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

Rail (UK) - - Opinion -

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.


Track work­ers near Ashchurch for Tewkes­bury on Septem­ber 1 2013. Chris­tian Wol­mar be­lieves too much Net­work Rail work is con­tracted out.

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