GB Railway Industry

Background Information

Introduction

Historically, Britain's railways were developed and built entirely by private sector interests with no government support. In consequence a paranoia developed about railways potentially misusing monopoly power (before the Second World War rail was the most practicable way to travel or move goods). After the war inland transport was nationalized, main line rail finding a home in British Rail, which planned, operated and maintained the network and ran the trains. For many years it also built its own trains, but construction was hived off in the 1980. In the period 1994-1996 it was privatized.

This is not the place to set out the aspirations for the privatized utopia the government expected, let alone the extent to which this may or may not have been achieved. Suffice to say that things did not go as the architects expected. Thus structures were set up that were designed to separate control of the infrastructure from control of the trains, and other structures were set up to ensure that 'anyone' could have access to the railway to run their trains. Separate structures were set up to bring into being and control private operators to run specified train services through fixed period franchises, and so it went on. When it didn't work out properly there was then a succession of major changes to try and get things to work better. The outcome is a privatization model that one would perhaps regard as very complex and not entirely logical. Perhaps the best that might be said is that a lot of good people make it work, but one would hardly have designed things in this way. It is most unlikely to survive without further significant change.

Accordingly, it may be helpful to set out who does what.






Links to more detail

More information is available on this website, please click appropriate button for relevant page.



Link to more information about GB Train Operators CLICK HERE


Link to list of Network Rail Major Stations CLICK HERE

Who Operates The Services

Network Rail Network Rail owns the infrastructure (the land, stations, track, and all the trackside equipment that allows a railway to operate). Network Rail operates no commercial trains itself. Network Rail’s main function is to sell timetable ‘slots’ to train operators, for which it levies access charges. The revenue is used to operate, maintain and renew the system, and it must do these things to levels determined by the independent regulator. The company is limited by guarantee, has no shareholders and pays no dividend, surpluses (if any) being ploughed back into the network. In addition to access charges (which have proved insufficient to finance its activities) direct grants are currently received from the DfT. Network Rail also borrows money extensively in the form of bonds that are effectively government backed. Network Rail also operates directly the 18 UK Major Rail Stations run by Network Rail.
Franchised Train Operators These operators are granted a ‘franchise’ by the government to operate trains in particular areas or along particular routes. They also operate the majority of stations under leases granted by Network Rail. Franchised operators run the vast majority of passenger trains in the UK, and there are currently 20 of them. Franchised operators own few assets, the trains being leased from Rolling Stock Leasing Companies and the stations and depots being leased from Network Rail. They also pay Network Rail significant fixed and variable access charges. These fixed charges typically account for between half and three quarters of all operating costs.  Franchised train operators have to operate the train services set out in the franchise agreement, the specifications for which are now very tightly defined. There is only some scope at the margins for making service changes the operators themselves identify, rather different from the original privatization notion. Click here for inventory of franchised train operators.
Open Access Train Operators These operators are under no commitment to the government and have the right to operate trains where they like providing timetable paths are available and subject to agreement of the Office of Rail Regulation. Most open access operators run freight services but a small (but growing) number operate passenger trains. Click here for inventory of open access train operators.

Who is In Charge?

It was not always thus, but for the time being the Secretary of State for Transport is in charge. Strange to say that in the entire history of the railway industry, including the period after nationalization, the minister or appropriate secretary of state has never had direct control of the train services; nor was this the case immediately after privatization, either. After  various other models were deemed to fail the minister took direct control in 2005. It seems strange that the Secretary of State has more control of a privatized network than was ever the case when it was 'publically' owned, but there we are. We need to define our terms though. Despite having more control than ever, day to day delivery is in the hands of private operators (except East Coast Trains) and Network Rail is a curious aberration whose exact status is a little ambiguous. In theory it is a private company and thus has a tight system of regulation where short term direction is given by the office of rail regulation, covered shortly. For now we shall look at the Secretary of State's responsibilities, executed by his Department for Transport (DfT):

Responsibility Explanation
Letting new rail franchises The Department is responsible for defining the shape of future franchises, establishing the stakeholder interests and defining the service levels required. It is then responsible for holding the necessary competition for bidders and selecting the bidder offering best value. The level of detail set out in service specification has varied over the years and is currently regarded as quite prescriptive. In recent times franchises have rarely exceeded seven years and this short period is said to be stifling innovation (as franchisees have too short a time to implement plans and obtain a return). A recent attempt to let a longer franchise on the West Coast route ended in disaster owing to flawed processes, but some of this hinged around how long term risk is managed as train operators are not able to control external economic effects, a real problem with long term franchises. This is recognized as a problem that is hard to resolve and is a consequence of the franchising system. It is unrealistic to expect operators to pick up risks they cannot control, born out by experience.
Managing rail franchises Having let a franchise it is important that all franchise commitments are met and the companies operate within the expected financial regime and exhibit appropriate behaviour. The Dft has a franchise manager for each rail franchise to maintain oversight and manage the interface.
Withdrawing franchises In certain circumstances it may be necessary to alter or amend franchise agreements, hold operators to account, or in extreme circumstances withdraw the franchise. In these circumstances it would be the intention to retender a franchise but in emergencies the DfT can step in overnight as ‘operator of last resort’ and special arrangements are in hand for this to be implemented with shadow companies already on the shelf and consultants First Class Partnerships available to populate one or more of them with senior management team. So far this has been needed twice, and East Coast trains is run by the DfT through its subsidiary Directly Operated Railways after National Express withdrew after making heavy losses.
Budgeting The DfT manages the whole of the rail budget in England and has agreements with the Welsh assembly, Transport Scotland, the Greater London Authority and the regional Passenger Transport Executives to co-ordinate budgeting across the UK. Some UK franchisees require a subsidy while others pay a premium to government – in either case it leaves each franchisee with notionally adequate income to pay its large fixed charges. The DfT also makes substantial grants direct to Network Rail for general support and for specific projects.
Co-ordination  Theoretically unnecessary in a ‘privatized’ railway environment, it has become evident that a hugely fragmented industry relying on public support needs to have ‘someone’ in charge and the DfT have necessarily moved to fill this role (not originally envisaged). One obvious example of this is with the management of rolling stock. With 20 or so franchises, some kind of co-ordination was vital in distributing stock around the country, while equally it was obvious that there needed to be a long term plan which owing to short franchise lengths no train operator was in a position to manage. The DfT has just agreed to fund a new fleet of inter city trains as nobody else was in a position to do so. The DfT have also run or sponsored other capital projects requiring coordination across several train operators and Network Rail.
Accident Investigation This is an activity carried out in the Secretary of State's name but by a semi-independent unit called the Rail Accident Investigation Branch (RAIB), modelled on its marine and air forebears. Railway accident investigation was for nearly a century and a half undertaken by the Railway Inspectorate (who reported to the Board of Trade and, upon its formation in 1919, the Ministry of Transport). An inspector would normally hold a public enquiry and produce a useful report within a matter of weeks (at one time it was days). Inspectors were nearly always drawn from the Royal Engineers. For all kinds of not entirely satisfactory reasons the HMRI was transferred to the Health & Safety Executive and the accident investigation system collapsed owing to the HSE desire to establish guilt with a view to mounting prosecutions. This extended enquiry times and made witnesses reluctant to say anything, prejudicing rail safety as cause took a long time (sometimes years) to establish. An entirely new system was therefore required to try and establish cause much faster, and spurred on by Euro-directives a solution was found in the RAIB which simply investigates accidents as soon as they happen in order to establish cause and make recommendations to prevent repetition. A protocol is entered into so that in serious accidents there is only one lead investigator amongst the Police, ORR or RAIB and that they co-operate without too much duplication or delay.


The Independent Regulator

The second body in our 'In Charge' section is the Office of Rail Regulation (ORR) which has three main areas of responsibility and operates as the independent railway regulator. This body goes back to the earliest days of privatization, but has changed somewhat in form. In particular there was once an individual appointed as the rail regulator but he was replaced by the office of rail regulation in 2005, with modified but comparable powers.

Responsibility Explanation
Supervision of Network Rail Because Network Rail is a monopoly supplier (of transport infrastructure), the ORR has a huge role in ensuring that adequate provision is made for system maintenance and renewal. Network rail seeks to understand how future demand will develop and produces budgets in 5-year periods called control periods. These have to be agreed with the ORR before the ORR will agree what charges Network Rail may levy for access to its system (access charges being its main source of income). The ORR must seek to agree budgets that the government finds affordable yet meet the governments high level specification for future rail services. This is a very involved process designed to prevent an earlier occurrence which resulted in the regulator setting access charges that the government had not expected but were nevertheless liable to pay for (an explanation of the money-go-round will be available shortly).
Fairness to all rail operators The ORR is required to ensure that Network Rail can accommodate services likely to be specified by the government through the franchising process as well as ensuring that Network Rail can accommodate within reason open access operators without discrimination. The ORR also defines standard forms of lease for train operators who lease stations and depots from Network Rail, and upholds the so-called Network Benefits and impartial trading standards that hark back to the old British Rail days and which are preserved or required by law.
Operation of the safety regime The ORR is also became the final resting place of the venerable "Her Majesty’s Railway Inspectorate" who are responsible for ensuring that all railways have a satisfactory safety management regime in place and who can take enforcement action and investigate breaches of health and safety law. The railway inspectorate was formed in 1840 and abolished upon transfer, but its inspectors remain entitled to be called HM Inspector of Railways. The ORR does not normally get involved in accident investigation unless a breach of the law is anticipated or it is a very serious one. Accident investigation is presently carried out by the Rail Accident Investigation Branch (see above). The ORR has safety responsibilities that extend beyond Network Rail to include all train and depot operators, London Underground and other metros and tramways.

Who owns the Trains?

The problem that faced the privateers was that, with the rail franchise model proposed, the franchise periods would be quite short and had the potential for innumerable small franchisees to emerge. Now railway rolling stock had a long life, at least thirty years and possibly up to fifty; not only did this make it quite impractical for operators to own the rolling stock, but it was important to prevent significant barriers to entry to the industry. There were also issues about how new stock would be purchased, and by whom, and how they bogeyman of 'monopoly supplier' could be avoided. The decision was to create three rolling stock leasing companies (competing with each other), and these bodies would own the trains and purchase new trains when they were needed. To kick-start the process the entire British Rail fleet was divided into three and divided amongst the new leasing companies (initially BR subsidiaries) which were then sold to the market with the benefit of the first leases in place with the new train operators.

This all sounds simple enough, but the problems are quite subtle. The main problem is that the rolling stock leasing company (or 'Rosco') has to recover the cost of new trains (and their financing charges) through the price they charge train operators to lease them. However, they only know how long the initial leases will last as they are tied to franchise agreements. They have no idea who future franchisees will be or what sort of trains they will want, and therefore do not know for certain that a new fleet of trains will be used beyond the first few years and won't end up sitting in sidings somewhere off-lease. The temptation is to try and recover costs early on in the life of new trains, but that makes them nearly unaffordable to a train operator (and there are other leasing companies from whom to lease and the possibility of buying their own trains). The outcome is a system where Roscos try and work out the risks of ending up with trains off-lease and build that into their pricing, but the fact that there is any risk does mean that leasing costs can be fairly high. At one time the business was regarded as primarily a financing business, not wholly an accurate description, but one that attracted the larger banks to take a keen interest, though one that subsequently waned.

As Roscos own the trains, they are responsible for ensuring they are maintained. Day to day maintenance is usually carried out by operators (or someone on their behalf), whilst heavy maintenance can be done by Roscos or their representatives (who can be the train operator where they have the facilities). The main Roscos are:

Angel Trains Ltd. Based in London and Derby the company emerged in its present form in 2008 when bought by a consortium of investors (Arcus Infrastructure Partners; AMP Capital Investors; International Public Partnerships; Public Sector Pension Investment Board and STC Funds Nominee Pty Ltd and Farm Plan Pty Ltd. The company was previously owned by Royal Bank of Scotland. The company owns Locomotives, High Speed Train sets, the Coradia and Pendolino fleets and a large number of suburban and regional fleets.

Eversholt Rail Group. Eversholt has existed in its present form since 2010, having previously been owned by HSBC Bank. Present owners are a consortium comprising STAR Capital Partners, 3i Infrastructure plc and Morgan Stanley Infrastructure Partners. Eversholt has a large mixed fleet of predominently suburban trains, but also the new South-Eastern High Speed trains, the East Midlands 125mph sets and some locomotives and wagons.

Porterbrook Leasing. Porterbrook exists in its present form since December 2008, having previously been owned by Abbey National. It was sold to a consortium of investors: Antin Infrastructure, Deutsche Bank, Lloyds TSB and OP Trust, though Lloyds TSB later withdrew. Like the other Roscos, Porterbrook owned a large mixed fleet, but is perhaps more active than the others with wagon and locomotive leasing.

A number of smaller leasing companies have emerged in recent years, but it is too early to say whether this will influence the way the industry develops.