2019 Williams: Delayed. Expected: 2021 (hopefully)
In 1836, a young Charles Dickens made his name with the publication of his first novel, Pickwick Papers. Only a short instalment was initially published, leaving readers gagging to know what happened next. It was a wildly successful strategy, and Dickens became an overnight success.
The DfT seems to be taking the same approach to the Williams Review.
Having announced some initial principles back in July 2019, we’re all now gagging for chapter two.
I assume it must be deliberate, as for a study into the problems of railways to be running two years’ late is, otherwise, too great a gift to headline-writers (such as, for the moment, myself).
What is wrong
Before solving a problem, it’s worth being clear what the problem is.
In this context, I remember sitting in DB’s gargantuan head office tower in Berlin with a senior team from the German state railway. They were showing us their internal customer satisfaction surveys, which showed how the Germans thought the DB service was woeful (and so much worse than the British).
The reality is that the grass on the other side is always greener, but objective research from the EU (when we were lucky enough to be part of such things) showed high levels of customer satisfaction with British rail services.
The only areas in which British trains were in the bottom half of the table were provision of Wifi and availability of seats.
At an overall level, Britain was 6th - ahead of every other big country.
The “Bahn Tower”, DB’s massive Berlin HQ. The grass is greener from up here…
So, what is wrong? Well, costs are out of control and the British system results in infuriating niggles (especially in fares) that create a disproportionate reputational hit. Punctuality has been falling in recent years and timetable changes have been chaotic.
Costs: the problem starts at the centre
I’ve written previously about infrastructure costs, but they are not the only reason for out of control costs in rail. The other is that the DfT has found a way of printing free money. The DfT’s own version of Quantitative Easing is the franchise specification, the process in which the DfT defines what it wants from private contractors.
This process seems remarkably free from cost control. I suspect the problem is that it is impossible to quantify what the specification is asking for in financial terms without the bids coming in, but by the time the bids are in, it is too late to change the specification.
Certainly, I remember from my time in rail how easy it seemed to be to get something written into a franchise agreement that then became binding, and locked in cost for the next seven years.
This has been made harder by DfT not approaching the task with a clear idea of what it was they were seeking as outcomes. The specification for, as an example, the London Overground was extremely clear what outcomes were required. Whereas with DfT franchises, the DfT asks the bidders to offer their own combinations of apples and pears that they think appropriate for the franchise.
I remember a very senior person telling me - after their owning group had won a franchise bid with a big new train order - that the DfT had told them afterwards that “we had no idea that we’d get new trains.”
The bidder had worked out that chucking away perfectly decent trains and replacing them with brand new trains would nudge their quality score into a winning position, even though they weren’t the cheapest bidder.
Now, obviously, if the DfT wants new trains, it must have new trains (and the taxpayer will be happy to cough up for them). But DfT didn’t ask for new trains. It asked for a Quality score, and found it bought new trains by accident. It may be that consumers would have got the same ‘quality’ improvement from being given a free biscuit, but the Quality measure wouldn’t have known how to appraise them.
The franchise specification is now so detailed that effective cost control is impossible. DfT franchise managers specify weighted bundles of outcomes that can only result in high-cost bids. By the time the bids come in, even the cheapest bid is still expensive. As DfT becomes contractually obliged to buy the outcomes it asked for, it means the cost of the railway will continue to rise.
Is Fragmentation really the issue?
The other issues I described above (the fares niggles, the timetable chaos) are frequently seen as the consequence of fragmentation.
Maybe that’s right.
But (and perhaps I’m just being contrarian), I’d like to have a go at challenging that view.
I know Switzerland is a cliche but it is one of the best networks on earth, so worth looking at carefully.
And it consists of 74 different operators (some public, some private), with funding decisions made by 26 separate cantons. Despite this, the Swiss railway is integrated and successful. Indeed, the multiplicity of actors may, in a Swiss context, inspire benchmarking and improvement.
The last time I was in Switzerland, my train was running late and I was in danger of missing my connection. I spoke to the train manager, and the train I was connecting onto was held until I arrived. This despite the fact that the two trains were run by completely different companies.
It is perfectly possible to achieve successful delivery in a fragmented environment, if the incentives are there. Heathrow Airport is delivered by 400 separate companies serving 90 separate airlines.
Obviously, I’m not saying fragmentation is a good thing for its own sake: just that solving fragmentation won’t necessarily solve the problems in the British railway.
The niggles in the British system aren’t caused by fragmentation: they’re caused by incentives.
Who cares?
In Switzerland, each railway is incentivised to care about the customer. In their system, this is achieved by each railway having contracts with the Government (national or local; railways are contracted both by the centre and by the Cantons) to increase revenue while reducing costs. But they have operational independence on how to achieve it.
Is there time to find one more passenger?
By contrast, in the British system, franchisees often have vast matrices of franchise obligations. These obligations are hyper-detailed as they are, basically, a list of everything that was in the winning franchise bid - and the winning franchise bid was so long it had to be delivered by lorry.
Each train company will have a person (or more) who’s full-time job is to ensure that the relevant manager discharges a franchise obligation on time. An obligation may be to achieve a certain timetable change by a certain date. Or to improve a certain waiting room. Or to refurbish a certain class of train.
These obligations are sacrosanct as, if the train company fails to achieve them, they are in breach of contract. So a lot of management time and effort is put into compliance.
Now you may read this and think “Jolly good!”. After all, who isn’t in favour of timetable improvements, painted waiting rooms and new seat covers? But the problem is that these are not necessarily the things that customers most want now. They are the things that were written by a bid team writer (normally a consultant who would not go onto work on the railway in question) as something that would sound like something customers want to a bid marker, who themselves has no connection with the railway in question. In the fifth year of the franchise, the bid was marked six years ago and written seven years ago.
It maybe that the customer does want these things, of course.
But the reason the things are happening is not to achieve any customer benefit but to tick a box. (Quite literally. I have frequently gone into the relevant spreadsheet and ticked the box)
In the Swiss system, all a manager knows is that they always have to do more with less. That means constantly working on ways of delighting more customers so as to bring in more income with less expenditure. Swiss railway stations have become shopping centres because of the rental yields while Swiss trains have playgrounds (with slides!) because it makes families more likely to travel. Both are good ways of getting more with less.
A slide. On a train. Not sure if my kids loved this more, or I did.
In the British system, an innovative bid manager might write into a franchise bid that they would arrange for x number of trains to be fitted with y number of slides. In which case, it would happen (unless the obligation was traded with DfT at a later date). But it would happen because it was in the bid; implemented as a project, and then forgotten. Not because it was to be leveraged to get more families onto trains. In Switerzland, the slides are part of a fully-integrated package for families designed to get families onto trains.
This is important as, in Switzerland, slides on trains makes the railway more profitable. But in the UK, an identical project delivered as a tickbox would simply be a cost.
(Now, before every railway manager in Britain rises up in fury and shouts how much they care, let me just explain that I know that the system is packed full of individual humans who care and who try to achieve good outcomes for customers. What I mean is that the incentives of the system are to care about the pre-defined obligations as opposed to care about customers overall).
Vicious circle
This ties into the first point - that DfT specifies more and more, which creates inflated costs. :
This is the vicious circle we’ve now reached:
1) DfT realises that train company outcomes aren’t designed around customers
2) DfT feels the need to specify more and more detail
3) Franchise bids become more complex and risky
4) Train companies refused to take on the risk of the complexity
4) So DfT forced to take on more revenue risk
5) Train companies, isolated from revenue, no longer incentivised to care about customers
[GO GACK TO (1)]
It is this cycle looping for the last 15 years that’s got us to a point where:
1) Private bidders won’t bid, so all the risk sits with Government
2) Customers are frustrated and feel ignored
3) Costs are out of control
It is also why the fundamentals are still largely good. Targets around punctuality, safety and frequency are relatively easy to write; which is why the British system is good at delivering these things. It’s much less good at delivering the nuance that says, “if a train is near to the end of its journey and almost empty, it’s a good idea to hold it at a junction for another train with connecting passengers even if that causes both trains to end up late”.
Higher cost bids
The other spin-out from the whizzing of the vicious circle above is that all bids become more and more expensive.
If you’re going to be tied into a dense web of contractual obligations to be delivered regardless of circumstances, you’re going to find operating rail services unattractive.
Covid is obviously exceptional but there are lots of circumstances in which things change. Most businesses have flexibility to adapt. But rail franchises are tied to commitments made years earlier on the basis of incomplete information.
No wonder that private companies make up a smaller and smaller proportion of the rail network, with only state-owned companies willing to shoulder the risk. One of the biggest popular errors is that train company profits are too high: the reality is that they’re almost non-existent. The costs of the railway are too high; but it’s not leaching out into operator profits.
When I joined National Express in 2002, it was the largest rail operator in the UK with nine franchises, employing around 25,000 people. Shortly after it lost its final franchise, it was calculated that, probably, NX would probably have been better off not running a single train. That’s a huge amount of effort for no return!
But if most bidders don’t want to bid, the remaining offers are expensive.
Tragedy of the Commons
One of the reasons fragmentation is often seen as a major issue is that many of the niggles that impact on customers are ‘cross-border’ issues. For example, issues of fares and ticketing.
But this is, again, about incentives. In Switzerland, the 74 public and private railways have a fully-functioning, integrated system that avoids these issues as it is in everyone’s interests to make it work.
One of my abiding memories of my time in rail is sitting in the Commercial Board of RDG. This was the various commercial representatives of the owning groups. Time after time, it would be impossible to agree something that would benefit both customers and the industry’s finances.
The reason is that there was always a blocking minority of owning groups for whom it simply wasn’t in their commercial interests to improve the finances of the railway.
Don’t forget, in Switzerland, everyone’s been given a very simple contract: “Make more revenue at less cost". In such an environment, everyone wants to do things that make customers more likely to transact. Whereas in the British system, there are companies operating on cost-plus contracts, companies operating on no revenue risk contracts, companies at franchise end and customers in various cap and collar arrangements: all of which mean that investing owning group cash in, for example, improved railcard retailing makes so commercial sense right now.
The trouble is that right now was forever - as there was always a majority in that position; even if not the same majority.
What are the answers?
There’s general agreement that DfT has got far too close to the operational detail. In his principles, Williams says that “the Government will have to step back from the railway”.
That’s absolutely right. Franchise specifications should not be being written by DfT.
However, as we discuss tomorrow, it’s absolutely essential that the system that replaces the current one creates incentives to care about customers.
However, fewer targets with the incentives we’ve ended up with will simply mean fewer boxes to tick but no more care for customers.
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