INTRODUCTION:
This author has already discussed the British railway system in light of historical trends within the industry and also potential changes brought in by Brexit and other key drivers.[1] Indeed, the railway industry has evolved over the course of the last two centuries. Ranging from the inception of the ‘Big Four’ predominant companies which was a result of the rationalisation sought by The Railways Act 1921, which included Great Western Railway (“GWR”), London, Midland and Scottish Railways (“LMS”), London and North Eastern (“LNER”) and Southern Railway (“SW”). Britain post World War Two had led to a number of economic measures aimed at advancing a recovery from the toll of fighting a seven-long year war. Most famously, this included the creation of a nationalised railway through the enactment of The Transport Act 1947, which gave rise to British Rail. The state-run enterprise existed for nearly fifty years before a conservative led government began the privatisation process in the mid-1990s, which witnessed the breakup of assets, the inception of rail franchising and a newly created infrastructure company called Railtrack. Fast forward to 2021, and Britain’s railways face a new and unprecedented challenge brought on by COVID-19. With the nation going into numerous lockdowns and restrictions placed on travelling, this led to a dramatic fall in passengers travelling on UK trains on a national basis. As mentioned previously, this author has already encountered the question of how should Britain’s railways be run? Given the current political and economic landscape, this question remains even more challenging to answer. However, this author will not directly tackle this question, although, it will have some bearing on this article. Instead, this author will focus on the attempts to rationalise Britain’s railways and the factors driving such changes in the industry. Therefore, this author will first outline the rationalisation process known as the creation of the ‘Big Four’. This author will then discuss the development of British Rail and attempts made to streamline the state-run enterprise. This author will also highlight the journey of privatisation and how the implementation of the Williams-Shapps review differs from other privatisation models. Finally, this author will demonstrate that the new model of franchising brought in via the Williams-Shapps review is nothing more than a heavily regulated Principal and Agent relationship, since the government still bears the revenue risk. Therefore, this author will argue that this is the closest watershed moment a conservative government has come to running Britain’s railways in a near enough nationalised manner; which is a welcomed change to both passengers and Operators alike.
THE ‘BIG FOUR’ AND WHO?
Contrary to what the average bystander may think, Britain’s railways have been restructured and rationalised more often than one knows or thinks. Prior to World War One, the construction and operation of Britain’s railways was purely driven by private enterprises. At its pinnacle, there were more than 100 independent private companies operating a very fragmented system. Post World War One had witnessed the first rationalisation policy through the enactment of the Railways Act 1921, which created the ‘Big Four’ companies. Whilst this brought a much needed tidy up of the system, there were downfalls with this approach. As discussed in another article on this topic, we will use GWR as an example to highlight the inherent issues. GWR obtained high profits due to controlling a monopoly on key routes, most notably the Bristol Mainline. At the time, there were no other railway companies that could compete with GWR, which is still the case today. The only competition GWR faced was that from the Kennet and Avon canal which, most of the time, had water shortages and the slow alternative stage-coach services. Profitability was also enjoyed by GWR because of the lack of health and safety regulation. It was down to GWR to keep their own staff and infrastructure safe but, of course, profits took precedent back then and the infrastructure was not up to scratch, as demonstrated by the bridge collapse over the River Dee in 1847. However, even in the midst of such issues facing GWR in its early days, it was the only one of the ‘Big Four’ to make a profit between the amalgamation and nationalisation period. Yet, these were the days when the motor car and heavy goods vehicle began to take place and offer an alternative means of transportation of goods and people.[2] These factors, combined with the economic and political landscape following World War Two meant that the UK government had to redress the industry; this time, through nationalisation.
THE EMERGENCE OF BRITISH RAIL
Through the enactment of The Transport Act 1947, the railways were operated as a fully nationalised entity. When British Rail was enacted, it had a funding programme equivalent to £30 billion in today’s terms. However, even with such a large funding programme, the state-run enterprise faced massive hurdles and by the late 1950s, it was running at loss. Unfortunately, key drivers such as the Beeching cuts during the 1960s, which witnessed a third of the railway being closed,[3] and the increase of car usage only compounded the difficulty for British Rail to succeed. It seems easy to relate British Rail with inefficient services, poor customer service and experiences, large scale industrial action, old rolling stock and poor infrastructure. On balance, British Rail did bring massive benefits to the industry. Perhaps one of the most iconic and famous initiatives introduced by British Rail was the creation of the Class 43 High Speed Train which reached speeds of 125mph, and was later dubbed by the term ‘Intercity 125’.[4] This author, amongst others,[5] argues that technological feats such as this were understated at the time of their inception. The Class 43 become synonymous with modern British rail travel and are still being used 45 years later on. Perhaps a more balanced analysis of British Rail ought to be borne out, but this is not the purpose of the article.
During the 1980s, British Rail was subject to further rationalisation policies such as the creation of sectorisation. Unsure of how to privatise British Rail, given its size and complexity, a Thatcher led government took the initiative to sectorise British Rail. These steps aimed to divide British Rail into more manageable parts rather than operate it as one whole body. Perhaps these steps were the prelude to rail franchising, as several large passenger and freight sectors were created which corresponded with business sectors as opposed to geographic locations.
PRIVATISATION AND RAIL FRANCHISING
It was John Major’s conservative led government which began the process of privatising the rail industry. The legal framework which allowed this process to occur was through the enactment of The Railways Act 1993. One could argue that the sectorisation process pursued by Margret Thatcher’s government gave way to the franchising model. During the mid to late 1990s, tracks and infrastructure were transferred to Railtrack, which was a public company answerable to shareholders.[6] The operation of passenger services were then transferred to privately operated companies known as Train Operating Companies (“TOCs”). The process in which this occurred involved Parent Companies such as Virgin, Stagecoach and FirstGroup bidding to operate services. When a contract was awarded to operate a franchise, a sister company would be created to do so. This gave way too many TOCs such as, First Great Western, Virgin Trains, and GTR. These TOCs were not responsible for the infrastructure, since this was controlled and maintained by Railtrack, and the rolling stock that each TOC operated was leased through long-term and often complex commercial arrangements. Equally, this process also involved the privatisation of freight-based rail services, which is often an overlooked factor.
In principle, this process appeared to bring about competition and offer passengers value for money, since there would be more than one operator providing a service to key destinations. For a conservative government, it also broke up the National Union of Railwaymen, or commonly known as the NUR. The inception of TOCs meant that union activity existed, but it was split into multiple facets, each representing a workforce with different terms and conditions. However, the model of franchising was not without its issues. These included, but not limited to, failed franchises requiring state intervention as seen with the InterCity East Coast franchise having been taken into public ownership twice, increasingly complex fair structures, overcrowding, government interfering with the system leading to diminished commercial freedom for TOCs, and the chaotic introduction of new timetables. Indeed, it was the timetabling fiascos in May 2018 which proved to be one of the key drivers that gave way to the Williams Review.[7] Railtrack was also losing money, especially after the Hatfield train crash in October 2000. Railtrack also continued to demand further public funding without a clear strategy or mandate regarding how it intended to utilise such additional funding. Railtrack was placed into administration so to give way to Network Rail, which is a non-for-profit entity.[8] Supporters of the privatised model often look towards the Japanese model as being the epitome of transport success, because it is entirely privately controlled. Whereas, the British model is a collection of temporary and varying franchises tightly controlled by the government.[9]
THE WILLIAMS-SHAPPS PLAN FOR RAIL
The Williams Review was intended to feed into a White Paper to be published in the autumn of 2019 with reforms taking place from 2020. Unfortunately, with the emergence of COVID-19 and the consequences of a global pandemic placed this on hold. As a result of the global pandemic, all TOCs were effectively nationalised under the radar through the implementation of contractual mechanisms known as Emergency Measure Agreements (“EMA”) and Emergency Recovery Measure Agreements (“ERMA”). These mechanisms effectively suspended rail franchise agreements so to avoid TOCs from collapsing due to the severe drop in passenger journeys, which was a result of national lockdowns and restrictions placed on the movement of individuals. These measures mean that all revenue and cost risk is assumed by the government, while the incumbent TOCs are paid a management fee for continuing to run a service. This fee is based on five key areas which are scored according to the TOCs performance against such areas on a sliding scale basis.[10] With many TOCs now leaving such mechanisms and entering into what are called National Rail Contracts (“NRCs”). On 20 May 2021, the Government released the Williams-Shapps Plan for Rail (the “White Paper”), setting out its proposals for reform and restructuring of the Great British Rail Industry.[11] The White Paper promises ten outcomes achieved through meeting sixty-two commitments. For the purpose of this article, focus will be the emergence of GBR and the subsequent changes that private companies face. The White Paper also outlines changes and benefits for passengers, a majority of which is dedicated to fares reform, something which this article will not be discussing at the length or detail it deserves.
GREAT BRITISH RAILWAY
The creation of Great British Railway (“GBR”) is set to replace Network Rail, as well as the relevant functions of the Rail Delivery Group and the Department for Transport, and act as the single guiding mind to own the infrastructure, receive fare revenue, run and plan the network and set most fares and timetables.[12] But what does this actually mean in practice? This author can only provide insight based on an interpretation of the White Paper as well as the recommended proposals, which are subject to potential changes to reflect legal, political and economical challenges.
In terms of the single guiding mind concept, GBR will be the governing body which monitors and controls everything. Acting as the single entity which subsumes all financial elements of the industry so to manage cost and increase revenue growth. Rather than be an extension of Network Rail, GBR is an entirely different beast in its own right. It will be given a mandate to serve passengers, freight and taxpayers alike with an overarching objective to increase revenue and grow rail travel throughout the industry.[13] This author is hopeful but also conscious of this vision. If successful, there needs to be a clear distinction between political judgments, for instance, items for politicians which are supported by civil servants to be determined, and technical or commercial judgments, which are to be made by functional experts. There is no objective way to make the distinction, so it will be necessary to set clear boundaries to GBR’s autonomy and to maintain a political consensus around these on an ongoing basis. This will require sustained commitment from both politicians and GBR’s leadership.
So how will this new concept be funded? Traditionally, Network Rail would be given a budget based on a five-year investment strategy, known as Control Periods.[14] In a similar vein, GBR will produce five-year business plans, but it will have a long-term strategy outlined for the next thirty years from 2022, which will be the key driver for innovation across the industry. The five-year business plans aim to produce savings totalling £700 million per year, without detriment to service or fare levels. That is quite a bold proposition given the impact COVID-19 has had on rail travel and that the long-term consequences of such are not yet clearly understood.[15] Additionally, there needs to be clarity around how GBR’s 30-year planning horizon will align with its five-year funding settlements.
The actual structure of GBR looks as if it derives itself from that of sectorisation pursued by Margret Thatcher in the 1980s. In essence, GBR will be made up of regional divisions with a degree of independence, meaning that budgets and delivery responsibilities may be held at the local level within GBR, not just nationally. Of course, key decisions will be taken centrally, but the White Paper highlights that while GBR will act as the single point for accountability, it will be encouraged to open itself up to wider organisations and create deep routed partnerships with towns, cities and other regions in order to best serve the passenger at those locations.[16]
With the structure of GBR resembling a nationalist approach to operating the rail industry, how will this bode with that of the devolved services in Scotland, Wales, London, Merseyside and Tyne and Wear? The paper does not explicitly mention how GBR will interface with such organisations. However, there is a strong element of collaboration. There are proposals suggesting that it will assume to be the infrastructure owner, therefore replacing Network Rail where applicable. Although, the remainder of the paper suggests that partnerships with Transport Scotland and Transport for Wales will be utilised to make sure that these organisations benefit from the key deliverables of the White Paper.[17]
One interesting aspect of the White Paper is that the overall brand recognition and PR awareness feels like British Rail. The brand adopted will be an updated version of the infamous double arrow logo synonymous with British Rail. Of course, one could argue that this a Conservative Government attempting to push a privatised model as far as possible to a nationalised operation. If we develop this line of thinking further, then we can look to the White Paper since it is steeped in creating a ‘one network’ vision for Britain’s railways. Perhaps the nationalistic operation of GBR has a more understated goal. Indeed, the government is perhaps in a better position to weather calls to fully nationalise the industry, but this may prove challenging where devolution is concerned. For some, the logo and brand awareness will be welcomed as a positive to increasing the overall British identity. However, for others, this will not bode well who favour devolution, and in some instances, full independence from the United Kingdom. Therefore, this author argues that GBR will act as a double-edged sword, whereby it should not be expected to manage political tensions in isolation.
The whole point of having a privatised rail system is that there is an organisation who manages track access in terms of private companies bidding to run their induvial services for a profit. The White Paper proposes that all existing track access agreements will be honoured and transferred from Network Rail to GBR. Once existing track access agreements naturally come to end, GBR will be in a better position to negotiate new arrangements which maximises the public benefit angle, but also allow for a clearer legal framework to be adopted for private companies to utilise.[18] This is to be welcomed since the current adoption of track access agreements tend to be overly complex and varying in nature based on region and also per each respective TOC. The rationalisation of track access means that there will be consistency and certainty in the rail market for both passengers and private companies.
The emergence of a super entity like GBR requires a strong presence of accountability and regulation, but this may prove challenging given the size of its operation and overall purpose. The White Paper suggests that it will be the Secretary of State for Transport who will appoint the chair of GBR, as well as agreeing the framework for pay.[19] In terms of scrutinization, the Office for Rail and Road (“ORR”) will oblige in this area. Acting as the official regulator for the industry, it will assume greater powers in terms of directly challenging GBR on its policies and objectives. Traditionally, the ORR has acted as an intermediate party between TOCs and Network Rail, but has perhaps arguably demonstrated a greater degree of regulatory behaviour towards TOCs and their obligations to their passengers. The White Paper sets out a strategy to bolster the ORRs presence by creating a rules-based access system which is backed up with legislation, which will also provide Operators an ability to challenge unfair decisions.
With so much being changed, it is difficult to understand what this means. Below is a visualised layout of the how the overall structure of GBR will operate.
PASSENGER SERVICE CONTRACTS
To bridge the gap between the effects of COVID-19 and the implementation of the Williams-Shapps review, all current TOCs will be entering into two-year agreements called National Rail Contracts (“NRCs”). Eventually, Passenger Service Contracts ("PSCs") will surpass NRCs. Under PSCs, GBR will, as already outlined in this article, have greater influence and control over timetabling, fares setting and all other sorts of aspects within the industry. The role of an Operator, since the term TOC will no longer exist, is that GBR will procure their services through a competitive tender process. The successful Operator will be expected to provide a service based on the specification it originally bid to operate. The specification will ultimately tie into GBRs overall governing mandate.[20]
Under the PSCs, both revenue generated and lost will be borne by GBR. Operators will ultimately be paid a fee based on the delivery and performance against the specification they operate to. Interestingly, there is some wiggle room for long-distance Operators to be more commercial savvy, for instance, taking on revenue risk at the discretion of GBR. The actual boiler plate agreements between the Operators and GBR will for most part be standard, as the ultimate aim is to create a one vision network. However, the differences between each Operator will be reflected in their individual contracts based on the specification they operate to. For example, the specification to operate services out of London Paddington may be very different to that of a specification to operate services out of London Euston. This is where the uniqueness of each Operator will come into effect.[21] However, the crux of how each Operator will be paid will be consistent.[22] The areas in which an Operator will be scored include the following:
a) Quality of service.
b) Running the trains on time.
c) Passenger experience.
d) Revenue protection.
e) Train capacity.
In addition to these core criterions, there will also be room for Operators to earn additional fee if they can demonstrate evidence of:
a) Collaboration; and,
b) Innovation.[23]
The intention being that "good performance" is aligned with what passengers want. The Review sees this as the way forward for the railway: placing passengers back at its heart and creating trust in the railway system.
In addition to PSCs, the availability of new open access services will also be explored where spare capacity exists.[24] Something which will remain at the disposal of the government will be its Operator of Last Resort, which will still be utilised should Operators fail to adhere to the specification and where appropriate, their contract to operate a service is terminated.[25]
CONCESSIONS OVER FRANCHISES
The key driving force behind the production of PSCs is that preference is now being given towards operating an overall concessionary-based system. Traditionally, the Department for Transport (“DfT”) awarded franchise agreements to rail operators, following a competitive tender process. Those franchise agreements tended to see operators taking most, if not all, revenue risk. While newer franchises made use of a “Forecast Revenue Mechanism” as a means of sharing revenue risks between the DfT and the operator, such franchises are by no means free of revenue risk. That traditional model saw operators taking into account projected revenue in contracted payments to and from the DfT.
However, unlike franchising, concessions are more akin to an ordinary services contract and the Review sees this as the way forward. Operators are paid a fixed fee for operating the rail services, while the contracting authority, which will be GBR for most part, save where there are devolved organisations, will retain revenue from the fares. The rationale driving this option through the White Paper centres around the inability of TOCs to predict or influence major culture changes, often to referred to as macroeconomics. The concessionary model incentivises Operators to perform to the best of their ability, whilst also offering additional payments where collaboration and innovation can be properly demonstrated. It is intended that this will deliver what passengers really need and want, rather than awarding a franchise and allowing private companies to make as much money as possible during the often-short franchise period. The rationale driving the White Paper can be compared to the current model adopted by TfL for its existing contracts in London. Here, concessions are in place for London Overground, DLR and TfL Rail services. As previously mentioned, there is an opportunity for long-distance Operators to assume more revenue risk. Therefore, it is unclear how far and wide the concessionary model will be implemented in practice. Although, the White Paper does allude to a full concession model in its traditional sense.
It will be important to show that sufficient room for private sector innovation remains to justify the costs of contracting out, rather than simply nationalising the entire industry. The devil will be in the detail, since a contract is a legal agreement whereby the Operator will provide a specified service to GBR for a fee. As mentioned previously, while Operators will assume less risk in terms of revenue, it will be required to ensure their running costs are below the fee they receive. This less leveraged proposition could broaden the field of contract bidders,[26] but it is unclear how successful bidders will then maximise their fee and increase their profit yield. This of course depends on the length of the contract awarded. One option would be to reduce staff costs, but this places the Operator into direct conflict with unions, which ultimately affects their overall performance against the contract specification they bid to operate. Alternatively, an Operator could contract on the basis of a passenger demand-linked fee. However, this will not only be difficult in political terms, since this bears some resemblance of a franchise as risk is going back to the private entity, but there is also difficulty in trying to craft contractual terms which satisfies both the Operator and the contract awarder.
There is also the issue of a ‘blame culture’ in the railway. Traditionally speaking, a TOC will always dispute delay minutes because for most part, it is economically viable to do so. Unfortunately, this does not create a one-minded vision for the industry and it defeats any attempt at installing collaboration between public and private entities. Perhaps GBR will be better placed to negotiate and ensure the contracts it awards are simpler and easier to manage than those awarded by the DfT. Then again, contracts are only enforceable up to a certain point, and in some situations the Operator may feel like it is easier to just walk away. Therefore, GBR will need to balance the contract it awards in terms of both protections afforded to GBR and how easy the contract is to renegotiate when things to go south. Only time will tell on this front.
CONCLUSION
What this author has aimed to do is to present the changes being suggested in the Williams-Shapps White Paper in light of previous rationalisation policies that have already been undertaken throughout the rail industry. Indeed, this author has provided a summarised position of the ‘The Big Four’ and British Rail rationalisation policies, and would welcome further insight and commentary into these respective styles of operation that they are rightly due. However, the intention of this author was to provide salient points around how each model operated, albeit, in a summarised fashion. What has been highlighted is that the pendulum of revenue risk has swung from traditionally being placed onto TOCs via franchise awards, to now being borne by the contract awarder, in this instance and for most part GBR. Operators may welcome the move towards concessions, as it removes the major risk component from existing franchises and the possibility that passenger numbers may not meet anticipated forecasts. Indeed, First Group welcomes the announcement of their new NRCs for South Western Railway and TransPennine Express. However, with less risk potentially comes less reward, and Operators will have limited exposure to increased profits under the new PSCs.
This author argues that the changes being brought within the rail industry are a complete overhaul to adopt a consistent concessionary model that drives investment, revenue and satisfies passenger expectations, whilst allowing a government entity to subsume control in a nationalistic approach. What Operators now need to do is to assess and analyse the DfT’s proposed NRCs so that they are better able to first, transition between an NRC and PSC, and secondly, operate effectively under the PSC since the NRC will be a prelude to what is expected to come. Equally, a number of issues have already been highlighted in the White Paper, most notably around fares reform. There is also a balance to be stuck here, and whilst this has not been the focus of this article, the government will need to balance industry needs against value for money for the passenger. It has been evident for some time that the current franchising proposition simply does not work. Too much risk has been expected to be taken on by the private sector. The pandemic changed that. Instead of expanding the market for franchises, the consequences of COVID-19 have meant that the market has shrunk. Therefore, this author welcomes the changes being brought in by the government, especially around introducing a concessionary model and allowing GBR to ultimately act as the guiding mind in the rail market. It is argued that whilst the White Paper will take some time to be implemented, it is purported that the implementation of it will expand the rail market and bring consistency and longevity to a very fragmented operation.
Written by Mr Jake Richardson LL.B (Hons)
Connect with Jake on LinkedIn: https://www.linkedin.com/in/jake-richardson-a83570113/
REFERENCES
[1] See generally <https://creditratingresearchinitiative.blogspot.com/2018/08/guest-post-back-on-track-or-heading-for.html> accessed 30 September 2021.
[2] <Lessons of History: An illusion of railway grandeur: The GWR's profits rested on monopoly and shabby service, writes Christian Wolmar | The Independent | The Independent> accessed 30 September 2021.
[3] <https://www.bbc.co.uk/news/uk-21938349> accessed 30 September 2021.
[4] <https://www.bbc.co.uk/news/uk-england-south-yorkshire-57069437> accessed 30 September 2021.
[5] See generally, Terry Gourvish, British Rail 1974-1997: From Integration to Privatisation (OUP, 2002).
[6] < https://www.theguardian.com/world/2002/jun/27/transport.uk1> accessed 02 October 2021.
[7] <https://www.theguardian.com/business/2018/jun/09/uk-railways-great-timetable-fiasco-whats-gone-wrong> accessed 02 October 2021.
[8] <https://www.theguardian.com/world/2002/jun/27/transport.uk1> accessed 02 October 2021.
[9] <Rail nationalisation: should British railways be public or private? | The Week UK> accessed 02 October 2021.
[10] <Covid-19: government suspends rail franchise agreements | Rail industry | The Guardian> accessed 02 October 2021.
[11] Department for Transport, Great British Railways: The Williams-Shapps Plan for Rail (White Paper, CM 423, May 2021).
[12] Department for Transport, Great British Railways: The Williams-Shapps Plan for Rail (White Paper, CM 423, May 2021) Ch 3.
[13] Department for Transport, Great British Railways: The Williams-Shapps Plan for Rail (White Paper, CM 423, May 2021) 31.
[14] <Our Delivery Plan for 2019-2024 - Network Rail> accessed 02 October 2021.
[15] Department for Transport, Great British Railways: The Williams-Shapps Plan for Rail (White Paper, CM 423, May 2021) 27, 38.
[16] Department for Transport, Great British Railways: The Williams-Shapps Plan for Rail (White Paper, CM 423, May 2021) 29, 30.
[17] Department for Transport, Great British Railways: The Williams-Shapps Plan for Rail (White Paper, CM 423, May 2021) 25, 30, 31, 40, 41.
[18] Department for Transport, Great British Railways: The Williams-Shapps Plan for Rail (White Paper, CM 423, May 2021) 49.
[19] Department for Transport, Great British Railways: The Williams-Shapps Plan for Rail (White Paper, CM 423, May 2021) 37.
[20] [20] Department for Transport, Great British Railways: The Williams-Shapps Plan for Rail (White Paper, CM 423, May 2021) 54-56.
[21] Department for Transport, Great British Railways: The Williams-Shapps Plan for Rail (White Paper, CM 423, May 2021) 54-59.
[22] Department for Transport, Great British Railways: The Williams-Shapps Plan for Rail (White Paper, CM 423, May 2021) 56.
[23] Department for Transport, Great British Railways: The Williams-Shapps Plan for Rail (White Paper, CM 423, May 2021) 56.
[24] Department for Transport, Great British Railways: The Williams-Shapps Plan for Rail (White Paper, CM 423, May 2021) 106.
[25] Department for Transport, Great British Railways: The Williams-Shapps Plan for Rail (White Paper, CM 423, May 2021) 60.
[26] <http://www.ft.com/content/1942e0a7-4ec9-45a7-91d6-bbe155a24c5c> accessed 01 October 2021; < https://www.standard.co.uk/business/julian-glover-insane-train-franchising-system-requires-an-urgent-rethink-a4120431.html> access 02 October 2021.
Disclaimer: This article (and any information accessed through links in this article) is provided for information purposes only and does not constitute legal advice.