Wednesday, March 25, 2015

The "re-nationalisation" of Network Rail in UK and lessons for India

The Business Standard reports that the Bibek Debroy Committee constituted to make recommendations to reform Indian Railways is likely to advocate private participation in the running of passenger and freight trains. In this context, it may be instructive to take stock of the latest problems being faced by Britain's controversial rail privatization.

For the record, the British rail privatization had unbundled the system into three parts. An infrastructure company, Network Rail (earlier Railtrack) owns the track, rolling stock operating companies (ROSCOs) own the trains, and train operating companies (TOCs) run the trains. There are currently 17 TOC franchises (down from the original 25), operating both long distance inter-city routes as well as urbanized commuter lines. The ownership of the franchises have changed hands many times. 

I have already blogged about a comprehensive study on British rail rolling stock private franchising which found large private profiteering without capital investments and costing large subsidy outflows from the government. It found that the franchising policy boosted the profits of privately owned TOCs, without investments in network expansion or upgradation, and loading debt into the publicly guaranteed Network Rail. Faced with rising train ticket prices, the British government was forced to intervene by capping commuter fares in 2013.

As regards rail tracks, the British rail regulator, Office of Rail Regulator (ORR), has criticized the recently "re-nationalized" monopoly rail infrastructure operator, Network Rail (NR), of poor performance and declining standards in all aspects of its business. The ORR has said that NR is failing badly in meeting its new investment commitments on electrification and signalling, and standards on punctuality, service reliability, and track and signal maintenance. This criticism comes on top of a study few years back that found that privatized British rail performed the worst in comparison to its mostly government controlled peers in seven other European countries.

In September 1, 2014, the 1994 British railways privatization turned full circle as NR, the private entity which operates and develops Britain' fixed railways infrastructure - over 2500 railway stations, railway tracks, signalling systems, bridges, tunnels, and railway crossings - was formally "re-nationalised" as a public entity. This followed the government assuming the £38bn debt that NR had accumulated. 

NR, the successor to the failed Railtrack, is listed on the London Stock Exchange and has a private market sourced management. It was set up in 2002 as a private company with no shareholders, though its finances were guaranteed by the government. Though now public, its governance structure provides for an arms-length relationship with the government, thereby ensuring commercial and operational freedom. NR is regulated by the Office of Rail Regulator (ORR).

NR's operating revenue comes mainly from three sources - 60% as grants from Department of Transport, 27.8% from track access charges paid by train and freight operators, and 10.6% from income from property and shops. While it has previously raised debt directly from the market, the re-nationalization means that it will borrow directly from the government, by way of a £30.3 billion loan facility for its current (2014-19) five year investment plan. In the current plan, NR intends to spend £35 billion - £12.5 billion on new and upgraded stations, electrification, and platform lengthening, a third on track renewals, and the remaining third on running the railways. It spent £36.2 billion in operating, reviewing, and maintaining tracks in the previous five year period (2009-14). 

Its management argues that NR is being squeezed by onerous cost reduction targets and rising service standards at a time when passenger traffic is growing at record rates. It claims to have reduced operating costs by 40% over the past decade and says that any further reductions are difficult. The result has been rising ticket prices, which has generated popular resentment and political opposition.

As it proceeds with reforming Indian Railways and introducing private participation, its administrators would need to take a more nuanced view of the whole process rather than a simple strategy of allowing franchising in passenger and freight traffic segments. 

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