High costs… and consequences

I hesitate to return to the vexed subject of the industry’s cost base, for a number of reasons. But I feel I need to do so even if some will find it uncomfortable reading.

Firstly, it is commonly considered nowadays within the industry that there is far more upside potential to balancing the books through revenue growth than by bearing down on the cost base, given the very poor outcomes of recent efforts to do just this.

I don’t disagree with this assessment, but I strongly believe that growing our way out of this crisis is a necessary but insufficient strategy.

Secondly, pretty much everyone in the industry - including almost every separate organisation I can think of, with the notable exception of the Office of Rail and Road (ORR) - has been badly scarred by the series of efforts made since the pandemic to reduce costs within the industry.

Even those businesses who successfully managed to reach pay deals with their staff have suffered from loss of access to infrastructure during the lengthy series of strikes by Network Rail staff.

Rolling stock companies have suffered from a glut of units (and even locomotives) being prematurely taken off-lease in early to mid-life.

The whole infrastructure supply industry is now suffering from the slowdown in renewals activity and the chronic uncertainty in enhancements.

The Rail Delivery Group is on extended life support, the future of Rail Partners is uncertain, Transport Focus is being stymied by lack of funding for its rail research, and the Great British Railways Transition Team feels like a baby condemned to wearing nappies forever.

The train operating companies (TOCs), which have been prevented from reaching settlements with their staff, have the dual horror show of extended micro-management by civil servants.

Even the Department for Transport is not immune from the chaos, as the shenanigans over the curtailment of HS2 last autumn demonstrated just how bereft it is of any real clout in government.

Thirdly, every significant recent attempt to trim the cost base has ended in a shambles that succeeded only in setting the cause of cost control backwards by some years.

The prospect of making meaningful inroads into productivity among train crew, for example, or in ticket offices, has receded significantly owing to the botched way in which proposals for reform have been developed and handled for England nationally.

It would be good if we could see an easing-off of upwards pressures on the cost base, but sadly (energy excepted) this does not appear to be the case.

Uncertainty of forward workload among suppliers contributes significantly to rising unit costs. And we must remember that despite looming energy price reductions, the price of diesel and electric traction currently sits well above historic levels.

Network Rail engineers upgrade a level crossing at Wokingham in February, as part of the Feltham and Wokingham Area Resignalling project. NETWORK RAIL.

Unit cost problem

Depressingly, much of the DfT’s focus on cost reduction has been to reduce the level of activity. In effect, this reduces the variable cost of decremental levels of activity without tackling the level of fixed costs or the absolute level of each element of variable cost.

This was inevitable in the immediate aftermath of lockdown and the much lower levels of commuting and business traffic seen during that period. But the time for cutting the volume of vehicle miles run has long since passed.

Stand back, though, from the day to day cut and thrust of running the railway and consider for a moment the implications for infrastructure of the current financial position.

Rising unit costs, coupled with a fixed funding settlement for Control Period 7 (CP7) at levels insufficient to maintain assets in steady state condition, or to renew at a rate to keep pace with the ageing of those assets, is a recipe for gradual decline in asset reliability.

Add to this the need to divert parts of the funds originally earmarked for track renewals, in order to spend significantly more on drainage and embankment/cutting stabilisation because of the wetter and more severe weather we have been experiencing of late, and the stage is set for ever-decreasing performance.

This is happening despite, by any dispassionate analysis, the large amounts of money allocated to maintenance and renewals year by year.

We have reached the point where the gradual escalation in unit costs for infrastructure is starting to make the railway unaffordable - to this government at least, and quite probably the next one, too.

The recently completed Feltham and Wokingham Area Resignalling project is stated by Network Rail to have cost £375 million for around 80 miles of double-track railway.

At close to £5m per railway mile, this delivers virtually no additional benefits to users and is small beer in cost savings. It is simply the cost of keeping the railway operational some 40 years after it was last resignalled.

That’s an annual charge of around £120,000 per rail mile just to pay for the cost of installing signalling controls, never mind their operation and maintenance. Even on an important commuter route you need to sell a lot of season tickets just to pay for this element of essential railway infrastructure.

Elsewhere, two new platforms and a freight loop to be installed at Darlington are set to cost almost £100m, even before construction work has started.

A single new platform at Bradford’s Forster Square station (including presumably the track and connections to service it) has just been authorised at £24m.

Replacing two lifts at Bolton station is going to cost over £570,000.

It’s worth remembering that £570,000 is more than enough at current costs to construct and fit out a five-bedroom detached house (assuming you already own the land, that is). But it now costs a similar amount of money simply to replace two existing lifts within existing lift shafts within an off-track environment not requiring costly possessions or (hopefully) isolations.

Tim Shoveller, CEO of Freightliner’s owner Genesee & Wyoming, reminded us recently (and very eloquently) about how complacent the industry has become over the costs of doing anything.

A new road truck tractor unit, including a full cab fit-out, now costs around £100,000. You can buy an articulated trailer to go with it for £10,000. So just £110,000 and a few days for delivery gets you going as an owner-driver in the road haulage industry. What does £110,000 buy you on the railway these days?

What have been the main drivers of unit cost escalation over the past 20 years?

It’s surprisingly difficult to get at any real data or analysis.

There’s lots of talk of efficiency and value for money in regulatory documents for each Control Period review, and press releases are full of the latest initiative designed to improve either or both of these.

But there’s precious little that shows how much it costs to perform various of the core tasks involved in maintaining and renewing the railway over time, with the impact of inflation stripped out.

I have therefore made my own high-level calculations of NR’s costs based on data published on the ORR data portal, which dates back to April 2010, and adjusting for inflation using the Office for National Statistics official inflation indices.

In 2010-11, operating and maintenance costs plus the annualised capex charge for renewal costs totalled £4.2 billion. At 2022-23 values, that is £6.9bn.

In 2013-14, the same costs totaled £4.7bn, which has an identical current value of £6.9bn after allowing for inflation. So, no significant change in the amount being spent on the railway in those four years.

Yet in 2022-23, NR spent £8.8bn on these three items - some £1.9bn more in real terms than was being spent nine years earlier.

With the obvious exception of Okehampton, the network was broadly the same size then as it is now, but presumably the average age of the assets has increased by a few years in the intervening period.

Much intellectual effort on the part of both ORR and NR is put into determining the exact volume of maintenance and renewals required to sustain the asset base in each CP, but I think there is common consent that the determinations for at least CP6 and CP7 have been insufficient to maintain assets at steady state overall, and the average age of assets has probably increased by four or five years over the past 13 years. I say ‘probably’ because it seems impossible to get at accurate average age data anywhere in the public domain.

I know I’m making some broad-brush assumptions along the way here, but please bear with me for just one more of these.

Given that the level of activity on the network is broadly the same now as it was back in 2010-11, but the total cost has increased in real terms by £1.9bn on a base of £6.9bn, we are looking at a net increase in unit costs of almost 28% over that time period.

Given that there have undoubtedly been some efficiencies delivered over that time period (think remote monitoring, digital inspection, reduced operational costs from resignalling schemes) this implies that in other areas the deterioration in unit costs has been greater than 28%.

Drivers of inefficiencies

What has driven this extraordinary trend towards inefficiency?

A simple question you might think, but one where it is amazingly hard to find any solid data with which to answer it. My speculation can be no better than any other seasoned and independent observer, but here goes.

First on my list would be the flight away from red zone working. While there are undoubtedly risks to be managed before allowing track workers to work on the line while trains are running, it is much cheaper to plan and execute work and to deliver it in a timely manner if it doesn’t have to be done during planned periods of no trains running.

Before I get lambasted here, I’m absolutely not arguing for a return to the old order, where track workers were not protected as well as they are today. But I do recall from my decades on the track that it is possible to work in safety on the track while trains are running if staff follow the rules diligently.

There must be a compromise somewhere that produces a safe working environment without the need to eliminate rail movements altogether.

In this regard, the loss of adjacent line operation has been particularly expensive in terms of the level and cost of disruption involved in carrying out basic track inspection and maintenance tasks.

My second cost driver has been the culture of risk aversion, which grew up in the early years of NR’s life.

It became much easier to just follow the standards, because it became extremely difficult and time-consuming to seek to persuade those in authority that a derogation from standards was both possible and appropriate.

I also sense that the change in treatment of the old NR zones from profit centres to cost centres, and the accompanying drift towards centralised decision-making by command and control from the centre, also contributed towards poorer-quality decision-making and less concern about value for money.

It also resulted in a bigger superstructure of people paid large salaries in HQ roles, all adding to overheads.

Fighting back

Much has been written in the past about this rise of risk aversion within NR - the unwillingness to challenge standards, and the extended project timescales with attendant project on-costs we have become used to.

But under the current leadership team we have seen a serious attempt to row back on this: through devolution to get more decisions made closer to the coalface, through rationalisation of senior management roles, through Project SPEED and other initiatives, as well as project teams being empowered that it’s OK to challenge standards where they appear inappropriate or are driving unreasonable costs.

We are starting to see some early signs of success with this change of culture, and I have seen several excellent projects entered in recent National Rail Awards competitions.

Examples such as the Flow footbridge and reduced electrification clearances show that it is possible to challenge the status quo and to reduce the cost of projects on the infrastructure.

But it is a super-tanker that NR Chief Executive Andrew Haines and his senior team are trying to turn around here. They may not be able to do much about construction cost inflation, but the way that the supply chain is managed, and how renewals and enhancement projects are developed and delivered, will significantly affect total project costs.

Unfortunately, rumours abound of continuing pressure from ORR to further ratchet up the approach to safety management, which of course comes at a cost which someone has to bear.

It’s not as if the industry as a whole is conspiring to cut corners on safety, so pressure to move further than the accepted principle of ALARP (As Low As Reasonably Practicable) risks further driving up costs.

In NR’s case, this means even fewer funds will be available for maintenance and renewals, because of the fixed nature of revenue over the duration of the five-year Control Period.

It’s not only infrastructure

Tim Shoveller has also been quoted recently as saying that our railway lives in a bubble.

By way of example, he says that Freightliner pays its truck drivers roughly the same as a railway company pays its shunters, and expects a 50-hour week from them for this amount. There is no shortage of applicants and productivity is high.

He also observed somewhat wryly that track access costs are rising annually in line with inflation, while road fuel duty has been frozen yet again for the 12th consecutive year.

Rail freight operates in a very competitive and agile market, and this has affected the way that operators have to pay and utilise their staff.

All rail operating businesses which survive only through their revenue from customers have managed to reach pay settlements with their staff. Many have also driven significant productivity growth by adapting terms and conditions of employment over time.

GB Railfreight is probably the best example of this in the UK, as its train managers (as its drivers are called) are deployed extremely flexibly and can turn their hand to whatever task is required of them. GBRf has grown from running its first trains in 2002 to become the biggest freight operator (by train miles) during the most recent reporting quarter.

Likewise, open access operators have been able to agree pay and productivity deals with their staff in recent years which have enabled them to survive and thrive through some pretty lean years.

Those franchises and concessions which are not let and managed by the DfT have all managed to reach pay deals with their staff over the past year or two. It is the DfT franchises where there remains a huge problem with pay and productivity.

And here I hesitate because I know what I want to say will upset many people. But I do feel that the following three things need to be said.

It is obvious to all that the approach to pay deals with TOC staff since the pandemic has been extremely badly handled. It is indefensible that in some TOCs, train drivers have not had any pay increase now for nearly five years. But the unwillingness among trade union leaders and their members to countenance productivity deals to fund improvements in pay is not simply a post-pandemic feature, but one that has existed for many years.

I’m not defending the government’s approach to the current pay negotiations - far from it. But it is possible to sense the palpable frustration within government that the industry has not itself been able to tackle what is seen as a high wage low productivity environment.

Against such a background, the current government, which is not in the least favourable to rail, has simply decided to draw a line in the sand over pay. And it has subsequently stuck to its guns, no matter the consequences within the railway industry.

It is entirely possible that a future Labour government, faced with the same financial pressures that the existing one has, will continue to take a similar line on pay and productivity within the railways.

I imagine that sorting out the NHS, social care and defence will seem quite a lot more important to it, and thus will take the lion’s share of any available additional funding.

There is an acute sense of entitlement within the TOC and NR worlds which is proving a very hard nut to crack.

I do understand the unions’ starting position on this. Current terms and conditions have been hard fought for over the generations and aren’t going to be given up easily. And pay has lagged behind inflation in the years since the pandemic.

Yet it is also undoubtedly true that the key roles in the railway industry are well paid by comparison with other sectors, yet productivity often lags badly. Rostering and diagramming practices among traincrew is an area ripe for modernisation in most TOCs.

Average bus driver basic salary in London is currently £33,000 for a 38-hour week. This compares with the average basic salary for a train driver in London of £64,000, mostly for a 35-hour week (Source: Glass Door).

The following statement will cause apoplexy among my train driver friends, but in my opinion driving a double-decker bus in London is a much tougher job than driving a train on the main line railway. The employment packages and working environments for bus driving are also much less attractive.

Yet on the whole, London bus operators continue to be able to recruit and retain staff. There also continues to be no shortage of applicants for train driver roles when they are advertised, despite the lengthy training periods before qualification currently seen.

The conclusion I draw from this is that flexibility of deployment of staff within the TOCs is the big opportunity. Let’s not try to reduce the staff remuneration, but instead make sure that those highly trained individuals are earning their keep much more of the time than they are currently.

After Ashington…

I suspect that the Ashington line will be the last one to receive funding for reopening in the foreseeable future.

Our railways have simply become unaffordable as far as policy makers are concerned, and the current government’s response to the post-pandemic waves of strikes shows that railways outside London are no longer considered essential to the fabric of the community.

Yes, we obviously need to continue the drive to grow revenue in order to reduce the net cost of the railway. But the need to reduce costs by driving productivity and efficiency through many aspects of the industry is paramount if the trust of government is to be recovered.

And I believe this conclusion will hold good for the next government to be formed, too, no matter what its political makeup turns out to be.