The elephant in the (waiting) room

The McNulty report – Realising the potential of GB rail – is a queer beast. The report, published last week, is the final report of a long term investigation, established by the last government, into the efficiency of the British rail industry. And the report identifies a sensible and quite extensive set of barriers to efficiency in the rail industry. But it then proposes a slightly odd set of solutions to address those barriers. Or, rather, it fails to address the most obvious question of them all – are the problems generated by the fragmented and semi-privatised ownership structure of the industry?

Actually, that’s not even true. The report identifies industry fragmentation as key part of the problem. But it doesn’t explore the most obvious solution to that problem – large scale reintegration. Whether that is a result of Sir Roy McNulty’s disposition or the DfT setting a brief that precluded asking the question publicly is less clear. It does, however, mean the review is a missed opportunity.

The report identifies barriers to rail industry efficiency under nine headings (pp.9-10):

  1. The roles of government and industry – there is a lack of clarity in policy, and government is seen as responsible for costs while the industry is consequently not focused in seeking cost reduction
  2. Fragmentation – too many players and too many interfaces mean difficulty in securing co-operation for the common good
  3. The way in which the main players have operated – Network Rail has operated in a centralised fashion with little concern for its customers, while train operating companies are short-termist.
  4. Incentives which are either ineffective or misaligned  – Network Rail and the train operating companies face almost completely different incentives, and the operating companies have limited incentives efficient resource allocation
  5. Franchising –short overly-prescriptive, insufficiently flexible franchises do not transfer sufficient risk away from Government
  6. Fares structures
  7. Lack of best practice in key areas
  8. HR/IR management weaknesses
  9. Legal and contractual framework

These factor, McNulty argues, mean that whole-systems approaches are hard to apply. Economic actors seek progression within their own organisation – against their organisational criteria for success – rather than working towards delivering outcomes that are best for the industry overall. McNulty rightly argues that many of these factors are inter-related and are symptoms of a problem with the industry’s culture and relationships.

The report presents a series of recommendations under three headings: creating an enabling environment; delivering greater efficiencies; driving implementation. The thrust of the key structural recommendation is more closely aligning the infrastructure and operations at route level. In its maximal form that could mean full vertical integration of on-rail operations and infrastructure management. The overall thrust of this reform could be seen as edging us back towards the pre-British Rail era.

Fully implementing the report’s recommendations would be expected to achieve 30% unit cost reduction by 2018/19, assuming current estimates of future demand turn out to be accurate. While that might sound substantial, the industry has stood still in efficiency terms for a decade. So it is simply catching up on technical efficiency gains that should probably have already been made. The report involved some benchmarking against rail in continental Europe. The conclusion was that GB rail would have to cut costs by 40% to match those of rail in France, the Netherlands, Sweden and Switzerland.

This benchmarking exercise hints at the elephant in the room. All the rail systems being used to compare with GB rail are largely state owned and largely integrated national networks. That is, they are comparable in structure to British Rail pre-privatisation. That might suggest that the solution to the fragmentation of the GB system is re-integration of the network and management of the disparate parts of the system. That would be hard to achieve while retaining private involvement, so it might also require renationalisation.

If we look at the industry from the perspective of the new institutional economics – which I can’t do here in detail – we might well conclude that there are sound economic reasons why the problems identified cannot be expected to be resolved in any other way. Only by reintegration can incentives be sufficiently aligned while minimising transaction costs. Only by restructuring ownership can thinking efficiently and effectively be oriented to the long term and focused upon national economic and environmental interests, rather than organisational profitability.

Yet, the McNulty report never raises the possibility. It doesn’t really interrogate the principle or potential of a privatised rail system.

The previous Labour government faced calls to renationalise the rail industry at a number of points during its term. Those calls were always kicked into the long grass, at least in part on the grounds of cost. Yet, in the light of the money pumped in to the banking system following the global financial crisis, it is clear that much larger sums of money can be found to prop up strategically important industries. So it is possible to overturn prevailing narratives regarding the impossibility of the state re-establishing control if the need is seen as pressing enough.

Solving the rail industry’s problems is going to require the case for similar action to be made fully and forcefully. And for government to accept that the 20 year experiment with increasingly outré contractual arrangements that attempt to keep a putatively private system on the rails has failed.

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