The UK railways are integral to the country’s economy, its citizens’ daily commercial and personal lives, and the UK’s path to net-zero emissions. It is therefore paramount to establish a stable, reliable, and customer-centric railway that is efficient, affordable, and delivers long-term value.
The rail franchise system was established at a time when British Rail had become highly inefficient and therefore a significant burden on the UK taxpayer. The government chose to franchise essentially all UK rail undertakings and publicly listed the infrastructure manager. While this system had notable successes, such as a strong increase in passenger volumes, there are several shortcomings: (i) a perception that the railway does not deliver for its passengers or provide value for money; (ii) severe under-investment in infrastructure; (iii) high unit costs for infrastructure investments, often a multiple of those of European peers; and (iv) disruption through the financial failure of rail franchises.
Even before COVID, it had become clear that the rail franchise system had become untenable. Passenger volume forecasts became increasingly unpredictable, and many franchises went into revenue support, thereby operating under incentives which were contrary to the interests of customers and the Department for Transport (DfT). COVID expedited the end of the UK rail franchise system.
UK rail is now at a transformative juncture and has a chance to resolve many of its immense challenges. We have laid out below (i) what a more unified rail system can do to address those challenges, (ii) how an integrated system would have to be set up, and (iii) the key success factors to drive rail reform.
Addressing challenges through rail integration
Rail nationalization centers around integrating rail industry stakeholders to create opportunities that could address many of the issues inherent in the current structure (and that have been exacerbated throughout the franchise period). Such issues include:
- Scale diseconomies from network and operational fragmentation, impacting customers’ experiences and creating higher costs for passengers and taxpayers.
- The increasing importance of technology for high-density networks. There is a need to deploy world-leading technology (such as digital rail) to deliver capacity increases and improve operational reliability.
- The slow rollout of much needed electrification of UK rail infrastructure, where investments and deployment costs are higher than those of continental European peers
- The public-private sector interface has been a continuous issue in franchising. Industry-disrupting contractual issues have led to rail operators’ financial failures, wrong incentives, and tendering process issues.
- Harmonization is required among a complex set of stakeholders, in particular around timetables, to benefit passengers and operations and ensure that freight operators can continue to grow.
By addressing these areas, the rail industry could significantly improve its customer-centricity, increase modal share, and decrease overall funding requirements.
Requirements for the setup of an integrated rail industry
A clear strategy, effective governance framework, and a sustainable financial structure are required to deliver on the government’s policy objectives.
A long-term strategy can enable clarity about what needs to be achieved, efficient and effective system design, investment and management priorities for major infrastructure changes, planning integration between rail and other modes of transport, and coordination between passenger rail and freight operators. An integrated strategy will enable the system to leverage the best that the great British railways can offer across their operations to deliver a customer-centric proposition.
A new governance structure needs to align incentives between stakeholders and their short- and long-term requirements. Specifically, incentives must enable the system to secure long-term funding, mitigating the temptation for short-term fixes where long-term investment is required. The system also needs to leverage the benefits of strong regional stakeholder cooperation and alignment between the railway undertaking and the infrastructure manager, controlled by an effective regulator that combines the powers of the various bodies currently in place.
Finally, an integrated railway model needs to enable close control over delivery of and adherence to government funding decisions. A viable financing model will deliver the investments required to maintain and upgrade the UK’s deteriorating infrastructure.
Critical success factors in rail reform
Industry transformation is a significant and disruptive undertaking. Working with railways and in other industries across the world, we know that successful transformations begin with a clear vision, the design of effective operating models to support this vision, and the development of pragmatic roadmaps to get from the current to the future state.
Based on this experience, we see the following key success factors as critical in setting up an integrated rail system that delivers on the opportunities of rail reform. The reform should:
- Align on a long-term vision and priorities to determine which outcomes matter most (for example, increased service reliability, improved passenger satisfaction levels, decreased operating costs), and which trade-offs are acceptable.
- Translate the vision into clear and passenger-centric targets with concrete objectives and key performance indicators (KPIs) for the next 2/5/10/20 years.
- Define an institutional model that drives the right incentives. This includes clearly articulating roles and responsibilities among DfT, Great British Railways (GBR), the Office of Rail and Road, and other stakeholders, to ensure coherent delivery of outcomes and that incentives are aligned.
- Establish an effective governance model to maximize taxpayer value. An operating model must be defined that will best empower GBR to meet its functional responsibilities and accountabilities, both as operator and infrastructure manager. The main challenge here will be to balance the level of service delivery with value for money.
- Provide clarity about the conditions under which open access passenger rail operators can contribute.
- Boldly innovate on the business model, considering how the system can extract additional value from existing assets (like real estate) or develop new sources of revenue.
- Use the opportunity to strengthen small and medium-sized enterprises (SMEs) in the UK manufacturing supply chain, so that they can become world-leading players in the rail industry
- Optimize the contribution that can be provided by rail freight.
- Empower change and build a skilled workforce. Consider what strategies will cultivate a capable and motivated rail workforce that can meet the sector's evolving needs, manage the transition of thousands of employees, and embed the right culture and capabilities.
- Ensure public support via quick wins. By demonstrating early wins, the government can maintain momentum and public backing for the reform agenda, long before the broader impacts of the longer-term transformation are felt.
By embodying these success factors from the outset, the government can ensure that its early decisions lay the groundwork for a revitalized rail system that meets the needs of passengers and contributes strongly to the UK economy.