrification at a recent press conference, John Armitt said that his personal preference was for diesel traction since it required one interface less.
Nor, even if it had the will, can the Government do much about this. The forthcoming High Level Output Specification should will the ends, but at one remove through the Office of Rail Regulation. And experience of other regulated industries tell us that regulation shares the short-termism favoured by the market.
Where once government had one throat to choke it now has to grapple with a multi-headed hydra. As you can read in our feature article on electrification, government and railways were once willing to think big. For the industry to prosper it has to regain that confidence. Perhaps the short term carrots should be accompanied by some long term stick.