Charles Johnson-Ferguson is transport partner at PricewaterhouseCoopers, having joined the company in 1996. With over 15 years’ experience advising public and private sector clients on infrastructure and related transactions across the rail, road, maritime and aviation sectors, his UK projects include the Intercity Express Programme and the re-privatisation of the East Coast Railway Franchise.
Here, Julian Turner asks Johnson-Ferguson whether we are about to see the biggest shake up of Network Rail since privatisation.
Julian Turner: What key recommendations does the Shaw Report make to the UK Government?
Charles Johnson-Ferguson: The most important recommendation made by the Shaw Report has to do with creating geographically devolved areas with a significant amount of delegated authority.
Network Rail (NR) is already devolving authority, but regional regulation of rail services constitutes a much bigger step that NR hadn’t planned to take. The Shaw Report recommends two things. First, quasi-regulation for each of these devolved areas and second a guiding mind that ensures the entire network operates as a system, while still encouraging localised input into regional requirements.
Should a successful regional regulatory solution emerge, it will give the UK Department for Transport (DfT) a number of future options; leave NR as it is, recentralise it, or if it works well transform it into a network of independent, regionally regulated utilities similar in structure to the UK water industry.
That model is seen to have been relatively successful in that it has attracted skills and financing from the private sector rather than relying on government grants, and allows the devolved water utilities to access private capital. There’s been a big debate as to why NR, which is in effect a utility, should be managed by the government and not what is perceived to be the more efficient private sector.
JT: What is the overarching strategy behind regional rail devolution and will it work in practice?
CJF: The Conservative Government’s philosophy is that it wants NR to be closer to its customers, the passengers, and that being closer to the people who actually use the infrastructure leads to better decision-making at the local level. In the capital, for example, the responsibility sits with the Mayor and Transport for London (TfL), because they are more likely to understand local issues. That’s much more difficult to do that if you’re sitting in London opining on what people want in, say, Carlisle.
NR is a slightly different beast, however, in that it receives a significant subsidy from HM Treasury. Services such as timetabling and the procurement of large equipment are difficult to absorb at a local level. That’s the conundrum: how do you maintain central control and drive efficiencies in terms of how the network operates, while at the same time devolving authority to individual routes?
JT: Why is the Shaw Report potentially so significant for Network Rail and UK rail passengers?
CJF: It’s the regulatory aspect. NR has never carried out regulation at a devolved level before and the consequences are potentially significant. NR has to work out what the devolved regions are, what rail users want, calculate what that means in terms of cost and negotiate government funding.
What happened at NR at a national level is now going to happen at a regional level, and it also has to create a guiding mind that brings the network together. That represents a major change in the way infrastructure use will be priced, how it will be monitored and controlled, and how NR operates.
JT: The Shaw Report recommends ‘alternative financing’ and argues that current structures do not give “sufficient focus on financial discipline”? What are the implications for Network Rail?
CJF: Sir Peter Hendy, author of the 2015 Hendy Report, has said publically that he would like some users of rail infrastructure to fund it. For example, if new dedicated infrastructure is going to be built in the north, shouldn’t northern rail users make a larger contribution to that? Hendy believes there simply isn’t enough government funding to pay for infrastructure upgrades across the network; if devolving takes place regionally, then he’s keen to see funding coming directly from the local level.
The other element of ‘alternative financing’ involves introducing private sector finance rather than the current situation where NR receives a Treasury allowance for subsidy and infrastructure costs.
There is also the perception that devolution will promote financial responsibility in that regions will demand more bang for their buck from NR because they’re accountable to local stakeholders, and accessing capital from banks and commercial lenders will encourage discipline from the borrower.
JT: Could profitable lines such as the Wessex route be managed as long-term concessions?
CJF: The Shaw Report recommends that NR investigate whether concessions could drive further efficiencies or be used to access private capital, but it’s clear that NR isn’t that keen on the idea.
Speaking at Infrarail 2016, Peter Hendy said he doesn’t think concessions are the answer, but that accessing funds from the regions and users is the way forward. The general industry view seems to be that further NR fragmentation would result in inefficiencies and even have safety implications.
JT: What steps should Network Rail take toward implementation of the Shaw Report findings?
CJF: If this model is to be implemented in the government’s 2019–2024 funding cycle, some serious work will be needed. This will be particularly trying with NR currently undergoing its greatest ever capital works programme while simultaneously carrying out a programme of major assets sales.
The DfT, following talks with NR, will likely respond to the Shaw Report recommendations by the end of the year. NR has been asked to look at implementation, but it has a lot of other things on its plate right now: delivering CP5, the asset sale programme, integrating several new board members, the digital railway.
In short, a deliverable solution will have to be in place in less than two years and setting up a joint implementation team, with oversight from DfT and NR, which can identify what can feasibly be delivered in that timeframe will be critical. Focusing on creating only one relatively simple devolved route to begin with to use as a test bed ahead of a wider roll out, could also be a smart move.
JT: Is more private investment in the UK’s railways the answer or should they be renationalised?
CJF: Never say never. The Labour Party’s policy is to renationalise and if it had a mandate that could feasibly happen. The privatisation vs nationalisation debate is an emotive one, but it’s not the most important issue. For me, the key question is this: what is the best structure to deliver an efficient railway financed with the right capital structure that delivers the right outcome for passengers?
In the 20 years since privatisation, the UK rail network, despite many failures, has doubled passenger numbers and improved the customer experience. Personally, I’m not sure that maintaining this focus on customers and on growth across the network would be achievable in a renationalised structure.