Tory Rail Review 3.0 - Grayling must either confront the railway ‘blob’, or settle for more of the same

The announcement that the DfT is considering yet another "fundamental review" of the UK's rail architecture was, perhaps, an inevitable response to a summer of timetable problems amidst the populist appeal of Labour demands for full-scale renationalisation of the sector.

Should it happen, this will be the third such review since 2010. It is therefore worth re-visiting its predecessors to remind ourselves of their recommendations and to check progress.

Review 1.0 – McNulty

A product of the 2010 government's broad desire to control public spending after the 2008 crisis, and chaired by Sir Roy McNulty, the long-serving and respected former Chairman of the Civil Aviation Authority, the 2011 review was focused initially on the objective of reducing or at least containing the growth in rail costs.

McNulty's remit was quickly diluted, and the final report contained two key recommendations:

1. Less prescriptive franchises for TOCs
2. More decentralisation (to regional elected mayors, and within Network Rail).

In 2018, the TOCs find themselves in precisely the opposite position, with ever more closely specified contracts, that remove almost all cost flexibility, and leave TOCs as vessels of blame whenever operational or financial conditions are unfavourable.

Thanks to George Osborne, there has been substantial movement towards strong regional governance. Unsurprisingly, these newly empowered transport authorities now seek the kind of detailed control over rail services increasingly exercised by TfL.

As to the Report's primary objective – a pathway towards a 20-30% reduction in the railway's unit costs, there has been no detectable progress. McNulty chose to leave the pre-existing economic architecture in place, and to rely on friendly exhortations for the industry to try harder and deliver more. Without any economic reform, the upward pressure on industry staff costs has continued and intensified, spilling over into disruptive strikes intended to bolster the political case for nationalisation, and [presumably] future pay increases to be met by the taxpayer. Far from reducing costs, Network Rail has presided over astonishing cost over-runs, but has met its objective of remaining a unified entity [although asset sales have now resumed in order to shore up the corporation's cash position].

Review 2.0 Shaw

The 2015/16 Nicola Shaw Review started more promisingly, with a commitment to examine serious structural reforms. This economics-based agenda was once again diluted, and the final recommendations were even more meagre than McNulty's - comprising motherhood-and-apple pie commitments to the centrality of passengers, and vague exhortations in the direction of further devolution. Once again, NR remained intact, and the TOCs remained holders of short term franchises, with diminishing flexibility and huge exposure to economic and political fluctuations.

Given the intellectual seriousness of the Shaw group, it was impossible not to see this as anther victory for the rail industry 'blob' – that coalition of change-resistant vested interests first identified by Michael Gove in the education sector. Within UK rail, the blob consists of the rail unions, parts of industry management, some incumbent companies and suppliers, and elements of the civil service. Equity investors and HM Treasury stand somewhat outside this group, but are also cautious about major change.

Both reports were undertaken by serious people, of good standing, and with relevant expertise. The ease with which any proposals for serious structural change were watered down, even before publication says much about the power of the rail blob, and the caution of politicians.

What's changed since 2016?

The previous reviews floundered on the DfT's unwillingness to carry out fundamental changes to the economic structure of Network Rail, or to amend the role of the TOCs. Indeed, political pressure on DfT has led to ever greater contractualisation of train operations, placing the TOCs into the position of becoming passive receivers of economic and political risk, with none of the flexibilities enjoyed by either 'normal' private businesses or regulated utilities.

Both McNulty and Shaw came down in favour of exhorting efficiency improvements, without the harsh medicine of structural change.

Even more alarmingly for the Tories, the huge investments in capital projects and intensified timetables they have funded have resulted in real and visible hardship for passengers. Whatever the medium-term benefits, Thameslink's shiny new trains, and Northern's recast timetable, are now associated with passenger disruption and Tory 'cuts' [when in fact, spending has occurred at massive levels].

This political problem goes far beyond the rather technocratic objectives of the first two reports.

Labour's plan suffers from no such caution. They have the advantage of clarity, and build on misconceptions that are shared much more broadly than Labour's newly radical base. These include:
1. A confusion between profit and dividend
2. The [largely false] idea that TOC owners have enjoyed high and or stable financial returns
3. The failure to see a linkage between the UK rail industry's difficulty in controlling unit costs, and the growth in passenger fares
4. The implied suggestion that fares will be subsidised much more heavily by taxes on a broader population [many of whom rarely travel by train]

This kind of woolly thinking is not confined to the quasi-Marxist left, which now makes up Labour's activist base, and polling suggests quite widespread support for a state-owned railway network. The implied leap in spending will surely be funded by the undefined 'rich' who will 'be asked to pay a little more in taxes'.

Grayling's second emerging problem is that rail demand is now showing the first significant secular weakness since the mid 1990s. No unambiguous trends are yet apparent, but one possibility is that technology changes, such as the ease of home working and shopping, are finally eroding peak demand. This could be fundamental, given that rail spending [and over-spending] has for some time been justified by the idea that constant increases in rail capacity are inevitable and desirable.

Grayling therefore faces problems on multiple fronts:

1. A change resistant industry, whose major actors are beneficiaries of the current arrangements
2. Sceptical equity investors, who now publicly wonder why UK-listed companies should participate in an industry in which returns have been meagre, but where investors are regularly accused of profiteering
3. A persuasive opposition, with strong support from trades unions and passenger groups who anticipate [probably correctly] that nationalisation would benefit both employees and passengers at the expense of the non-travelling tax-payer
4. A cautious Prime Minister, whose economic views, so far as they are known, lean towards centrist interventionism, rather than Thatcherite reform
5. Passengers, media and voters who allocate responsibility to the government, and not the industry

Given the government's meagre parliamentary strength, it would be unwise to anticipate proposals for truly fundamental reform, let alone much subsequent progress on the ground.

Change is only likely to occur if it is forced through, probably on a local basis, and probably over a protracted timescale.

David Leeder is Managing Partner of strategy consultant Transport Investment Limited (TIL) and founder and director of European bus group MET.