Four models proposed – but the Treasury fancies Japan
As has been noted before, the Labour Party’s transport team is adept at asking pointed and timely questions. Catherine McKinnell, MP for Newcastle North, is Chair of the All-Party Parliamentary Group on the East Coast main line. Not surprising then that a recent question to the Transport Secretary was very much to the point. Would he ‘provide an update on (a) the work of (b) decisions taken by and (c) the membership of the East Coast Partnership; and if he will make a statement’. Responding for the Government, Transport Minister Andrew Jones gave the usual two-part answer. Part one established what the question is about:
‘The Government’s Strategic Vision for Rail, published on 29 November 2017, set out the Government’s intention to introduce the East Coast Partnership (ECP) on the East Coast main line. In May 2018 the Secretary of State announced the establishment of a Partnership Board to develop proposals for the East Coast Partnership, bringing together the operation of track and train under a single leader.’
Part two may, or may not, answer the question. Indeed, when in full obfuscation mode, it may answer an entirely unrelated question the Department would rather the MP had asked. In this case the answer went as follows: ‘The Partnership Board is chaired by Tony Poulter, a non-executive Director at the Department for Transport, and has members from Network Rail the inter-city operator team, London North Eastern Railway (LNER), the Department for Transport and independent members to ensure the interests of other operators on the route are considered. The board has been developing the options for delivering the East Coast Partnership, which will be aligned with the Williams Rail Review’.
Conspiracy theorists may question: how will the options be aligned with a review that is still taking evidence? And then quote the adage that you don’t commission a review until you know what answer you want.
Anyway, these options the board is developing are known as Commercial Models (CM). The board cautions that all options must leave room to ‘leverage’ the current plethora of reforms sweeping across the railway landscape. These include Andrew Haines’ 100-day review, the Williams Rail Review and the Glaister Report, to name but three. Starting with the most basic commercial model, CM1 offers an enhanced alliance within the industry structure. Given that we don’t know what structure will emerge from the Williams Review, I’ll leave it at that.
CM2 is a bit more exciting. DfT’s client role would be reorganised into a separate body called the East Coast Partnership Company, ECPCo for short. ECPCo would be an ‘office’ of the DfT. Echoes of the former Office of Passenger Rail Franchising.
This option, claims the board, would provide ‘clearer funding, direction and accountability to London North Eastern Railway (LNER) and the Network Rail Route’. This would be the East Coast Route (ECR) within the Eastern Region under Andrew Haines’ new structure. Under this option, ECPCo (couldn’t they have come up with an abbreviation you can actually say in conversation without sounding like a hiccup?) procures the Train Service Operator (TSO). So no role for DfT’s Passenger Services Directorate which lets (or currently is failing to let) and manages franchises.
ECPCo would also negotiate a tripartite agreement with the TSO and ECR that would address ‘inhibitors’ and bring track and train together. Skipping quickly over how you address an inhibitor, this structure is described as ‘similar to the Strategic Rail Authority model, but with contractual engagement with the ECR’.
With CM3 we are starting to get serious about restoring vertical integration – not that the ‘V’ word features in the Partnership Board’s vocabulary. A new holding company (ECP HoldCo) would be responsible for track and train. The company would have clear ‘direction, funding and accountability for train operation plus planning and delivery of Operations Maintenance Renewals and Enhancements (OMR&E)’.
Network Rail staff would transfer to the Infrastructure Manager, which would be a subsidiary of ECP HoldCo and be managed alongside the Train Service contract. So, track and train would still be separate activities under the HoldCo and the infrastructure would remain in public ownership. However, the board adds that the HoldCo would have flexibility on the choice of supplier when procuring services. This option might require primary legislation to implement.
According to the board, CM3 is similar to Transport for London and the Overground on the basis that TfL owns the infrastructure and contracts out train operations. It feels to me like a bit of a bodge which doesn’t add all that much and could be intended to make CM4 more attractive.
Finally, CM4 sees ‘track and train brought together in one private sector concession which has clear direction, funding and accountability for train operations and planning and delivery of OMR&E’. Followers on Twitter (@captain_deltic) will see that this contravenes my long-standing mantra that reform should focus on ‘structure not ownership’. But other than that, CM4 comes closest to my submission to the Williams Review.
Infrastructure and operations would be the responsibility of yet another unpronounceable abbreviation, ECP Concessions Ltd (ECPCL), with staff transferred from Network Rail. Infrastructure would remain in public ownership.
According to the board, ECPCL would be free to decide which services to contract out. It is described as similar to High Speed 1 but with the inclusion of train service operations. Commercial Models 2 and 3 can be implemted without legislation if ECPCo and EPC HoldCo are established as offices of DfT with the Transport Secretary remaining as the franchising authority.
However, there may be other legislative requirements for CM3 and primary legislation would definitely be required for Model 4. Oddly, given Brexit, the board cautions that compliance with the European Commission’s Fourth Railway package will also have to be considered, particularly with CM4.
As has been pointed out since Chris Grayling came up with the ECP, the East Coast main line is not the route you would choose for your first trial of vertical integration, given the many other passenger operators on the route. Or, as the board comments, ‘the potential benefits of bringing track and LNER services together may be limited because LNER is one of several users of the ECML.’
In the longer term, the closer alignment of ‘operators and geography’ needed for greater accountability and single leadership could be achieved by remapping under the current devolution programme – which already creates ECML as a single Route within the Eastern Region. Alternatively, other operators could be brought into the ECP.
That last, seemingly throwaway sentence may be more significant that it seems. Back in January, the Chief Secretary to the Treasury tweeted in response to an article on Japanese railway privatisation in The Financial Times. Ms Truss said ‘Interesting piece on Japan’s private rail system. Track and train united. Bulk operates without subsidy. A third of income from real estate development’.
Naturally, this attracted a largely negative response. But it always pays to listen to the Treasury’s musings when they concern railways. While I am critical of the ECP Board’s focus on ownership, I am not so naïve as to forget the ultimate arbiter – the Treasury. So I can understand the following sop to Cerberus from the board’s executive summary on the commercial models: ‘As track and train under the commercial models become more aligned the opportunities for joint planning, the existence of a credible single point of contact and an organisation with a clear covenant will enable better allocation and management of risk and therefore private finance solutions’.
It is worth emphasising the board’s various caveats regarding the unsuitability of the ECML for what would be the pilot scheme for vertical reintegration. I sense that the DfT civil servants involved are using the same strategy as Professor Andrew McNaughton with his electrification cost review for DfT. This was commissioned to inform HS2 on the likely costs of electrifying the classic routes between HS2 and city terminals. However, Prof McNaughton used the specific opportunity to make the general case for a rolling electrification programme.
Similarly, tasked with checking possible aerodynamic configurations for a ministerial knee-jerk flight of fancy, DfT is using the opportunity to establish the basis for something that would definitely get off the ground – such as Anglia, Great Western or South Western.
A qualitative appraisal has been made which matches the four commercial models against eight critical success factors (CSF). This ranks the four commercial models on a one-to-three star basis. One star shows that the mode is likely to provide some support in achieving the critical success factor, two stars offers ‘tangible support’ and three stars ‘good support’.
Only CM4 gets a uniform three stars across all factors. CM3 also gets three stars for CSF 1, 2 and 6, but only two stars for 3 and 5. Note that CSF 4 has not been scored in the appraisal.
On the subject of a possible programme and timescale, it is suggested that you could get to CM3 or CM4 either via CM2 or start with CM1 and build up. Assuming that CM1 is skipped, CM2 could be in place in 2021.
This allows a year to set up ECPCo and appoint a Chief Executive, followed by six months to develop the delivery strategy. Procurement of the TSO is estimated to take 18 months to two years. During this time the agreement with Network Rail would also be negotiated. If you add up the estimated times, getting CM2 established would take three years at best.
Given that the process is unlikely to start until Williams has reported and the government of the day has decided what to do – if anything – with his recommendations, we’re looking at the end of 2022 rather than 2021. It is assumed that you could get from CM2 to CM3 in two years (2023) and CM4 in 2026.
The argument is that it could be ‘appropriate/necessary’ to create a ‘track record’ under CM3 before moving to CM4. And also that it would take two to three years to run the competition for the concession. Of course, ‘structure not ownership’ means that you get a functional railway running first and then, depending on the dogma of the government in power at the time, decide whether to keep it in the public ownership or hand it over to the private sector. But that is politics. What this work by DfT, Network Rail and LNER shows is that there are ways to create a vertically-integrated functioning railway by around the end of the new Control Period 6 in 2024. But not on the ECML.
Personally, I don’t see the point of CM1 and CM2 if the ultimate aim is something like CM4. And we simply don’t have time for staged implementation. Andrew Haines is driving devolution hard and whatever structure Williams comes up with, the foundations will be in place by the time he reports. Straight to CM4 should be the aim.
CRITICAL SUCCESS FACTORS
1. Scope for DfT to set a long-term strategic vision which leverages integrated track and train and provides freedom to implement that long-term strategic vision for ECML.
2. Single leader accountable and empowered to deliver DfT’s strategic vision; enable holistic decisions regarding OMR&E; and deliver better offer to passengers.
3. Train service operator model with an appropriate term and incentives to support the delivery of DfT’s strategic vision.
4. Treat all operators on the ECML in a fair and transparent manner.
5. Aligned (between NR Route and LNER) staff messages, strategies, objectives and incentives to engage staff and encourage them to work together delivering customer-focused responses.
6. A credible public-private interface risk (and allocation of); commercial credibility including covenant and leadership credibility.
8. Demonstrates value for money and wider benefits.