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Greater risk, bigger rewards

Richard Thompson met the sSRA chairman Sir Alastair Morton to find out what progress the Government's railway arm has made in its first year.

Last April, when Sir Alastair Morton took over as chairman of the shadow Strategic Rail Authority, he told NCE his first job would be to carry out an assessment of Britain's railways. It would then set about establishing a framework within which the disparate parts of the privatised rail industry could work to grow the railway. Then, he said, it would 'push' at the parts of the system that were not coming into play.

The good news is that after a year in office the sSRA has completed its assessment and will go on from there to develop its first strategy document, setting out its framework in the autumn.

The bad news is that Britain's railways are not fit for purpose.

'The condition of the railways in this country is not good, ' Sir Alastair says.

'The infrastructure is worn out in some areas which is why you are getting more broken rails. Over the years it had been modified to suit a decline in traffic. And the changes haven't necessarily suited when traffic began to grow. The result is we have rail infrastructure in poor condition, imperfectly laid out and with most of its spare capacity soaked up by the growth in recent years.'

Capacity is the key to the future success of the rail network. The past year has seen the sSRA carry out studies and conversations to establish exactly what Britain needs from its rail network and to find the most economical way of improving both the quality and capacity of the network to meet that demand.

The conclusions will form the basis of the strategy document that was due to coincide with today's National Rail Summit. This will now be published in the autumn to await the outcome of transport minister Lord MacDonald's 10 year transport plan due in the summer. Morton is sanguine about the delay.

'The Government has to decide what it wants, ' he says. 'There is not much point us saying 'let's point all the lines north-south' when it might say 'we want them all going east-west'.'

Another key element of the railway jigsaw that sSRA has to wait for is the conclusion of Rail Regulator Tom Winsor's Periodic Review of Railtrack's access charges, now due in September. Winsor's final price determinations will set out what Railtrack can charge train operators for using its infrastructure. 'That defines what Railtrack does, ' says Morton.

The third stage of the sSRA's work identified by Morton was to 'push at the parts of the system that were not coming into line'. The sSRA chairman says his organisation is doing this in reverse order by 'luring' the train operating companies to invest in infrastructure in return for longer train operating franchises, which the sSRA awards.

This development is particularly significant for civil engineers because it could represent a massive increase in the amount of money spent on enhancing Britain's rail infrastructure over the next decade.

'We have started luring passenger operators into a more constructive framework where they are remunerated for taking more risk by investing more to develop their services, ' says Morton.

'Privatisation was done on the basis of lowest bid wins. Now we are awarding the franchises to the bidders with the best ouputs subject to them being financially sensible.'

Morton adds that the new franchises can be for up to 20 years and the SRA will ensure operators stick to their investment promises through periodic reviews. Failure to fulfill promises will mean losing the franchise. 'If they don't deliver what is in the contract it could even put them out of business, ' he warns.

The driver behind everything the sSRA does is to see a modal shift of commuter and inter city travellers on to rail. 'Time will tell if we have got the right approach, ' he says. 'But one thing is sure. We are going to get a much higher level of commitment from new franchisees.'

Attracting investment

One of the most significant and controversial initiatives introduced by the sSRA in the past year has been to call for new investment in rail infrastructure, particularly from train operating companies.

The move could lead to a multiowner rail network with special infrastructure companies set up between train operators, project management contractors and City institutions.

But current monopoly infrastructure owner Railtrack, confused ownership with control and criticised this idea by arguing that operational issues such as safety make it unviable to have more than one infrastructure owner on a multiuser network.

Morton says it is the only way to bring in the resources needed to develop Britain's railways. 'Railtrack and I don't yet agree on this, ' says Morton. 'But I'm quite convinced Railtrack has neither the financial nor management resources for the scale of the programme ahead of us. We will agree.'

And he says the sSRA and Railtrack are closer than the network manager realises. 'We are at a very early stage of designing project structures and finances, ' he explains. 'The one thing I have been clear about from the start - and I laid it down at the beginning but Railtrack wasn't listening - was we were never going to create a patchwork quilt railway. The railway is going to be controlled and operated by Railtrack.

'It doesn't matter how many owners we have. What matters is the contracts for the use. Railtrack is the controller of the network. It says what happens therefore the contract between it and the financiers of the network will specify that it is going to be run Railtrack's way by Railtrack under the laws of the land. You cannot have Land Securities telling Railtrack how to run a railway. I see no problem there, just hard work to get it right.'

Morton says the plan to introduce new investment is at a very early stage and there is no single investment model new investors have to follow. 'You fit the financing to fit the facts of the case.Therefore, the cost of it overall is almost infinitely variable.'

He dismisses the argument that using companies other than Railtrack to finance infrastructure upgrades is inefficient because new investors will not be able to borrow as cheaply as Railtrack.

'Yes, corporate debt costs less than project debt because it depends on the risk against which the project debt is made. But not a lot less, ' he explains.

'And the simple fact of the matter is you can't put £52bn on Railtrack's balance sheet, so a lot of it is going to be off balance sheet and therefore project debt. Let's face it, project debt may be cheaper in some cases by sSRA involvement but is always cheaper than the cost of unavailable debt, which you could call infinite!'

What is the sSRA

The Shadow Strategic Rail Authority was set up by the Government in July 1999 to provide strategic direction for Britain's railways, encourage investment and manage the passenger rail franchises. Currently it is engaged in a process of replacing these franchises, with the aim of increasing capacity and improving the overall service to the customer.

It will operate in its current 'shadow' form, pending legislation, introduced to Parliament in November 1999, to constitute the Strategic Rail Authority.

The sSRA's activities include the functions of the Office of Passenger Rail Franchising, which was set up in 1993 to monitor and manage the 25 passenger train franchises operating on the national railway network in Great Britain, with a strong emphasis on protecting passengers' interests fresh investment in the railway and quality of service. The sSRA also encompasses the residual functions of the British Railways Board.

Following Royal Assent to the Transport Bill, parts of the Rail Regulator's office (dealing with consumer issues) and the Department of the Environment, Transport and the Regions (freight grants) will join.

The Authority will publish its strategic plan for Britain's railways in autumn 2000. This will set out how the sSRA expects to tackle the job of increasing the role of the railway in addressing transport problems by promoting an expansion of services and improvements in quality.

In seeking to improve the level of capacity across the network, the sSRA is involved in a number of projects aimed at opening up capacity bottlenecks and expanding the capacity of the network In November 1999 the sSRA announced the start of the process of franchise replacement. SSRA chairman Sir Alastair Morton has pledged to introduce longer franchises 'in which there will be value for the franchise owner, derived from longer terms and modified subsidy, in return for commitments to high levels of investment and service'.

It also has a dedicated freight team, with the purpose of developing a strategy for the growth of freight on rail, within the strategy for the railway as a whole. However, the sSRA has no locus in safety matters.

The challenge for Railtrack

Last April, Sir Alastair Morton told NCE that Railtrack's project management skills looked inadequate. Events on the West Coast Main Line seemed to confirm that. Since then, Railtrack has recruited American programme managers Parsons Brinkerhoff, Bechtel and Fluor Daniel to manage its major projects. It has also restructured its entire procurement stream into several discipline based strategic supply groups. Morton is hopeful about the changes.

'Railtrack needed to look at its management structure and seems to have done so, ' he says. 'Gerald Corbett has made lot of changes. Now we have to see how they work out in practice.'

Railtrack's problem, according to Morton, is that it was originally structured to manage the infrastructure of a declining rail industry rather than carrying out billions of pounds worth of network enhancements to provide the extra capacity for today's booming industry.

'Railtrack's biggest challenge is to do its projects successfully, ' he says.

'It got off to a terrible start on West Coast Main Line but that doesn't mean it's going to do everything badly. But it has learned the lesson that things can go very badly. I know better than anyone from the Channel Tunnel that if you don't get the projects set up right they have a horrible tendency to go wrong. And once projects go off line they cost an arm and a leg to get back on line.'

More worrying for the network manager is Morton's belief that it has not yet worked out how to use its new management resources effectively. 'Railtrack has to work out how to use its programme managers to best advantage. Of the top 13 people on the WCML one was from Parsons, the other 12 from Railtrack.

Now how many project teams can Railtrack put together with 12 out of 13 of the top people? How many people has it got available to do that?'

Morton is also critical of Railtrack's approach to its long term planning which he says is highlighted by its Network Management Statement 'I'm not happy that once a year Railtrack starts from nothing and writes a document. It needs to develop a flow of NMS production, ' he says. 'This year's isn't a complete document. Railtrack is supposed to set out its stall based on its understanding of what its users and funders want. But this year they say the NMS is a menu of things they can do and it is up to its customers to pick what they want. That is not the right answer. All the reasonable requirements of the customers and funders need to be done. That is condition seven of its network licence.'

'Equally, they have made very little effort to get together with the DETR or us except on the sSRA's Incremental Output Statements.'

But Morton warns that it is not just the network manager that has to change. Its suppliers will have to change too. 'Railtrack is going from a maintenance outfit that for a while wasn't up to its task, to a construction company, ' he says.

'In about three or four years, the amount of money going out of Railtrack's till per year will be larger on enhancements than the sum going out on maintenance and renewals. That is a transformation.

That never happened under British Rail. This means the suppliers have a market that is a multiple of the market they used to have. And if suppliers think they are going to behave towards that market the way they used to behave they need to think very hard again or they are going to lose business. They have to get more efficient.'

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