Advancing economics in business

May 2021

‘Great’ British Railways? ‘Great’ British Railways?

capable of taking on significant revenue risk, work here. But arguably one of the failures Contact at least over the short to medium term, is the of rail in over the past decade Katie-Lee English government. or so has been the increasing politicisation Senior Consultant of decision-making, and accompanying The proposed concession model should central government control—and so it is be a positive step for aspects of private- worth striving for independence. sector competition in this market. Bidders for franchises have dwindled year on year Conversely, significant budgetary as more and more companies have been uncertainty means that decisions need deterred by the risk/reward balance that they to be made by those with a mandate to offered. Concessions may offer low reward spend taxpayers’ money—politicians. On 20 May, the UK government (in terms of profit margins), but they are also The only other solutions are GBR using published the Williams–Shapps Plan much lower-risk (in general), making them revenue, or cost levers, and the Plan for Rail, which proposes the creation appealing to a much larger pool of potential suggests neither fare increases nor of a new rail body, ‘Great British bidders. slashing services. And let’s not forget that Railways’. Katie-Lee English, Oxera this formerly ‘independent’ review now Senior Consultant and former Head It is, however, worth holding on to the best bears the name of the current Secretary of of Rail at HM Treasury, offers some bits of the old model. Franchisees knew State… initial thoughts on the proposals in the their patch well, and there was no one Report. better placed to identify new opportunities What about the workforce? Some of the to grow the market. Rail is a largely fixed- most talented leaders in this sector may cost operation, so a marginal fare is close not be keen to operate in an environment At long last! People in Great Britain can to marginal profit. Maximising capacity where commercial decision-making is celebrate the publication of the eagerly utilisation is therefore core to increasing replaced by following a contract specified anticipated Williams (ahem, ‘Williams– the sustainability of industry finances. The by government. Shapps’) Review after nearly three years in challenge for government is to design the making. Passenger Service Contract incentives And finally, is this good for freight? cleverly so as to capture this innovation. Integration between track and train does And of course, this is now not just another Indeed, the Plan suggests that ‘revenue not bode well for private-sector freight rail Review to add to the mounting pile— incentives will be built into contracts to operators, which need flexible access this one is a Plan. So the question is: is it a grow passenger numbers, foster a culture to the network across many Network good one? of innovation and introduce efficiencies that Rail routes. However, the pandemic deliver real benefits for passengers’. This has demonstrated that there is pent-up The Plan sets out a vision for a single certainly sounds like what is needed, but demand for rail freight, and a will to use entity—‘’ (GBR)— designing a contract that delivers on it won’t the network more intensively, with longer that would run GB rail. The entity would be easy. For example, while the government trains, as passenger services have been subsume and vast swathes takes on revenue risk, it will find it difficult reduced and have freed up capacity. One of the Department for ’s rail to resist fares-setting—but it surely cannot hopes that GBR may facilitate a greater functions, as well as operational elements want to take operational control of yield voice for freight in industry strategy of the .1 The new body management on long-distance services. formation, but we’ll have to wait and see would then let concessions (‘Passenger Balancing the strength of the incentives to how this particular matter will pan out. Service Contracts’) to the private sector grow volumes with not passing on volume to operate parts of the network, with risk to the private operator will also not be Is the writing on the wall? timetables, fares and most other aspects straightforward. of the specification dictated by GBR or The sector needs a kick-start, and devolved bodies. The governance model maybe this is it. If passengers don’t flock back to rail, and quickly, the sector will Two aspects are worth looking at in more This is perhaps more of a leap of faith. GBR fast become financially unsustainable, detail from an initial review: first, the new will be an enormous organisation with a and will need the industry to set a new commercial model for private operations; vast scope of work. Network Rail, which will purpose that isn’t focused on bringing and second, the structure and governance become part of the new body, is already millions of people into and out of offices of the sector. one of the largest employers in the country. in city centres. Part of that purpose will Can such an organisation be expected to undoubtedly include the key role that The new commercial model deliver ‘someone in charge’, as promised in rail can play in the UK’s decarbonisation the Plan? The evidence is not particularly agenda—but only if people or freight can Let’s face it: what is the alternative right supportive. The , be encouraged off the road and onto the now? Asking franchisees to take on for example, currently has three separate trains. revenue risk under the old model was Director Generals to cover its rail remit. always a tall ask. It did wonders for their If it’s too hard for one person to cover the The promises of trains that run on time, motivation to drive revenue and reduce government’s rail role in a team of hundreds, better information during disruption, and costs (of delivering what was specified how feasible is this task when it is scaled up simpler tickets sound great for passengers, in contracts)—but, at the end of the day, to tens of thousands? but how the Plan’s organisational and these thinly capitalised entities were poorly commercial changes translate into these placed to absorb the downside risk (not The Plan envisages GBR as being distinct real-world impacts remains to be seen. to mention the incentives to over-bid that from Central Government, and free from are inherent in the auction model).2 And political interference. Is this realistic, and is it But at least the big questions are sorted. that meant franchise failures. Add to this desirable? The budgetary requirements for 2 will be the new industry a pandemic that has seen rail demand the sector have never been more uncertain, . collapse, and which has created untold and so the traditional quango model of uncertainty for the future of passenger ‘here’s your budget, use your commercial demand growth. Suddenly, the only entity freedom to maximise outcomes’ is unlikely to

May 2021 1 ‘Great’ British Railways?

Contact [email protected] Katie-Lee English

1 The Rail Delivery Group is the industry body comprising all passenger and rail freight companies, as well as Network Rail and HS2.

2 Oxera (2012), ‘Sold to the slyest bidder: optimism bias, strategy and overbidding’, Agenda, September, https://bit.ly/3u1IdKU.

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