Why do so many railway projects cost so much?
The use of contractors and sub-contractors, rather than taking railway contracts in-house, is at the root of the problem, argues CHRISTIAN WOLMAR
ONE of the great mysteries of the current structure of the railways is: why does every piece of work, whether undertaken by train operators, Network Rail or the engineering companies, cost so much?
Network Rail quotes for schemes are sometimes a factor of ten more than might be expected, and even the most minor routine job seems to be far higher than comparable work in other industries.
Of course, some of this is down to the particularly difficult nature of the rail industry, with its requirement to keep running as much as possible and to maintain incredibly high standards of safety. However, I have always been convinced that outsourcing, with the use of contractors and numerous sub-contractors, is at the root of much of the high cost of railway contracts. Network Rail and the train operators have lost the ability to manage contracts and to bear down on costs.
I have written on numerous occasions about high-level major contracts going wrong and costing millions more than expected. My frequent rants on this subject have attracted a considerable mailbag from people working in the industry who are increasingly appalled by waste of public money.
My latest whistleblower, who has provided me with lots of accurate information in the past, reports from the other end of the scale - the routine maintenance and small repairs needed to keep the railway going. He is convinced that there is a series of scams which cost the railway dear, and which ultimately mean that passengers pay more for their tickets and taxpayers have to cough up more of their hard-earned cash to keep the railways going.
He is convinced that the train operator in the area where he works is being taken for a ride in several respects. The operator is responsible for station maintenance and obtains many of its supplies from a single contractor which, in turn, uses many sub-contractors.
The main contractor (let’s call them Number One) markets itself on the basis that it can get fantastic discounts from suppliers, sometimes up to a staggering 99%. However, these discounts are reductions from a price that never really existed or was only charged briefly.
For example, cable is charged at £17.32 per metre but wow… there is a 97% discount which means the price is only 52p per metre, plus an 8% handling charge. That’s very impressive, until one finds out that ordinary customers can buy the same cable at just 46 per metre. Offering such spurious discounts makes it easy to disguise the true cost of supplies.
It gets worse. Number One contractor actually buys a lot of material from a very big wholesaler - Number Two. Many of the prices are marked up by Number Two when they supply Number One, which ultimately enables both to benefit from overcharging the train operator.
So, an item that costs £200 on its list would normally be supplied at a discount to a large purchaser - say 25%, making it £150. Number One’s 8% handling charge brings what it should be charging for the item up to £162. However, Number Two inflates the price to £272 plus 8%, making £293.75 (which amounts
“Whereas an in-house operation such as BR would have ready access to supplies, now every requirement has to involve going to a wholesaler.”
to 80% more than should be paid).
How does Number One benefit from this? At the end of the year, Number Two provides a refund bonus to its clients of about half the extra it takes from them.
The practice of buying supplies and services at inflated prices, by the way, is almost as old as the railways. In The Great Railway Revolution, my book on the history of the American railroads, I explain how the directors of the Union Pacific (one of the two companies building the first transcontinental) set up a construction company (Crédit Mobilier) to carry out the work at inflated prices, leaving its excessive profits to be shared between the directors.
My informant also enlightened me on a particularly perverse way that VAT works. Apparently, doing work in-house is subject to VAT while contracting is VAT-deductible, and therefore (on the face of it) cheaper. Yet using contractors often turns out to be more expensive, because of lack of supervision and the incentive to make jobs take as long as possible. As an example, it costs £100 to replace a tap washer, and no job ever costs less than that.
Moreover, whereas an in-house operation such as BR would have ready access to supplies, now every requirement has to involve going to a wholesaler, which my informant says “results in more chargeable time”. There are also safety implications, with contractors often unaware of the difference between a signal or a mains cabinet, and forcing the former open with possible dangerous consequences.
I have omitted specific details of these cases, but I have copies of some of these invoices and my contact is happy to provide them to any official source prepared to investigate. He says he has alerted the train operator through its confidential call centre (which is overseas), but the company has taken no interest in his revelations.
Such practices add up to millions of pounds of extra spending in his area, and across the network amount to tens or even hundreds of millions. It is clear that the railway lost its ability to manage costs at privatisation, and the Office of Rail and Road often refers to the inefficiencies in the system.
However, because the industry is so fragmented and outsourcing so entrenched, little is done to address this issue. It is time that this changes. And to all of you in the industry who read this column, keep the information flowing to me - confidentiality guaranteed.