On 20 May the Secretary for Transport, Grant Schapps, chose to launch the Government’s blueprint for the future structure of the rail system with a photo of himself posing alongside the Mallard (the world speed record holder for steam traction) at York Railway Museum. Nostalgia is certainly a prevalent theme in the rail sector at the moment and the names of some of the great railway companies from the past, such as the Great Western Railway (GWR) and the London and North Eastern Railway (LNER) have been resurrected by train operating companies. Mallard was, of course, a LNER locomotive and the LNER was one of the ‘Big Four’ railway companies of the inter-war years, which, as we shall see below, resulted from an earlier massive restructuring exercise. Whether it ultimately succeeds or fails, the Williams-Schapps plan (WS Plan) is set to become the latest watershed moment in the long rail history of the country which, as GM Trevelyan put it, gifted the railways to the world.
Background: a whistle-stop tour of railway restructuring
The ‘Big Four’
As noted above, The ‘Big Four’ resulted from the first major national restructuring and rationalization of the industry in the early 1920s, almost exactly a century since Parliamentary authorization had been obtained to build the Stockton and Darlington Railway; which many regard as the first railway in the modern sense of the term. The construction and operation of the railways thereafter was driven by private enterprise operating in a largely uncoordinated manner resulting in more than 100 companies and a very fragmented system before the amalgamation into the Big Four under the Railways Act 1921.
The creation of the Big Four was arguably a partial step towards nationalization in that, although the companies were private entities, they were created by statute pursuant to a strategic government plan. Full nationalization followed just 25 years later in the immediate wake of the Second World War under the Transport Act 1947. During the war, the railways had effectively been managed as a nationalized industry in any case and had been run into the ground due to the demands of wartime operating.
The railways were operated as a fully nationalized state-owned industry for the next four and a half decades under the auspices of the much-derided British Railways which was rebranded as British Rail (BR) in 1965. It is fashionable to ridicule BR as the archetypal state-owned leviathan synonymous with inefficiency, poor customer service, industrial strife, crumbling infrastructure, ancient dirty trains and stations, and terrible catering! Although, some commentators would argue that, at least in its latter years, much of this criticism is undeserved and the result of lazy caricaturing (for a more balanced analysis of British Rail, which focuses on the successes as well as the failures, see Terry Gourvish’s book, British Rail 1974–1997: From Integration to Privatisation (OUP, 2002).
The 1980s saw a radical programme of privatization under Margaret Thatcher’s administration. However, not even this most vehemently pro private sector administration was quite sure how to tackle BR due to its size, complexity, and vast number of moving parts (literally and metaphorically). Sectorization in the late 1980s constituted tentative steps towards securing this aim by dividing the industry into more manageable components. To this end a number of large passenger and freight sectors were created which (save for Network South East and Scotrail) corresponded with business sectors as opposed to geographic location.
From privatization to the Williams Review
John Major’s Tory administration of the early 1990s finally grasped the nettle and fully set about privatizing the industry under the Railways Act 1993. However, the sectorization approach was abandoned in favour of a model which has been a constant source of controversy and dissatisfaction in many quarters. The tracks and infrastructure were placed in the hands of a newly created state-owned company, Railtrack, which was placed at arm’s length from central government. Private train operating companies (TOCs) were then invited to bid for the right to run services on those tracks using rolling stock which had been acquired by leasing companies. The essence of that system has remained unchanged until the latest phase of developments although Railtrack was replaced with Network Rail at an early stage of the franchising era.
As I have already said in previous posts which have tackled this issue, the franchising system has been marred by failed franchises necessitating state intervention, increasingly complex fair structures, overcrowding, government tinkering with the system leading to diminished commercial freedom for TOCs, and the chaotic introduction of new timetables. Indeed, it was the latest of these timetabling fiascos in May 2018 which proved to be one of the main triggers for instigating the Williams Review.
The Williams Review was intended to feed into a White Paper to be published in the autumn of 2019 with reforms taking place from 2020. This schedule was upset by the onset of the Covid19 pandemic, however, as I noted in my previous post on this issue, the emergency necessitated unprecedented Government intervention in order to support the industry through lockdowns and travel restrictions. This brought forward the end of the franchising system under an ‘interim system’ whereby the Government absorbed much of the financial cost in return for gaining new controls in terms of the operation of services. For more detail on the interim measures and the Williams Review please see earlier post: 2020 Roundup.
Key Aspects of the Williams-Schapps Plan
There are a great many proposals set out in the paper and I do not propose to cover them all here and now. For present purposes I shall merely offer an overview and some initial thoughts on some of the key proposals. However, as the legislative process gets underway certain issues shall doubtless come to the fore and I may well be returning to aspects of the plan in due course in more focused posts.
Great British Railways
The headline proposal seized upon by most of the media is the creation of a new state-owned company, Great British Railways, which will bear a slightly modified version of the famous British Rail ‘arrow logo.’ Despite the demise of British Rail almost thirty years ago with privatization, the logo has never entirely gone away and has survived as the recognized symbol for stations on the national rail network. However, the new company shall reclaim it as the official corporate badge for the company charged with providing the nation’s rail network.
The company shall own and operate the tracks and infrastructure and shall replace Network Rail in that respect. However, it will not simply be a replacement for Network Rail in that the idea is to create a corporate identity which reunites track and trains as part of a cohesive system. From the passenger’s perspective they will enter a Great British Railways station and board a train bearing the same logo and possibly a standard livery which is the same throughout the land. So far this sounds very much like renationalization and the resurrection of British Rail. However, there is a key difference in that, despite the outward appearance of uniformity, the services operated under the GBR badge shall still be provided by private operators in many cases. However, as we shall see, the terms under which they provide those services shall differ significantly from the now defunct franchising system.
Passenger Service Contracts
It will come as little surprise to those who have followed the Williams Review to learn that the franchising system will be replaced by a concession model under agreements which shall be termed Passenger Service Contracts (PSRs). The key difference between franchising and concession-based systems is that, under the latter, the ‘revenue risk’ is borne by the public entity (in this case GBR) which grants the concessions. In other words, the company operating the concession is not solely dependent upon revenues for its profits. It will receive a fee for operating the services on behalf of GBR come what may. Should any revenue-based profits be generated on top of the fee the terms of the PSR will stipulate how the spoils should be divided between the parties. Although the Plan states that, ‘in most contracts, fare revenue will go to Great British Railways, with operators delivering to the specification and managing their costs in doing so.’ (see section 21, p 54). Of course, in the longer term there will still be a major incentive for a TOC to operate profitably in that, whilst it may enjoy financial security for the duration of its current PSC, a failure to generate profits would not be conducive to the renewal of the contract (although the general tenor of the WS plan is to the effect that it may take some time to recover from the pandemic and one should not expect a return to profitability anytime soon). Moreover, the contracts will set demanding performance targets for reliability, punctuality, reducing overcrowding at peaks times, cleanliness of rolling stock, dealing with vandalism and overall customer satisfaction.
The other major difference from franchising is that the TOCs will have far less commercial freedom and will have to operate within the confines of a system designed and built by GBR. GBR will be responsible for timetabling, branding, setting fares and most other operational aspects of the business. This is all part and parcel of the desire to deliver a service which has a strong and uniform corporate identity. The model provided by Transport for London was cited many times in the proceedings associated with the Williams Review and features heavily in the WS Plan which emerged from that Review. At this point it should be noted that the legislative machinery for facilitating concession type arrangement has always been part of the privatized system and is facilitated by section 24 of the Railways Act 1993 which enables exemptions from normal franchising arrangements. However, it was regarded as an exception to the normal franchising system and was certainly never intended to be the norm. Clearly, the WS Plan constitutes a complete reversal of that approach with the end of the standard franchising model altogether.
It should also be noted that the plan emphasizes the need for flexibility and to avoid a ‘one size fits all’ approach. It is likely that PSCs will have some core features and common terms but there will also be substantial bespoke components designed to reflect regional variations and the different types of customer demand on particular routes. Clearly, there are major differences between commuter routes, long distance services and local rural services. Moreover, there may be some services, ‘predominantly the long-distance ones’ where operators may be afforded more commercial freedom and take on more of the revenue risk (see section 25, p 58). In other words, PSCs are likely to sit on a spectrum with most likely to operate as concessions but with some being more akin to the old franchising model.
The new system cannot be brought in overnight, due to the need for new legislation, thus, as an interim bridging measure, National Rail Contracts will start replacing the emergency agreements which were brought in as a result of the Covid-19 crisis.
Thoughts on the Legal Dimension: Reducing the Scope for Internal Conflict in the Industry
The main focus of the proposals is to create a national rail organization with a strong corporate identity (with some regional variations) where passengers know what they are getting whichever part of the network they are travelling upon; whilst at the same time keeping the benefits of competition and private enterprise. This aspiration is perhaps most concisely summed up by the following passage on page 31 of the WS Plan:-
Great British Railways will be responsible, and held accountable, for meeting the punctuality, quality, efficiency, safety and other goals set out in this white paper and by Ministers. The whole system, planning and operating functions needed to deliver a joined-up network will be directed by Great British Railways, working in partnership with devolved transport authorities where appropriate. There will be no excuse-making and blame-shifting. The cottage industry of costly commercial disputes over delay attribution will end.
As the latter part of this extract makes clear, one of the main criticisms levelled against the privatized system established in 1993 has been the fact that there has been fragmentation of the industry and too many different entities not always working together in a cohesive manner. The nadir of privatization was arguably epitomized by the Potters Bar rail crash of 2003 where arguments raged for a time over who was responsible for the defective points that caused the derailment. At one point it looked as though no one would accept liability with the maintenance contractor, Jarvis, suggesting the possibility of sabotage (a tactic to stop res ipsa loquitur from operating?). Network Rail (as successor to Railtrack) swiftly made the decision to take all routine track maintenance back ‘in-house.’ Jarvis and Network Rail admitted liability in 2004 and set aside £3 million to meet claims. In 2010 the Office of Rail Regulation instigated criminal proceedings against Network Rail and Jarvis and the former was convicted of Health and Safety offences having entered a guilty plea; the action was not pursued against Jarvis in the light of the fact that it had already gone into administration (see ORR report). (See Railways Archive for other reports and documentation pertaining to the incident).
The Potters Bar crash marked a watershed moment in terms of health and safety and brought about much needed clarifications in terms of roles and liabilities. Indeed, some research indicated that, overall, safety improved under privatization; for a flavour of the debate as to the impact of privatization on safety see BBC report, ‘Rail “safer” after privatization.‘ However, the franchising system left plenty of scope for internal conflict, especially in the field of track access agreements. The fact that the TOCs are effectively ‘customers’ of Network Rail in terms of using the fixed infrastructure instantly establishes a source of conflict and arguments as to who bears the loss when things go wrong, and delays occur. When the railways were privatized in 1993 so-called ‘Schedule 8’ payments were introduced which required Network Rail to compensate TOCs for delays caused by infrastructure issues – be it leaves nn the line, vandalism, points failure, or even something as dramatic as the 2014 storms and the collapse of the sea wall at Dawlish. Schedule 8 payments imposed a form of strict liability on Network Rail in that they were payable irrespective of any fault on the part of Network Rail. The Office of Rail Regulation (as it then was) explained the rationale for the payments as follows: to ‘align the interests of the infrastructure manager with those of train operators’ by ensuring that the former has a financial incentive to minimize disruption.’ This was intended to offset the effects of the ‘vertical separation’ between the infrastructure and the trains.
The contractual agreements between Network rail and the TOCs is governed by a vast and complex document called the Network Code which covers all aspects of the relationship and sets out detailed Access Dispute Resolution Rules (ADDR). This has given rise to a largely unseen hinterland of alternative dispute resolution which forms a large part of the work of any lawyer engaged in rail law. This is what the WS Plan means when it refers to a ‘cottage industry of costly commercial disputes over delay attribution…’ The franchising system clearly created much scope for conflict although, in fairness, the industry has tried very hard over the years to adopt a more collaborative and less confrontational approach to dispute resolution and set up the Delay Attribution Board to this end, which promotes good practice in terms of avoiding and resolving disputes. Nevertheless, the WS plan seems to suggest that the franchising system was largely designed for the benefit of lawyers!
Today’s railways are a maze of agreements between hundreds of different parties, drawn up and policed by battalions of lawyers and consultants, including an entire staff dedicated to arguing about who is at fault for each delayed train. (at p 8).
As I have said many times over the years it is easy to make lawyers the villains of the peace but the plane fact is that there would have been no rail system in the first place were it not for the likes of Francis Mewburn and Samuel Carter, both pioneering railway solicitors of the nineteenth century. Moreover, the rail system is vast, complex and highly regulated which means that it needs lawyers to make it work. Nevertheless, there is certainly a need to reduce the scope for conflict insofar as we can within the model which the WS plan proposes.
I shall be closely following future developments as the requisite legislation takes shape and at some point begins its passage through Parliament.