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Value for Money in the Rail Industry – where next?

The benefits of the radical reforms to the rail market in the UK are much debated. Whilst the period since privatisation has seen growth in passenger and freight markets, continued improvements to safety, an overall increase in customer satisfaction and improved operations this has been delivered at a significant cost to the public purse.

Both rail infrastructure costs and train operating company costs have risen sharply; the former from roughly £15bn to £30bn when comparing the second 5 year period after privatisation to the first 5 year period. Train operating company unit costs are now nearly 20% higher than at privatisation. This experience contrasts sharply with the experience of other industries which have seen privatisation and the introduction of competition.

In May 2011 Sir Roy McNulty published a report for the Department for Transport on Value for Money in the rail industry. Here I review the contribution of Dr Andrew Smith, Professor Chris Nash and Phillip Wheat to identifying and quantifying the level of inefficiency in the rail industry before looking at the key barriers to efficiency that McNulty identified. Andrew and Chris offer their reflections, one year on, of some of the bigger challenges that remain to be addressed.

One of the key research challenges to be overcome when considering how to establish whether the management of the UK rail infrastructure is efficient is to establish what to benchmark it against. There was only one privatised Railtrack and subsequently one Network Rail. The research work first therefore developed innovative econometric techniques which sought to unpick the different drivers of rail infrastructure costs over time to allow the performance of different global infrastructure managers to be benchmarked. A lack of international benchmarking was an important gap in previous regulatory reviews. This work is particularly complex as infrastructure operators are structured differently and often divided into several business sub-units.

Two separate, new econometric studies were therefore developed. The first used national data over a long-time period to generate estimates of Network Rail’s efficiency performance relative to best practice and also track progress over time. Flexible panel data stochastic frontier techniques were applied; to our knowledge for the first time in a regulatory context. The second quantitative study was applied to a dataset for several countries whilst also extending the dataset by incorporating disaggregate data for different regions within each country. New methods were developed which allowed the persistent element that applies across the company (external inefficiency) and the part that varies at sub-company level (internal inefficiency) to be separated.

The outputs of the first econometric study was used by the Office of the Rail Regulator as the central piece of evidence on Network Rail’s relative efficiency performance in the 2008 Periodic Review of the company’s finances. The second study was used as corroborating evidence. An efficiency gap, estimated at 37%, resulting from the econometric model was directly used to derive a funding settlement for Network Rail covering the fourth control period (2009/10 to 2013/14). In line with regulatory best practice, whilst using the ITS study as the core evidence, ORR also commissioned a wide range of engineering, bottom-up studies, that also indicated a substantial efficiency gap.

In addition to the work on rail infrastructure costs, ITS has also done new work to compute and then explain changes in train operating company costs since privatisation and the introduction of competitive tendering in 1997. Our research showed that unit costs are roughly 20% higher than at privatisation, which is a disappointing result compared to the experience of rail tendering elsewhere in the world and indeed the results of tendering in other sectors. This work was quoted in the McNulty review and formed part of the recommendations, namely that operators should at least get costs back to pre-privatisation levels, before then also targeting further cost savings.

Our research showed some of the key drivers of unit cost growth, including a very substantial increase in real wages of rail staff, far above average earnings growth in the wider economy during this period. The work also showed that the franchising authority’s decision to place a large number of distressed TOCs on management contracts for an extended period led to a substantial deterioration in efficiency relative to other TOCs. Specifically, following the shift to management contracts, the affected TOCs were found to be 23% per cent more expensive than industry best practice. Whilst the use of management contracts may have been a useful expedient – the franchising authority faced a situation where half the sector ran into trouble – it was nevertheless a costly decision, particularly given that the contracts persisted for several years (the latter, to allow the franchise boundaries to be re-drawn prior to the next round of re-franchising).

The McNulty report draws on the evidence from the research described above and presents an analysis of the main barriers to efficiency. These are many, complex and interrelated:

fragmentation of structures and interfaces, the ways in which the roles of Government and industry have evolved, ineffective and misaligned incentives, a franchising system that does not encourage cost reduction sufficiently, management approaches that fall short of best-practice in a number of areas that are key cost drivers, and a railway culture which is not conducive to the partnership and continuous improvement approaches required for effective cost reduction.” (p5, McNulty Review)

I asked Andrew Smith and Chris Nash for their take on some key issues that remain to be addressed one-year on from McNulty. Andrew identified two key points which suggest that there is still a need to understand the causes and not just the differences, although work remains to be done here too:

Firstly, whilst there is or was a substantial gap between Network Rail’s efficiency and European operators, continuing to collect and share good quality, comparable data remains a challenge, as does modelling heterogeneity between railway systems. It does also need to be remembered, however, that we are comparing Network Rail against state owned infrastructure managers, so the efficiency potential as compared to private firms could be even greater, given the general evidence on the impact of privatisation in other industries across the world. The splitting up of Network Rail into ten routes now offers the prospect of domestic, comparative competition, as used in other regulated sectors, which will at least help target internal inefficiency.

On the train operations side, in contrast to rail infrastructure, McNulty relied entirely on top-down trends-based evidence to set the efficiency challenge. There was therefore no absolute efficiency comparison between British TOCs and their global comparators (more precisely, some was carried out, but it was inconclusive). So, the argument was as follows: British Rail was inefficient, so unit costs should have come down but did not, and should therefore fall, at least to pre-privatisation levels. Costs should then reduce further, in line with the experience of competitive tendering in rail elsewhere in Europe and the wider evidence on the impact of competitive tendering in other sectors. There was also little or no bottom-up evidence that might explain the gap in terms of the working practices that need to be adopted to get costs down. McNulty rather relied on faith in harnessing the incentives of the private sector, combined with competition for the market, through the use of longer franchises, combined with less tightly defined franchises. This may be the right answer, but it is far from proven.

Chris Nash reflected on the on-going misalignment of incentives:

McNulty quotes the work of one of our PhD students, Rico Merkert, as showing that the additional transactions costs of vertical separation of infrastructure from operations are not great as a proportion of total systems costs, but the bigger issue he raises is misalignment of incentives. Despite having sophisticated track access charges, to reflect the damage done by different types of rolling stock, and penalties for poor performance, train operators and infrastructure managers still lack sufficiently strong incentives to work together to reduce costs. A number of new forms of alliance are being tried, but achieving appropriate incentives whilst not disadvantaging other operators remains a challenge.”  

For me, this research is an excellent example of the best type of impact that can be delivered when academics work closely with industry, government and regulators to bring independent analysis to a problem. It is interesting to note that the Department for Transport has yet to issue its response to the McNulty Review. This serves as a reminder of the challenge of keeping important agendas under the spotlight and the rather more difficult task of changing policies and practices in a highly complex governance environment. These findings also cast a shadow on the presumption that greater private sector involvement in managing our strategic road network will necessarily be a good thing, as the Prime Minister suggests. Rail is a different sector for sure, but the scale of the complexities and unintended consequences of privatisation suggest that any propositions which emerge from the current Treasury review need full and honest scrutiny.

This blog was put together with the assistance of Dr Andrew Smith and Professor Chris Nash (www.its.leeds.ac.uk/people)

This is part of a monthly blog on research projects at the Institute for Transport Studies by the Director, Dr Greg Marsden (G.R.Marsden@its.leeds.ac.uk)

Disruption Project Tackles Key Government Research Needs

The Disruption project (www.disruptionproject.net) is a 3 year project funded under the Research Council UK’s Energy Programme seeking to identify new ways to develop and implement lower carbon and more energy efficient travel. The project suggests that businesses and individuals are more adaptable to new situations than is typically assumed and that this could open new opportunities to change patterns of living such that they are less dependent on carbon intensive travel. The project will explore, through a series of practical studies, the extent to which travel practices that are assumed to be routine are frequently disrupted as part of unplanned (life) events.

A review of research commissioned by DEFRA has examined a similar proposition – considering whether “moments of change” can be used to stimulate pro-environmental behaviour change, particularly drawing on psychological theories of behaviour change. The report (Thompson et al., 2011) concludes:

 “From a theoretical perspective, there are good reasons to believe that significant life events provide a promising opportunity for breaking existing habits…There is some promising empirical evidence in the academic literature, but this is relatively scarce and also very largely confined to transport behaviour. Anecdotally, almost all of the limited number of people we spoke to – academics, practitioners and campaigners alike – found the moments of change hypothesis plausible prima facie. However, on the whole they were not aware of, or had not themselves collected, data that could demonstrate changes in habitual behaviour actually occurring at moments of change” (p157).

Our research suggests that one of the reasons why evidence on change is limited is because we have not specifically looked for it. Much of our data is cross sectional in nature and therefore of limited use in answering such questions. The report makes a series of recommendations for future research which the Disruption project is already beginning to address in two key areas:

New research methods:

DEFRA Research Recommendations

  • “Conducting qualitative research with people who have already changed their behaviours in order to understand the motivating factors, especially in relation to the timing of behaviour changes.
  • Developing action-research projects based on real-world situations and interventions.
  • “Mapping” the life course in terms of people’s contact with service and organisations that could potentially deliver a behaviour change intervention.” (p14)

The Disruption project is conducting a series of longitudinal ethnographic studies with families in Brighton and Lancaster which will provide in-depth understanding of the before, during and after implications of moments of change that typically occur. We are also conducting a longitudinal study of the impacts of the Olympics disruption on journeys to work. The research project examines the issues from a range of theoretical perspectives (including the psychological approaches on which the DEFRA study draws and mobilities). By taking a broader socio-technical systems approach we also bring research into the broader system, organisational and governance context, which informs and shapes our mobility patterns, to the fore. One of our contentions is that moments of change or disruptions are interesting because of what they reveal about our travel practices – not because they are of themselves necessarily the right tools for change.

Deliberative Policy Design:

DEFRA Research Recommendations

  • “Exploring the relationship between people’s receptivity to interventions at different “moments” and the message content and framing.
  • Exploring whether the source of the intervention impacts on its acceptability and efficacy.
  • Exploring whether upstream or downstream interventions are most effective at moments of change.”

Our research design includes a series of policy design workshops with expert groups and the general public. Each of these groups will be invited to consider, in the light of the evidence, what types of changes to the broader system, the specifics of particular policies or the framing of policy will be effective in promoting a transition to lower energy consumption for mobility. The project will conclude by bringing the solutions and the groups together to genuinely co-design a set of acceptable and effective measures which may be implemented by governments, business, regulated industries or individuals.

Further information on the project is available at www.disruptionproject.net or through contacting the Project Director, Dr Greg Marsden (G.R.Marsden@its.leeds.ac.uk)

DEFRA report Thompson, S., Michaelson, J., Abdallah, S., Johnson, V., Morris, D., Riley, K., & Simms, A. (2011). „Moments of change‟ as opportunities for influencing behaviour: A report to the Department for Environment, Food and Rural Affairs. nef (the new economics foundation). Defra, London. http://randd.defra.gov.uk/Default.aspx?Menu=Menu&Module=More&Location=None&ProjectID=16193&FromSearch=Y&Publisher=1&SearchText=EV0506&SortString=ProjectCode&SortOrder=Asc&Paging=10#Description

Bridging the Digital Divide

On my travels today I was invited to connect my linked-in network to my flight so I could see who else it might be interesting to talk to on the plane. Ignoring the value I might place on travelling as a bit of space and time for me, it is a reminder of how far and fast mobile computing is moving. However, even in this age of apparently ubiquitous mobile communication and enhanced personal computing in the UK 10 million people do not have access to the internet and of these, 4 million are the most socially and economically disadvantaged in the country. 1 in 4 adults have never used the internet. 39% of people over 65 do not have internet access and 70% of people who live in social housing aren’t on-line (data from the Royal Geographical Society).

The BRIDGE (Building Relationships with the Invisible in the Digital Global Economy) has been a three year collaborative EPSRC research project between the Institute for Transport Studies and partners in the Product Design and Engineering Department, Middlesex University and the Engineering Design Centre, University of Cambridge. It started with the premise that over time, non-participation will lead the excluded to become invisible. They will have little influence on the design of new services and will therefore not be able to become part of the potential future market. Reflecting back on the statistics once more, 80% of government transactions are with the 25% of the population that are worst off and least engaged with the internet. It will be difficult to transition to fully automated systems unless the demand and supply side is planned in an integrated manner.

The research at ITS looked at the acceptance and potential for three different types of technology. The first, more automated driving assistance, was used to establish some basic contentions about technology acceptance amongst users of computers versus non-users. Sometimes the obvious result is a relief! Whilst both groups were sceptical this was far more so with the non-computer users. The next two tests were more practical applications. The first of these looked at the role of in-car information systems which gave warnings about speed limits, accidents ahead, congestion and facilities such as pubs and rest areas. This appeared to add to the driving experience even for non-users of computers although less critical information such as rest area location was deemed to be distracting.

The final experiment looked at the role of technological aids for walking such as digital maps, information about buildings, shops and buses, and video contact with friends. Participants walked local areas whilst using tablet computers. The study has found that the social organisation and specialisation of roles within the home have a significant impact on learning to use these technologies; that usefulness is informed by the penetration of social media and technology within their social networks; and that there are indications of positive impacts on physical connectivity in both familiar and unfamiliar surroundings. Participants who are currently not using digital technologies expressed both their desire to learn how to become a user, as well as the obstacles preventing them to do so. Further work has been looking at the interface design issues and how it maps to people’s expectations.

So, some new technology appears to have the potential to add to the travel experience of those that are currently digitally marginalised. It is not the case that they don’t use these technologies because they don’t want to. Different design concerns do emerge for these users although it is not possible from this study to separate out fully the effects of age or income and experience. This is one of many strands of technology acceptance research on-going at the Institute and it looks set to be a growth area. Innovations will continue to be pushed out into the market place and research has an important role to play in anticipating those, shaping them and ensuring they are as compatible as possible with a sustainable and equitable transport system for the future.

The BRIDGE project is led at the Institute for Transport Studies by Yvonne Barnard.

This is part of a monthly blog on research projects at the Institute for Transport Studies by the Director, Dr Greg Marsden (G.R.Marsden@its.leeds.ac.uk)

Winter Weather Disruption

Britain and much of Europe has been under a blanket of freezing weather, bringing snow and ice across much of the country for an extended period. The severity of the weather has not reached those seen in late 2010 but it was still significant enough to see Heathrow airport drastically cut capacity earlier in the week and to witness renewed levels of public anger at the inability of the UK transport system to perform well in extreme weather. One estimate of the costs of the disruption on just one day was £280m.

Simon Calder, writing in the Independent, earlier this week suggested several easy remedies. These included more rights for train travelers affected by delays, penalizing transport companies that do not get their staff in place in anticipation of the bad weather, lower speed limits and construct extra capacity. These are all things that can be done at a system level.  Reports by Begg and Quarmby following the events of last year provide a few more. Many of these suggestions will have merit and be taken forward – but there is not the space here to discuss them further. Instead, should we ask a more fundamental question about our own travel patterns, the expectations we have and the expectations that are put on us?

The Disruption project (www.disruptionproject.net) is studying the extent to which travel patterns are actually more adaptable than we currently anticipate. We change job, home and the types of activities over time and we make much more frequent re-evaluations of where and at what time we do things. Our choices are often influenced by the actions of other household members. One example would be the knock on impacts of a school age child being ill or a school closing for training or bad weather if there are no full-time carer roles in the household.

We make assumptions about the availability and quality of transport services when we make our location decisions and it is here that the problem may lie. Over time, as transport networks have expanded, then the ability to commute longer distances have increased. Distance though brings vulnerability to adverse events such as accidents on the network or weather. Typically, the further out from cities we are the less choice of alternative ways of travelling we have.

This brings us back to thinking about the winter weather problem. The current default policy position is to attempt to keep transport networks operating as fully as possible for as long as possible. As Heathrow have found, where the network is built around operating at or near capacity, this can quickly break down. On the roads, even when roads can be kept clear, conditions can be treacherous and accidents are commonplace, leading to additional jams in conditions which are difficult to tackle. There are very significant costs in the machinery, manpower and chemicals required just to maintain the operation of the core network. There is however, little guidance as to how we should use this precious resource. People struggle in to work because they think they should. For some jobs this is unavoidable but for others it is possible to reschedule and restructure. Could we embrace this further and have both a plan for the use as well as operation of the network in extreme conditions? If, for example, a reduced size and frequency public transport network could be guaranteed to operate who should use it? Could there be differential pricing or some sort of “priority card”? Should it be made clear to people that if you live within walking distance of these priority routes that you will not be penalized for failing to reach work on time? Would it be more cost-effective to have winter weather travel planning? One of Norman Baker’s remits in the Department for Transport is to consider alternatives to travel – this seems like an opportunity to put this into practice.

This article might lead to a sustained period of the warmest winters on record. However, all of the policy prognoses are for climate change to bring more extremes of weather and, therefore, one might expect more weather related disruptions. For now, it is back to looking out of the window, checking the websites and hoping that the gritters have done their stuff. Maybe in future we will have learnt some different lessons and also be reacting to the potential disruption by working smarter. That might have financial gains and safety benefits as well as distressing the winter disruption experience.

If you are interested in further findings on the Disruption project please contact Dr Greg Marsden (G.R.Marsden@its.leeds.ac.uk). The research is funded by the Engineering and Physical Sciences Research Council and involved partners at the University of Aberdeen, Brighton University, Lancaster University, University of West of England, University of Glasgow and the Open University.