Mark Carne exclusive

Rail nationalisation moves a step closer, but does Treasury already have its hands on the “railway joystick”?

In 2014 Network Rail’s borrowing was reclassified from the private sector to the public sector, becoming part of the national debt. Are there lessons for the passenger railway today?

Mark Carne was Chief Executive of Network Rail when it happened.

“The Transport Secretary, Patrick McLoughlin, told everyone it was a purely statistical change, and it would make no difference to the way Network Rail was run,” he said.

“We were naïve to believe that. It was profoundly different. The five-year Control Period defines the money you’re allowed for maintenance and renewals. That bit was fine. The bit that really was not fine was the enhancements programme.

“Network Rail had submitted a very ambitious programme, but none of the costs for those projects were at all mature. We all knew - everybody, including government, knew - that these costs were going to change significantly. The Regulator put in place a mechanism for us to borrow more money if the costs turned out to be different from our back-of-the-envelope estimates. But as soon as we were reclassified as a public company, the Treasury said: ‘Oh no you don’t. You’ve got a set amount of money, and no more’.

“That fundamentally changed the game. It led to so many of the public relations nightmares that followed. We were forever being told we had overspent, that we had blown the budget, that we were incompetent. When in fact we were just going through the process of developing projects and firming them up.

“The DfT was then faced with having to cut projects it previously wanted, because the money had gone. That led to the embarrassment of pausing the Midland Main Line upgrade and other projects in 2015. It led to the sacking of Richard Parry-Jones, chairman of Network Rail.”

Carne acknowledges there was also a positive side to being classified as a public body. NR could no longer enter a funding period with multi-billion-pound projects for which detailed budgets had not been prepared: “The whole process of capital discipline on the railway needed significant reform. Reclassification shone a light on that.

“The train operating companies, freight companies, leasing companies and Network Rail should identify the best enhancement projects. They should then present a shopping list to government, ranked in economic impact order, and then government can decide which projects they want to fund.

“You should remove politicians from the detail of the project ranking. Let the industry do that. Then it’s for the politicians to decide how much public money to spend and where. That’s how normal business operates: you see how much money you’ve got, and you pick the ideas you can afford.

The railway didn’t really operate that way.”

How does that relate to today’s issue for passenger trains?

“I had the DfT crawling all over things all the time,” says Carne.

“It was not always the bestinformed decision maker. This isn’t the same. The DfT already defines what train operators can and can’t do in enormous detail. The train operators are essentially nationalised, because they are just contracting bodies doing as they are told, delivering a highly specified agreement.

“The level of innovation is incredibly low. Will reclassification make a difference? In terms of operation, not much. But it will make a very big difference to the balance sheet of the railway. If the pension obligations and the rolling stock leasing charges all show on the Government’s balance sheet, that is billions and billions of pounds.

“I would argue the Treasury has its hands on the railway joystick already. The majority of franchises are operated by European stateowned entities. They have access to very cheap capital. They have very different incentives to normal commercial business. So they have out-competed the private sector, and largely wiped it out already. And making any changes once you’ve signed the franchise is notoriously difficult.

“If you want to innovate, and go back to the Department with a plan to change a service because doing so will make more money, then the DfT will say it wants a share of the extra profit. So the train operator sees no point in making the change. Or the DfT will not agree to the change because it’s outside the original paperwork.

“It worries me that unsuccessful bidders for the franchise will go to court for allowing different terms to the bid they lost. There are many cases of unsuccessful bidders taking the DfT to court. So you can’t innovate, and the bidding is dominated by state enterprises that have already squeezed out the private sector. The current crisis has demonstrated the fundamental weakness of the system.”

The 18-month emergency contracts from September would suggest the long-overdue Williams Review into the railway’s structure will either be postponed or buried. Given Carne’s benefit of experience and perspective, what should happen?

“It is anybody’s guess how this is going to pan out. The Government will have even more control of the railway than before, with no incentive to innovate. Where will the creativity and the drive for change be? The franchising system hasn’t been delivering it for years. It is not at all clear to me where it will come from in future. Fundamental reform is long overdue.”