Re-structuring Britain’s railways

CILT welcomed the publication of the Williams-Shapps Plan for Rail (WSPR) in 2021. Since then, progress towards delivering reform has been slow, despite widespread concern around costs and outputs. There has been a significant shift in transport demand and there is now a requirement for the rail industry to regain direction, clarity and respond to what freight and passengers need.

Government, and funders (both state and private sector) across Great Britain, are the ultimate decision-makers – transport is key to delivery of their wider strategies and policies. The rail network delivers for freight and passengers, as well as having the potential to grow, thereby underpinning wider policy objectives such as Net Zero, Levelling Up & Connectivity.

We need a sense of urgency in the sector:

• Empowering industry expertise and leadership to support and deliver reform;

• Recognising changes following the pandemic and responding to user requirements;

• Reforming where the 1990s privatisation arrangements are no longer fit for purpose;

• Establishing a sustainable financial structure which delivers benefits through long-term funding and investment.

WSPR recommended that a single guiding mind for the industry should be set up. Great British Railways (GBR) is currently being developed in shadow form – and some changes may require primary legislation. But there is no reason to delay progress while waiting for Parliamentary time. With clarity as to what the industry’s outputs need to be, improvements can be made quickly, to shape the longer-term structures that will deliver required outcomes efficiently and reliably, and fulfil rail’s potential.

The railway system is a national asset which should deliver a national network for freight and long-distance passenger services. This needs to be aligned to increased devolution and taking decisions as close to the market as possible. GBR’s mandate will need to be adaptable and flexible to provide stable leadership and oversight, while ensuring that future changes are possible, particularly as markets change in response to net zero requirements.

There are major delivery choices that have yet to be resolved and there is need for urgency and transparency from government. These include:

• The balance between the public and private sectors in service provision;

• Clarity over where competition within the railway will benefit users and where more co-ordination can deliver better services for passengers and freight customers;

• Defining how the nations and regions of Great Britain are engaged with GBR at both strategic and operational levels;

• Identifying if vertical integration can, in parts of the network, deliver a more efficient and responsive delivery model;

• How the pace of change can be accelerated both to respond to market needs and to deliver efficiencies.

These are complex, inter-related issues and we recognise that there are choices to be made in implementing reform that deliver effective change, as well as in creating momentum across the railway. We need not wait until the whole reform package is defined – the best is the enemy of the good – and with a clear direction of travel led by government, the industry has the ability and the will to quickly unlock both its potential and the apparent paralysis that is now holding it back.

The need for action

It is over five years since Keith Williams was asked to review the structure of Britain’s railways. When the recommendations were published in May 2021 in the Williams-Shapps Plan for Rail (WSPR) whose contents we summarise in Appendix A, the Chartered Institute of Logistics and Transport (CILT) welcomed proposals for a more coherent structure for the rail industry with the creation of a single accountable leadership to improve the efficiency and cost of the railway.

In supporting the WSPR publication, we set out our priorities as:

• Focusing on delivery to passengers and the freight industry at pace;

• Supporting the delivery of priorities for transport and logistics at national and regional levels; and

• Ensuring the transition works in the interests of users and funders.

Over two years have now elapsed since publication, and although WSPR gained widespread support, its implementation has been delayed, ostensibly due to a lack of parliamentary time.

The current proposal for legislation to implement WSPR is modest, focused chiefly on moving procurement of passenger services from the DfT to Great British Railways (GBR). The Rail Minister has stated that much of the proposed reforms can be achieved without any legislation and that government is already able to set up a new organisation, make appointments and give it significant powers.

The Secretary of State has said that when created, GBR will be a ‘thin controller’ organisation and for it be more of a guiding than a controlling mind. As such, CILT is concerned that GBR will struggle to achieve the high expectations the sector is now placing upon it.

Achieving net zero is still a major target for the UK and moving more freight on rail will be a key part of this.

However, strategic direction is required now in order for relevant investment from the private sector to be made in time to create the additional infrastructure to support such a modal shift.

We believe that there is a clear need to move at pace, engaging with users and the industry to provide leadership and addressing the challenges that are now manifest. WSPR left many issues of implementation unclear, and even two years on, many issues have not been resolved. This paper identifies both the challenges and the complexities, and provides some commentary on where implementation can be improved.

Britain’s broken rail model

The Secretary of State for Transport has described Britain’s rail model as broken.

This model was created by design, through the 1993 Railways Act. Emerging outputs from GBRTT do not envisage existing contracts and interfaces changing significantly or quickly. It is assumed that track will still be managed separately from train, operators contracted by GBR will function independently of each other, devolved operations will remain outside the direct control of GBR, as will independent open access and freight operators.

The pandemic broke the passenger contracting model, so the railway is now often more contractually than customer focused, with a culture of management by KPI rather than passenger need. This means that:

• At most passenger operators, government now takes the risks on both revenue and cost, signing off operational decisions as well as detailed service development and rolling stock strategy.

• Train operations have very divergent business and operating models, across DfT TOCs, Devolved Authority TOCs, DOHL TOCs, Open Access TOCs and Freight Operators.

• The original concept of Network Rail funded by supplying access to TOCs and FOCs no longer applies. Successive industry change has required NR to lead across capacity allocation and strategic planning. Its focus is on delivery of its regulatory determination, which does not fully align to user and funder requirements. The link between regulated outputs set for Network Rail and public contracts with train operators is opaque (albeit with more clarity in Scotland).

Our understanding is that GBR passenger operating contracts will be competed for by private sector operators and are likely to have differing incentives to grow revenue. The ORR will continue to provide whole-sector regulation, including five-yearly periodic reviews of infrastructure funding and outputs, approving, and directing access to the network, licensing operators, and enforcing competition and consumer law. GBR will operate under directions and guidance issued by the Secretary of State which will include requirements for co-operation, but the entities will remain separate.

This does not feel like a radical change – although elements of these proposals may be simpler, more efficient, and more integrated than today. If we do largely more of the same, we will largely get more of the same outputs.

While passenger services suffered during the pandemic, freight services thrived. The agility of the private sector to move quickly to take advantage of opportunities to move more freight by rail has provided a good example of why this part of the rail industry should remain privately owned. But we have a model which constantly sets freight behind passenger services, and this needs to change. Freight is not just about the private sector, it needs the public sector to facilitate freight growth through the encouragement of modal shift, together with ensuring adequate infrastructure capacity and capability is provided. The public sector has a further important role in freight with land use planning policies and guidance for rail and intermodal terminals including strategic rail freight interchanges.

Defining policy outcomes

Great Britain’s rail network is a key part of the transport system that supports wider society and the economy. We consider that there are policy outcomes that government at all levels needs to define to allow the industry to deliver:

• Providing the best services for end-users efficiently and reliably, for both passengers and freight.

• Delivering wider strategic and policy objectives: In common with other vital services, rail can support wider government objectives including Net Zero, Land Use Planning; Levelling Up & Connectivity; Air Quality, and Noise

• A funding structure that best reflects customer and funder priorities: Rail operations are best run with commercial awareness, focusing on efficiency and the interaction between costs and revenues.

• Managing the long-term nature of investment to deliver the benefits of rail: Railway investment can take many years to plan, deliver and realise. Funding, both public and private, requires certainty for those investing and they need confidence they will get the outputs they have paid for. Investment decisions need to be accelerated to realise benefits.

Delivering change should reflect key principles

In the absence of a delivery plan for rail reform, we believe that there are principles around how changes can be implemented most effectively:

• Decisions are best made when they are closest to the market they serve. We need to define responsibilities and accountabilities on a system-wide basis to align with markets and geography.

• Deciding how to fund the sector is key. There is inconsistency and opacity in both capital and revenue spending, and the railway structure needs to better link outcomes to both current and future funding requirements.

• Transport is a devolved matter for the nations and many regions of Britain, which needs to be reflected and embraced. The railway is a network and needs to operate as such. Current plans are that GBR will be centrally directed by ministers and DfT will be limited in its scope in respect of services it does not directly control. Inclusive devolution within GBR’s objectives and governance will be critical to gaining support from the nations and regions and restoring confidence in future plans for rail.

• Given the diversity of markets, regions and operations, there is no ‘one size fits all’ and industry structure needs to allow for differences.

• Where there is one main operator of train services, the best way to integrate track and train may be a single operator for both. In such cases, other operators, including freight, will require firm rights and protections independently overseen and enforced by ORR.

Policy choices

The slow pace of change and the apparent lack of transparency from government means that there are still questions that need to be addressed. We are mindful that reform will not be a single ‘big bang’ and that decisions taken now will inform the ultimate direction of the railway.

The balance between the public and private sector in service delivery

A majority of the public are in favour of public ownership of the railways and the current system is viewed as a fragmented system of monopolies that does not deliver. We do not believe ownership is, of itself, the key issue. Rail will remain a mixed industry, given both strategic and funding realities, decisions need to be centred on delivery of the right service outputs rather than focusing on the boundary between public and private sectors. This is particularly important for freight which is based around the private sector and managing investment budgets.

Much of the passenger network requires significant public funding to operate. While public sector borrowing has lower financing costs, it is constrained by overall government financial limits. The Treasury now takes all revenue risk for directly managed English franchised passenger operators, increasing complexity, and reducing market responsiveness. The private sector can often be more responsive, flexible, and innovative within its wider risk appetite. Priority should be given to devising separate optimal risk-reward profiles for both private sector involvement and public sector delivery.

Passenger contracts need to be simplified and redesigned to focus on outputs and efficiency while supporting good management by minimising the opportunities for gaming or perverse outcomes. The financial consequences of failure in performance or delivery are not as great for a public sector body as for a privately funded organisation, nor is exceptional performance rewarded as well. The effectiveness of incentives for public sector bodies is mixed but can act as a catalyst if the regime is carefully designed and managed. This indicates different regimes between private and public sector will generate the best results.

The growth of freight services post pandemic highlights the rapid progress that can be made with a dynamic, focussed private sector. While passengers often have little regard for the operation of freight the regulation of access to railway infrastructure must take account of the strategic value of freight services.

Competition vs coordination

WSPR’s recommendations envisage continued competition, both FOR and WITHIN the market for passenger services, and the extent to which each is promoted is both a political and a structural choice. We need to remember rail is a minority mode, and road remains dominant. In most markets, the main choice is between the car and public transport. Coordination across public transport operators may provide stronger competition with the car and create opportunities to deliver wider policy outcomes.

Freight is successfully delivered in a competitive environment, and ORR’s evidence shows competition has a record of driving better outcomes for passengers. Experience on the East Coast Main Line, where there are three Open Access operators, demonstrates strong growth across all operators compared to other routes.

The potential for more open access passenger operations is limited and could increase complexity and confusion amongst passengers. Integration across modes and reducing pressure on track capacity might be better achieved through clear specification and contracts, but they may not be as responsive to changes in market needs and may still be limited by Competition Law. Particularly for local and regional transport, there is a recognition that integrated timetabling and ticketing are valued both by existing and potential passengers.

The complexity of both passenger contracting and regulation of Network Rail has often had a detrimental impact on both competition within the sector and the ability to coordinate. WSPR identifies that simplification and alignment will reduce both costs and perverse incentives, enabling greater focus on delivering stated objectives, but how this will be delivered particularly without restricting freight growth is a matter for discussion and choice.

National vs local decision making

WSPR states that key strategic decisions will be taken centrally with operational delivery led by five regions, empowered, accountable and funded for the whole system in their geographies. How this tension between a single national guiding mind and devolved regional bodies will be managed, whilst maintaining accountability, remains unclear.

The need to maintain a national network for long-distance passenger and freight delivery is central and whilst many nations and regions now have devolved powers, we consider that the rail industry will need to be strongly co-ordinated from the centre to deliver national objectives, whilst recognising that most passenger journeys, including rail, are local. GBR will need to be firmly governed with clear accountability.

GBRTT’s plans for simpler, better industry processes, envisage GBR having its strategic objectives set by the Secretary of State, whilst considering devolved body views and enforced by ORR. There is still a major decision to be taken on how non-DfT funders and investors will be included both in terms of directions, guidance, and real-time governance of GBR. To truly encompass Great Britain, GBR leadership must fully embrace all government authorities and industry leadership must be focused on markets and delivery rather than maintaining and developing industry governance activity.

Continued separation between track and train vs vertical integration

WSPR sets out a requirement for greater collaboration in the delivery of service to the end users of the network. The current separation of track and train was established at privatisation. It is envisaged GBR’s regions will be responsible for day-to-day delivery across both track and train.

The Rail Minister has stated that he wishes to see one person responsible for both track and train, and that examples of collaboration between operators and Network Rail are to be applauded. The simplest way of delivering a single point of accountability and collaboration across track and train is to consider vertical integration. Most local routes have one predominant operator, and in these cases vertical integration may be a suitable model. Examples already exists in the case of London Underground, Tyne & Wear Metro and Core Valley Lines.

Yet GBRTT’s plans assume that even their directly contracted operators will be subject to the same regime as other operators and will require GBR to act non-discriminatorily within the requirements of competition law and overseen by an independent ORR, in a manner very similar to the current NR access policy.

We do not view current plans as the most appropriate for the whole network, both in terms of cost and complexity and for network development, particularly given the services operated by devolved authorities and open access operators. A simpler regulatory framework may be able to achieve better, quicker, and faster outcomes.

Delivering freight access (as well as open access passenger) requires certainty and firm regulation. A simpler regulatory regime may be possible if GBR fully incorporates all DfT and devolved authority services with regulated access rights entirely focused on rights of open access operators. As the track access arrangements for CP7 will come into effect in April 2024, we think that the urgent priority is to consider how reform can be delivered in the medium-term and to engage the industry and its users in identifying a simpler model that protects and promotes both freight and passenger growth.

Stable financial arrangements

We recognise that rail’s challenges to restore financial stability are acute, a consequence of the impacts of the pandemic on passenger demand patterns and high costs within the industry.

Current projections show public sector funding to support rail operation will be around 40% in 2023/24 and planned substantial investment in railway infrastructure will result in additional ongoing costs.

If the current level of support is unsustainable there needs to be action to reduce the net cost of the railway through a combination of efficiency gains and targeted revenue growth rather than simply cutting services or de-scoping projects.

Most government funding is currently channelled through NR’s Network Grant as well as subsidy channelled through DfT and devolved authorities. Government funding needs reform to improve transparency to ensure best use of subsidy to capture wider benefits such as Net Zero.

Track Access charges need review to ensure growth is properly funded and capacity used efficiently. Growth in demand when placed alongside increased costs, does not necessarily improve overall industry finances, and a framework that recognises the complexity of decision-making is a benefit that GBR should be required to provide.

Fares regulation does not support optimising revenue or aligning with production costs. It has entrenched perceived complexities and precluded changes responding to the market. Where rail is highly competitive with other modes, more commercial freedom for operators to set fares and service levels may drive improved efficiency, while greater national and local control of fares through GBR may make the case for removing formal regulation in favour of political and public sector accountability.

Pace of change

The Secretary of State has said that reform is continuing ‘at pace’, that much can be achieved without legislation, and that government can set up the organisation, make appointments and give them the powers. But there is little tangible evidence of progress.

We are very concerned progress towards implementation of rail reform following the publication of WSPR is very slow. There is little realistic likelihood of primary legislation being in place before the next General Election. The industry is currently in stasis and focused on the possibility of organisational change, rather than responding to external challenges.

There is a perception that change cannot happen unless the whole reform package is defined, whereas there are early deliverables that can be done to support longer-term change. We are aware that there is a lack of trust from operators and transport authorities in DfT, Network Rail and, by extension, GBRTT. If government wants to see better engagement from the rail industry, it must see it as more than merely its delivery agent.

Government and the industry should work to:

• Actively engage with and embrace devolved authorities within the process of reform so they become an integral part of the creation of a re-structured railway across Britain.

• Align short and medium-term outputs across funders, NR, operators and rail authorities and identify ‘quick wins’.

• Increase areas of common cause, through greater transparency (e.g. sharing of TOC Annual Business Plans).

• Provide clarity on areas which support private sector investment, particularly for freight developments alongside the railway.

Where there is a gain to passengers, freight, and the taxpayer we would hope that changes can be made quickly. Notwithstanding any uncertainty surrounding the timing of legislation, a timetable of change for those aspects that do not require legislation should be created. Current structures will remain for some time, and these already give government more control over the railway than at any time since privatisation. We need to understand what obstacles exist, and then seek to address each in turn. We consider these include:

• Treasury concerns over risk and funding

• Government institutional governance designed for policy and strategy, not operational decisions.

• Vested interests seeking to protect or promote their own positions.

• Other priorities within government taking a higher priority removing time and energy.

Strengthening delivery of reform

There is a genuine consensus reform is required. We continue to support WSPR and urge the government to progress as quickly as possible.

GBR is proposed to operate under a mandate from the Secretary of State and to take in Network Rail, some RDG functions and awarding passenger contracts for the current DfT operators. Many operators, including those contracted by devolved authorities, open access freight and passenger operations will remain outside GBR (see summary of WSPR in Appendix A).

The need for a network-wide guiding mind is urgent, but we recognise that there are still potential choices that could determine future policy choices. These include:

Formalised engagement for devolved funders and policy-makers in GBR governance to consolidate its authority and mandate in the industry.

Current proposals mean that GBR is solely accountable to the UK Secretary of State, who will set its directions and guidance. There is no formal role for devolved funders and authorities, which excludes a significant number of subsidised passenger operations, and which erodes the concept of a national network and potentially creates tension around regional and network priorities.

Delivering consistently and effectively requires a strong central capability within GBR covering the whole of Britain and building on NR’s System Operator accountabilities. Providing more engagement at Board level and in defining GBR’s directions and guidance to involve formal accountability beyond the DfT would increase its capability to manage the network with minimal political intervention at the point of delivery.

Potential vertical integration and simpler, focused regulation to protect and promote freight and other passenger operations.

Great Britain’s railway network is completely separated at the interface between track and train, to a much greater extent than in most similar countries. There are some routes where there is only one regular passenger or freight operator, or where the vast majority of services are provided by a single operator. Simplifying management interfaces could reduce costs and complexity, as well as a much closer alignment to the markets served. We recognise that there would need to be a focused regulatory framework to provide certainty around access and charging for third parties, such as freight operations, and that this would permit more integrated decision-making.

More commercial freedom for GBR passenger operations to generate growth and efficiency.

WSPR is clear that there needs to be accountability and a commercial focus to meet passenger needs. It included unspecified proposals for some operators to be given greater commercial freedom. At present the National Rail Contracts (NRCs) are highly specified and it may be appropriate, if the private sector is to bear more risk, to consider more discretion around pricing and service levels, especially if there is limited direct subsidy to a passenger operator.

Protecting the public interest as well as promoting co-ordination and maintaining a coherent service offer will be needed, as well as clarity as to interactions with freight and other passenger operators. Good design needs to provide aligned incentives across operating contracts to take decisions that are right for the passenger, while being informed by the GBR guiding mind.

Appendix A:

Williams-Shapps plan for rail (WSPR) recomendations

Governance

• GBR established as single national organisation under Secretary of State (SoS) direction (through the DfT).

• The SoS will appoint the Chair, whilst Ministers will hold GBR to account, take key funding decisions and set direction.

• GBR will produce a 30-year long-term plan and will be used by Ministers to ensure that the railways respond to wider government policy.

• Parliament will hold Ministers to account for these key strategic functions.

• Local railway managers will be scrutinised by local politicians through joint governance arrangements to provide clear accountability locally in all areas.

• Network Rail will cease to operate as a separate body and will be absorbed by GBR as will cross-industry functions, such as NRES and RDG.

• Awarding of DfT passenger contracts will move to GBR with Passenger Service Contracts (PSCs).

• Existing devolved authorities in Scotland, Wales, London, Merseyside, and Tyne and Wear will continue to exercise their current powers and to be democratically accountable for them.

• Open Access passenger and freight services will also be managed outside GBR contract arrangements.

• ORR will continue to approve access to the network and license Operators. 

• ORR will provide whole-sector economic and delivery oversight to hold GBR accountable against licence, with powers to require improvement. 

• Transport Focus will be reformed to be passenger champion and advise SoS. 

• HS2 Ltd and East West Rail Ltd will retain their current roles as will other regulated infrastructure managers that are separate from Network Rail.

• Safety and standards will continue to be overseen by ORR, RSSB, RAIB and BTP.

Delivery

• GBR to make strategic decisions centrally, but operational matters will be led by five regional divisions, with devolved responsibility to manage budgets, operations, and infrastructure and decide upon investment priorities.

• Five-year business plans and funding cycles, with flexible spending review settlements for operations but fixed control period funding for infrastructure (as now).

• GBR to establish national brand with national and regional sub-identities.

• New partnerships established between GBR and local government to give local leaders a greater say in how the railways are run in their area and ability to directly fund additional services locally.

• GBR will draw up service plans consistent with direction and funding from SoS.

• Freight, open access passenger and non-DfT operators will be able to use GBR tracks through a new rules-based system for access to the network by all operators. New open access services will also be explored where spare capacity exists.

• ORR will operate an appeals process for access decisions.

• GBR will award new PSCs which will contract with private companies to operate trains to the timetable and fares it specifies, in a way similar to London overground.

• PSCs will require operators to meet specified standards for key passenger priorities such as delivery of punctuality, passenger experience, and revenue protection etc. Revenue incentives will be built into contracts to grow passenger numbers, but GBR will take revenue risk in these contracts.

• PSCs will be tailored to different places and markets using different mixes of incentives, and some operators may be given greater commercial freedom.

• Commuter and long-distance off-peak fares will continue to be regulated.

Conclusion

Decisions need to be made now to support the future success of the industry and its contribution to the overall wider policy objectives and prosperity of Great Britain. The perception of drift needs to be arrested, freeing the industry to deliver efficiently and respond to external change.

Policy should drive the process. Greater clarity is needed on what the railway is to deliver, and which can then define the best delivery mechanism. Industry leadership must fully embrace all government authorities and if government wants to see more from the rail industry,

it must see it as more than just its delivery agent. If the wider railway is galvanised and engaged, much more can be done. We believe current proposals should be strengthened through governance that reflects the required industry outputs.

Current structures will be with us for some time, and government exercises more control over the railway than at any time since privatisation. We need to understand what is delaying change and prioritise evolutionary improvements that are consistent with, and required for, further reform.

Contact

We plan to engage with national government and local authorities, but we are always interested to hear from or about other interested parties, so if you have any comments on what you have read, please contact:

Daniel Parker-Klein Director of Policy and Communications, CILT(UK)

E policy@ciltuk.org.uk

The Chartered Institute of Logistics and Transport

Earlstrees Court, Earlstrees Road Corby, Northants NN17 4AX United Kingdom

W ciltuk.org.uk