A middle track for Network Rail reform

23 Mar 16

A government review into Network Rail’s structure is likely to herald more diversity in rail delivery across the country, which could unlock innovation

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The review of Network Rail led by Nicola Shaw reported with the March Budget. It didn’t grab many headlines because it didn’t conform to a binary privatisation versus nationalisation debate warmed up by trade unions amongst others in autumn 2015. Nicola Shaw favoured neither – certainly not in the simplistic form usually attached to them.

To cynics this might come as a surprise. Given the review covered the period from 2019, wholesale privatisation could potentially have offered a very timely asset sale to help the chancellor achieve his desired budget surplus in 2020 and to shift Network Rail’s £38bn plus debt from the government’s balance sheet. But this wasn’t an option put forward by Shaw.

However, while the review rules out privatising the network by selling ownership wholesale to private owners, in three important respects, private sector involvement has also been ruled in. First, the review speaks of ‘possibilities of third party funding and financing of enhancements’ and speaks positively about the potential of rail concessions or long-term licenses to manage track. This includes the prospect of concessions for a whole route. By handing over responsibility (and associated revenues) to a private provider, the government would hand over delivery risk for many decades whilst securing an upfront payment from selling the concession. Shaw has first-hand experience of the benefits that concessions can bring as chief executive of HS1, which was sold to Canadian investors. Such developments would be especially powerful if they facilitate vertical integration between track and train. Studies have shown that the advantages of vertical integration are particularly strong for more densely used railways, where the co-ordination costs between track management and train operation are high.

A second aspect of risk transfer to the private sector that may provide solace to the chancellor is that external financing and operation of track management through concessions may also enable re-classification of the debt associated with those parts of the network. This issue is carefully assessed in the review and all things considered it seems possible that some of the assets and debts could move off balance sheet.

Third, there remains a real prospect that aspects of the rail network will leave the hands at least of national government. A route for the north is now being promoted. Given the increasing prominence of Transport for the North and the significant levels of new infrastructure to connect cities within the Northern Powerhouse, the aim to coordinate services in the hands of more localised decision-makers is compelling. In the longer term it may presage the way for demands for total responsibility for rail to be handed over to Transport for the North. Both of these moves could have significant implications for franchising – either with responsibility delegated to a different commissioner (say Transport for the North) or the concession for track management and train operation handed over to one responsible provider.

The outcome of all of this is likely to be greater diversity in rail delivery across the country, better reflecting the variation in Britain’s network. This is likely to be a good thing for innovation, at a time when technological opportunities are substantial.

  • Nigel Keohane

    Nigel Keohane is the director of research at the Social Market Foundation

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