Christian Wolmar
Outsourcing ‘supertanker’.
SOMETIMES I could do with a twice-weekly column to cover the rail industry properly, rather than once every two weeks, and this is such a time. The East Coast bailout, the National Audit Office report into the Thameslink, Southern and Great Northern franchise, Labour party preparations for renationalising the railways and the Carillion chaos could all fill this column… and more.
But I will confine myself to the latter, with a passing reference to the East Coast, as it chimes with so much that I have covered in this column in recent months.
The immediate impact on the rail industry is severe. Contracts, such as renewals on the East Coast, have stopped instantly with workers simply being told to pick up their tools and go off into the sunset.
Secretary of State for Transport Chris Grayling glibly said that the work would be taken in-house, but this is by no means easy. As I mentioned in RAIL 844, Network Rail cannot cope with its workload at the moment, which explains its overuse of outsourcing. Therefore, taking on a huge amount of extra work is going to overtax the company further.
This should accelerate the process of Network Rail reassessing its way of conducting its business. On the benighted 12-mile Gospel Oak-Barking line, the electrification has necessitated an extra 11 weeks of closure after the initial five-month possession proved to be insufficient, because of a series of errors such as breaching of sewers and a failure to assess the scope of the scheme properly. The contract was award to J Murphy but involved the use of no fewer than 50 sub-contractors, which again highlights the outsourcing culture that is ultimately so inefficient.
Carillion’s collapse is part of a wider pattern. Over the past 30 years, there has been a fashion in the business world for outsourcing and contractualisation. Where once British Rail ran everything from canteens to coachworks, many tasks within the transport industry have now been handed over to outside firms. At times, this makes sense. Railway companies can no longer expect to do everything themselves - building coaches, for example, would be daft, even if there were just one single rail company.
However, there is no doubt that this process has gone too far. The fact that Network Rail is unable even to specify and scope most of its projects suggests that it has lost far too many skills because of this trend. Remember how, after Hatfield, Network Rail took back its maintenance in-house and this became national news? I remember doing a live broadcast for BBC’s Ten O’Clock News about it. However, renewals - defined as jobs bigger than a certain size - remained contracted out.
The East Coast bailout (and I insist on calling it that) is another aspect where outsourcing has failed. I must disagree with my esteemed editor (not for the first time) over this one. We are not au fait with details of the franchise agreement because they have not been released, but my reading is that if a private company takes the risk of paying huge premiums, then it should not be bailed out by the Government.
The issue is whether the difficulties for the train operator have been caused by the failure to deliver improvements, such as the power upgrade, other renewals on the line, and the new Hitachi trains. Both sides - Network Rail and Virgin/Stagecoach - have released their side of the story, and there is a big disparity between the two. Network Rail claims that there was no timescale for the work, while Virgin/Stagecoach are adamant that there was.
The key, however, is what risks were taken on by the operator and what is precisely in the contract. Oddly, the Government could clearly knock out the idea that this is a bailout by explaining so, but at a hearing of the Commons Transport Select Committee on January 22, Grayling did not enlighten us on that key point, and ducked the issue by saying there was no change in the nature of the contract so far.
It is a very strange affair, and again highlights the problems with franchising out the railway. I won’t repeat my well-rehearsed arguments, except to say that I do not buy into the argument that these poor companies - whether Carillion or Virgin/Stagecoach - were forced into overbidding because the nasty government was being so rapacious. These are private companies with long-established records who ought to know what they are doing. My heart does not bleed for them. Their business is to make profits on contracts, not to bid so low that they get into trouble if they win them.
In terms of outsourcing generally, the fundamental issue is over the definition of what is a company’s core task. While I don’t think that the Carillion story marks the end of
outsourcing, or even of PFI projects, it does mark a turning point. Turning round the general thrust of public policy which has explicitly favoured privatisation and outsourcing cannot be done overnight. However, just like turning round a supertanker, it has to start somewhere - this episode will be seen in years to come as the time when the policy began to be seriously questioned.
It is important for reasons that go well beyond the railway. When Virgin Trains outsources its cleaning services (as it does on both East and West Coast), it is contributing to the destabilisation of work patterns with farreaching consequences. If the cleaning staff worked for Virgin, they would feel a sense of loyalty towards the company. They might even consider trying for promotion to being a guard or even a driver. Moreover, Virgin would have a sense of responsibility towards them. However, if they are simply contract workers, they owe no particular loyalty to Virgin, and vice-versa.
I have no doubt that cleaning should be regarded as a core task. So should catering. They are both part of the customer-facing aspect of the business, and therefore should not be contracted out. Failings by those staff reflect on the image of the company. Nobody will think that a dirty train is down to whoever has the cleaning contract. They will blame Virgin, so it should retain that work.
There is another aspect, too. Outsourcing is generally seen as saving money for the company handing over the work, but this is not necessarily the case. It may save some HR and administrative costs, but it hands over a key aspect of the company to a private concern over which it has no control, resulting in other expenses (such as relating to legal and compliance).
Ultimately, academic studies of contracting out reveal that there is no clear case for doing so. In a well-timed publication, the Smith Institute released a pamphlet on January 22 entitled Out of Contract, time to move on from the ‘love in’ with outsourcing and PFI, in which it suggests that it’s time to examine every PFI and outsourcing contract to see if they offer value for money.
Astonishingly, the authors discovered that there is no clear evidence one way or the other as to whether the policy has been successful and saved money for the Government. That should make Network Rail and the Department for Transport think twice before automatically calling on the private sector to carry out work.
“These are private companies with long-established records who ought to know what they are doing. My heart does not bleed for them. Their business is to make profits on contracts, not to bid so low that they get into trouble if they win them.”