INFORMED SOURCES e-Preview March 2012
This month’s Informed Sources was written while the row over Network Rail’s revised Management Incentive Plan was developing. While not as dramatic as the forcing of Railtrack into administration in 2001, it is likely to have serious consequences, so I give a blow-by-blow account up to the adjournment by the Members of the meeting on 10 February.
Transport Secretary fuels Network Rail bonus storm
No Oyster extension for Captain Deltic
Captain Deltic’s rolling stock round-up
Network Rail and SWT trying for first ‘deep alliance’
When it comes to bonuses, always remember that the Office of Rail Regulation requires Network Rail to have an incentive plan ‘to drive senior managers to achieve and out-perform’. After 18 months’ work Network Rail’s Remuneration Committee had come up with a revised Annual Incentive Plan (
What triggered the political row was an Early Day Motion in Parliament calling on Network Rail Directors to turn down their bonuses for the current financial year. That was a bit premature because no one knew what bonuses, if any, will be paid for the 2011-12 financial year, not least because the new scheme had not been approved.
Politics
Anyway, Shadow Transport Secretary Angela Eagle latched onto the EDM and urged Network Rail not to pay bonuses at a time when the company was under Regulatory pressure over operating performance. With bonus bashing all the rage, Transport Secretary Justine Greening could not afford to be knowingly out-bashed.
So, over the top she went and on 2 February issued a statement blaming Labour for Network Rail’s corporate structure which left Government with ‘virtually no power to control executive pay at Network Rail’. She added ‘These latest bonus proposals are unacceptable’.
When this was published @Captain_Deltic tweeted, pointing out that DfT was one of Network Rail’s Members. Not an Industry Member, nor a Public Member, but a ‘Special Member’. So Ms Greening could vote against the proposed scheme.
@LabourTransport, went one better, noting that as the ‘Special Member’ DfT had the right to appoint a ‘Special Director’ who, under Network Rail’s Articles of Association, is a member of the Remuneration Committee. And, in passing, when Labour created Network Rail in 2002, the then Strategic Rail Authority had an appointee on the Board.
The Articles of Association also state that ‘The Remuneration Committee shall consist of (1) the Special Director and (2) at least two other non-executive directors to be appointed by the Board’. And on top of that, should the Remuneration Committee want to change its terms of reference or the incentive policy, any changes would need the ‘prior written consent of the Special Member’.
We know that ORR gave written consent because the correspondence is on their web site. But what about DfT? On 7 February Ms Greening told the Daily Telegraph ‘I have made it clear to Network Rail at every stage that this proposed package did not go far enough in reflecting the need for restraint’.
But would Network Rail really have gone ahead with these ‘unacceptable’ bonus proposals without the written consent of the Special Member? Informed Sources report that the Secretary of State had indeed reviewed the proposal personally. A Freedom of Information request should unearth what really happened.
But I find it significant that a letter from ORR to the Remuneration Committee in October 2011, requesting clarification of three areas in the proposed revised Incentive Plan, was copied to: Philip Hammond (then Transport Secretary), Lin Homer (DfT Permanent Secretary) and Steve Gooding (Director General Domestic Group). But ORR’s final letter approving the proposal was copied only to Mr Gooding and Nick Bisson (Head of Rail Directorate). Clearly ORR considered it unnecessary to bother the Secretary of State with a done deal.
Anyway, faced with powers she hadn’t known she had, the Transport Secretary announced she would go to the Members meeting and vote against the bonus proposals.
Network Rail’s Board responded by recommending that the meeting should be adjourned.
And come the day, that is what happened, leaving Network Rail Chairman Rick Haythornthwaite to muse ‘Today's meeting is the latest leg in an 18-month search to find the answer to a crucial question - how can we retain and attract talent to meet the very significant challenges that Network Rail takes on daily - while at the same time, make our remuneration approach better aligned with taxpayer needs, tougher in its demands and less lucrative in its potential reward. This dilemma remains unresolved’.
Unworkable
As I argue in some detail in the column, bonuses are unworkable on the railways where bad things can happen. ORR is clear that ‘a catastrophic safety failure could result in no bonus award’. And I also wax philosophical on the theory of bonuses, which I will spare you here.
One solution to the ‘dilemma’ would be to drop the politically unacceptable and effectively unworkable AIP and increase the basic salary. If ORR demands an incentive scheme, bonuses could be linked to Network Rail’s regulatory cost cutting targets.
Say ORR requires savings of £5 billion over CP5. Then at the end of the five years a small percentage of any savings over the £5 billion would go into a bonus pot.
But even if you could get this scheme past Government, ORR and the Members, all it would need is a catastrophic accident a week before the end of the Control Period and bang would go the bonus. I’m going to have fun with this dilemma when I interview the ORR Chief Executive later this week.
Oyster extension update
In January First Capital Connect told passenger representatives that the Department for Transport had rejected a plan to extend Oyster Travelcard and Pay-as-You-Go (PAYG) to
FCC explained that DfT wants to progress ITSO smart card technology and Oyster cards are not ITSO-compliant. While the extension of Oyster ‘would have been a major benefit to our customers’ FCC ‘recognises the additional benefits that nationally accepted ITSO-compliant cards will bring to integrated travel’. ‘Additional benefits’ like no PAYG.
But, hang on, didn’t DfT’s announcement of the award of the interim Greater Anglia franchise include a commitment to extend Oyster pay-as-you-go services to ten stations on the Shenfield and Hertford East lines’? So Oyster to Hertford North vetoed, Oyster to Hertford East a franchise requirement to make life easier for passengers.
Official view
In addition to FCC and Abellio Greater Anglia, First Great Western and, Southern have also shown what DfT calls ‘varying levels of interest’ in extending Oyster PAYG on their networks.
FGW’s proposal was to extend its current boundary at West Drayton to
We know this because TfL had asked DfT whether any extensions would be implemented by May when National Rail and TfL fares databases ate next updated. The answer was ‘no chance’,
All very infuriating. As with the Intercity Express Programme, DfT is putting a pet project ahead of the passenger’s interest.
Rolling stock latest
With so much politics it is always a relief to turn to real railway issues and rolling stock in particular. But even here, politics can break in.
When an Informed Source asked if I knew why South West Trains was reducing the mileage on its Class 444 Desiros, I had to confess that I didn’t, but I knew a man who would.
Siemens maintains SWT’s four-car Class 450 and five-car Class 444 fleets. Charges are based on average annual unit mileage which is divided into a number of bands. As the mileage moves up a band the charge will increase, reflecting the cost of more-frequent examinations and major overhauls.
Stagecoach’s winning bid to retain the SWT franchise included withdrawing the Class 442 EMUs from long distance services and covering these diagrams with the Class 444 fleet. This change took the Class 444 annual mileage above the existing 160,000-170,000 top band. So a new top band had to be negotiated with Siemens which was, naturally more expensive.
But by October 2011 the Class 444 moving annual average was around 172 000 miles. If the fleet could be brought back into the 160 000-170 000 miles band savings could be made.
So, instead of running five-car Class 444s between the peaks, these services are now covered by eight-car Class 450 formations. This drops the Class 444s back into the previous top band. The Class 450 fleet has been averaging around 110 000 miles per unit per year in a relatively cheaper charging band. So the saving on the reduced Class 444 mileage is significantly more than the extra payment for the slightly increased Class 450 mileage.
Mind you, it does mean that long distance off peak passengers, expecting a luxo Class 444 turn up to find a suburban Class 450. But needs must when a franchise is in revenue support under Cap & collar and every pound saved is vital.
Class 395
SWT is not the only
A number of minor scheduling tweaks have already been implemented but the major changes are planned for the May timetable. Three peak Broadstairs services in each direction will revert to six cars. They were increased to 12 car formations with the May 2011 timetable.
One result of the changes will be a reduction in the availability required. Currently 24 sets are in service out of 29 and this will fall again with the May changes.
Caledonian Sleepers
Sorry, but it’s back to politics again with the Caledonian Sleepers. First of all Transport
Then with local outrage building up nicely, the dastardly English decided to interfere in Scots’ affairs. In his Autumn Statement on 29 November, the Chancellor announced that £50 million would be made available to ‘replace the Caledonian Sleeper fleet’, subject to the Scottish Government matching the investment.
Bounced into responding, the Scottish Government announced that it will invest ‘at least £50million to enhance cross-border Caledonian sleeper rail services’. Minister for Housing and Transport Keith Brown pointed to the existing ‘significant’ government support for the Caledonian sleeper. And trusting in short memories added ‘it was always our intention to ensure a continuing and improving service for passengers beyond 2014’.
Ridership in 2010-11 was 274,000, up by 31% on five years earlier. The Consultation Document quoted the annual cost of the sleeper service at £21 million, or £75 per passenger.
Clearly, ‘replacement’ is not really an option and major refurbishment is the most likely outcome. This could provide some premium berths with en suite facilities but the reduction in the number of berths would make the service even more uneconomic.
Class 350/3 Desiro ordered
What looked like the end of this interminable procurement process came on 3 February when London Midland published an OJEU Notice confirming the order and laying out the differences between the original specification and the final deal. The manufacture, maintenance and operating lease contracts with Siemens and Angel cover 10 four-car Class 350/3 EMUs each for London Midland and First Trans-Pennine Express.
Changes to the original requirements include a different seating specification and delayed delivery, with the
Maximum speed is now 110mile/h. Valued at £148 million the contract also includes upgrading and electrifying Ardwick Depot.
NR and SWT explore ‘deep alliance’
Network Rail’s announcement on 23 January drew the distinction between ‘framework alliances’ and ‘deep alliances’. Framework alliances are simply a commitment to work more closely with a
While there are several framework alliances, the only deep alliance is being developed between Network Rail and Stagecoach. Central to any deep alliance is trust between the parties involved. The essential personal chemistry appears to exist between Stagecoach’s Sir Brian Souter and Network Rail’s Robin Gisby.
If they can agree on a deep alliance for South West Trains it could see the creation of an integrated joint management team responsible for both train and track on the
People
Current thinking sees the combined organisation headed by an Alliance Board with Robin Gisby and Stagecoach Finance Director Martin Griffiths as co-Chairmen. One of the keys to getting serious talks underway was Tim Shoveller’s move from East Midlands Trains to Managing Director of SWT. The ex-BR old-school operator it tipped to become Managing Director of the deep alliance.
Don’t forget that financially ‘big numbers’ would be involved. SWT’s annual revenue is over £700 million and it currently pays Network Rail around £55 million in track access charges. Wessex Route receives a sizeable share of DfT’s £3.5 billion direct grant to Network Rail to cover the total spend on operations, maintenance and renewal.
Savings
Developing a financial structure for the alliance which does not disadvantage either party is not going to be easy either. Cash-flows will need to be compatible with both Network Rail’s Regulatory Settlement and SWT’s franchise agreement.
While most staff will continue with their existing employers, if in five year’s time Tim Shoveller is heading a fully integrated, thriving, ultra-cost effective business, unscrambling it to re-let the South West Train’s franchise could be difficult.
But that’s chicken counting. As the discussions continue mutual trust is vital for another reason. It could still fall apart to the potential embarrassment of the two parties. ‘It’s an adventure right up to when it goes live’ one of those involved told me.
And finally
The column contains an O Level maths question based on DB Schenker’s claim that the three wind turbines it is going to install in
Roger’s blog
The January Fourth Friday Club meeting incorporated the Golden Whistles Awards– the Operators version of the Golden Spanners for Depot Engineers. The event goes from strength to strength and the fancy algorithms that normalise the raw data have settled down. Ian Walmsley (an engineer) was a provocative master of ceremonies and a good time was enjoyed by all. What was particularly noticeable this year were the many press releases the following week from the winners.
Like the Spanners, the Whistles have now got serious clout. There was a Siemens advert in the last Modern Railways which assumed that anyone reading would know what the Golden Spanners were for.
As you read this I will be preparing for a check-up colonoscopy. I’ll spare you the details but it should get me in the right mood for the interview with the ORR Chief Executive Richard Price on Wednesday. First question: do you have a bonus scheme. In the evening there’s an event at the IMechE commemorating my late uncle which always has a strong railway representation.
March is currently pretty quiet until the next Fourth Friday. Barring publication of the Railways Command Paper this should give me a chance to make some long-promised visits.
I must also find the time to update my ‘who runs the railway’ table. I get asked for this more than anything else and with Network Rail having appointed its devolved Route Managing Directors a combined table of
Meanwhile, if you want to keep in touch on breaking news, you can follow @Captain_Deltic on Twitter. I promise that I don’t tweet on what I had for breakfast, but you will join over 1000 followers who get the occasional alert on things like DfT’s vote and the FCC Oyster veto mentioned this month.
While Twitter is widely scorned, astute TOCs are already using it to publish real time service information. And it works both ways. I have used it to alert FCC to a PIS problem and also to ask about the next day’s service plans during the snow.
Right, now to fire up the ‘who runs the railway’ spreadsheet. Good grief, all those cobwebs! Was the last one really published in 2005?
Roger