Railway reform and incentive alignment British experience Chris - PowerPoint PPT Presentation

Institute for Transport Studies FACULTY OF EARTH AND ENVIRONMENT Railway reform and incentive alignment – British experience Chris Nash Institute for Transport Studies University of Leeds C.A.Nash@its.leeds.ac.uk

Outline 1.Introduction 2.Passenger franchising 3.Problems of cost control 4.Freight 5.Conclusions

British approach to rail reform • No remaining state owned operator – all operations privatised • All passenger services franchised, mainly by national government (DfT)(Services in Wales, Scotland, Greater London and Merseyside devolved) • 20 franchises • Freight privatised with open access (DB Schenker and Freightliner main operators) • Strong independent regulator (ORR) • Separation of infrastructure from operations in 1994; Railtrack privatised

PASSENGER FRANCHISING

Nature of passenger franchise • Net cost contract (good incentives, especially re more commercial services?), but problem of risk so revenue risk shared (also payments indexed to inflation and government bears risk re track access charges) • Length currently normally7+3 years (government did decide on longer franchises but abandoned this after problems) • Franchisee usually responsible for providing rolling stock, usually from leasing companies (but may lead to high prices unless government bears residual risk, and also lack of innovation) Recent major procurements led by government: - Inter city Express Passenger - Thameslink - Crossrail

Franchisees Group Owners Nature of Company Nationality National Express National Express Private, bus and rail British Firstgroup Firstgroup Private, bus and rail British Arriva DB Public, bus and rail Germany Stagecoach Stagecoach Private, bus and rail British Virgin Virgin Private, rail and air British MTR MTR Public rail Hong Kong Go ahead Go ahead Private, bus and rail British Via rail SNCF Public rail France SERCO Serco Private, utility British ABELLIO NS Public rail Netherlands Deutsche Bahn DBAG Public rail Germany

Rail passenger km in Great Britain 1996-2014 b pass km 70 60 50 40 b pass km 30 20 10 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Reasons for passenger growth? • Economic growth? But scarcely affected by recession • Reduced competition from road -Slow growth of car ownership -Congestion worsening road journey times -Rising petrol costs • Reduced rail fares, improved rail services and better marketing

PROBLEMS OF COST CONTROL

Passenger railway costs per train km (2011/2 prices) (£b) 1996/7 2005/6 2011/2 • Total 20.2 27.0 25.4 • Infrastructure 9.2 14.4 13.9 • Operations. 11.0 12.6 11.5 See Smith and Nash (2014)

Infrastructure costs: Rail regulator benchmarking Profile of Network Rail Efficiency Scores: Flexible Cuesta00 Model 1 0.9 0.8 0.7 Score against frontier 0.6 0.5 0.4 0.3 0.2 0.1 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Infrastructure manager developments • After the Hatfield accident in 2000, high levels of spending on the infrastructure and compensation to train operators led to Railtrack becoming insolvent • Successor, Network Rail, a not for dividend private company with members, not shareholders, but with debt guaranteed by the government • In 2014, reclassified as a public sector company

British Train Operating Company Costs • Evidence that British franchises are typically too big Wheat and Smith (2015) • Problems in managing franchise failure • Some costs such as fuel cost, insurance and policing have risen a lot • Big rise in staff costs partly due to competition for scarce skilled staff? • Lack of alignment of incentives between infrastructure and operations (McNulty)

McNulty report 2011 recommendations • Should achieve a 30% reduction in costs by 2018/9 • Rail Delivery group to oversee • Decentralisation of Network Rail, with regional concessions and closer links with train operators (Leasing of infrastructure to operators?) • Longer (at least 15 year) less highly specified franchises carrying more risk re revenue and infrastructure costs • Increased local involvement in specification and funding

Possible solution – growth of on track competition • Competition and Markets Authority Report 2015. Might produce more on track competition by - Removing constraints on entry - Splitting franchises in two - More overlapping franchises - BUT - Lack of track capacity - Lack of integrated timetables - Loss of economies of density

Possible solution - reform of franchising • Long franchises necessary whenever franchisee responsible for service development, procuring rolling stock, influencing infrastructure investment (at least 20 years) Chiltern 20 year franchise the model • Short gross cost franchises may make sense where the franchising authority is responsible for asset procurement, marketing, influencing working practices etc. London Overground 7 year franchise the model • Alliances with Network Rail crucial – ideally complete sharing of changes in revenue and cost SW Trains the model.

Possible solution – reform of Network Rail • More concerns about the efficiency of Network Rail have arisen with severe cost overruns and delays in the electrification programme • Also Network Rail now classed as a government owned company with its borrowing on the government balance sheet • Shaw report in 2016 advocates: - Separation of Network Rail into a central systems operator (charges, planning new investment, allocation of capacity) and regional organisations responsible for operations, maintenance and renewals - Possibility of concessioning latter to private sector

FREIGHT

Privatisation process 1994 Railways Act introduced open access for new entrants. Government also decided to sell existing rail freight services as 6 companies: 3 regional trainload companies Freightliner – domestic containers (incl to ports) Rail express systems – post office Cross Channel intermodal

Privatisation process ctd. • Only non management buyout bids were from EWS (subsidiary of a consortium led by Wisconsin Central). Sold to DB Schenker. 2008. • Freightliner sold to Management Buyout • All other companies sold to EWS • But Freightliner set up Freightliner Heavy Haul whilst EWS expanded into containers

Rail and road freight traffic Great Britain. billion tonne km Year Rail Road 1975 21 92 1995 13 150 2000 18 159 2005 22 163 2010 19 151 2014 22 136 Source: TSGB 2014

Rail freight traffic 2014/5 b tonne km Coal 6.50 Metals 1.82 Construction 3.93 Oil 1.21 International 0.60 Domestic intermodal 6.49 Other 1.67 Total 22.21

Was freight privatisation a success? • Gave customers choice • Traffic growth- but entirely coal and containers. • Productivity of labour and rolling stock (doubling of mean train loads, big rise in labour productivity) • Re entering some markets – e.g. food for supermarkets, post

Conclusions • Reforms successful in boosting passenger and freight traffic, although not the main cause of the spectacular growth • Complete separation of infrastructure from operations problematic – alliances with main operators may be a solution • Franchising has not achieved the expected cost reductions, but reforming franchising more likely to achieve objectives than extension of open access. • Freight competition a limited success.

References • McNulty, Sir R (2011) Realising the potential of GB Rail: final independent report of the Rail Value for Money study. Department for Transport and Office of Rail Regulation, London. http://assets.dft.gov.uk/publications/report-of-the-rail-vfm- study/realising-the-potential-of- gb-rail.pdf • Smith, A S J, Nash C A and Wheat P (2009), Passenger rail franchising in Britain: has it been a success? International Journal of Transport Economics 36(1) 33-62. • Andrew Smith and Chris Nash (2014) Rail Efficiency: cost research and its implications for policy. Discussion paper, International Transport Forum • Y. Crozet et al (2014) Development of rail freight in Europe: What regulation can and cannot do CERRE Discussion Paper, Brussels