Rail Delivery Group Chairman delivers Franchising Structure Lecture to the Rail Industry (and the Government)

Published 27th November 2012

London - Rail Regulator’s Office and Rail Delivery Group debate future of railway costs & targets

The First Group Chief Executive Tim O’ Toole delivered the 2nd Bradshaw lecture at the Institute of Civil Engineers - hours after Parliament had grilled The Transport Secretary Patrick McLoughlin about the The Laidlaw Report into the West Coast Main Line franchise shambles.

In a commanding speech to a specially invited audience containing what appeared to be every rail industry chief, past and present, Mr O’Toole commenced proceedings by saying that it was an extraordinary time in the rail industry. After a brief deliberate pause for effect, he added wryly, for some more than others!

Rail Regulator Reveals Operators’ Costs and Revenues

Meanwhile, the Office of the Rail Regulator (ORR) has disclosed the results of a study into franchised train companies’ costs which they hope will point the way to where economies can be made. They are also looking to make membership of the RDG a mandatory requirement following industry consultation.

Operator costs accounted for 48% of total rail industry costs in 2010-11, and are therefore an important element in improving the overall efficiency of the industry.

They Said:

ORR's Director of Markets and Economics, Cathryn Ross, said:

"The cost of running Britain’s railways is too high and this must be tackled by the industry as a whole. Exploring and understanding the key factors that drive each train operator’s costs is a very positive step in helping achieve greater efficiency.

Today’s Railway Challenges

Tim O’ Toole listed the challenges our railways have to meet and suggested that an alliance had now been made between Network Rail (NR) and train operating companies as a result of the McNulty report. This report created The Rail Delivery Group (RDG) and Mr. O’ Toole is the Chairman of this as well as Chief Executive of First Group.

The challenges are how to manage NR’s devolution, the massive ongoing Government investment and what was the largest franchising program ever until it was stopped literally in its tracks. Another threat or challenge to be met was that of the Office of the Rail Regulator (ORR) who is looking as though they are trying to extend their areas of Regulation. All this is going on at the same time as the debate on the future shape of the industry.

Higher speeds at lower costs

Because of all these factors, Mr O’ Toole suggested that it was a waste of time they do not have, to engage in useless and irrelevant debate about the future structure and organisation of the railways. The one goal after safety is speed at lower cost which is really the essence of the whole UK railway business. The current debate reflects this and the two main subjects, HS2 and the McNulty report underlines these points.

History Lesson

Mr O’ Toole took the audience to the start of railways to demonstrate his point about delivering speed and capacity at lower cost and said that this is what all the great railway engineers had strived to deliver. Railways drove the Industrial revolution and the railway was just another machine made up of trains, track, signals and stations which in turn attracted architects and civil engineers.

Railway signalling he said, is about train control and communications and depended on signal engineers who could not and should not be pressured, something he had learnt over the years. Following accidents, signalling engineers introduced flags, then lamps and more complex signal systems were continually being developed improving safety while increasing capacity.

The introduction of Track Circuits allowed everyone to know where trains were and created an ever more complex railway system which delivered right side failures, better safety and higher speeds at lower costs.

Communications Complexity

Communications moved from telegraph to telephone and on to radio and railway evolution has continued to deliver an ever increasingly complex system while providing more capacity. He mentioned the European Rail Traffic Management System (ERTMS) as an example of an expensive promise which was supposed to deliver faster and cheaper operations on the West Coast Main Line. Railtrack’s failure to achieve this led to a realisation that higher speed at lower cost to deliver growth was only possible with massive Government investment.

Today, computer programmers design signalling systems that a local technician cannot now fix if they fail unlike the past. We are at the next stage of complexity with ERTMS development which ultimately will deliver better capacity, higher speed at lower cost and therefore growth.

No return to a Monolithic past

The RDG will be proposing an Industry structure which will allow growth for private train companies, a must for survival. Mr O’ Toole said that a public monolith lacks the diversity that fuels the innovation that drives growth and only generates loyalty to the pension fund. These shortcomings were an excuse for poor customer service and the industry has now moved on over the last 20 years, one of its great strengths.

The growth in rail is a good thing for Society to help it function well and the industry structure must be focused on this by using the right franchising system to deliver growth. New emerging systems, multiple train operators and NR’s devolution has and will create more complexity, but despite this, rail has continued to deliver growth.

Sophisticated systems do not eliminate complexity, they accommodate them and can take advantage of complexity but when truly evolved, they hide the complexity and people can rely on them without ever knowing what lies behind them.

Microsoft or Apple?

Mr O’ Toole compared Microsoft with Apple, who as he said, delivered massive improvements in computing power and new ways of communicating. The downside he said was that users had to learn how to use the system and how to deal with the blue screen failures!

He made his point by saying Apple gave us Ipads and other great products which are very complex but do not force users to understand what goes on behind the screen. The railways are at the Microsoft phase with complexity and are forcing the public to deal with our complexity - some systems are not fit for purpose such as timetables and tickets and some corners of the Industry still believe that British Rail (BR) should be brought back.

Innovation

This Industry had brought innovation since BR and this was one of its great strengths but can only prosper in an environment if conditions allow and it is the Government who sets these conditions.

These Government conditions have historically been run by bodies such as The British Transport Commission, BR, The Strategic Rail Authority and now The Department for Transport. It is now the Rail Delivery Group which has to take on the McNulty conclusions and they disagree with some of the savings’ assumptions in the report are concerned. They also did not agree with McNulty’s view that unit costs had remained flat despite the passenger growth.

We are now carrying out long term planning for the first time with the High Level Output Specification (HLOS) to be published as a strategic business plan to be delivered from April 2014, the first time a joint plan has been issued. This will also help the Supply Chain which had been neglected since BR.

RDG Leadership Role

The Industry has joined forces and the RDG has agreed to assume a leadership position and everybody will benefit from the business model eventually adopted. Franchised operators will work with NR and the Government to make sure the environment is right for this to happen.

Private companies will lead innovation and change but the RDG want to clarify roles for the different groups so the industry becomes more transparent and will help the Government carry out changes as well as clarifying and understanding the role of the DfT.

Clocks or Clouds?

Mr. O’ Toole said that all problems are clouds or clocks and the latter can be taken apart, understood, and put back together again and improved while clouds are a function of simultaneous multiple reactions.

The Government thinks that if it tinkers with the railways, all will be solved but as railways are part clock and part cloud and also require public funding to function so it can tinker. The multiple interactions such as innovation and risk in railways cannot be reverse engineered and the Government has to accept limitations to allow ambition, diversity, risk and innovation for example.

The Government can only create the right environment if it can ask questions about the best options available and then make honest decisions. This is the role of the RDG (to advise) that the Government has been trying to fulfill for decades. We want to make sure our complexity is not complicated and that the Government will be able to see a way forward for what it needs to deliver.

Chaos Challenge

The immediate challenge is the franchising chaos we are facing now and the RDG intends to deliver a unified position for the entire industry for the best way for the Government get franchising up and running again as soon as possible.

The current system has delivered spectacular growth and has not failed as some commentators suggest. Long term franchises and easier systems to understand for the public are better than short franchises which is one easy solution. The financial risk with franchises needs a debate and we need long franchises to get the best investment and public understanding.

Regulation

Speaking about ORR’s performance monitoring and target setting for Network Rail, Mr. O’ Toole said that the train operators and NR need to join together to persuade ORR of the implications of their performance improvement drive. We may have to compromise some performance measures because of the volume of traffic because there are many more trains running now on faster schedules and that means service recovery is more difficult after disruption.

Savings

The longer refranchising is delayed, the savings proposed by McNulty will also be delayed which is not an option - these savings need to be agreed between operators and NR.

NR’s devolution must not add more complexity to the industry and ORR’s ambition for more Regulation must not hinder train operators evolving and dealing with emerging problems. For example targets for passenger information and disruption news might mean train operators will offer low thresholds if new demands are to be enforced by contract. We need to work these issues with ORR.

This industry must come together and resolutely defend the current business model despite the chaos and we will tell the Government what to do as a group. If the RDG doesn’t do this, they will go elsewhere for advice and further delay any lower costs and greater speeds. We can be guided by the past and we have to display the right signals and get the industry moving forward as quickly as we can.

The Government needs to work out how to manage financial risk and macro-economics, train operators can turn around bids quickly and delaying things for a long time would be a terrible mistake. The railway is a complex system but is a successful industry and system.

The Government needs sound advice and the RDG will avoid the mistakes of the Strategic Rail Authority by not becoming part of the problem as they did, with a massive beaurocracy alienating itself from the Industry.

The success of the last 15 years has been spectacular. So far as franchises are concerned, how do you price risk? There will always be failure in making a market and the Government has not refranchised the East Coast Main Line after three years as there would be no bidders as it stands now. Look at what happened after GNER were replaced by National Express and their promises.

And Tim O’ Toole said, First Group still stood behind its bid for the West Coast Main Line and its outputs.

Bradshaw

The first timetable guru, Bradshaw, combined a hugely complex set of timetables and combined them so the public could understand them. We must do the same thing with our complexity and not force it on the public and find ways for the industry to simplify and change.

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